How to set up a company in China is a top priority for any company that wants to open or expand its business in China. The setup process is not always easy, and can be long, resource-intensive, and often expensive. However, with proper preparation, it can be made simpler-one of the key issues or delays in the process is usually insufficient preparation.
Before starting the registration task of a Chinese WFOE, it is very important to be familiar with all the required requirements, procedures and documents. But even before that, there are some key areas to consider-the sooner the better. This will further save time, money and frustration.
1. Decide on planned WOFE structure
A WFOE will need an ownership structure defined from the start. This is not always as simple as simply using a foreign parent company-many companies prefer to use a separate holding company structure or open a specific holding company in tax-efficient locations such as Hong Kong or the British Virgin Islands. The best decision requires consideration of various issues, including company size and future plans, taxes, required anonymity, and legal circumstances.
In recent years the situation has become more complex, with the introduction of “Actual Controlling Person” regulations. This involves the identification of the ultimate owners of the company. It is required to identify all investors in a WFOE, down to the individual or public company level (no private companies are permitted). Holding structures can still be used to facilitate complex ownership, but not to hide the identity of the owner or owners, and this needs to be considered from the outset.
2. Understand WFOE Capital requirements
Before 2016, the Chinese government set a fixed minimum level of registered capital. For some companies, these may exceed the requirements and are part of the high cost of doing business in China. Abolishing these minimums now is a good thing for Chinese WFOEs, but it is still important to consider the required capital as early as possible.
The reasons for this are less to meet government requirements, but more to aid business operations. As a guide, sufficient funding is needed to cover the WFOE’s financial obligations before the company is self-supporting (often set as 1 year), but this will vary for different company types and business plans. There is also now much more flexibility than in the past regarding the time period over which capital should be injected, and WFOEs can set this to match their planned operations.
Getting this right at the outset can be challenging, but it is important. Capital injection remains an efficient way of funding business setup and early operating costs. Any amount needed for permitted activities in excess of capital levels will be taxed as income. If the level is set too high though, funds will be locked into a capital account that could be better used elsewhere.
Capital levels can be changed later but this is a complex and time-consuming process that many companies choose to avoid.
3. Know your scope of business and business location
One of the unusual aspects of opening a WFOE in China is that the business it can perform is guided by its defined “Business Scope.” This is a short description of the business that the company will engage in, provided as part of the initial WFOE registration.
Needless to say, it is important to define this right, and this can take some effort. Thought must be made about both initial and future planned business, but approval is unlikely to be given by MOFCOM for anything too wide. It will also effect doing business with Chinese companies, as they will only engage with (and receive invoices from) appropriately defined businesses. Changing the business scope after incorporation is possible, but it can be a long and complicated process.
Along similar lines, thought should be put into the location (city/province) where the company is registered. It will affect future potential business and clients, both due to the specific location and also due to associations with location and brand (a finance company registered in Shanghai, for example, presents a different image than one registered in Chengdu). There can of course also be other considerations such as differences with taxes or incentives, availability of appropriate staff or business space and costs.
4. Tax planning
The tax will be major considerations and administrative task post WFOE setup, but there are also some issues that need to be thought about before registration.
Firstly, there are some details about the way in which China levies taxes on foreign-owned enterprises in the “pre-operation” stage (the period between the issuance of the business license and the first invoice issuance or revenue generation). Many expenses incurred during this period are eligible for income tax relief. These include wages, printing fees, training fees, registration fees, transportation fees and the purchase of non-fixed assets.
Secondly, tax and costs should be considered early as part of defining the capital levels. There are many areas, both during setup and later, where cost can be settled out of registered capital.
Thirdly, various tax registrations are required during the WFOE setup period, including value-added tax. In recent years, China’s value-added tax system has been simplified, but it is still quite complicated! In particular, companies, regardless of size, should consider the impact of registering as a “general” rather than a “small-scale” VAT taxpayer as soon as possible, as this will affect the tax rate paid and the ability to deduct VAT.
5. Consider availability of time and resources for the setup process
Before embarking on the WFOE registration process, many companies believe that the delays and complexities of registration are mainly related to the Chinese government and obtaining approvals, etc. Whilst there is some truth in this, and there is often an element of back and forwards discussion prior to various approvals being received, one of the main factors in delays is planning and preparation required by the company.
In addition, various departments of the company or related parties usually need to provide a large amount of information and documents. It’s vital to get the right people, consultants, and agents involved and make commitments from the start. The information contained in this article is effective as of September 19, 2018. For updated information, please contact us via email at contact chinapayroll@jimocun.com
