How to establish a wholly foreign owned enterprise in China

Guide on setting up foreign-invested company in China
By Attorney-at-law(China), Chen Liang Ting

Index
Chapter1 Legal forms of Foreign-invested Enterprise
Chapter2: Analysis and Evaluation of Register Capital Issues
Chapter3: Rent an Office
Chapter4: WFOE Establishment Procedure in China
Chapter5: Human Resource Issues

The level of difficulty in setting up your company depends on your industry. The reason is that China encourages foreign investment in certain industries while discourages it in others.
It typically takes 3 to 5 months to register a WFFE or JV, depending on scale and industry.

Chapter 1: Brief for legal forms of Foreign Investment Enterprise

When deciding to invest and carry out business in China, there are four legal forms of Foreign Investment Enterprise (“FIE”) to choose: a Representative Office (“RO”), a Sino-Foreign Joint Venture (“JV”), or a Wholly Foreign Owned Enterprise (“WFOE”),or a Partnership Enterprise(“PE”)

WFOE is a business that is 100% owned by a foreign company or a foreigner(s). These are must establishing an office in commercial building. A WFOE requires a minimum capitalization. A WFOE is an independent legal entity which is allowed to carry out business, issue formal RMB invoices, hire its own employees, enter into contractual agreements, set up branches in China, receive payment in RMB, and convert RMB into designated foreign currency for profit repatriation.

JV is a partnership between a foreign company or a foreigner(s) and a local company. A Joint Venture may be appropriate if WFOEs are not permitted in your industry classification.

RO is easier to set up than either a WFOE or JV. It costs less and does not require capitalization. However, Representative Offices may not engage in trade, receive fees for service, sign contracts or directly generate income. They are typically used for market research, promotion, and establishing or maintaining China business contacts.

PE is a new classification that was issued since March 1, 2010. It allows partnerships between foreign companies and individuals, and Chinese companies and individuals.

Chapter2: Analysis and Evaluation of Register Capital Issues
Chinese law and regulations state that a WFOE is required to have its registered capital contributed by its shareholder(s) within a certain period after the WFOE’s establishment. Issues of registered capital are often a point of confusion for foreign investors. Therefore we would like to share some experience and analysis in this area.

Registered Capital and Total Investment
Registered Capital
The Registered Capital of a WFOE is the capital subscribed and contributed by the investors for setting up the WFOE. The amount of registered capital shall be registered with relevant Chinese local government authorities, and the registered capital shall be contributed completely by the WFOE’s investor(s) within the period stipulated in the WFOE’s AOA. The WFOE’s registered capital belongs to the WFOE and may be used for the WFOE’s operation, rent, purchase of equipment, payment of salaries, and other costs incurred by the WFOE. After the WFOE’s liquidation or termination, the shareholder(s) is entitled to recover the registered capital remaining after payment of all the WFOE’s outstanding debt obligations. Responsibilities are respectively allocated to the shareholder(s) based on their subscribed capital contribution to the WFOE.

A WFOE’s costs are likely to be greater than its revenues for the period immediately after its establishment; the shortfall is funded by the WFOE’s registered capital. If the WFOE’s registered capital is not sufficient to cover its cost before it starts to record a profit, the WFOE shall choose either to borrow a foreign loan or to apply to the relevant government authorities to increase its registered capital. Increasing registered capital is costly in terms of money and time. We strongly recommend investors to carefully plan and calculate the likely level of capital required until profitable operation.

Total Investment
Total Investment of a WFOE is the total amount of capital needed for the WFOE to establish its operations in line with the business scale stipulated in the WFOE’s AOA.

Total Investment = Registered Capital + Loans

Total Investment shall not be less than Registered Capital. The balance between Total Investment and Registered Capital is not required to be contributed by the investor(s).

In the case of a WFOE with registered capital insufficient to cover its costs, the WFOE is entitled to obtain foreign debt either from its shareholder(s) or from a foreign bank for the amount of the balance between its Total Investment and Registered Capital. Note that in no circumstances should the amount of foreign debt exceed such a balance between Total and Registered Capital.

