Is your business considering doing business with China? Step one—you must be aware that many foreign companies will choose either a Representative Office (RO) or a Wholly Foreign Owned Enterprise (WFOE) to do business in China. If you’re seriously considering how to setup operations in China, take a look at the following top 2011 China company setup questions and answers from foreign direct investment (FDI) expert Li Hong, from the Beijing Office of Lehman, Lee & Xu.
Li Hong was asked:
- Do you agree with this opinion that the restrictions on capital funding for WFOEs is down to a reasonable sum for running an office for a year – say RMB 100,000?
Li Hong: I partially agree with that manager’s opinion. Generally speaking, since a new business usually can not earn profit within the few months of operations, the registered capital requirement provides sufficient support for the WFOE’s daily operation until revenue exceeds expenses; for example, rent payment, salary payment, etc. If the registered capital is too low, there is a risk the WFOE would not be able to fund its daily operation expenses and lead to an application of bankruptcy.
As to the minimum registered capital requirement, actually, according to the Company Law of the People’s Republic of China (PRC), which was promulgated in 2005, the minimum required registered capital for a WFOE is RMB 100,000. However, in practice, the authorities will strictly assess the business scope and scale of the WFOE to make sure the registered capital is consistent with the business scope and scale.
Government regulator authorities may set different registered capital standards to different kinds of WFOE. And please kindly be noticed that the authority’s standards varies from city to city. Let’s take Beijing for example, as to a trading WFOE, the minimum registered capital we have incorporated is USD 75,000 (equivalent to RMB 490,000); as to a consulting WFOE, the minimum registered capital we have incorporated is RMB 100,000.
However, there is another issue we need to take into consideration at the very beginning of the WFOE setup, i.e., bank account opening. As you may know, in China, each WFOE is required to open at least two bank accounts in a Chinese bank: one is the registered capital bank account for injection of registered capital; another is the basic RMB bank account for normal business operation. In practice, most Chinese banks have their own standards on what a company’s registered capital should be, if the registered capital is too low, the bank might refuse to open a bank account for the company. Therefore, we had better negotiate with the bank and select one deciding an amount of registered capital.
- How much time and money would it cost to set up a WFOE?
Li Hong: Generally speaking, to establish a consulting WFOE will, practically, take about 2-3 months if all documents are prepared properly and accepted by the very first authority.
Our service will cover the entire process of the company set-up, including commerce bureau approval, business license and post-registration (such as company chop making, tax registration, finance registration, foreign exchange registration, etc.) and our quotation for the establishment of such a WOFE is based on all these registrations and we charge by a standard hourly rate.
- Any other relevant considerations?
Li Hong: To better understand the difference between the RO and WFOE, I list below the main differences:
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RO |
WFOE |
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Legal entity |
An RO isn’t a legal entity and cannot conduct business activities (such as, signing a contract, as a WFOE) in China. | As a legal entity, a WFOE can sign contracts, and conduct business activities described in the approved business scope. |
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Business scope |
An RO’s business scope is restricted, and it is generally described as liaison with the headquarters, marketing promotion, marketing research, technology communication, etc. | A WFOE’s business scope is wide-ranged and it can conduct business activities that a general company is permitted to do. |
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Registered capital |
No requirement for registered capital. |
Depends on the scale and business scope of the WFOE.
A period of two years is given to pay off unpaid registered capital after it pays the first 15% of the total promised amount within 3 months upon the establishment date of the WFOE. The registered capital can be used for operating expenses. |
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Employment |
An RO is required to hire employee(s) through an authorized Human Resource Professional Agency (say FESCO, CIIC, China Star Corp., etc). The employee(s) needs to sign(s) labor contract with such personnel agency, and work(s) in the RO through dispatchment. An RO pays salary and social insurances through the personnel agency.
Note: The personnel agency will charge certain fee for their services rendered. |
A WFOE can enter into labor contracts with its employee(s) directly. |
Furthermore, since the Chinese government enhanced its supervision on ROs this year, the RO is required to not only renew its registration certificate but also attend annual inspection every year. For the RO’s registration certificate renewing, the notarized and legalized certificate of incorporation from the headquarters and a bank reference letter are required. This will increase the cost of RO maintenance. The annual inspection for a WFOE is much simpler and yearly renewal is not necessary.
If you found this helpful, read Hong Kong Special Purpose Vehicle. Setting up a company and tackling legal problems in China is easy, for those who know.