A Wholly Foreign Owned Enterprise (WFOE) / Foreign Invested Commercial Enterprise (FICE) is a limited liability company wholly owned by the foreign investor(s). WFOEs / FICEs allow foreign investors to manufacture, process, assemble, trade, distribute or deliver services in China, without joining together with a Chinese partner. Setting up a Limited Company does not necessarily mean that you can engage in any sort of activities, as may be the case in the West and certainly in Hong Kong.

Business Scope
WFOEs / FICEs can only be operated within the scope of business as approved by the authorities. If, at a later date, the WFOE / FICE wishes to add other activities, these are subject to further approval by the relevant government authorities. It is therefore very important from the onset of your establishment to determine what will be the functions of the WFOE / FICE. The difference between a WFOE and FICE business scope is that the FICE is able to have distribution rights (ie. import and export rights) included into the business scope.

Time-line and Procedures
Registration process takes approximately 3 months from the submission of the company application documents to the government.
It takes an estimated 6 weeks to obtain the Business License and additional 6 weeks until the remaining steps are completed.

Corporate Structure
The corporate structure of such an entity is as follows:

- Shareholder – Can be an individual or company
- Shareholder appoints a Board of Directors (min. 3 people) or an Executive Director
- Shareholder appoints a Legal Representative – usually a member of the Board or the Executive Director
- Board of Directors / Executive Director appoints a General Manager
- Shareholder appoints a Supervisor – cannot be a Board Member / Executive Director / Legal Representative / General Manager

These individuals do not need to be residents of the PRC. They can be residing in their home country.
The Legal Representative is the “legal face” to the company and is automatically liable to pay personal income tax in China whether they are residing in China or not.

Registered Capital
The China Company Law for the minimum registered capital has been put on a unified level for all types of businesses to RMB 30,000 (approx. USD 3,750).  Although local governments and regulations may indeed specify this “minimum amount” – the actual amount of registered capital to be injected into the business should be catered for on the basis of this capital being equivalent to the operational capital needs of the entity – the amount of money required to sustain operational cash flow until the business can support itself in China.  Attention to detail should be taken when drafting cash flow projections to break even – as the shortfall in operational costs is the amount that may be injected as registered capital. One of the documents required by the government is a type of Business Plan (Feasibility Report) outlining the companies projected expenses and capital needs for the first five years of operation.  We have had the experience that some of our clients only had enough registered capital to last a few months and therefore had to go through the tedious process of increasing the registered capital which can take approximately 2 months of application procedures.

The registered capital must be remitted from the direct Shareholder of the entity and into the bank account of the China entity in foreign currency.  It cannot be remitted from the ultimate shareholding company and it cannot be remitted in Renminbi (RMB).

For trading companies (looking to sell on the domestic market and issue VAT invoices) the minimum registered capital amount is USD 140,000 (RMB 1,000,000).  This registered capital is going to be used as your working capital and will be the initial capital used to pay off all your expenses, as well as purchase the initial incoming products, pay initial customs duty and VAT fees, etc. It is very important to calculate the needed investment capital to begin this operation. There is no tax liability on the registered capital amount. However the registered capital is the liability of the entity.

For consulting companies the minimum registered capital is USD 15,000 (RMB 100,000). However it should be noted that this registered capital is going to be used as your working capital and will be the initial capital used to pay off all your expenses. The registered capital is the liability of the company. It is also remitted tax-free to the Limited Company.

For manufacturing companies the minimum registered capital amount is USD 140,000 (RMB 1,000,000).  This registered capital is going to be used as your working capital and will be the initial capital used to pay off all your expenses, as well purchase equipment, renovate the factory, purchase raw materials, etc.

 

Taxes
A Limited Company is liable for a variety of taxes. The main taxes imposed are as follows:

Enterprise Income Tax Rate (EIT = profits tax) is 25% and is calculated on a quarterly basis.
Business Tax Rate (BT = service tax) is 5% and is calculated on a monthly basis.
Surtaxes applicable on Business Tax Payable is variable depending on location.
Value Added Tax Rate (VAT = trade tax) is 17% for General Tax Payer and is calculated on a monthly basis.
Individual Income Tax Rate (IIT = personal tax on salary) is variable depending on the salary level.

Benefits of a Hong Kong Holding Company for Limited Companies in China