It is possible to conduct business in China using local agents or establishing a representative office. Recently, however, scandals and reports of big cultural gulfs between partners in Joint Ventures have resulted in a considerable drive to enter the Chinese market independently. In most cases, a Wholly Foreign Owned Enterprise (WFOE/WOFE) is an increasingly popular option for many businesses taking the Chinese market seriously. In addition to projecting a sense of stability and commitment that is very attractive to local investors, partners and customers alike, having a legal entity present allows a company to hire its own employees, do its invoices in RMB and gain valuable local market intelligence without a middleman.
However, the establishment of a WFOE/WOFE is notoriously complicated. While the regulations are rigorous and government audits are common, any prospective enterprise shouldn’t worry so long as it maintains strict adherence to the guidelines during the application process. As long as the paperwork is robust and complete, the process is relatively quick and painless.
The Chinese central government has put out a list of businesses it labels either “prohibited,” “restricted” “permitted” or “encouraged.” The list of these industries can be found in the Catalogue for the Guidance of Foreign Investment Industries, last updated in 2011. For example, industries such as mining and quarrying rare earth minerals are listed as “prohibited” for the purpose of foreign investment, while other fields are open only to companies operating limited equity or contractual JVs. If the WFOE’s intended business is in accordance with these restrictions, they may register as one of three different types; Service (or consulting) WFOEs are intended to offer expert service, advise and other consulting services; Trading WFOE (or FICE, a Foreign-invested Commercial Enterprise) which intends to engage in trade activities, be they retail, wholesale, etc.,; and Manufacturing WFOEs, who are aiming to manufacture goods in China. Of these three types, a Service WFOE requires the least amount of capital and can be established relatively quickly, while Trading or Manufacturing WFOEs require considerably more commitment.
Chinese regulations require WFOE to have enough funds registered as capital to support itself until it can produce enough cash flow to support itself. Typically, the registered currency must be either offshore RMB or foreign currency converted to RMB after having entered the country; domestically secured RMB is usually unacceptable. How much funding is necessary is a particularly nebulous area. The minimum official capital requirement is RMB 30,000 for a venture with multiple shareholders. Single shareholders, on the other hand, must provide a minimum of RMB 100,000. It depends, however, on region and the targeted industry. As mentioned before, Manufacturing WFOEs have a much higher minimum, between RMB 500,000 and RMB 1 million, into which things such as the factory and equipment costs can factor. FICEs and Service WFOEs can require anything from RMB 100,000 to RMB 1 million.
Previous attempts to found companies with just enough capital to cover operating costs have sometimes been met with rejection. For example, a compan approached the Shanghai municipal government with registered capital of about $40,000, significantly over the minimum RMB 100,000 regulations have suggested, and were told to register capital of at least $150,000. The company replied by saying that registering that much capital would be wasteful as costs could easily be covered with the aforementioned amount, but the local government officials said that a larger amount of capital would make registration much easier; audits would show it as less risky than a company with just enough to cover initial operating costs.
This highlights the fact that the amount of registered capital for WFOE varies depending on the type of enterprise being registered, as well as the region it is being registered in. Overall, however, an amount between $140,000 and $150,000 has been reported to be the most acceptable for both municipal and central governments.
It is vitally important that any WFOE carefully structures its business scope. The business scope is a single sentence that describes exactly what the WFOE’s function will be. This sentence, which will ultimately feature on the business license, is critical; once it has been approved, any attempt to expand or change the enterprises’ business will require a new approval. Failing to secure new approval could result in the company being shut down. Examples of business scope are things such as providing a specific kind of technology consulting, manufacturing, marketing and promotion, etc. Certain companies have applied with a business scope that was acceptable to a district government but too vague or inaccurate for central government, usually as a result of following the advice of businesses offering WFOE registration services. This has also resulted in businesses being shutdown.
One important rule that needs to be considered is that the WFOE must secure physical space for its business before the application can be approved. Service and Trading WFOEs mst have office space secured in a dedicated business space (not a residential building or a combined residence & commerce building), while Manufacturing must have factory space rented. These contracts must be signed and secured before the application can be completed and registration granted. It should also be noted that the company’s address must be unique to its business; previously, businesses have been penalised for having established their offices in a building that shared an address with other enterprises. If the WFOE wishes to change address to a different district, it must reapply for a new license with the new district government.
Overall, the regulations for establishing a WFOE can be convoluted and involve several pit-traps for unwary companies. There are several companies willing to provide support and information for prospective applicants. The paperwork should be treated with extreme care and attention to detail. While the rules are strict and can be unclear, China is still willing to encourage foreign investment, so long as it is done under its terms and conditions.