A WFOE in China
A WFOE is a company wholly owned by foreign investor(s). It was designed as a vehicle for foreign investors to carry out commercial activities in China, and is established under the form of a limited liability company, not requiring any local partnerships. This type of vehicle notably allows investors to retain control of their capital and company management.
INS advises and accompanies you in the creation of your business in China. A foreign company can be allowed access to the Chinese market through the following vehicles: a China WFOE (Wholly Foreign-Owned Enterprise), a sales office, a representative office or a joint venture.
A sales office
The creation of a sales office is principally for setting up commercial representation, without legal and financial restrictions. Its establishment requires the involvement of 3 different parties:
- The foreign company, who decides on the characteristics of the sales office, i.e. its architectural properties, location and size;
- The representative of the foreign company in China;
- The local partner, called a PEO (Professional Employment Organization).
This option offers simplicity, flexibility and reduced taxation.
A representative office
A foreign company can use a representative office in order to carry out certain operations in China. While the scope of activities for this type of office may be limited, opting for this separate legal entity offers a simple and low-cost solution for operating in China.
A Joint Venture
A joint venture is a commercial agreement in which at least two parties combine their resources in order to achieve a specific objective. The creation of a joint venture with a Chinese partner allows foreign investors to:
- Make use of the workforce, facilities, networks, channels and other resources of the local partner;
- Avoid administrative problems and other bureaucratic complexities;
- Access certain sectors and industries in China.
Comparison of the different options
Tips for setting up a WFOE in China
By law, foreigners are only allowed to set up certain types of companies in China, the most common being the WFOE. While each WFOE is different, you can expect the process to take anywhere from three to six months on average. While this takes longer than establishing a sales office, it is far less time than a joint venture would require.
The first step in setting up a WFOE is deciding on the business name and verifying this with the Chinese authorities. You will need to provide personal and demographic information about the business owners. You will also need to appoint individuals to serve on the board of managers; these people can be Chinese or foreign nationals.
Once you have set up the business structure, you will need to set up the daily activities of the business and generate what is called a business feasibility report. Depending on the nature of the business, you will need to apply for a business license as well.
If you are operating within a free trade zone, you should be set to go. If your business is located outside of a free trade zone, however, you will need to open a Chinese bank account and deposit the minimum share capital as required.
While this is not required, it is a beneficial idea to register with the government for tax purposes.
Company incorporation in China: Payroll and tax obligations
China requires that employers withhold tax and other deductions from employees’ paychecks, and that employers provide employees with pay stubs. China also requires that companies contribute to Social Security for their employees, which is defined in that country as including health insurance and maternity leave, pension, unemployment insurance, and insurance covering workplace injuries. Social Security amounts differ across China, so withholding amounts can differ across offices.
While tax obligations are relatively straightforward, payroll obligations in China are more complicated. To handle payroll for employees, companies need to have a large local staff that is highly trained on up-to-date tax administration, withholding and payroll obligations.
For WFOEs, the best option might be to work with a local payroll provider who can handle all of the day-to-day duties of administering payroll, such as calculating the appropriate amount of payroll taxes, submitting tax reports as required by China’s government, and ensuring that everything is done accurately and on time. Given that there may be penalties for mistakes in payroll and taking into account the general complexity of China company formation & registration, many companies choose this option.
WFOE registration in China: Licensing and permitting
To operate a business legally, you need a permit. The China permitting process can be confusing, since there are actually two government entities that together deal with permitting and licensing. First, you should apply for a permit with China’s State Administration of Industry and Commerce and then the Ministry of Commerce. These two entities will review your application jointly and notify you of acceptance. Once the application is formally accepted, you will be issued a business certificate.
China requires that food and beverage, telecommunication, construction and manufacturing companies obtain dedicated business licenses beyond the regular business certificate. Given the various regulations based on industry and the multiple entities involved, many companies find it best to get assistance with this portion of their Chinese business strategy.
Investment benefits of Chinese company formation
China is poised for growth and makes an attractive investment opportunity for several reasons. Among the biggest benefits of investing in a Chinese company include:
- Lower regulations: Because China is a low-regulatory environment, entrepreneurs may be better able to experiment and innovate without needing to jump through regulatory hoops. While regulations may change at any time, the current environment is very friendly to business, making this a growth opportunity for investors.
- Excellent logistics: With its superior shipping, road and rail infrastructure, China is poised to meet the logistics needs of many businesses. There are also built-in supply chain efficiencies that make China an attractive environment for opening new businesses.
- Expansive local market: China has an expansive and untapped local market which represents additional business opportunity for investors.
- Tax-advantaged free trade zones: Setting up inside a tax-advantaged free trade zone brings added financial incentives for investors who wish to open a business in China.
- English friendly environment: China is also an English-Friendly business environment. Gain access to a new region while enjoying local work talent who speak high level English.
- Dynamic business sector: It is an exciting, dynamic time to be opening a business in China. While there will continue to be opportunities as the Chinese market matures, the present offers a once-in-a-lifetime opportunity to get in on the ground floor, which can be irresistible to investors.
Get help with your China business strategy
As a leading provider of employment and payroll services, PEO, recruitment, and more, INS Global is poised to help you envision and execute your Chinese company formation strategy.
We have helped more than 300 companies grow global businesses, with many opening new offices in China. Our clients have come to rely on us for business incorporation and licensing, post-incorporation growth, and corporate strategizing that continues to support their goals. We have an intimate knowledge of Chinese regulations, permitting, licensing, payroll, invoicing, tax and business opportunities. Our team makes it easy and efficient to take your business overseas while complying with all legal and regulatory requirements that come with expanding into the Chinese market.
To talk more about your vision for a Chinese company and learn how INS Global can help, contact us today.