1. Several WOFE categories according to their main activity
a. Business consulting services and other services
Suitable for services to companies or individuals, subject to regulations governing the very nature of the deliverable. These companies can issue corresponding CNY invoices ("fapiao") to their customers. However, they are not licensed to engage in the purchase or sale of products. Certain types of service are (highly) regulated and require special permits or additional licenses. These include, for example, recruitment services, umbrella company services, catering, information-related IT professions, cloud hosting activities, etc.
b. Distribution, retail, e-commerce, import export trading
Companies involved in purely commercial activities are also referred as FICEs (Foreign Invested Commercial Enterprises). They may have import-export rights, and buy and resell Chinese or imported products to customers in China. The meteoric growth of online sales in China, and of mobile payment systems such as Alipay and Wechat, has prompted many Western companies to set up subsidiaries in China. In this way, they can effectively benefit from these new opportunities while retaining control over local stock and distribution.
c. Production, manufacturing or assembly
From simple assembly workshops to other production and textile manufacturing activities, these WOFEs were historically the first authorized in China. Today, many companies with significant import trading activities are facing increased local competition. Some are starting to assemble in China, either to control domestic distribution, improve quality or control supply costs. This situation has become particularly apparent since 2020 with the covid-19 pandemic. See our page dedicated to production activities.
2. Regulatory WOFE news : updates for 2023
The latest Law on foreign investments in China came into force on January 01, 2020. In particular, it stipulates that if the nature of the project is not included in the negative list of restricted sectors, the previously compulsory requirement to obtain a Registration Receipt has been cancelled.
So, this means that setup or modify the structuring of a WFOE follows a logic closer to those more flexible governing the domestic companies. Still, a suitable business scope should be carefully drafted so as to allow conducting the full range of expected activities. In practice, the local administrations (tax bureau, China customs, company registry, controlling authorities for foodstuff or medical devices, etc.) remain highly autonomous. There is no overall coordination in their respective requirements.
Practically, this means the incorporation or AOA modification of a WOFE (not engaged in the negative list's prohibited activities) follows administrative procedures in line with those applicable to the Chinese invested enterprises. Still, a suitable business scope should be carefully drafted so as to effectively allow your expected activities. Up to now, we observe the administrations remain very autonomous. They do not coordinate with each other (tax bureau, customs (GACC), Administration of Commerce, Immigration Bureau, Health Bureau, China FDA, etc).
For installation projects supported by individual entrepreneurs: a regulation issued by the State Administration for Market Regulation (SAMR) has also come into force. It authorizes the incorporation of a joint venture between an individual of Chinese nationality and a foreign legal entity or individual. This provision was previously prohibited, as it required the Chinese party to be a corporate business entity. For the time being, this measure only concerns projects registered in Shanghai or the neighbouring provinces of Jiangsu, Zhejiang and Anhui. In keeping with the spirit of the pilot measures often implemented here, the logic could be extended to the rest of the country. While this model facilitates the prospects for sino-foreign partnerships, it is advised not to lose sight of a few essential considerations. These include investor liability and the management of profit repatriation. Options and conditions to be evaluated and compared before embarking on the creation of a sino-foreign joint venture (JV).
3. Investment classification for foreign investors
Prior to 2016, foreign investors were required to obtain formal authorization to invest in China (either as their own subsidiary or as a joint venture) before registering their company. This authorization depended on the exact nature and description of the desired activity. A foreign investment catalog used to classify foreign investments as encouraged, authorized, restricted or prohibited, as follows:
- Encouraged: research and development R&D, environmental protection, greenfield, energy savings
- Authorized: for example as a WOFE status or only allowed as a joint-venture
- Restricted: additional licenses requested, prohibitive minimum capital required for example
- Prohibited: strategic sectors or monopolies : many still remain, even in services activities
In October 2016, the National Reform Commission (中华人民共和国国家发展和改革委员会) and the Commission du Commerce or MOFCOM (中华人民共和国商务部) published "Interim Measures for Management on the Registration of the Establishment and Modification of Foreign-owned Enterprises". These measures stipulated that, for any project not included in a new "negative list of foreign investments", official authorization was to be replaced by registration. Thus, the Certificate of Approval was replaced by a Registration Receipt.
This list is periodically updated by the 2 Commissions. Its official principle is the reduction of restrictions, not adding new ones. Still, the continued existence of specific regulations governing foreign investment underlines the continuing reality of differential treatment with Chinese domestic investment.
You may consult here the latest 2023 version of the negative list.
In short, the evolution of these measures indicates that China is generally keen to promise a higher degree of real opening for foreign investors. For example, the authorities have announced a simplification of the procedures for registering a 100% foreign-owned company or subsidiary.
In practice, while the number of sectors authorized to foreign investors has gradually increased, and the number of Licenses and Certificates required may be lower, the content and density of the application files to submitt have increased. After an initial phase of filling online forms for approval, the next step is to submit original paper files, duly signed and chopped. Some documents need to be legalized and notarized beforehand, requiring a pre-setup phase lasting several weeks in the investor's country.
