New Horizons incorporates WFOEs (WOFE) in China on behalf of foreign investors. When the WFOE model is appropriate to secure the development of business operations, below is the key aspects to quickly understand what’s coming next.
- 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)
- 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. The investor can be the director
- At least 1 supervisor (a supervisor cannot be a director, legal representative, or senior executive of the WFOE)
- Registered company address
- The business scope of the new company to be established
Although the Chinese government had canceled the limited requirement of registered capital for some industries in 2014, New Horizons explicitly suggests foreign companies to determine a registered capital that would not be lower than 1,000,000 RMB according to the business activity and district for incorporation, in order to easier obtain the certification of registration.
Besides, such a register capital may be injected within a period up to 29 years, it does not have to be injected at the same moment the WOFE is establishing. The registered capital can be used to support the costs of the newly established WOFE’s activities, as payment of the salaries, office or facilities rental, purchase of a product, etc.
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 WOFE 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.
Opening a bank account
In order to open their WFOE bank account in China, foreign companies can consider any international banks along with local banks. A foreign-invested company usually needs to open 3 bank accounts according to its business activity. First, a basic account (it should be with a Chinese bank). Second, a capital account (in order to transfer the capital), and finally a foreign currency account. Those 3 accounts can be opened more easily with an international bank (e.g. the Bank of China) in order to use just a single bank system. New Horizons advises using the nearest / most convenient bank to collaborate with.
- Approval of registration
Business registration license
- Original passport of the legal representative person
- Phone numbers of the legal representative, contact person, and financial person
- Company business stamp, financial stamp, and legal representative person’s chop
- Articles of association
- Company office rental contract copy
- Some other documents according to the bank’s local district requirements
New Horizons’ local team can help you with this process by arranging the appointment at the most convenient branch with your representative and ensuring a complete understanding of your WFOE banking system. In case no representative can be present at the meeting with the bank, it is possible to give a power of attorney to someone locally depending on the banking institution. New Horizons needs to first communicate with the bank prior confirming the local instructions details.
About the post-incorporation WFOE Management
As a legal entity registered in China, all WFOEs must follow the P.R. of China rules after incorporation, which is:
On a monthly basis:
- Bookkeeping (whether the company is a small scale taxpayer, or a VAT tax payer)
- Accounting for all the services/trading activities invoiced in China
- Tax department export rebates declaration (if necessary)
- Payroll & tax compliance for all the employees in China
On a yearly basis:
- Income final settlement and payment report
- Audit report (if requested by the Chinese authorities)
- Joint annual inspection
- Yearly annual return
When the WFOE signs a Service Agreement in China:
Step 0: sign the contract;
Step 1: month M payment of the Net to the other parties;
Step 2: month M+1 declaration of monthly VAT & ITT to the tax bureau (by the accountant);
Step 3: month M+1 payment of the tax
The company must make sure to keep all relevant documents/proofs of services for the records, in case the tax bureau asks.Special procedures apply when the Service Agreement is signed between a WFOE and a foreign entity (e.g. purchasing services in China invoiced from a foreign entity). In practice, for each payment, the final tax amount will be reviewed and decided by the tax bureau, which usually takes 20 working days. And the bank will only proceed to make any payments after they receive the proof of payment of taxes issued by the tax bureau. This means a minimum of 1-month time lag between proposing to pay and the actual payment for every transaction.
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 3 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.