As China’s leading administrative specialist, New Horizons supports foreign corporations in China to incorporate a Wholly Foreign-Owned Enterprise, also called a WFOE / WOFE.
A WFOE is a limited liability company that allows companies to engage in profit making activities and hire both local & foreign employees. Further, the company structure can be differentiated as follows: Consulting, Trading, Manufacturing, etc.
Excellent support for your growth in China.
WFOE Setup Requirements
Basic Initial Requirements
- At least 1 investor (from any country except China, including Hong Kong, Macau and Taiwan regions);
- At least 1 director. The investor can be the director;
- At least 1 legal representative;
- At least 1 supervisor (a supervisor cannot be a director, legal representative, or senior executive of the WFOE);
- Registered company address (can be a virtual office address);
- The business scope of the new company to be established.
Registered Capital vs. Starting Capital
The rules on a WFOE’s registered capital as opposed to the actual starting capital in China can be quite confusing for foreign investors.
New Horizons is committed to make this procedure as transparent as possible and state reliable information about the capital requirements to incorporate a WFOE in China.
The Chinese government has in fact eliminated regulations regarding the amount of starting capital and registered capital in order to ease the WFOE incorporation for foreign investors. In theory, no capital needs to be invested upfront except from the actual costs of the registration.
However, in order to facilitate the administrative process of obtaining a certificate of registration, we explicitly advise foreign investors to simply declare a registered capital no lower than 1,000,000 RMB when registering the WFOE (subject to the business activity and district for incorporation).
Note that this amount does NOT need to be injected into the WFOE in the beginning or at once. It is rather the amount of funds that is planned to be generated by the WFOE within a fixed period of 29 years. The registered capital can be used to support the costs of the newly established WFOE’s activities, as payment of the salaries, office or facilities rental, purchase of a product, etc.
In summary, it can be simple and straightforward to setup a WFOE even with a rather low starting capital.
Registered Address in China
In order to incorporate a legal entity in China, foreign companies must provide a valid registered address to the local authorities.
In practice, Chinese authorities request the foreign company to provide the following documents:
- 2 originals of the office lease contract
- 2 copies of the housing ownership certificate related to the register address stamped with the official stamp of the holder
It is possible for the register address to be using a virtual office lease contract. In major Chinese cities, virtual office lease is also possible in the Free Trade Zone (“FTZ”). New Horizons has the ability to provide a register address if there are no food catering or medical instruments trading activities. If the main business activity of the company is related to export, the registration of a real office address is necessary in order to get the tax return. In this case, New Horizon is to recommend a registration in the FTZ.
In case of the investor of the WFOE is a company, the following documentation must be provided for the company incorporation in China:
- The business scope of the new company to be established. In case of import & export activities, the list of goods is to be provided;
- Bank reference letter;
- At least ten Chinese names for the new company to be established; the name should take the following form: AB (名字 – the name given to the company) + (上海 – Shanghai) +贸易/国际贸易 (trading/international trading) + 有限公司 (Limited company);
- 1 (investor’s certificate of identification or registration;
- 2 notarizations of investor’s certificates of identification or registration. The notarization must be issued by a local public notary, and verified by the Embassy of China in the home country of the investor;
- Original passports and copies of directors, legal representatives and supervisors of the WFOE to be established;
- Copies of passports of the financial manager and tax specialist of the enterprise to be established.
General WFOE Setup Procedure
- Collection of the required documentation for the application process;
- Approval of the company name for application/pre-registration;
- Registration of the documents and signature of the investor;
- WFOE application process;
- Obtainment of the Certificate of Approval from the Ministry of Foreign Economic Relations and Trade;
- Obtainment of the business registration license.
- Registration with the local public security bureau;
- Fabrication of the company stamps;
- The opening of the company bank account;
- Application for import & export licenses (if necessary);
- Application for the general taxpayer (VAT taxpayer) and application for tax refund permit (upon request).
Enterprise Income Tax (EIT)
In practice, the Enterprise Income Tax shall be paid monthly or quarterly (depending on the scale of the taxpayer) within 15 days of the end of month/quarter, and be reviewed and settled by the tax bureau at the year-end (within 5 months starting 12/31). Normally, the EIT is calculated on the base of “Enterprise Income”, a.k.a, profit before tax (PBT) generated in a month/quarter, or a contract price for services provided in China by companies without legal entities registered in China (e.g. a HK company providing services in China with dispatched workers). The tax bureau can exercise their right to apply a tax rate after assessment.
EIT = Profit Before Tax or Contract Price x Applicable Profit Tax Rate x Applicable EIT Rate
The profit rate ranges from 15 percent to 50 percent, depending on the type of services provided. Specifically, the profit rate shall be:
- From 30% to 50% for management services; and
- From 15% to 30% for services such as design and consulting;
- More than 15% for other services;
- (Please note that the profit rate category and the effective rate is chosen by the local tax office.)
- According to China’s Corporate Income Tax Law, the Applicable EIT Rate can be as high as 25 percent for foreign enterprises.
For instance, the guiding profit rate for services is 15-30%.
Therefore, EIT = PBT (e.g. contract price) x 15-30% (applicable profit tax rate decided by the tax bureau) x 25% (applicable EIT rate).
Value Added Tax (VAT)
VAT percentage in China varies according to the scope of activity of the company. The standard rate of VAT in China is 17% for trading activities and 6% for consulting activities. In addition, VAT can be deductible for WFOE companies.
The three rules of deductible VAT:
- The WFOE must be a general taxpayer before it could claim VAT deduction during the course of business.
- Only special VAT fapiao (Chinese receipts) can be used for deduction.
- The WFOE must have some revenue to pay VAT for. The WFOE must generate legal income within the capacity of the entity in order to deduct a VAT fapiao from the total VAT amount to be paid on its income.
In China, once you paid the tax (any tax), there is a very low chance of getting it back directly. Unless the company files for tax administration review. In other words, the company must ask the tax bureau to correct a mistake. In addition, a Chinese fapiao is only valid during 360 days for deduction.
Withholding Tax (sending money from a Chinese WFOE to a foreign company)
When a Chinese company wants to send money to a foreign entity, a Service Agreement must be concluded to confirm the transaction. In general, a withholding tax of around 10% is applied on the amount of the contract. In China, the final rate could only be assessed after carefully examination of the contracts and the invoice.
This withholding tax consists of the Enterprise Income Tax (EIT) which varies according the tax officer decision (usually around 20-25%), the VAT (from 6-17% according to the scope of activity of the Service Agreement), and a surtax (11-13% depending on location of the tax bureau in China). According to the country where the money to remitted, a tax discount for the amount of EIT paid in China can be applied according to eventual existing double taxation agreement.
Regarding the Chinese VAT and surtax, it is usually not recoverable in other countries. Finally, another option is to pay income tax on the WFOE result in China and then repatriate dividends abroad.