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4. Legal incorporation and shareholders status
A WOFE is a limited liability company (LLC Company Limited). Its shareholder and parent company is usually a corporate entity, i.e. a registered company headquartered abroad. Chinese regulations now allow a shareholder to invest as a natural person.
This legal form is a recommended alternative to the JV partnership in business sectors where investments controlled 100% by foreign investors are permitted.
Choosing this legal status for your legal entity in China offers the key advantages of autonomy of management, decision-making, better control over trademarks, patents and overall development strategy.
5. Investment budget and minimum capital
The minimum amount required by the Chinese authorities for a WOFE varies according to a grid of criteria which include, in particular :
- the business sector concerned, according to its classification in the Negative List
- the location (city and province) where the company will be registered
- zone requirements (free trade zone, Special Economic Zone, Hainan Free Port)
- your WCR, investment and cash-flow requirements to be realistically forecast
- KPI ratios for Chinese industrial parks. For production or manufacturing activities, they have highly variable ratios, particularly in terms of expected capital and tax performance..
The schedule for paying up the capital - in a single contribution or in several instalments - must be stipulated in the company's articles of association. They shall also be presented in an initial feasibility report. In Shanghai, the authorities consider a foreign entrepreneur or investor to be serious if he proposes a minimum capital to cover the start-up expenses until break even. This should follow a carefully drafted budget, presented in a feasibility report. In the services sector, financing requirements are often lower than in the retail and distribution sector (no stock financing). As a reminder for manufacturing or assembly activities, the minimum capital should be also planned according to the specific - and variable - requirements of industrial parks.
The capital should be paid on a specific capital bank account, then transfered to the current accounts. Please note any overseas payment from an parent company sent directly to a WFOE's current bank account will not be recorded as a capital contribution (on top of being subject to income tax in China). Thus, undercapitalizing a subsidiary at start can reveal to be disastrous, both in terms of cash flow needs and in possible restrictions (VAT status, credit rating with China customs (GACC), impact on the company's public records and reputation).
In principle, a capital increase for a subsidiary in China is authorized. The recapitalization process remains procedural and time-consuming, as it is subject to prior approval. A new cash injection will entail additional formalities lasting at least several weeks. Not the best choice to meet urgent cash needs.
6. How to finance and capitalize a company in China?
The investor (parent company or individual shareholder) provides the initial necessary investment for the initial financing of the business. However, the choice of a bank for a subsidiary in China needs to be made carefully. While China's major banks are generally fully licensed by the Central Bank, foreign banks present in China are sometimes limited in their prerogatives. Strict exchange controls exist in China, under the supervision of SAFE (State Administration of Foreign Exchange). The official currency, RMB (ISO code: CNY), is still not freely convertible.
The capital contribution can be made as soon as the company's bank accounts are opened. It will have several bank accounts, including in particular :
A capital account. Temporary, dedicated to capital contributions.
A designated account to which compulsory deductions, including taxes, will be debited.
The banker authorizes the opening of bank accounts once the company's business license and official chops have been issued by the authorities.
Above, a company's bank account opening certificate
Since Chinese regulations allow individual investors to be direct shareholders without a parent company or holding company, the choice of bank and currency of contribution are worth comparing. It is also worth checking the tax treatment of dividends and examining the conditions under which shareholders can sell their shares.
7. Liability of directors and legal representative in China
The nomination of directors and managerial positions is defined in the company's articles of association (AOA). This applies first and foremost to the legal representative, whose name appears on the business license. It also involves other officers such as an Executive Director or a General Manager. Subject to the approval of the authorities after review, it may be possible for a single person to combine several functions. Certain positions may be given to non-resident individuals. To evaluate and compare. For a foreign-owned company, it is also possible to go for a Board of Directors. This is mainly for internal governance considerations.
To date, in 2023, Chinese foreign investment regulations contain no provisions for what we overseas call auto-entrepreneurs, micro-businesses, self-employed workers or liberal professions. These statuses simply do not exist in China for foreigners.
8. Foreign company licenses in China
a. Legal registration of the company with a business license
This is an example of the Business License of a foreign-owned company (WOFE) registered in China. It is equivalent to a US certificate of incorporation. It is issued by the Ministry of Commerce (SAMR) of the locality or administrative area where the company is registered.
It indicates, from top to bottom :
- business license (商业执照)
- license number
- company social credit number
- full company name in Chinese
- legal registered address of the company
- type of company (foreign-owned)
- company registered capital
- date of legal incorporation
- business license expiry date
- authorized business scope (permitted activities)
- QR code for public records access
- corporate seal of the licensing authority
- the issuance date of the license
There is no mention of the Roman alphabet on this license. Simplified Chinese remains the only official language recognized in China.
b. Additional licenses: certificates and permits for regulated activities
In China, a number of activities are also supervised and controlled by administrations that are neither subordinate to nor coordinated with the MSA. As such, they issue additional licenses, certificates or permits required for operations. This reality affects various sectors in services, retail, import-export trading or manufacturing activity. Here are 4 examples, illustrated and explained below.
and telecom services
This is a sample of a VATS (value-added telecom services) license authorizing to engage in value-added telecom services. It is one of the requirements going with China's Cybersecurity Law.
