Establish A WFOE in China

ESTABLISH
A WFOE IN CHINA
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individual income tax law.
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The Service Briefing of Business Partner:

Establishing a Wholly Foreign Owned
Enterprise in China
Index
Chapter I: What Is a WFOE?
Chapter II: Considerations before Establishing a WFOE
Chapter III: Management Structure of a WFOE
Chapter IV: Analysis and Evaluation of Register Capital Issues
Chapter V: Articles of Association
Chapter VI: WFOE Establishment Procedure in China
Chapter VII: Rent an Office
Chapter VIII: Human Resource Issues
Chapter IX: Tax and Accounting Related Issue
Glossary
WFOE Wholly Foreign Owned Enterprise

FIE Foreign Investment Enterprise
JV Sino-foreign Joint Venture
RO Representative Office
MOFCOM Ministry of Commerce
AIC Administration of Industry and Commerce
AOA Article’s of Association
ESTABLISH A WFOE IN CHINA | 1
Preface
When deciding to invest and carry out business in China there, are three
legal forms of Foreign Investment Enterprise (“FIE”) to choose from: a
Representative Office (“RO”), a Sino-Foreign Joint Venture (“JV”), or a
Wholly Foreign Owned Enterprise (“WFOE”). This guide focuses on issues
related to the establishment of a WFOE in China.
2 | ESTABLISH A WFOE IN CHINA
Chapter I: What is a WFOE?
A WFOE is a company wholly invested by one or more foreign investor(s)

and no local Chinese investors. The foreign investor(s) may be either
individual(s) or enterprise(s).
A WFOE is an independent legal entity which is allowed to carry out

business, issue formal RMB invoices (Fapiao), hire its own employees,
enter into contractual agreements, set up branches in China, receive
payment in RMB, and convert RMB into designated foreign currency for
profit repatriation. The following sections summarize the key differences,
advantages, and disadvantages of a WFOE compared to other types of FIE:
Representative Offices and Joint Ventures:
A WFOE Compared with RO:
A WFOE is an independent legal entity in China, while a RO is not. A WFOE

is allowed to carry out business in line with its registered business scope in
China, receive payments in RMB, issue formal invoices in RMB (“Fapiao”),
and hire its employees directly. A RO can not perform any of these functions.
The notable disadvantage of establishing a WFOE is a registered capital

requirement which means that at the initial stage of setting up your
business in China, you’ve already been required to invest a certain amount
of capital. We discuss registered capital planning and requirements in more
detail in Chapter IV.
A WFOE Compared with JV:
Both a WFOE and a JV are regarded as independent legal entities in China.

As a WFOE is wholly owned by the foreign investor(s) it enjoys a higher
level of foreign managerial control than a JV, and allows easier allocation of
profits back to its foreign investor(s).
Since a WFOE is invested without Chinese partners(s), it must seek

facilities, hire staff, and establish business channels without the assistance
a local partner may be able to provide.
Chapter II: Considerations before Establishing a WFOE
Changing business scope, registered capital or total investment, and other

key company information registered in relevant government authorities
during the establishment of WFOE can be costly and time-consuming.
Therefore, we strongly recommend considering the following issues before
establishing a WFOE:
a Total Investment and Registered Capital
The following chapter illustrates total investment and registered capital in more
detail. It is important to thoroughly assess the level of required investment: the
amount of funds necessary to invest sufficient to ensure smooth operation of
your WFOE before it will be able to commence profitable operation.
The practical level of required capital is often greater than mandatory

minimum requirements of registered capital legally required. It can take
several months to increase registered capital once a WFOE is established;
insufficient levels of registered capital can have a serious impact on a
WFOE’s operations, especially in the period shortly after being established.
a Business Scope
The business scope of a WFOE refers to the type of business it is permitted

to carry out, and it’s registration with relevant government authorities
relating to those activities. Before being permitted to carry out business in

any new area its business scope must be changed and approved, this can
be a time-consuming process.
a Location of Your WFOE
In China many different cities, even districts and business zones within
cities, may have different policies and incentives related to different
types of business and industry. Examples include tax incentives, differing
mandatory capital requirements, or preferential zoning policies. Before
establishing a local presence, local policies affecting your WFOE should be
analyzed and thoroughly understood.
Chapter III: The Management Structure of a WFOE
III)-1 Highest Authority of a WFOE
In line with relevant Chinese laws and regulations, the Shareholder’s

Meeting shall be the highest authority of a WFOE and the Board of
Directors (“Board”) or the Executive Director shall be responsible for the
WFOE’s normal affairs.
Below is an illustration of the typical allocation of rights between the

Shareholder’s Meeting and the Board or Executive Director:
c Issues to be decided by the Shareholder’s Meeting
(1) determining the WFOE’s operational guidelines and investment plans;

(2) appointing and changing the Directors or Executive Director,
Supervisor, and determining matters concerning their remuneration;
(3) deliberating and approving the reports of the Board;
(4) deliberating and approving the reports of the Supervisor;

(5) deliberating and approving annual financial budget plans and final
account plans of the WFOE;
(6) deliberating and approving profit distribution plans and loss recovery
plans of the WFOE;
(7) making resolutions on the increase or decrease of the WFOE’s
registered capital;
(8) making resolutions on the issuance of corporate bonds;
(9) adopting resolutions on the assignment, division, change of company
form, dissolution, or liquidation of the WFOE;
(10) extending the WFOE’s business term;
(11) changing the WFOE’s business scope or the establishment of a branch
or subsidiary of the WFOE;
(12) revising the Articles of Association (“AOA”) of the WFOE; and
(13) approving any disclosure of any trade secret of the WFOE.
c Issues to be decided by the Board or Executive Director
(1) reporting the operation of the WFOE to the Shareholder’s Meeting;

