On March 15th, 2019, the National People’s Congress of China passed its new Foreign Investment Law (FIL) that replaces the Wholly Foreign Owned Enterprise law (along with the Sino-Foreign Equity Joint Venture and Contractual Joint Venture laws).
Many questions surround the actual implementation of the FIL and much remains to be seen. With regard to WFOEs, however, the business setup process is expected to continue with only minor changes and several new possibilities in terms of fund management. Generally speaking, the various rules governing WFOEs have already been extensively relaxed over the past few years:
WFOEs were originally set up for export manufacturing and introducing advanced technology and later for consulting, services, trading and software development. Today, any business fully owned by an overseas investor is a WFOE.
WFOE’s will mainly be governed by the Company Law from January 2020 onwards. So how do you set up a foreign company in China? Hong Kong and Taiwan will continue to be treated as foreign regions, so incorporating a company in Hong Kong is still a viable entry strategy for setting up a business in China. Opening a limited liability company in Hong Kong and a Hong Kong bank account is a practical start to doing business in China. Indeed, Hong Kong company setup is the most logical first step and foreign investors can consider setting up a WFOE in China under their Hong Kong company as their “stage 2” plan, after regional business stabilizes, resulting in a necessity to receive funds locally in China.
Existing registered WFOE’s can continue under the same setup until December 31st 2024, and the procedure for setting up a foreign owned company in China remains the same until January 2020. There will only be minor differences from 2020 onwards when foreign enterprises are governed under the Companies Law; WFOE’s will be required to contribute 10% of their profits to their statutory surplus reserve funds until their reserve totals half of their share capital and liquidation will be carried out by shareholders. WFOE’s will be able to operate as joint stock companies without specific requirements for amounts to be contributed to their employee welfare and bonus funds.
WFOE administration will also shift from the board of directors to shareholders, which is a restructuring process required for any existing setup, especially those with Joint Venture equity holdings whereas Joint Venture partners may need to re-enter a new shareholders’ agreement and consider to restructure the board under the new law.
Mainland China and Hong Kong will continue their longstanding free trade agreement, the Close Economic Partnership Agreement (CEPA). The agreement covers trading in commodities without tariffs, recognition of Hong Kong service providers associations and qualifications in the Mainland, and preferential investor access. The development and integration of cities Greater Bay Area further enhances the scope of the CEPA and Hong Kong’s strategic positioning as a window into China.
The process of setting up a WFOE remains unchanged under the Companies Law.
The steps are as follows:
Generally, the costs associated with setting up a foreign owned business in China are incurred during the incorporation process, which is extremely difficult to do without a good service provider, and sufficient capital. In our experience, generally speaking manufacturing enterprises require at least 1,000,000 RMB, while trading companies should expect to provide at least 500,000 RMB. However there is no stated time period during which the capital has to be fully paid up, so investors can do so during the lifetime of the WFOE.
We can provide you with the ideal company incorporation services for every step of the way and assist with your on-going compliance needs. Your WFOE’s company formation, tax strategy and bank account set up are in safe, experienced hands. Contact us with any enquiries and we will get back to you with a quotation for personalized services tailored to your needs. We take pride in our advisory services, having developed our operations working with numerous clients in Hong Kong and the Mainland over the past 50 years. We know all the benefits and drawbacks and we are always up to date with the business environment on the ground.
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