The services cover data hosting in a Chinese Cloud, other hosted IT services and call center telecommunication activities.
The content of this license is not standard. Its back side lists in detail the authorized activities and their geographical coverage area(s).
IT activities include IDCs (Internet Data Centers), IRCs (Internet Resource Collaboration）, IP-VPN network operators, MPLS (Multiple Protocol Label Switching) and ISPs (Internet Service Providers).
This license was obtained for a company (WOFE) in Shanghai. It was delivered from the Chinese Ministry of Industry and Information Technology (MIIT) created in 2008. The license valid for 5 years, renewable.
Here, the special permit authorizing the sale and distribution of alcoholic beverages issued to a Shanghai based foreign company (WFOE).
It takes the form of an additional license issued by the administration bureau also in charge of controlling the circulation of these products.
In addition, employees in charge of the logistics and storage of the beverages must undergo training with a dedicated supervising bureau.
This is a copy of the certificate of registration delivered by the local customs to an import-export foreign trade company (WOFE).
This certificate must be obtained by any international trading company established in China.
The same requirement applies to china owned companies as well.
Industrial production activity
The license shown here authorizes a foreign-owned factory to manufacture food contact packaging.
The supervisory authority is a department of the Food Hygiene Administration (CFDA) in charge of matters relating to food production activity.
Its issuance attests to the conformity of the equipment installed and operating on the site.
It is also issued following prior training and qualification of the employees responsible for production, who hold individual permits.
The second special license opposite authorizes the production of foodstuffs for the same plant.
These two special licenses illustrate China's meticulous administration, which qualifies, authorizes and controls related activities in a highly compartmentalized manner.
REMEMBER: Beyond these few examples of additional or special licenses, many other activities are concerned. In particular, they are those that are sensitive from the point of view of :
- hygiene and public health regulations (food, pharmaceutical, medical sectors, etc.)
- compliance with China standards and other environmental protection rules
- hazardous operations (safety aspects of production, for example)
- sensitivity to strategic sectors (networks, communications, defense)
- compliance with international rules or agreements (e.g. NVOCC or IATA licenses)
- cultural and publishing matters in China.
Obtaining these licenses is not automatic. It's a case-by-case approval process, not a simple declaration. With careful preparation and anticipation, these licenses can be obtained by a foreign-owned company (WFOE or joint-venture），in accordance with national laws and regulations and local procedures governing foreign investment.
9. Hiring Chinese and foreign employees
A WOFE company has legal personality. It has a seal (official stamp) which, when affixed to an employment contract with its Chinese and foreign employees, enables it to conclude a direct hiring contract in its own name.
Foreign employees can obtain a work permit and resident visa, allowing them to work legally in China. Many subsidiary managers subcontract the payroll management, accounting, social security and tax declarations to a duly qualified local accounting firm.
10. Recommendations before setting up your company in China
First consult the list of restricted or prohibited foreign investments. This list does not however indicate the specific conditions which may be required for the investments which are authorized. These conditions can be variable according to the cities (and districts). It is a first possible point of optimization : conducting a pre-setup analysis helps to compare the requirements based on an overall project and pre-negotiate some key points with the authorities. These would be the minimum capital level required, know the official and effective taxation rates, the availability of specific premises, customs procedures, VAT treatment, conditions to get the VAT back after products are exported, etc.
- Except in special cases, the review and approval of an investment project is entrusted to several administrations at provincial or municipal level. They validate them according to their local development priorities. In other words, in a non-uniform or standardized way.
- Preparing the registration file for a WFOE requires the drafting of a feasibility business plan, which will be carefully examined. Inspections and administrative controls will verify that the activities actually carried out comply with the initially approved content of a corporate object. The increased frequency of controls illustrates the effective implementation of the social credit system applicable to companies based in China.
- A pre-setup analysis may also include a review of the requirements for approval and certification to Chinese standards that products, ingredients and components will have to meet. More generally, environmental considerations have become a major criterion for the acceptance of investment projects in China.
- If your products are already sold in China, assess the impact of setting up your own business on the relationship with your existing network of importing agents or distributors.
- Finally, for certain projects, it may be advisable first to carry out a more global analysis in the form of a study of pricing, potential, positioning or competition. In this case, the aim is to validate that your product or service offering is relevant before committing to investments
11. Company dormancy status or how to put a business on hold
As of March 1, 2022, a new clause in China's company regulations allows a company or subsidiary to apply for business suspension status. This recent measure comes in response to the difficulties encountered by many domestic companies during health crises (covid-19). Inspired by the spirit of Western regulations in this area, this possibility enables companies to reduce their monthly expenses or fixed charges in times of temporary difficulty. This option remains open to companies operating normally and not already blacklisted. Here you will find an article outlining the conditions for putting a company into dormant status in China.
The proper preparation and optimization of your China set-up project is one of our core business. Upon request, we keep at your disposal numerous examples of registration & licensing services for our customer. They include references in B2B or B2C service activities, import-export trading, wholesale and retail distribution, online sales (e-Commerce) and assembly + manufacturing.