(2) carrying out the resolutions made by the Shareholder’s Meeting;
(3) examination of operational and investment plans;
(4) drafting the WFOE’s annual financial budget plans and final account
plans;
(5) drafting the WFOE’s profit distribution plans and loss recovery plans;
(6) drafting the WFOE’s plans on the increase or decrease of registered
capital, as well as on the issuance of corporate bonds;
(7) drafting the WFOE’s plans on merger, division, change of the WFOE’s
company type, dissolution, and related issues;
(8) making decisions on the establishment of the WFOE’s internal
management departments;
(9) the appointment and dismissal of the general manager and other
senior management personnel, and the determination of their salaries
and benefits;
(10) establishing basic rules and policies of the WFOE for day-to-day issues.
III)-2 Board of Director or Executive Director
According to relevant Chinese laws, a WFOE shall either have a Board of

Directors or an Executive Director. The Executive Director has the same
rights and responsibility as the Board mentioned above.
III)-3 Board of Director
The Board of a WFOE shall be established on such WFOE’s establishment

date. The Board shall be composed of 3 to 13 directors appointed by
the shareholder(s) and shall have one Board Chairman. The method of
appointment for the WFOE’s Board Chairman and Vice Chairman shall be
prescribed in the WFOE’s AOA.
The terms of office of the directors shall be decided by the shareholder(s)

and shall be provided for in the WFOE’s AOA, but in no circumstance
should the director’s term of office exceed 3 years. The directors may, after
the expiry of their terms of office, hold a consecutive term upon re-election.
If no reelection is timely carried out after the expiry of the term of office of
the directors, or if the number of the members of the Board is less than the
quorum due to the resignation of some directors from the Board prior to the
expiry of their term of office, the original directors shall, before the newly
elected directors assume their posts, exercise the authorities of the directors
according to laws, administrative regulations, as well as the WFOE’s AOA.
The Board meeting shall be convened and presided over by the Board
Chairman. If the Board Chairman is unable or does not perform his duties,
the Board meeting may be convened or presided over by the Vice Chairman.
The discussion methods and voting procedures of the Board meeting shall
be prescribed by the WFOE’s AOA, unless it is otherwise provided for by

relevant Chinese laws and regulations. The Board shall make records of the
decisions on the matters discussed at the meetings thereof. The directors
who attend the Board meeting shall affix their signatures to the records.
III)-4 Supervisor
A WFOE shall set up a board of supervisors, which shall comprise at least

3 supervisors. A WFOE which is relatively small in scale choose to use 1
or 2 supervisors instead of establishing a board of supervisors. The term
of office of a supervisor is statutorily 3 years, and is renewable by the
shareholder(s). The directors and management personnel shall not serve
concurrently as the supervisor of the WFOE.
The supervisor’s responsibility is as follows:
(1) inspect and examine the financial affairs of the WFOE;

(2) demand any director or management personnel to make corrections if
his act has injured the interests of the WFOE;
(3) supervise the duty-related acts of the directors and management
personnel, and bringing forward proposals on the removal of any
director or management personnel who violates any law, administrative
regulation, the WFOE’s AOA or any resolution of the Board;
(4) propose interim Board meeting and convene the interim Board
meeting in case the Board Chairman fails to convene or hold the
Board meeting in accordance with the WFOE’s AOA;
(5) bring forward proposals to the Board;
(6) initiate actions against director or management personnel in the
event that they violate the provision of relevant Chinese laws and
regulations, the WFOE’s AOA and result in loss of the WFOE;
(7) other responsibilities provided for by the Chinese Company Law and
the WFOE’s AOA
Chapter IV:
Analysis and Evaluation of Register Capital Issues
Chinese law and regulations state that a WFOE is required to have its
registered capital contributed by its shareholder(s) within a certain period
after the WFOE’s establishment. Issues of registered capital are often a
point of confusion for foreign investors. Therefore we would like to share
some experience and analysis in this area.
a Registered Capital and Total Investment
c Registered Capital
The Registered Capital of a WFOE is the capital subscribed and contributed

by the investors for setting up the WFOE. The amount of registered
capital shall be registered with relevant Chinese local government
authorities, and the registered capital shall be contributed completely by
the WFOE’s investor(s) within the period stipulated in the WFOE’s AOA.
The WFOE’s registered capital belongs to the WFOE and may be used for
the WFOE’s operation, rent, purchase of equipment, payment of salaries,
and other costs incurred by the WFOE. After the WFOE’s liquidation or
termination, the shareholder(s) is entitled to recover the registered capital
remaining after payment of all the WFOE’s outstanding debt obligations.
Responsibilities are respectively allocated to the shareholder(s) based on
their subscribed capital contribution to the WFOE.
A WFOE’s costs are likely to be greater than its revenues for the period
immediately after its establishment; the shortfall is funded by the WFOE’s
registered capital. If the WFOE’s registered capital is not sufficient to cover
its cost before it starts to record a profit, the WFOE shall choose either to
borrow a foreign loan or to apply to the relevant government authorities to
increase its registered capital. Increasing registered capital is costly in terms
of money and time. We strongly recommend investors to carefully plan and

calculate the likely level of capital required until profitable operation.
c Total Investment
Total Investment of a WFOE is the total amount of capital needed for the
WFOE to establish its operations in line with the business scale stipulated
in the WFOE’s AOA.
Total Investment = Registered Capital + Loans
Total Investment shall not be less than Registered Capital. The balance
between Total Investment and Registered Capital is not required to be
contributed by the investor(s).
In the case of a WFOE with registered capital insufficient to cover its costs, the
WFOE is entitled to obtain foreign debt either from its shareholder(s) or from
a foreign bank for the amount of the balance between its Total Investment and
Registered Capital. Note that in no circumstances should the amount of foreign
debt exceed such a balance between Total and Registered Capital.
If a WFOE’s Total Investment stipulated in its AOA is equal to its Registered

