WFOE: Setting up in China

China market entry strategy

Before deciding on doing business in China, it is important to find a good strategy on how to enter the market, one that will best suit a new business in China. It is important to first identify the market. Different businesses have different markets depending on the locations. One should first identify the market and their location. There are some of the locations that are usually appropriate for certain business setups. For example, Shanghai is well known to be a great place to start chemical, petrochemical, automobile, pharmaceutical, financial and electronic apparatus companies.  There are certain cities such as Zhejiang, Shanghai and Guangdong that are known to be good cities to start-up a business because of their high population.

It is also important to identify the government regulations when formulating a market entry strategy. The regulations and legislations are usually important factors that affect the timeline and cost of market entry. One should then follow due diligence, hire staff, conduct market research and find strategies for protecting Intellectual Property rights in the country.

China Company set up

There are rumours different ways in which foreign firms may start a business in China. The country now allows foreign companies to venture into the market as Wholly Foreign Owned Enterprise (WFOE), Representative Office, Joint Venture and Foreign Invested Partnership Enterprise, a relatively new option.  

WFOE setup in China

Wholly Foreign Owned Enterprise, also abbreviated as WOFE is a limited company based in China and owned by a foreign investor. The government limits the investment that the foreign investors put into the firm when setting it up. The wholly owned foreign enterprise is different from other foreign business set-ups such as joint venture in that the foreign investors control and invest into the business without any influence from the Chinese government, except for the government regulations such as corporate registration and taxation.   

Wholly owned foreign enterprise is permitted to operate in the country like any other company, invoicing the consumers and earning profits unlike for setups such as a representative office. The company can also carry out its operations using the Chinese currency and therefore the costs and invoices are tax deductible for the WOFE. The companies can also hire as many foreign staff as they may see fit provided they are compliant with the country’s rules governing foreign workers. The greater the company, the more foreign workers it can employ. The company can also hire local staff if they are willing.

Choosing a business name

Before registering a company in China, foreign investors should first choose a business name that will be given to the firm. The company name for the WFOE should be in Chinese. According to the business naming regulation in Chinese, the first word in the business name should be a company name, the second word should be the activity the business would undertake, the third word should be the location of the business and the fourth word should be the company structure. After selecting the appropriate name to call the business, it is then registered with the State Administrative Bureau for Industry and Commerce (SAIC), this is the China company registry. If a company is to use the name ‘International’ or ‘China’ in their Chinese business name, they should have a minimum capital of 10 million USD. A country should pre-register a name with SAIC with five to eight alternative names before they undergo any applications. The SAIC will then decide whether a name is appropriate or not.

China Company Registry

Company registration in China is usually different to that of other nations. The Chinese regulations usually discourage foreign investors from submitting their application documents for their start-up business directly to the relevant authority in China. This is especially true for the foreign investors starting up WFOE in China. For the investors to submit their relevant documents, they usually have to find a public representative within China, an entity that is authorised by the authorities to present such document and act as a sponsor. This entity submits the documents for scrutiny and approval by the State Administration for Industry and Commerce.

The procedures that are usually required for setting up a wholly owned foreign enterprise in China is as follows:  

• Registering an appropriate business name with the State Administration of Industry and Commerce.
• Certificate of approval by foreign economic cooperation bureau or ministry of commerce.
• Application for a business license with the State Administration of Industry and Commerce.
• Developing Chops that will be registered with the Public Security Bureau
• Obtaining organisation code license from the Technical Supervision Bureau
• Getting a tax certificate from the taxation bureau
• Registering and being approved by the State Administration of Foreign Exchange.
• Opening a China Corporate bank account that supports RMB and foreign currency
• Funnelling capital from the foreign investor’s bank account overseas
• Obtaining a capital verification report from a certified public accountant
• Applying for a permanent business license from the State Administration of Industry and Commerce
• Registering for a financial certificate
• Registering for a statistics license
• For the manufacturing and trading WFOE they should get import/export license

Representative office in China

Before starting a company registration in China when you are only considering venturing into the Chinese market, foreign investors at times open representative office, which are liaisons to the parent company. An investor may do this to first test the Chinese market before setting up a WFOE. However, the representative office is usually restricted to conducting businesses that do not have profits. After the test, the foreign investor can then shut down the representative office and set up a WFOE.