Incorporating a WFOE Company Structure in China with Timothy Weckesser, CEO of Sino Consulting

Questions and answers on incorporating a WFOE Company Structure in China with Timothy Weckesser, 20 year veteran in China and CEO of Sino Consulting.

Timothy, please introduce yourself…

My first trip to China was actually in 1986. We began SCI in Philadelphia in 1988, and began our China business in about 1992, when my old friend Shiqiang Gu joined us from Tianjin.

So we have been working in China for over 20 years now. And the changes we have seen over that time are really quite astonishing.

It is quite difficult to comprehend how such a huge country could move so far so fast. I don’t believe there has been anything quite like it in all of history.

I feel rather privileged to have been able to observe these changes in real time. I got my Ph.D. in political science but my real love has always been international business. So this is just where I want to be!

What do you do at Sino Consulting?

SCI helps US companies do business in China. This includes market research and strategy development, setting up operations, and direct sales. In fact, the biggest part of our business is direct sales representation, mostly for middle market companies with high-end industrial products.

We offer the convenience of a US-based contract to develop sales in China with our own sales engineers. Our consulting client list for market includes many multinationals like GE, P&G, Alcatel, General Cable, Fairfield Oerlikon, Latrobe Steel, Waukesha Bearings, and dozens of smaller companies whose names may not be so recognizable but who offer top notch technology.

For those that don’t know, what is a WFOE?

“WFOE” simply means “wholly foreign-owned enterprise”. It is a company owned 100% by the foreign investor. Let me provide a little background on this.

For the first 20 years, more or less, after China’s great “Reform and Open Door” policy began in the late 70s, almost all foreign investment was in the form of equity joint ventures.

China’s intention was to attract badly needed foreign investment, technology and expertise. Special economic zones (SEZs) were set up in all the major cities along the coast expressly for this purpose, along with very attractive investment incentives.

All business taxes were waived for the first three years, and then reduced to half the normal tax for several more years. And if you were classified as “high tech”, the incentives were even more powerful. The result: The SEZs were spectacularly successful and, in fact, still are to this day!

Around 2000, China was receiving more foreign direct investment (FDI) than any country in the world, including the US. And as foreign companies became more “comfortable” in China, they also wanted more corporate control. So by the early 2000’s, there were actually more WFOEs being formed than JVs. Today, the vast majority of FDI is in the form of WFOEs. It is the preferred corporate structure.

But it is important to note that the “good old days” for foreign investment – JV or WFOE – are long gone in terms of preferential tax treatment. Some 10 years ago China leveled the playing field for both foreign and domestic companies in terms of taxation.

The business income tax rate for manufacturers is 25% for all. However, many cities and SEZs are still authorized to provide certain incentives (e.g. “tax rebates”) to certain targeted foreign companies, for example high tech.

What is the process (and time frames) for incorporating a WFOE?

In fact it is much easier and faster to set up a WFOE than a JV. We show a kind of comprehensive process on our website, but in fact the actual WFOE registration process itself can be be quite quick and painless, provided there are no special problems – for example environmental issues (China has gotten very strict about any kind of process effluents).

The whole process can be completed in a few months. But note that to do so, you must first have a business address to use in your application. It’s a little bit like putting the cart before the horse, but you have to enter into a lease agreement for space, or have the signed option to do so, before applying for the business license.

This, in turn, means you need to decide where you want to be before starting the process. If you add in these factors, you need to figure perhaps six months from start to finish.

A really important point is that the SEZ’s have staff that can help with the entire registration process. And, in our experience, they are excellent. We have worked in the Tianjin Economic Development Area (TEDA), the Suzhou Industrial Park (SIP), several zones in Wuxi, and in others, and the staff in each one has been terrific.

There are three phases of documentation, as you will see on the website reference, and the staff can provide you with boiler plate and review of almost everything.

What are the director, shareholder and company secretary requirements?

There are no shareholder requirements since a WFOE is 100% owned by the investor. Regarding Directors, the applicant must simply submit a list and official “Certificates of Appointment”. These points are not challenging. What is more important is to get the “Articles of Association” right.

This defines who you are, what you will do, who will do it, and how much you will invest to get it done. It is a key registration document. There is normally also a “feasibility study” required, but in recent years this has been largely reduced to almost a boiler plate statement on the market and why you think there is good potential for your company.

After you receive your business license, you will set up a bank account and you must be sure to register with all of the key government agencies, including the bureau of taxation, customs bureau, public security bureau, State Foreign Exchange Administration, and the financial affairs bureau.

If you don’t, they will find you in due course. Better to build very good relations from the beginning with these powerful organizations.

What fees are involved and what does it cost to incorporate?

Filing fees required by various government agencies are small – probably a few hundred dollars all in. The key variable in the cost of registration is how much or how little you choose to use legal counsel.

Costs of counsel in China is not much different from such costs in the US. Because so much of the application procedure has been simplified, you may be paying high hourly rates for review of boiler plate documentation. It is important to decide if and when such fees are justified.

More important, you must understand the “registered capital” and “total capital” requirements. This is always a little confusing to investors and I will not go into any detail here.

Suffice it to say that “registered capital” is the key. The requirements for this vary from region to region, but I think it is safe to say that you can use $200,000 as a kind of rule of thumb.

It is important to understand, however, that this registered capital is not held in escrow or restricted in any way. It can in fact be used by the investor as operating capital. Whatever the registered capital you commit to, you must stick to the investment schedule. For example, if you commit to two tranches of $100,000 each on certain dates, you must do it!

What are the current tax rates for a WFOE business structure in China?

As mentioned above, there are no longer any special tax rates for foreign-investors, with a few exceptions to that rule. The across-the-board tax rate is pretty much 25% now. The 17% value-added tax (VAT) is another matter, and very serious. But it, too, applies to everyone. It is important to retain all VAT documentation for presentation to authorities if you are part of any rebate program.

What are the on-going company maintenance requirements?

These rules are whatever you call out in the Articles of Incorporation. There is nothing special or onerous about this. Under Chinese law, a WFOE can decide to do anything it likes under their Scope of Business, including hiring, laying off, deciding management practices, production, sales, etc.

I don’t mean to imply that it is all simple and easy. Nothing is simple and easy in China. In fact, there is a well-known saying that, in China, “everything is possible, but nothing is easy”. Still true.

What’s next for Sino Consulting?

It is an exciting time in China. (For that matter, what time hasn’t been?) Our US-to-China business services continue to do well, especially with high-end manufactured products.

China’s movement up the value chain has been so rapid that foreign companies can really only compete effectively at the high end anymore. But at the same time, we have seen a rapid rise in China-to-US business, with FDI from China to the US (and many other countries) growing exponentially. We are looking at how we can participate and add value in this trend as well.

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