1. Several WOFE (WFOE) categories classified according to their principal activity
- Services and business consulting WOFE: typically used to provide B2B services to companies or B2C services to individuals. Subject to regulations applicable to the very nature of the deliverable, a service oriented WOFE can issue a service invoice to its customers but are not allowed to engage in products trading or import/export operations.
- Trading WOFE: used for wholesale, retail, e-commerce or import export trading. If solely involved in commercial activities, these companies are also called FICE ("Foreign Invested Commercial Enterprises"). They can get import export Rights, buy and sell local or imported products to their customers in China and/or export them. The quick development of online sales (e-commerce) in China as well as the possibility to offer domestic mobile payment solutions (Alipay, Wechat) have motivated many western companies to set up a WOFE as their development base in China.
Production or assembly WOFE: from the simple assembly workshop to more sophisticated production activities, this kind of WOFE were the first authorized in China. Many companies with a long-standing import activity in China, but facing increased local competition, decided when relevant to engage in assembly or production in China.
2. Regulatory WOFE news: updates in 2020
On January 01, 2020, a new "Law on foreign investments in China" stipulates the prior obtaining of a Registration Approval Receipt is cancelled if the nature of the investment project is not included in a "negative list". This list highlights the business fields not accessible or subject to restrictions for a WOFE.
Practically, this means the registration or status modification of a WOFE (not engaged in the "negative list" prohibited activities) follows administrative procedures more in line with those applicable to the domestic chinese owned companies. Still, a suitable business scope must be carefully drafted so as to effectively allow the requested activities. To date, we observe the administrations (tax offices, Chinese customs, trade administration, immigration bureau, health authorities FDA-NMPA, etc) remain very autonomous and do not coordinate with each other.
For individual entrepreneurs business activities: a new regulation of the Market Management and Supervision Administration (MSA) also comes into force in 2020 and authorizes the incorporation of a joint venture (JV) between a natural person of Chinese nationality and a foreign legal or natural person (this was previously prohibited in China as it required the Chinese side be a legal person). However, this provision currently only concerns projects registered in Shanghai or the neighboring provinces of Jiangsu, Zhejiang and Anhui. True to the spirit of test measures (called "pilot measures") often launched in China, this measure could, in the future, be extended to the rest of the country. If this pattern facilitates the prospective of a sino-foreign cooperation, it is recommended not to lose sight of some key questions, in particular the director's liability and the treatment of dividends. You may seek professional advice to compare the cooperation options and conditions before embarking on a joint venture project.
3. Classification of investment sectors for foreign investors
Before 2016, a prior formal approval to invest in China (in WOFE or in joint-venture ) had to be obtained by any foreign investor before being authorized to register his company. This official approval depended on the exact nature of the targeted activity. A catalog of foreign investments then classified foreign investments as encouraged, authorized, restricted or prohibited:
- Encouraged (research and development, environmental protection, etc.)
- Authorized (for example as a WOFE or only as a Joint-venture)
- Restricted (additional licenses requested, prohibitive minimum investment for example)
- Prohibited (strategic sectors or monopolies: many remain, even in services)
In October 2016, the National Reform Commission and the Trade Commission published the “Provisional measures for the management of the registration of creations and modifications of enterprises with foreign capital in China' which stipulated that, for any investment project not contained in the "negative list", the Approval step was replaced by a declarative step. Thus, the "Certificate of approval" was replaced by a "Registration receipt".
In addition, a “negative list” of foreign investments in China is periodically updated by the two Commissions (Refom and Trade) based on an official principle of “reduction of restrictions and no additional restrictions”. Globally, we should keep in mind the existence of specific regulations governing foreign investments still display a difference with the rules governing the Chinese domestic investments.
The previous Catalog of Foreign Investments in China of 2015 is no longer in force since it has been replaced by the Negative List, the last version of which dates from August 2019 and is still the one in force today. Here you will find the latest Negative List of foreign investments in China.
Globally, the evolution of these measures indicates that China broadly annouces a higher degree of openness for foreign investors by communicating on a simplification of the registration procedures for a WOFE subsidiary. Practically, if the sectors authorized for foreign investments have gradually increased and if the number of Licenses or Certificates is less than a few years ago, the content & details of the application files to submit to the authorities have become much more dense. Practically, after a first phase of online documents submission, follows a second phase of submission of signed & chopped documents & files.
