Kneppelhout & Korthals: Recent changes on setting up a WFOE in China05/12/2017

By Victor Zheng, Consultant Asia Practice

Following a series of amendments on Chinese legislation relating to foreign invested enterprises in China,  a number of flexibilities have been introduced in order to lower the thresholds and simplify the procedures.  Nevertheless, setting up a Wholly Foreign Owned Enterprise (“WFOE”) still remains a complicated and time consuming project for foreign investors in China.

Incorporation procedures
Before October 2016, setting up a WFOE in China mainly involved two major steps, namely obtaining approval from the local Commission of Commerce (“CoC”) and registration with the Administration of Industry and Commerce (“AIC”). It could take up to 2-3 months to receive the Certificate of Approval and the Business License for the WFOE if all the application documents were accepted by CoC and AIC.

However, since October 2016, the approval system for WFOE incorporation has been replaced by a filing system, which means the step involving the local CoC has been greatly simplified. From October 2016 onwards, as long as the foreign investment does not fall into a category specified by the “Special Administration Measures”, the foreign investor can file the incorporation of the WFOE using the online platform of the Ministry of Commerce. Filing takes normally 3-5 days to complete as long as all filing documents are accepted by the local CoC. Meanwhile, the filing can even been done after the WFOE is incorporated in some provinces (e.g. in Beijing).

Capital requirement
The second major change regarding WFOE follows the introduction of the new Chinese Company Law, which came into effect in year 2014. According to the new Chinese Company Law, the minimum capital requirement for limited liability companies has been waived and in theory, it is possible to register a company in China with 1 RMB only. This also applies to WFOEs.

In addition, instead of having to inject the registered capital of the WFOE within two years since the incorporation of the WFOE (20% within 90 days following the WFOE’s incorporation) as was the rule previously, foreign investors can now decide at their own discretion on how and when to inject the registered capital depending on the needs and the actual situation of the WFOE. There is no prescribed mandatory schedule for registered capital injection anymore.

However, in practice the AIC will still look at the amount of the registered capital of the WFOE, which should be in compliance with the future planned operation of the WFOE. Regarding the schedule of injection of registered capital, the AIC would still require the foreign investor to stipulate a long-term schedule in the Articles of Association of the WFOE, which can be 15 years or 20 years within the business term of the WFOE.

Steps to set up a WFOE
Taking into consideration of the changes in the amendments on the Chinese legislation relating to foreign invested enterprises, the steps for setting up a WFOE in China nowadays are as follows:

  1. Location/office premises selection;
  2. Pre-name approval;
  3. Environment impact evaluation (for manufacturing WFOEs);
  4. Approval/filing with the local CoC;
  5. Registration with the local AIC (business license obtained);
  6. Carving company chops;
  7. Open bank accounts;
  8. Accounting and taxation compliance work;
  9. Import & export registration procedures (for trading WFOEs).

Should you have any question on setting up a new WFOE or on your current existing WFOEs in China, please do not hesitate to contact us.

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