If a WFOE’s Total Investment stipulated in its AOA is equal to its Registered Capital, and if such WFOE’s Registered Capital proves insufficient to cover costs before profitable operation is established, the WFOE will not be entitled to obtain foreign debt until the application for increasing its Registered Capital and Total Investment has been approved by relevant government authority.

According to relevant Chinese laws and regulations, the amount of total investment shall be equal to or higher than the WFOE’s registered capital, and shall not exceed the proportion stipulated in relevant regulations; the minimum statutory proportions of registered capital to total investment are:

(1) Total investment < 3 million USD: the registered capital shall not be less than 7/10 of the total investment.

(2) 3 million USD ≤ total investment < 10 million USD: the registered capital shall not be less than 1/2 of the total investment and shall not be less than 2.1 million USD.

(3) 10 million USD ≤ total investment < 30 million USD: the registered capital shall not be less than 2/5 of the total investment and shall not be less than 5 million USD.

(4) 30 million ≤ total investment: the registered capital shall not be less than 2/5 of the total investment. If the total investment is less than 36 million, the registered capital shall not be less than 12 million.

Minimum Registered Capital
The minimum permitted registered capital of a WFOE is 30,000 RMB. If a WFOE is invested by only one investor (either a foreign individual or a foreign enterprise), the minimum registered capital of such a WFOE shall be not less than 100,000 RMB.

As we have mentioned before, sufficient Registered Capital is an important issue for a WFOE, especially in the period immediately after its establishment. Legal minimums for registered capital requirements are not sufficient for the vast majority of WFOEs to establish and make profitable their operations. The procedure of applying for increasing the registered capital levels is complicated and time consuming. An outline of this procedure:

(1) Apply for registered capital increase with the original approving authority (usually the local bureau of commerce);
(2) Apply for changing the WFOE’s Business License with the local administration of industry and commerce;
(3) Apply for the modification of registered capital information with the local branch of State Administration of Foreign Exchange, for approval of the additional investment;
(4) Engage a Chinese public registered accounting firm to issue a Registered Capital Verification Report;
(5) Modify relevant information in local tax bureaus; and
(6) Other procedure required by local government authorities.

In our experience, the completion of the whole procedure to increase registered capital takes 2 to 3 months. Your business will be affected by this delay.

Registered Capital Injection
The shareholder(s) of a WFOE may make capital contributions in currency, in kind (such as equipment), in intellectual property rights, or by other non-currency means that may be assessed on the basis of currency value and transferred according to Chinese law. The value of non-currency contributions shall be assessed and verified by a China-qualified appraisal organization and are not permitted to be either under or over-valued. The amount of the capital contributions in currency paid by all the shareholders shall be not less than 30% of the registered capital of the WFOE.

The shareholder(s) may choose to inject capital contributions in the form of a lump sum or by installments. If the registered capital is chosen by the shareholder(s) to be injected in a lump sum, the shareholder(s) must contribute the whole registered capital within 6 months after the WFOE has obtained its Business License. If the shareholder(s) intend to inject the capital contribution in installments, the first installment should not be less than 15% of the capital contribution subscribed by the shareholder(s) and must be injected within 3 months after the WFOE has obtained its Business License, the rest of the registered capital must be completely injected within 2 years after the WFOE has obtained its Business License.

Chapter3: Rent an Office

After obtaining the WFOE’s name pre-approval from local administration of industry and commerce, and before engaging later steps in establishing the company, a lease contract is required to be concluded between the proposed WFOE and a landlord for the rental of office space to be used by the WFOE. As this important step sometimes leads to confusion by investor(s), we would like to provide some guidance based on our experience of common question raised:

Finding an Office

The type of building in which the office of the WFOE can be established shall be registered only for commercial use. If the building is approved by the local construction bureau for residential use, or for both commercial and residential use, establishing the office of a WFOE in such a building will be difficult. Sometimes, a building may not have been approved for commercial use even if it is like a commercial building in appearance; visual inspection of a building is insufficient to conclude it is registered solely for commercial use. We recommend before signing a lease agreement, the investor(s) employ a professional registration agent to check and verify the landlord’s Premises Ownership Certificate.