Capital, and if such WFOE’s Registered Capital proves insufficient to cover
costs before profitable operation is established, the WFOE will not be entitled
to obtain foreign debt until the application for increasing its Registered Capital
and Total Investment has been approved by relevant government authority.
According to relevant Chinese laws and regulations, the amount of total

investment shall be equal to or higher than the WFOE’s registered capital,
and shall not exceed the proportion stipulated in relevant regulations; the
minimum statutory proportions of registered capital to total investment are:
(1) Total investment < 3 million USD: the registered capital shall not be
less than 7/10 of the total investment.
(2) 3 million USD ≤ total investment < 10 million USD: the registered
capital shall not be less than 1/2 of the total investment and shall not
be less than 2.1 million USD.
(3) 10 million USD ≤ total investment < 30 million USD: the registered
capital shall not be less than 2/5 of the total investment and shall not
be less than 5 million USD.
(4) 30 million ≤ total investment: the registered capital shall not be less
than 2/5 of the total investment. If the total investment is less than 36
million, the registered capital shall not be less than 12 million.
a Minimum Registered Capital
The minimum permitted registered capital of a WFOE is 30,000 RMB. If

a WFOE is invested by only one investor (either a foreign individual or a
foreign enterprise), the minimum registered capital of such a WFOE shall
be not less than 100,000 RMB.
As we have mentioned before, sufficient Registered Capital is an important

issue for a WFOE, especially in the period immediately after its establishment.
Legal minimums for registered capital requirements are not sufficient for the
vast majority of WFOEs to establish and make profitable their operations. The
procedure of applying for increasing the registered capital levels is complicated
and time consuming. An outline of this procedure:
(1) Apply for registered capital increase with the original approving
authority (usually the local bureau of commerce);
(2) Apply for changing the WFOE’s Business License with the local
administration of industry and commerce;
(3) Apply for the modification of registered capital information with the
local branch of State Administration of Foreign Exchange, for approval
of the additional investment;

(4) Engage a Chinese public registered accounting firm to issue a Registered
Capital Verification Report;
(5) Modify relevant information in local tax bureaus; and
(6) Other procedure required by local government authorities.
In our experience, the completion of the whole procedure to increase registered

capital takes 2 to 3 months. Your business will be affected by this delay.
a Registered Capital Injection
The shareholder(s) of a WFOE may make capital contributions in currency,

in kind (such as equipment), in intellectual property rights, or by other
non-currency means that may be assessed on the basis of currency value
and transferred according to Chinese law. The value of non-currency
contributions shall be assessed and verified by a China-qualified appraisal
organization and are not permitted to be either under or over-valued. The
amount of the capital contributions in currency paid by all the shareholders
shall be not less than 30% of the registered capital of the WFOE.
The shareholder(s) may choose to inject capital contributions in the form

of a lump sum or by installments. If the registered capital is chosen by
the shareholder(s) to be injected in a lump sum, the shareholder(s) must
contribute the whole registered capital within 6 months after the WFOE
has obtained its Business License. If the shareholder(s) intend to inject the
capital contribution in installments, the first installment should not be less
than 15% of the capital contribution subscribed by the shareholder(s) and
must be injected within 3 months after the WFOE has obtained its Business
License, the rest of the registered capital must be completely injected
within 2 years after the WFOE has obtained its Business License.
Chapter V: Articles of Association
The Articles of Association (“AOA”) are the fundamentals of your WFOE’s

management and operations. The AOA will govern you and your WFOE
for 20-30 years, a template or pre-made AOA is unlikely to be a good fit
for your actual needs and requirements; carefully considering each aspect
of your AOA is likely to several significant long term difficulties with your
WFOE.
A sample AOA is outlined below. Please note that this sample is only a
basic draft of an AOA commonly used in China. As mentioned above,
your AOA should be re-drafted based on the particular requirements of
your WFOE and future needs of your business. The following draft AOA
is in English, after customizing, the draft shall be accurately translated
into Chinese and submitted to the necessary government authorities. We
strongly recommend you entrust a professional firm to work on this with
you to help both anticipate future difficulties and create the basis of a more
efficient company.
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Newsletter
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A Sample AOA:
Chapter 1 General Principles
Article 1
In accordance with “Law of the People’s Republic of China on Wholly
Foreign Owned Enterprise”, “Company Law of the People’s Republic of
China” and other relevant Chinese laws and regulations, [investors name]
intends to set up [WFOE’s name] (hereinafter referred to as the “Company”)
in [city], China. For this purpose, this Articles of Association hereunder are
produced.
Article 2
Company Name:
Legal Address:
Article 3
Shareholder’s Name:
Nationality:
Address:
Article 4
The organization form of the Company is a limited liability company.
The Shareholder is liable to the Company within the limit of its capital
subscription, and the Company shall assume external liabilities with all of
its assets.
Article 5
The Company has the status of a legal person in China and it subject to the
jurisdiction and protection of Chinese laws concerned. All its activities shall
be governed by Chinese laws and other pertinent rules and regulations. The
Company should observe common courtesy, morality of commerce, and
honesty and trustworthiness, accept the supervision of governments and

