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China Business Setup Guide (WFOE)

Updated:2018-5-11 15:16:55    Source:www.tannet-group.comViews:864

China business setup (WFOE) can vary somewhat depending on the chosen structure, namely a service WFOE, manufacturing WFOE, or trading WFOE, and its associated business scope. It is advisable for potential investors to enlist professional assistance when navigating the establishment procedures in order to ensure the venture’s success and to guard against any future issues. The following steps offer a rough guideline of the establishment process.

Step 1: Name Approval
One of the first steps for foreign companies is to decide on an appropriate name for the Chinese market. The key pieces of legislation governing this are the Regulations on Registration and Management of Enterprises Name and the Implementation Measures on Registration and Administration of Enterprise Names, which detail how a Chinese company name should be structured. It includes:

(1) Administrative region name of incorporation;
(2) Brand name;
(3) Industry or business;
(4) ‘Company Limited’.

Additional guidelines restrict the content of names, forbidding the use of content that either misleads consumers or hinders fair competition, or damages or contradicts national unity, policies, social ethics, culture, or religion. Special characters, such as Arabic numerals, foreign symbols or alphabets, are not permitted, and certain words such as ‘China’, ‘Chinese’, ‘National’, ‘State’ or ‘International’ can only be used under limited circumstances.

Step 2: Office/Facility Space Lease
As the company name contains the city of registration, careful consideration should be made before engaging an estate agent or landlord. In some cases, the city name can affect operations, as certain city names carry prestige and credibility that may impact sales, business development, and governmental relations.

If the intended facility space is not owned by the investor, it needs to be leased for legal operation in China. The lease should be made before submitting the application for incorporation, and a rental period of at least 12 months starting from the application submission date to the AIC is also required. Leases should be made with correct formatting, and registered with the local real estate authority. A land rights certificate and personal documentation should also be obtained from the landlord to ensure the legitimacy of the property.

Step 3: MOFCOM Approval or Record-filing
As long as a company’s business scope is not restricted by the Negative list for Foreign Investment (in free trade zones), or is not subject to the special administration measures for foreign investment access, the application can go through a simplified record-filing process, recently promulgated in the Provisional Measures for the New Filing System issued by MOFCOM. This process requires:

(1) An application form;
(2) Commitment letter by all investors or their representatives;
(3) Business license or pre-approval documents for the name of the WFOE;
(4) Power of attorney appointing the representatives and the identity paper of the representatives; and
(5) Certificate or identity document of investors and legal representative for the application.

Step4: Five-in-one Business License
After receiving an Approval Certificate from MOFCOM, registration and application for a business license can be made to the local AIC within 30 days of receipt. As with the record-filing process, the application for a business license has recently been significantly simplified with the introduction of the five-in-one business license, which has replaced the previous three-in-one license.

Accompanying the new business license scheme is an online business registration system, which facilitates information sharing between all departments involved in the registration procedure, thereby simplifying the overall establishment process. One application form and one set of application materials can be submitted to an application terminal at the local AIC, reducing the process from one month to around 15 to 25 days.

Step 5: Carving Chops
Unlike practices in the West, a company’s official seal in China has legal authority over the signature of a legal representative and has the power to validate documents and contracts, regardless of who uses it. Its possession and whereabouts are therefore of utmost importance.

All companies operating in China are required to have an official seal, which is round in shape and bears the official company name in Chinese, and where applicable, in English. A company seal can be obtained from the local Public Security Bureau (PSB) after successful registration with the AIC.

Other than the official company seal, a company must also have a legal representative seal, a financial seal, a seal for use on fapiao, and in the case of trading WFOEs, a customs seal. A WFOE’s financial and legal chops are usually required in order to verify the ‘signature’ of the company when opening a bank account in China.

Step 6: Open Foreign Exchange and RMB Bank Account
A WFOE in China needs to have a minimum of two banks accounts: an RMB basic account, and a foreign currency capital contribution account. An RMB basic account is a must for a WFOE’s daily business operations in China. This account is the only account from which the company can withdraw RMB cash, and often acts as a designated account for making tax payments. The foreign currency capital contribution account is necessary to receive capital injections from overseas. Approval to open this account can be obtained from SAFE. A WFOE can establish bank accounts with both Chinese and international banks.

Step 7: General VAT Taxpayer Related Procedures
Taxpayers in China are split into two categories when it comes VAT: general taxpayers and small-scale taxpayers. The latter are entities involved with wholesale and retail with sales of less than RMB 800,000 per year, manufacturers (including those providing processing, repair, and replacement services) with sales not exceeding RMB 500,000 per year, and taxpayers offering VAT-taxable services with maximum annual sales of RMB 5 million. All other taxpayers come under the general classification.

Despite lower VAT rates for small-scale taxpayers, general taxpayers can deduct input VAT from output VAT, reducing the overall tax burden of the company. General taxpayer status also permits the company to issue special VAT fapiao to its clients and customers. Provided a sound accounting system can be demonstrated, entities who fall into the small-scale taxpayer category can also apply for general taxpayer status, the application process for which has recently been simplified.

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