China offers a challenging yet exciting market for non-resident investors to navigate and succeed in. Firstly, there are a lot of paperwork that require to be completed in the local and provincial level. The benefits of establishing a wholly foreign owned enterprise (WFOE) however outweigh the tedious registration process and all other risks related to doing business in China. A Wholly Foreign Owned Enterprise (WFOE) is a limited liability company that was specially designed for international investors. Please note that Hong Kong is the gateway to China. That’s why a Hong Kong company may also help you to optimize your investments in China.
The famous Wholly Foreign Owned Enterprise
For a Wholly Foreign Owned Enterprise (WFOE) to start business activities in China, it must have at least one investor. A maximum of 50 foreign investors are permitted, though it is recommended to structure a consolidated international shareholdings in an offshore company before diving into creating a company in China.
Another company structure in China, the Foreign Invested Enterprises (FIEs) can be established using partial and full foreign capital. In the latter, foreign investors gain full control of operational, investment, and management strategies on behalf of the company. A Wholly Foreign Owned Enterprise (WFOE) with more than one investor is required to have its own board of directors. On the other hand, a Wholly Foreign Owned Enterprise (WFOE) with a single investor must have one executive director instead of a board of directors.
While Wholly Foreign Owned Enterprises (WFOEs) can engage in various industries with a few restrictions in mind, investors are deemed to follow provisions under China’s Foreign Investment Industrial Guidance Catalogue and industry-specific regulatory rules. Liberalization of foreign investment enhanced the popularity of Wholly Foreign Owned Enterprise (WFOE) among international investors, with Wholly Foreign Owned Enterprise (WFOE) being one of the most commonly used investment vehicles in China.
Wholly Foreign Owned Enterprise (WFOE) Registration Requirements
To establish a Wholly Foreign Owned Enterprise (WFOE) in China, investor/s must must the following criteria:
- At least 1 investor for a Wholly Foreign Owned Enterprise (WFOE) with permanent residency in any other country except China, Hong Kong, Macau, and Taiwan.
- One (1) director or board of directors. In a Wholly Foreign Owned Enterprise (WFOE), an investor can be assigned as a director.
- One (1) legal representative
- One (1) general manager
- One (1) supervisor, who does not assume director, manager, senior executive, or legal representative of a Wholly Foreign Owned Enterprise (WFOE)
- Registered business address, one which can be a virtual office address
- Size and scope of a the new Wholly Foreign Owned Enterprise (WFOE) to be established
Depending on the industry and region, a Wholly Foreign Owned Enterprise (WFOE) may be required additional documents to successfully incorporate a company in China.
Wholly Foreign Owned Enterprise (WFOE) Registered and Starting Capital
It can be confusing for first-time investors in China to differentiate between an actual starting capital and a registered capital. A reliable consulting firm that helps set-up Wholly Foreign Owned Enterprise (WFOE) in China can provide investors with a deeper understanding between these two factors.
At present, China has eliminated rules pertaining to the minimum amount of starting capital and registered capital for Wholly Foreign Owned Enterprise (WFOE) companies. By rule, there is no minimum capital share that needs to be invested upon establishment except for the actual cost of the registration process.
To facilitate a smooth and straightforward establishment and issuance of certification of registration, investors are recommended to declare a registered capital of 1,000,000 RMB or more for Wholly Foreign Owned Enterprise (WFOE)
Investors need to bear in mind that the registered capital does not have to be introduced into the Wholly Foreign Owned Enterprise (WFOE) immediately upon registration. The recommended starting capital pertains to the amount that a company aims to produce through a Wholly Foreign Owned Enterprise (WFOE) within a fixed 29-year period. A Wholly Foreign Owned Enterprise (WFOE) registered capital may be utilized to support the costs of operating a newly-formed company and its activities, including payment to workforce, office or facilities lease payment, and the purchase of products.
With the simple and straightforward registration process, it’s no wonder many investors are keen on establishing a Wholly Foreign Owned Enterprise (WFOE) in China.
Registering a China Address by a Wholly Foreign Owned Enterprise (WFOE)
To complete the registration of a Wholly Foreign Owned Enterprise (WFOE) in China, foreign companies are deemed to provide a valid registered address to local authorities. By rule, Chinese authorities typically request investors to submit the following documents:
- 2 original copies of office lease contract
- 2 copies of housing ownership certificate related to the registered company address. The document must be stamped with the official signature of stamp of the title holder
In some regions in China, it is possible to build a Wholly Foreign Owned Enterprise (WFOE) using a virtual office lease contract instead. According to the Free Trade Zone (FTZ), some Chinese regions permit the establishment of a Wholly Foreign Owned Enterprise (WFOE) with a virtual office address only.
In the case a Wholly Foreign Owned Enterprise (WFOE) intends to engage in export activities, registration of an actual office address is necessary to gain full tax return benefits.
Required Documentation for China Wholly Foreign Owned Enterprise (WFOE)
In the event that the investor of a Wholly Foreign Owned Enterprise (WFOE) is a company, the following documents must be filed to ensure successful company incorporation:
- Comprehensive scope of the new company to be established in China. If a company wish to engage in export and import activities, a company must list all the goods that will be provided.
- Bank letter references
- Generate at least ten Chinese names for the company
- 2 notarizations of investor’s identification and certification of registrationThese documents should be notarized by a local public notary and verified by the Chinese Embassy in the home country of the investor.