the social citizens, and take up their social responsibility.
Chapter Two Purposes and Business Scope
Article 6
The purpose of the Company shall be as follows: [ ]
Article 7
The business scope of the Company shall be as follows: [ ]
Article 8
The business scale (production scale) of the Company:
The Company predicts an annual sales volume of [ ] RMB.
Chapter Three Total Investment and Registered Capital
Article 9
The total investment of the Company is: [ ] RMB.
The registered capital of the Company is: [ ] RMB.
Article 10
The Shareholder shall contribute the registered capital [please choose: with
a lump sum or by installments].
Article 11
After the capital contribution of the Company to any installment, the
Company shall engage certified public accountants registered in China to
verify the capital and present a report on the verification of capital. And
after the issuance of the report on capital verification, the Company shall
present a certificate of capital contribution to the Shareholder.
Chapter Four Organization of the Company
Article 12
The shareholders shall decide the important issues of the Company, and
exercise the following authorities:
(1) determining the Company’s operation guidelines and investment plans;
(2) electing and changing the Director and Supervisor and determining
the matters concerning their remuneration;
(3) deliberating and approving the reports of the board of directors;
(4) deliberating and approving the reports of the Supervisor;
(5) deliberating and approving annual financial budget plans and final
account plans of the Company;
(6) deliberating and approving profit distribution plans and loss recovery
plans of the Company;
(7) making resolutions on the increase or decrease of the Company’s
registered capital;
(8) making resolutions on the issuance of corporate bonds;
(9) adopting resolutions on the assignment, division, change of company
form, dissolution, liquidation of the Company;
(10) extending the Company’s business term;
(11) revising the Articles of Association of the Company; and
(12) approving any disclosure of any Trade Secrets.
Article 13
The following decisions made by the shareholders shall be written down
and signed by all the shareholders and then filed with the Company:
(1) amendment of the Articles of Association;
(2) increase or decrease of the registered capital;
(3) Split of the Company or merger with other economic organizations;
(4) dissolution of the Company, or change of the Company form,
Article 14
The Company shall set up the Board of Directors with [ ] members who
will be appointed by the shareholders. The term of the directors shall be [ ]
year(s), renewed if continuously appointed by the shareholders.
The Board of Directors has one chairman who shall be appointed by the
shareholders.
The duties of the Board of Directors are as following:

(1) reporting the operation of the Company to the shareholders;
(2) Carrying out the resolutions made by the Shareholders;
(3) Examine the operation plans and investment plans;
(4) Working out the Company’s annual financial budget plans and final
account plans;
(5) Working out the Company’s profit distribution plans and loss recovery
plans;
(6) Working out the Company’s plans on the increase or decrease of
registered capital, as well as on the issuance of corporate bonds;
(7) Working out the Company’s plans on merger, division, change of the
company type, dissolution, and etc.;
(8) Making decisions on the establishment of the Company’s internal
management departments;
(9) The appointment and dismissal of the general manager and other
Senior Management Personnel, and the determination of their salaries
and benefits;
(10) Lay down the basic rules and policies of the Company.
Article 15
The Company shall have [ ] Supervisor appointed by the Shareholder. The term of
office for the Supervisor shall be three (3) years, renewable by the Shareholder.
Article 16
The Supervisor shall have the following responsibilities:
(1) checking the financial affairs of the Company;

(2) supervising the duty-related acts of the Directors and senior managers,
and bringing forward proposals on the removal of the Directors or Senior
Management Personnel who violates any law, administrative regulation,
the Articles of Association and the decision made by the shareholders;
(3) demanding the Directors or Senior Management Personnel make
rectifications if his act has injured the interests of the Company;
(4) To lie a proposal for the shareholders;
(5) According to the article 152 of “Company Laws of P.R.C.”, to file a
lawsuit against the board members and senior managers of the Company;
The supervisor shall have right to attend the Board of Directors meetings.
Article 17
The Company shall setup the management department which shall be
decided by the general manager.
Article 18
The Company shall have one (1) general manager with the term of [ ] year.
The general manager shall be appointed by the board of directors. The
general manager shall be responsible to the Board of Directors, and carry
out the responsibilities as following:
(1) carrying out the resolutions adopted by the board of directors;
(2) Implementing the annual business development plans and investment
plans;
(3) make the internal management organization of the Company;
(4) formulating the basic policies of the Company;
(5) make the rules of the Company;
(6) suggest to appoint and dismiss the deputy general manager and
financial manager of the Company;

(7) appointing and dismissing other employees except the ones shall be
appointed or dismissed by the board of directors.
(8) as well as drafting and submitting to the Board of Directors for its
approval the employment terms and benefits for all other Senior
Management Personnel and Company employees
Article 19
The Company exercises general manager responsibility system under
the leadership of the Board of Directors. The general manager is directly
responsible to the Board of Directors and organizes the daily management
and operation of the Company. The deputy general managers shall assist
the general manager in his/her work.
Article 20
After being appointed by the board of directors, the chairman and board
members may take the position of general manager, deputy general
manager and other senior managers.
Chapter Five Legal Representative of the Company
Article 21
The [chairman of the Board of Directors or general manager] is the legal
representative of the Company. The legal representative shall be appointed
by the Shareholder. The term of the legal representative is [ ] year(s),
renewable by the Shareholder.
Article 22
The duties of the legal representative are as follows:
(1) Supervise the implementation of the resolution made by the
shareholders and report to the shareholders; and
(2) sign the relevant documents on behalf of the Company.
Chapter Six Taxation, Foreign Exchange, Financing and Accounting, Labor

