Determine the right China legal structure for foreign enterprises - China WFOE

Legal Status

A China Wholly Forign Owner Enterprise (China WFOE) is an independent China legal entity registered with only foreign capital under the laws of China law. The Board of directors and legal representative are appointed by the foreign parent company. The WFOE is governed by the China company laws and regulations. The WFOE is similar to a limited liability company in Hong Kong. Legally, the minimum capital to be registered can be as low as USD4,000 (RMB30,000). However, the registered capital is usually much higher than this for practical reasons.

Please however do not take limited liability as a granted. If the owner of the company abuses (such as performing fraudulent acts) the limited liability status, this legal form can be taken away.

Business Scope

China Company Law restricts companies on their business scope, that is, business activities these companies can perform. The business scope of a WFOE is usually restricted to a manufacturing or processing or general service activity. Pure trading and distribution as a business scope (with restrictions to only a single category of products) is now allowed.

Within its business scope, the WFOE can perform normal commercial activities of materials procurement, products manufacturing, reselling or distributing its products, both locally and abroad. The WFOE can also declare customs, import and export according to its business scope. Local currency can be exchanged provided that the currency is used for legitimate business needs in line with its business scope. Profits can also be repatriated out of China in foreign currency.

Employment

Local staff can be hired directly under the China labor law. WOFE can hire and terminate employees. Foreign employees can also be appointed. Following the appropriate procedures, foreign employees can apply for work and residence permits as well as the appropriate China visas.

Office

The office of WOFE should be within authorized commercial buildings. In fact, all business registration should accompany the duly signed and stamped lease agreement; and, the property certificate of the landlord. The Government officers will ensure that the office is situated in authorized commercial buildings.

Taxes

WFOE pays enterprise income tax (and other turnover taxes if applicable). The tax rate has been leveled with local Chinese companies at 25% of the net profits. The tax is usually paid on a quarterly basis to the State tax bureau.

There are still some cities giving out tax concessions to encouraged industries or export-oriented industries to pay enterprise income tax at a reduced rate at 15%. However, these tax incentives are getting more difficult to obtain as the qualification process becomes much more stringent.

The individual income tax of the employees of the WFOE must be deducted and withheld from the salary payment on a monthly basis. The employer is obliged to deduct tax at source and paid to the Local tax bureau.

Other Registration Issues

There are other compliance issues that a WFOE must follow in order to be registered. For instance:

There is certain format on the proposed name of the WFOE to be followed. Of course, there are restrictions on the use of some words in the company name.

The articles of associations of the company, feasibility study and business scope are key elements for China government to grant its approval. An environmental protection study should also be made and approved.

The resumes and passports of the company management members should be submitted. Of course, there should be proper appointment letter and employment contracts properly executed by the parent company.

The parent company’s financial statements or certificate of financial position issued by practicing certified public accountants should be provided. This is required to prove the financial strength of the parent company to pay up the registered capital and support implementation of the feasibility study.

Understand the implications of China legal structure is of utmost importance

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