Landlord Document Verification

Before entering into a lease agreement, it is advised to check whether the potential landlord is legally entitled to lease the office offered. The landlord should be able to provide sufficient legal documentation. Not checking this may cause later problems for your WFOE.

Signing a Lease Agreement

When leasing an office the landlord will often provide a draft lease agreement for your signature. We strongly recommend you engage a legal professional to review and revise the lease agreement before you sign it, in order to mitigate future risks or uncertainties caused by clauses in the contract.

The lease agreement must be signed by the landlord in China. If the landlord happens to have a parent company or affiliate in your home country, they are not permitted to lease this property.

Chapter4: Steps in the Establishment of a WFOE in China
The following procedures are necessary steps in the establishment of a WFOE and compliance with relevant Chinese laws and regulations:

(1) Apply for pre-approval of the WFOE’s Chinese name at the local administration of industry and commerce;
(2) Submit the Feasibility Study Report (“FSR”) for setting up the WFOE and the WFOE’s AOA, and submit required information regarding the WFOE to the local bureau of commerce for approval;
(3) Apply for the WFOE’s Certificate of Approval from the local bureau of commerce;
(4) Apply for the WFOE’s Business License from the local administration of industry and commerce;
(5) Apply for the WFOE’s Enterprise Code Certificate from the local technology supervision bureau;
(6) Register the WFOE’s Company Seal, Financial Seal and Legal Representative Seal with the local public security bureau;
(7) Apply for the WFOE’s Foreign Exchange Registration Certificate from the local administration of foreign exchange;
(8) Tax registration of WFOE at the local and national Tax Bureau and application for the WFOE’s tax registration certificate;
(9) Apply for registration with the local customs bureau;
(10) Register with the local bureau of commerce to carry out import and export business;
(11) Apply for approval for the WFOE to open RMB and foreign currency capital accounts;
(12) Apply for the WFOE’s Finance Registration Certificate from the local financial bureau; and
(13) Apply for the WFOE’s Statistic Certificate from the local statistical bureau.

The government has advised a time-frame for completion of the procedure of around 4 months.

Chapter 5: Human Resource Issues

China has enacted a new Labor Contract Law in 2008 which, together with existing regulations and laws, broadly increases worker protection. It is important to have a thorough understanding of the laws and regulations applicable to staff employment.

Staff Engagement
A WFOE is allowed to employ and engage its own staff. However, many foreign investors choose to employ staff through Chinese domestic HR service companies, including FESCO, ADP, as well as others, rather than employ them directly.

According to the Labor Contract Law of the P.R. China, a WFOE shall conclude a written labor contract with its employee within one month of the date on which the WFOE started to use such employee. This contract ensures certain benefits for employees. Failure for an employer to enter into a contract with an employee after this period opens the WFOE to potential compensation payments.

Mandatory Provisions in Labor Contracts
A labor contract shall include the following provisions:
 Name, domicile and? legal representative or main person in charge of the employer;
 Name,? domicile and number of the resident ID card or other valid identity document of the employee;
 Term of the labor contract;?
 Job description and the? place of work;
 Working hours, rest and vacation;?
 Labor? compensation;
 Social insurance;?
 Labor protection, working conditions? and protection against occupational hazards; and
 Other matters which laws? and statutes require to be included in labor contracts (such as disclosure of occupational disease or ailment that occurs as a result of work or occupational activity).

For More Details, pls feel free to contact us:

Tina Chan, Attorney-at-law

Lawyer licensing of PRC: 14403200911135804

Guangdong Sun law firm, Shenzhen office

Cell: 0086-13714641589

Tel: 0086-755-83033101

Fax: 0086-755-83033022-3101

Msn:clt198187@hotmail.com

E-mail:clt@sunlawyers.com

Add:2th floor, Gong-jiao building, Lian-hua Road, Fu-tian, Shenzhen, China