Management, Trade Union
Article 23
The Company shall establish its own financial and accounting bylaws
according to laws, administrative regulations and provisions of the treasury
department of the State Council, and put on records to authorities.
Article 24
The matters, involving the recruiting, dismissal, salary, welfare, labor
insurance, labor protection, labor discipline, and other staff retention, should
be dealt pursuant to Chinese regulations of labor and social insurance.
Article 25
All employees of the Company shall have the right to establish a trade union
and to organize labor union activities in accordance with the Trade Union Law
of the People’s Republic of China. Trade union activities shall be conducted in
accordance with Chinese Law and shall not interfere with the normal operation
of the Company. The Company shall pay the trade union monthly fees
equivalent to 2% of the Company’s monthly total wage bill. The labor union
shall use such fees in accordance with the Administrative Rules Concerning the
Usage of Labor Union Funds as promulgated by the All China Labor Union.
Chapter Seven Business Term, Termination and Liquidation
Article 26
The company business term will be [ ] years, which starts from the date of
issuing of the corporate certificate.
Article 27
The company should submit the board resolution and the application letter
signed by the Shareholder to the former approval authority for the extension of
the company business term. The application for the business term extension
should have been done with 180 days before the termination of business term.
After being approved by the former approval authority for the extension of the
business term, the company should take the related registration amendment
work later on.
Article 28
If the company wants to stop the operation before the termination of the
business term, it must be approved by both Shareholder and the former
approval authority.
Article 29
The company could stop operations should there be any circumstances as
follows.
(1) For force majeure event, preventing the continuation of operations.
(2) The company has many years of red deficits and is unable to carry out
continuous operation.
(3) The Shareholder hasn’t implemented the responsibility of required
capital within the prescribed terms.
(4) If the Company experiences financial difficulties and the Shareholder
deems it necessary to dissolve the Company or the Company is unable
to carry out its business in a manner acceptable to the Shareholder;
Article 30
For expiration of the business term of a company and/or terminate
the operation before the date of the expiration, the Shareholder should
compose a liquidation committee to liquidate the assets of the company.
Article 31
When the liquidation completed, the company should submit the valuation
report to the former approval authority and take the deregistration
procedure from the former registrar. The company should hand over the
corporate licenses and publicize it outside. After the company dismissed,

the Shareholder should retain all types of account files.
Chapter Eight Applicable Law
Article 32
The conclude of the Articles of Association, its effectiveness, implementation
and settlement of dispute are all abided by the law of People’s Republic of
China.
Chapter Nine Miscellaneous
Article 33
The amendment to this AOA shall bear the signature of both the Shareholder
and the Legal Representative with Company seal on it.
Article 34
These AOA shall come into effect upon approval by the Approval Authority
and the amendment to this AOA shall come into effect upon approval by
the Approval Authority.
Article 35
These AOA are executed in Chinese. The two versions shall have the same
legal effect.
Article 36
These AOA is signed by the shareholder in Beijing on [date].
[Investor’s name]
[Signature]
[Date]
Chapter VI: Steps in the Establishment of a WFOE in China
The following procedures are necessary steps in the establishment of a

WFOE and compliance with relevant Chinese laws and regulations:
(1) Apply for pre-approval of the WFOE’s Chinese name at the local
administration of industry and commerce;
(2) Submit the Feasibility Study Report (“FSR”) for setting up the WFOE
and the WFOE’s AOA, and submit required information regarding the
WFOE to the local bureau of commerce for approval;
(3) Apply for the WFOE’s Certificate of Approval from the local bureau of
commerce;
(4) Apply for the WFOE’s Business License from the local administration of
industry and commerce;
(5) Apply for the WFOE’s Enterprise Code Certificate from the local
technology supervision bureau;
(6) Register the WFOE’s Company Seal, Financial Seal and Legal
Representative Seal with the local public security bureau;
(7) Apply for the WFOE’s Foreign Exchange Registration Certificate from
the local administration of foreign exchange;
(8) Tax registration of WFOE at the local and national Tax Bureau and
application for the WFOE’s tax registration certificate;
(9) Apply for registration with the local customs bureau;
(10) Register with the local bureau of commerce to carry out import and
export business;
(11) Apply for approval for the WFOE to open RMB and foreign currency
capital accounts;
(12) Apply for the WFOE’s Finance Registration Certificate from the local
financial bureau; and
(13) Apply for the WFOE’s Statistic Certificate from the local statistical
bureau.
The government has advised a time-frame for completion of the procedure

of around 4 months.
Chapter VII: Rent an Office
After obtaining the WFOE’s name pre-approval from local administration

of industry and commerce, and before engaging later steps in establishing
the company, a lease contract is required to be concluded between the
proposed WFOE and a landlord for the rental of office space to be used
by the WFOE. As this important step sometimes leads to confusion
by investor(s), we would like to provide some guidance based on our
experience of common question raised:
a Finding an Office
The type of building in which the office of the WFOE can be established
shall be registered only for commercial use. If the building is approved by
the local construction bureau for residential use, or for both commercial and
residential use, establishing the office of a WFOE in such a building will be
difficult. Sometimes, a building may not have been approved for commercial
use even if it is like a commercial building in appearance; visual inspection
of a building is insufficient to conclude it is registered solely for commercial
use. We recommend before signing a lease agreement, the investor(s) employ
a professional registration agent to check and verify the landlord’s Premises
Ownership Certificate.
We have experience with some WFOEs seeking to establish their office in

the same location as an earlier established RO. A WFOE is not allowed to be
registered in a RO’s current office; registering the same office will cause a
delay in the establishment of your WFOE. Three common solutions include: (i)
terminate the RO before applying to establish the WFOE; (ii) move the RO to
another office before applying to establish your WFOE and register the WFOE
in the RO’s former office; or (iii) rent a new office for the WFOE’s registration.
a Landlord Document Verification
Before entering into a lease agreement, it is advised to check whether the

