The difficult practicalities of the new WFOE recordal system.
Recently a new law came into force in China that was hyped by many to simplify the WFOE registration process. However, not all agreed with this and it seems that they were right.
Whilst the new system partially relies on recordals rather than registration, it still requires registration with the AIC. Until the system becomes one that is fully based on recordals, then the work and effort involved in incorporating a WFOE will not decrease significantly.
Additionally, the ultimate controlling person/entity must be disclosed to the authorities now. I feel that this is really part of a global trend to increase transparency in business. Many jurisdictions like to know who the ultimate beneficiary of bank accounts, property, businesses… etc will be. Some will complain that it interferes with their private dealings and others will say: “If you have nothing to hide, why worry?”
Some people do have to worry though. Perhaps they have a tax mitigation scheme planned or they want to enter some sort of restricted area of business which depends on multiple layers of companies. They will now need to go back to the drawing board and reconsider their whole China strategy.
When completing the forms to incorporate a WFOE, incorporators will now need to disclose the shareholders of each company in a chain of companies, until they reach natural people or public companies. This is a significant development that some Western companies may not be able to comply with or will have significant difficulties in complying with. E.g. A trust with a very large class of beneficiaries would need to disclose each and every one, or a jurisdiction where secrecy laws prevent this.
For those who already have WFOEs, there have been reports that MOFCOM may conduct some sort of audit in the near future to review existing foreign investments. It is now time for WFOEs to start getting their affairs in order and to consider making their businesses more compliant with the current regulatory arrangements, if they want to remain in China.