4. Incorporation legal status & the shareholders
A WOFE is a Limited Liability Company which can have either a legal person (a head office abroad) or one or more natural persons as its shareholders. The WOFE is a recommended alternative to the Sino-foreign Joint Venture in sectors for which an investment in WOFE is permitted, giving a clear advantage of autonomy in management and strategy.
5. What minimum registered capital to set-up a WOFE?
Fully usable to pay all operating expenses, the minimum amount required by the Chinese administration for a WOFE varies according to a grid of criteria which includes in particular:
- The sector of activity concerned, according to its classification in the Negative List
- The geograhical place (city and province) where the WOFE will be registered
- Specific areas requirements (in Free Zone, Special Economic Zone, Technological Zones)
- Your need in funds, investment and cash requirements, to be forecast realistically.
- The expectations of the industrial parks which, for assembly or production activities, have highly variable ratios from one zone to another on a minimum capital and tax target
The capital payment deadlines (one or more staggered contributions) must be stipulated in the WOFE Statutes, and therefore must be anticipated in the feasibility file prior to implementation. In Shanghai for example, the authorities will consider that a foreign entrepreneur or investor is serious if he is proposes a minimum amount of capital covering his set-up expenses until break-even, following a seriously drafted business plan to be part of an investment feasibility report. For the services sectors, the financing need can be lower than that of a trading and distribution activity (no financing of stocks).
As overseas payments payments to a WOFE's current account contributions are not allowed to date (treated as an taxable income), under-financing a WOFE's capital level at start can be disastrous, both from the point of view of investment approval conditions and from the point of view of restrictions (VAT status for example).
Adding capital to a registered WOFE is authorized but the process remains procedural and time-consuming since it is also subject to an approval logic (authorities + bank). Expect few weeks before doing a capital increase, not suitable to meet urgent need of cash.
6. Financing and capital contribution of a WOFE subsidiary
The WOFE's direct parent company bring the initial registered capital as soon as the bank accounts of the WOFE are opened and active. The banker can proceed with the WOFE's bank accounts opening only after all the licenses and certificates are issued. The chinese regulations allow individual investors to be direct shareholders of a WOFE (meaning no parent company or holding company). Here too, we recommend the structuring options need to be compared for your project, for example thinking first of the tax treatment for the dividends and the conditions for the sale or transfer for the shares.
7. Directors liability in China
The nomination and liability of managerial functions are defined in the WOFE's Articles of Association (AOA). They concern the Legal Head (whose name appears on the WOFE's Business License) and other managers such as an executive director or a general manager. Subject to the opinion of the authorities after review of a feasibility study, it may be authorized for a single person to hold several of the above positions. Some of these positions may also be occupied by non-China resident persons. To assess & compare too.
To date, in 2020, the Chinese regulations applicable to foreign investments do not contain any provision for the business status of what, that in western countries, we call self-entrepreneurs, micro-entrepreneurs, self-employed or liberal professions.
8. Hiring Chinese and foreign employees with a WOFE
A WOFE subsidiary has a legal capacity and can sign a direct employment contract with its Chinese and foreign employees as well as, for the latter, to request the obtention of a (mandatory) work permit and resident visa. Many WFOE managers use the service of a third-party agency duly authorized to manage payrolls, social and tax declarations.
9. Recommendations before setting up a WOFE subsidiary in China
First consult the Negative List of foreign investments in China cited above.
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!) And it is a first possible point of optimization: launching a preliminary set-up report helps to compare the requirements based on an overall project & pre-negotiate some key points with the authorities : minimum capital expected, official & effective taxation rate(s), availability of specific premises, customs procedures, VAT treatment, effective conditions to get the VAT back when products are exported, etc)
The approval of foreign investment applications is, except in special cases, given to several provincial or municipal authorities which treat them according to their development priorities, that is to say in a manner that is neither uniform nor standardized at the national level.
The serious filling of WOFE's registration files requires the preparation of an investment feasibility report carefully examined by the authorities. When the company operates, expect regular administrative checks aimed to verify the activities conducted are well in accordance with the initial approved Business Scope.
A preliminary set-up survey can usefully include the analysis of possible requirements on certification conditions and conformity to Chinese standards that products or their components must meet in China.
Finally, for some projects, it may finally be useful to conduct first a broader analysis (market survey, competition, positioning, etc) so as to elaborate or confirm what offer is suitable for the chinese market.
The right 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 deliverable for B2B or B2C service sectors, import export trading, wholesale & retail sales, online sales (e-commerce) and assembly and industrial production.