potential landlord is legally entitled to lease the office offered. The landlord
should be able to provide sufficient legal documentation. Not checking this
may cause later problems for your WFOE.
a Signing a Lease Agreement
When leasing an office the landlord will often provide a draft lease
agreement for your signature. We strongly recommend you engage a legal
professional to review and revise the lease agreement before you sign it,
in order to mitigate future risks or uncertainties caused by clauses in the
contract.
The lease agreement must be signed by the landlord in China. If the

landlord happens to have a parent company or affiliate in your home
country, they are not permitted to lease this property. This is because:
(1) As the landlord and its parent company are different independent legal
entities, you are not entitled to rent the office without the landlord’s
signature.
(2) A foreign company shall carry out commercial business only through
its subsidiary in China. Therefore, a lease agreement signed between
you and the landlord’s parent company in your country will be
deemed illegal in China.
(3) If you pay the rent to the landlord’s parent company in your country, you
will not be able to obtain the “Fapiao” issued by the landlord in China which
is required by the Chinese local tax bureau for your WFOE’s registration.
Chapter VIII: Human Resource Issues
China has recently enacted a new Labor Contract Law which, together
with existing regulations and laws, broadly increases worker protection. It
is important to have a thorough understanding of the laws and regulations
applicable to staff employment.
a Staff Engagement
A WFOE is allowed to employ and engage its own staff. However, many
foreign investors choose to employ staff through Chinese domestic HR
service companies, including FESCO, ADP, as well as others, rather than
employ them directly.
A commonly cited advantage of HR service companies relates to the cost

of meeting social welfare regulations. These regulations bring compliance
and implementation overhead; social welfare law and regulation is
complex, non-standard across cities and within cities, and regularly
changes. HR service companies may bring savings in compliance costs
and potential fines until the economies of scale of employing a dedicated
HR staff become feasible. Labor Contract
According to the Labor Contract Law of the P.R. China, a WFOE shall
conclude a written labor contract with its employee within one month of
the date on which the WFOE started to use such employee. This contract
ensures certain benefits for employees. Failure for an employer to enter
into a contract with an employee after this period opens the WFOE to
potential compensation payments.
a Mandatory Provisions in Labor Contracts

A labor contract shall include the following provisions:
c Name, domicile and legal representative or main person in charge of the

employer;
c Name, domicile and number of the resident ID card or other valid
identity document of the employee;
c Term of the labor contract;
c Job description and the place of work;
c Working hours, rest and vacation;
c Labor compensation;
c Social insurance;
c Labor protection, working conditions and protection against occupational
hazards; and
c Other matters which laws and statutes require to be included in labor
contracts (such as disclosure of occupational disease or ailment that
occurs as a result of work or occupational activity).
Probationary Period
a
In a labor contract, the employer is entitled to stipulate a probationary

period to assess an employee for potential regular employment. There are
limitations to this probationary period:
c Mandatory maximum probation period

Q months ≤ labor contract term < 1 year: not exceed 1 month
Q 1 year ≤ labor contract term < 3 years: not exceed 2 months
Q 3 years ≤ labor contract term, open-ended labor contract: not exceed 6
months

c Extension of probation period
Q through negotiation with employee
Q if the probation period has reached the mandatory maximum, the
employer may extend the probation period by extending the labor

contract term
Q in no circumstances should the probation period be longer than 6
months

c Circumstances to which probation period is not applicable
Q the labor contract term is less than 3 months
Q the labor contract is for the completion of a certain job, not for sustained
employment
Q the probation period is included in and equal to the labor contract term

Note: an employer may stipulate only one probationary period with the
same employee.
c Salary during the probationary period

Q may not be less than the lowest wage level for the same job with the
employer or less than 80 percent of the wage agreed upon in the labor
contract
Q may not be less than the minimum wage rate in the city or district where
the employer is located
c Termination of labor contract during the probationary period

Q Termination raised by employee
(a) 3 days notice to the employer in advance is the only requirement
(written or verbal)
(b) any training expenses of the employee during the probationary
period is not allowed to be compensated by the employee
Termination raised by employer

Q
(a) the employee is proved during the probation period not to satisfy the
conditions for employment (only applicable during the probationary
period)
(b) termination due to employee’s fault (Article 39 of Labor Contract

Law)
(c) termination not due to employee’s fault (Sub-article (1) and (2) of
Article 40 of Labor Contract Law)
(d) except for the situation mentioned in the above (a) (b) and (c),
the employer shall not terminate the labor contract during the
probationary period.
(e) notice in advance to the employee is not necessary
a Severance Pay
If an employer intends to terminate a labor contract with an employee,

the employer is required to provide severance pay to the employee where
required by Chinese law and regulation. When the Labor Contract Law of P.
R. China came into legal effect on January 1st, 2008, the scope of severance
pay was significantly enlarged. Application of severance pay is often a point
of confusion for employers, key aspects are outlined below:
The issue of severance pay is covered mainly by Article 28 of the Labor Law of
P. R. China, Article 46 of Labor Contract Law of P. R. China and the Regulation
on severance pay for Breaching or Terminating Labor Contract issued by the
Labor Ministry of P. R. China. According to these laws severance pay is based on
the number of years an employee worked with the employer at the rate of one
month’s wage for each full year worked. Any period of not less than six months
but less than one year is treated as one year of employment; any period of less
than six months is treated as a half year of employment and severance pay
applied at one-half of such an employee’s monthly wages. If the monthly wage
of an employee is higher than three times that of the average monthly wage of
employees in the city in which the employer located (as published by the local
government authority), the maximum rate for the severance pay paid to such an
employee shall be three times of the average monthly wage and no more than
that employee’s wage over 12-months. We can classify employment contract
termination into 7 types, based around the reason for contract termination:
c Type A: Employee’s Termination of Labor Contract.
The employer shall pay severance pay to the employee only if the employee is
forced to terminate the labor contract due to circumstances stipulated in Article
38 of the Labor Contract Law. For example, if an employer fails to provide the
labor protection or working conditions specified in the labor contract, or if an
employer uses violence, threats or unlawful restriction of personal freedom to
compel an employee to work, such employer must give severance pay to such
employee when such employee terminates the labor contract.
c Type B: Employer’s Termination of Labor Contract through Negotiation

with Employee.
This type of severance pay occurs only when the employer raises the
intention of terminating the labor contract with the employee and the
employee agrees to such termination. If the intention of terminating the
labor contract is raised by the employee first, the employer is exempt from
paying severance pay.
c Type C: Employer’s Termination of the Labor Contract in line with the

