To
invest in China, there are four major forms of business entities:
Wholly Foreign
Owned Enterprises (WFOEs)
Foreign Invested
Commercial Enterprises (FICEs)
Representative
Offices in China
Joint Ventures
(Equity Joint Ventures and Cooperative Joint Ventures)
Based
on the up-to-date regulations from the Chinese authorities
and the information from Wikipedia, Beijing LEEO offers a
read-before-action guide, which will give a brief introduction
and comparison of WFOEs, FICEs, Representative Offices in
China and Joint Ventures.
Wholly Foreign Owned Enterprises (WFOEs) have become the investment
vehicle of choice for the international investor wishing to
manufacture, process, or assemble in China. It negates the
need for a Chinese partner and does not require large amounts
of registered capital to fund. Although WFOEs are in essence
to be used for facilities involving production lines, they
have under certain conditions also proved suitable for service
industries. Manufacturing WFOE's, with an eye on total export
of their China manufactured product, and may also enjoy significant
tax and other incentives if based in Free Trade or Export
Processing Zones.
Legal
Status & Limited Liability Definition
WFOE's
are limited liability companies established under Chinese
Company Law. The shareholders are 100% foreign, usually an
international business who would own the company 100%. Limited
Liability is recognized by the amount of registered capital
injected into the business. Although this may in fact be a
combination of two assets, cash injection and equipment, the
total value of these also represents the extent of the WFOE's
liability.
Reduced
Capital requirements
The
lure of huge market potential coupled with the promise of
tax holidays, tax incentives and financial rebates has helped
China attract foreign direct investment (FDI) and to become
the biggest recipient and utilizer of FRI in the world. A
significant factor contributing to that is the reduced minimum
paid-up registered capital requirement for the formation of
WFOEs.
Previous
Requirements
- Consulting/IT/Design/Manufacturing
WFOE USD 140,000
- Retailing WFOE
Not Permitted
- Trading WFOE
USD 200,000 permitted to be incorporated only in some Free
Trade Zone and not eligible for Import/Export (I/X) License.
In the
past, only large multinationals and medium-sized corporations
were able to afford the above-mentioned registered capital
requirements and were willing to take greater risks when venturing
into China. However, their subsequent success then created
a ripple effect on their supplier/service providers outside
of China, including the smaller companies. This then initiated
the next phase necessary to sustain the influx of FDI into
China.
Following
the amendment of the Company Law and the Administrative regulations
for the Registration of companies, it is now possible to incorporate
WFOEs with the following paid-up registered capital
- Consulting/IT/Design
WFOE RMB 100,000
- Retailing WFOE
RMB 300,000
- Trading WFOE
RMB 500,000 for small-scale tax payer and RMB 1 million
if 17% Value-Added tax (VAT) status is required. Import/Export
License can now be issued
Domestic
Trading (i.e. buying and selling of goods within China) can
now be added into the business scope of a trading WFOE. To
differentiate this newly-approved structure, the term Foreign-Invested
Commercial Enterprise (FICE) has been introduced. Minimum
paid up registered capital is RMB 500,000 for small-scale
taxpayers and RMB 1 million if 17% VAT status is required.
- Manufacturing
WFOE RMB 500,000 and not subjected to additional paid-up
registered capital in order to apply for 17% VAT status.
As an
added incentive, the regulations for the administration of
the registration of companies paid-up registered capital were
amended to allow a longer period of capitalization as follows:
- First 3 months-
20% of paid-up capital subject to a minimum of RMB 100,000
- Within 24 months
- remaining 80% of paid-up capital.
As part
of this significant reduction in the paid-up registered capital
requirement for WFOEs, there are now several far-reaching
implications for changes in regulations.
1.
The Representative Office (RO) has become more or less a redundant
structure due to its inherent weakness, which includes the
following:
- Not a legal
entity licensed to conduct business in China
- Cannot receive
revenue in China nor issue official tax invoices (fapiao)
- Cannot hire
local staff directly unless through government agencies
- Chief Representative
(CR) full salary will be taxed. Monthly tax submission will
still have to be filed even if the CR does not enter China
during that calendar year.
- All expenses
incurred by the RO (including staff salary and rental) will
be taxed.
2.
A local company formed with two local PRC nationals acting
as nominee shareholders is not only severely risky but also
unnecessary.
- A foreign beneficial
owner bears a tremendous amount of risk in such Arrangements
Dividend are taxed as opposed to zero for a WFOE
A local
company or an RO is popularly used for carrying out market
studies, as a liaison office for customers and suppliers or
die to either a lack funds to risk USD 140,000-200,000 before
a final investment decision is made. Nonetheless, under the
new law, a foreign investor can set up a WFOE with a minimum
paid-up registered capital of RMB 100,000-500,000 even for
this sole purpose and yet avoid the inherent weaknesses outlined
above.
3.
Trading WFOEs and FICEs with Import/Export License
- Need not be
restricted in certain area. Establishment in all districts
in Beijing is now possible.
- Can conduct
both domestic and international trading, including importing
and exporting.
- Need not pay
1-5% on sales value to use the license of a local Import/Export
company for importing/exporting.
- Need not take
receipts of payments for goods sold through a third-party
local I/E company.
- Customers of
trading WFOEs deal directly with the company and will not
know the supplier or Original Equipment
4.
Retail WFOEs can be owned 100% by foreigners
- Need not form
a joint venture nor require two PRC nationals to hold shares
under a local company
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