- Copy of original passports and copies of directors, legal representatives, and supervisors of the Wholly Foreign Owned Enterprise (WFOE) to be incorporated.
- Copies of passports of the financial manager and tax specialist of the company to be established.
Comprehensive Wholly Foreign Owned Enterprise (WFOE) Set-Up Procedure
Before you can successfully establish a Wholly Foreign Owned Enterprise (WFOE) in China, investors need to complete various pre-licensing requirements, including:
- Gathering all pertinent documentation for the application process
- Approval of Chinese company name for application and pre-registration
- Submission of documents signed by the investor/s
- Wholly Foreign Owned Enterprise (WFOE) application process
- Completion of Certificate of Approval from the Ministry of Foreign Economic Relations and Trade
- Completion of business registration license
Investors need to secure all the necessary business license to operate in China. Here are a few activities that need to be completed before a Wholly Foreign Owned Enterprise (WFOE) can start operating in the country.
- Registering with local public security departments
- Production of company stamps
- Opening a bank account in China
- Application and approval of import and export license, if needed
- Application of general taxpayer (VAT) and tax refund permit, as requested
Overview of China Taxation Regime for Wholly Foreign Owned Enterprise (WFOE)
China is known to have a complex tax regime. For investors looking to establish a Wholly Foreign Owned Enterprise (WFOE), there are the relevant taxes to know:
Enterprise Income Tax
Depending on the scale of a taxpayer, the Enterprise Income Tax in China must be paid on monthly or quarterly within 15 days at the end of the month or quarter. This will be assessed and settled with tax bureau at the end of the year or within five months starting the 31st of December of each year.
In essence, Enterprise Income Tax is calculated based on Entrepreneur Income or profit tax that a company generates in a monthly or quarterly basis. The contract price if services provide in China may also be used to calculate the Enterprise Income Tax that a Wholly Foreign Owned Enterprise (WFOE) must pay.
In China, the tax authorities have the right to assess tax rates after initial assessment. Simply put, Enterprise Income Tax= Profit Before Taxes or Contract Price X Applicable Profit Tax Rate X Applicable EIT Rate.
Typically, the profit tax rate ranges between 15% and 50%, depending on the type of services a Wholly Foreign Owned Enterprise (WFOE) is providing. The profit tax rate is divided into the following activities:
- 30% to 50% for management services
- 15% to 30% for design and consulting services
- 15% for other services
The profit tax rate is decided by the local tax office. According to China’s Corporate Income Tax Law, Applicable Enterprise Income Tax can reach up to 25% for foreign enterprises such as Wholly Foreign Owned Enterprises (WFOEs)
Value Added Tax
The Value Added Tax rate percentage in China will depend on the scope of activity of a Wholly Foreign Owned Enterprise (WFOE). The standard Value Added Tax rate in China is 17% for trading companies and 6% for consulting firms. Additionally, Value Added Tax will be deductible in Wholly Foreign Owned Enterprises (WFOEs).
The three points in the Value Added Tax system in China for Wholly Foreign Owned Enterprise (WFOE) are as follows:
- A Wholly Foreign Owned Enterprise (WFOE) must be regonized a general tax payer before it can claim VAT deductions throughout the course of its business.
- Special VAT invoice can be used for Value Added Tax deductions.
- A Wholly Foreign Owned Enterprise (WFOE) must generate revenue before it can start paying Value Added Tax. A foreign-owned company in China must generate legal income within the capacity of the entity in order to deduct Value Added Tax invoices from the total Value Added Tax amount to be paid on its income.
It is crucial to remember that once you paid Value Added Tax or other taxes in China, it is less likely to get them back directly. Unless a Wholly Foreign Owned Enterprise (WFOE) files for tax administration assessment from the tax bureau to correct mistakes, Chinese invoices are only considered valid for 360 days for deduction.
- Withholding taxes are applicable in case the revenues made in China will be transferred overseas.
- A Service Agreement will be concluded if a Chinese Wholly Foreign Owned Enterprise (WFOE) will be sent to a foreign entity. A total of 10% will be assessed on the amount of the Service Agreement contract. The final rate of withholding tax will be assessed after careful evaluation of contracts and invoices.
- Withholding tax in China mainly consists of Enterprise Income Tax (EIT) after a thorough decision by a Chinese tax officer. Withholding tax ranges between 20% and 25%, Value Added Tax between 6% and 17%, and Surtax between 11% and 13% depending on the location of the evaluating tax bureau in China.
- According to the country where a money will be remitted, tax discount for the total amount of Enterprise Income Tax paid in China may be applicable according to prevailing double tax treaty agreements.
- When it comes to Chinese Value Added Tax and Surtax, they are not usually recoverable in other countries.
- Wholly Foreign Owned Enterprise (WFOE) may pay income tax before repatriating the dividends abroad.
To take advantage of the excellent investment opportunities in China, Damalion can help you with registering a company in Hong Kong. We also have a dedicated team of consultants that specialize in assisting private and institutional investors in registering a company in China. In this way, investors can utilize all the beneficial tax advantages in Hong Kong and the growth potential of being able to create and expand investment structures in Mainland China. Call a Damalion expert today and discover how to optimize your business potential in one of world’s biggest economies.
This information is not intended to be a substitute for specific individualized tax or legal advice. We suggest that you discuss your specific situation with a qualified tax or legal advisor.