Labor Law and Labor Contract Law.
This type of severance pay occurs when the employer terminates the labor
contract unilaterally under certain circumstances stipulated in the Labor
Law and Labor Contract Law. The statutory circumstances for this type of
severance pay are split into three main categories:
(a) after the statutory period of medical care for an illness or non-work-
related injury, the employee can engage neither in his original work
nor in other work arranged for him by his Employer;
(b) the employee is incompetent and remains incompetent after training
or adjustment of his position; or

(c) the labor contract is unable to be performed due to a major change
in the circumstances relied upon at the time of conclusion of the
labor contract and, after consultation, the employer and employee
are unable to reach an agreement on amending the labor contract.
c Type D: Employer’s Reduction of the Workforce
This type of severance pay occurs when the employer terminates the labor
contract unilaterally due to its Reduction of the Workforce under certain
circumstances stipulated in the Labor Law and Labor Contract Law.
According to Article 27 of the Labor Law and Article 41 of the Labor Contract
Law, if an employer needs to reduce its workforce when it is to be restructured
pursuant to the Enterprise Bankruptcy Law of P. R. China, suffers serious
difficulties in production and/or business operations, or faces other major
difficulties of its operation, an employer may reduce its workforce after it
has explained the circumstances to its Trade Union or to all of its employees
30 days in advance, has considered the opinions of the Trade Union or the
employees, and has subsequently reported the workforce reduction plan to the
local labor administration department. To the employees who have been fired,
the employer shall pay severance pay.
c Type E: Termination of Labor Contract when the Labor Contract Expires
This type of severance pay was newly introduced in the Labor Contract
Law. According to Article 46 of the Labor Contract Law, when a labor
contract ends due to the expiration of its term, the employer shall pay
severance pay to the employee unless the employee does not agree to
renew the labor contract whereby the conditions offered by the employer
are the same as or better than those stipulated in the current labor contract.
c Type F: Termination of Labor Contract due to Employer’s De-registration
According to the Labor Contract Law, if an employer is to terminate a labor

contract with an employee when such employer is declared bankrupt, has
its business license revoked, is ordered to close or is closed down, or when
such employer decides on early liquidation, it shall pay severance pay to
the employee.
c Type G: Other Circumstances for Employer to pay Severance Pay.
This type mainly aims at new or supplementary regulations related to

severance pay which may be issued by Chinese government authority in
the future.
Chapter IX: Tax and Accounting Related Issue
As a registered legal entity, the tax structure of a WFOE is more complex

than that of an RO. A WFOE is required to declare and file its taxes
periodically and to undergo an audit by a certified public accountant firm
(“CPA firm”) on an annual basis. The annual inspection process includes
submitting the audited report together with company records (financial
statements, business license, etc) to eight key official bureaus:
a State Tax Bureau (“STB”)

a Local Tax Bureau (“LTB”)
a Customs Office
a Foreign Exchange Bureau
a Bureau of Commerce and Industry
a Finance Bureau
a Statistical Bureau
This guide provides an overview of the key ongoing administrative and taxation
related issues affecting a WFOE. We outline the key issues involved in:
1) Tax Structure and Payment Treatment;

2) Accounting Environment and Requirements (Include Accounting
Software Selection)
3) Profit Allocation;
4) Audit and Annual Inspection;
We have separately issued technical guides addressing each of these topics

at a more detailed level. Brook Harvest would be happy to provide copies
of these guides, and other important information affecting your WFOE.
Section One: Tax Structure and Payment Treatment
A WFOE is likely to fall into several different tax categories depending on

its business scope and the nature of the enterprise. An introduction to each
tax category:
1. Income Tax
Income tax includes corporate income tax (“CIT”) and individual income
tax (“IIT”)
1.1 Corporate Income Tax

On 1st January 2008 a new corporate income tax law became effective. This
new law resulted in several changes to income tax treatment and payment,
including the abolition of the “two years exemption and three years half”
incentive for manufacturing enterprises. Alongside this major change was
a limitation of freedom for Economic Developing Zones (“EDZ”) and Free
Trade Zones (“FTZ”) to issue their own tax incentives: all tax incentives
must now be authorized and approved by State Council.
Our technical guidance book: “Guidelines TO Implementing the RuleS of

THE New Corporate Income Tax Law” discusses the newly issued China
Corporate Income Tax Law and the changes and improvement it makes.
The book can be downloaded from our website.
Tax incentives in the newly issued law largely revolve around High/New
Technology Enterprises (“HNTE”). If an enterprise can be attributed with
the HNTE classification it can enjoy a reduced tax rate of 15% Besides this
lower tax rate, the new law brings tax incentives in several other significant
areas for HNTEs, We discuss application conditions and requirements on
company for becoming HNTEs in our book “Guide to the Assessment and
Application Procedures for High / New Technology Enterprises” which can
be downloaded from our website.
The new standard corporate income tax rate is 25% for most manufacturing
enterprises. If an enterprise also conducts R&D, including R&D projects, it
may be able to be classified such operations as “HNTE” projects, income
derived from which may enjoy a lower tax rate and other benefits.
Corporate income tax is required to be filed and declare on a quarterly

basis. At the end of the year tax needs to be consolidated and cleared. We
explain this in more detail in Section Two: Accounting Environment and
Requirements.
1-2 Individual Income Tax
Here we limit discussion to the treatment of Expatriate Individual Income Tax.
If the expatriate is employed by the WFOE the expatriate should file and
declare his individual income tax if he is resident in China for over 183 days
of a year. The filing and declaration process is divided into two stages:
Stage One: Registration with the local tax bureau.
This requires documentation including the employee’s assignment letter,

VISA, and other documents relating to his employment and legal residence
in China;
Stage Two: Monthly reporting of income tax .
We explain detailed expatriate IIT issuance and illustrate IIT planning in

our technical book “The Guide of Expatriate Individual Income Tax”. This
book may be downloaded from our website.
In the past we have noted some clients split their salary into two parts: one
part paid by the China entity and the other part paid by the overseas Head
Office, the intention of which is to reduce overall tax liability in China. We
do not recommend clients continue this practice; the China tax office has
increased it’s international networking and monitoring network in recent
years and in doing so has increased it’s ability to track and demand tax and
compensation payments for tax it perceives as unpaid.
Expatriate IIT needs to be reported and declared on a monthly basis. We

explain the details of this in Section Two: Accounting Environment and
Requirements.
2 Turn-over Tax
China’s taxation structure includes three main types of Turn-Over Tax

applicable to a WFOE. We will publish a detailed technical book on these
TOTs shortly, providing detailed analysis on tax basis, calculation methods,
special treatments, incentives and other applicable themes. Below is a
skeleton-summary of TOTs:
2-1 Business Tax (“BT”)
Business Tax is payable by WFOEs that provide services as part of their

operations (are a ‘service provider’). Business tax law in China outlines
the following broad business activities as defining a service provider:
Q Provision of service activities;
Q Transfer of the ownership of intangible assets;
Q Sale of property;
The amount of business tax payable is based on the income derived from
undertaking a transaction. If a company has an income derived from
providing services and receives an income of RMB10,000, BT will be
calculated on that RMB10,000.
Business tax ranges from 3% to 20%, a typical rate for income derived
from providing business or consumer services would be around 5%.
Business tax needs to be filed and reported on a monthly basis and should
be paid within initial TEN days of the accounting month.
New rules and implementation guidelines applicable to business taxes were

issued at the end of 2008. We cover these in more depth in the December
issue of our ChinaInfo Update. The key change these newly issued rules
bring is related to The Definition of “Provision of labor service within China”
Under the old definition of services, Business Tax as applied to the definition:
“An institution or individual engaged in providing services (hereinafter
referred to as “taxable services”), transferring intangible assets or selling
immovable property within the territory of the People’s Republic of China as
provided in these Regulations shall be a taxpayer of business tax (hereinafter
referred to as taxpayer) and pay business tax in accordance with these
Regulations.” i.e. only if the service was provided in China was the service
taxable. However, the tax rule has been changed at the beginning of 2009,
according to new law, if the enterprise locates in China, they have to pay
business tax even though the service is provided outside of China.
For example: Company A, located in China, provides an Internet training

service via the Internet to Company B, located in the UK. Under the old
law Company A did not need to pay Business Tax in China since the service
was provided outside of China. Under the new law, as a service provider
within China, even though they are providing a service outside China,
Business Tax is applicable.
This is a significant change to the structure of Business Tax. The change

decreases the opportunities that existed in the old regime of providing
services outside China and avoiding payment of business tax on those
services.
2-2 Value Added Tax (“VAT”)
If a WFOE is involved in the activity of production or trading, the Company

is likely to be required to pay VAT. Some clients have confused whether
their company should pay BT, or whether it should pay VAT. In most cases
manufacturing companies are required to pay VAT while companies that
provide business services are required to pay BT.
Companies required to pay VAT can be further divided into two groups: General
Tax Payers, and Small Scale Tax Payers, the two groups differentiated according
to their annual sales turn-over. Again, a change in tax regime has caused a
recent change in tax assessment. Under the old system a Small Scale Tax Payer
was defined as having an annual sales turn-over of less than RMB1.8mn per
year. Under the new system (Clause 28 of the VAT Implementation Rule) Small
Scale Tax Payers are now required to meet the following conditions:
1) For tax payers that handle the goods manufacturing and service
providing or the tax payers mainly focus on the goods manufacturing,

but also handle the goods whole sales or retail, they will be entitled as
“Small Scale Tax Payer” if their annual VAT taxable income is less than
RMB500 thousands;
2) Other tax payers besides of above case, they could be entitled as “General
Tax Payer” if annul taxable income exceeds RMB800 thousand;
An enterprise is entitled with the status of ‘General Tax Payer’ is allowed

to issue VAT invoices, the tax rate of which is 17%, unless the enterprise’s
business scope covers certain specially treated areas which have a rate of 13%
A Small Scale Tax Payer not permitted to issue VAT invoices, it may issue
Commercial Invoices taxed at a rate of 3 percent.
a Tax Payable
For a Small Scale Tax Payer, VAT payable at the Sales Amount *3%.
For a General Tax Payer VAT paid on inputs can be reclaimed against VAT
paid on sales receipts. We outline the process of calculating this below:
1) Input VAT
Input VAT is calculated at a rate of 17% of the purchase costs. For example,
Company A purchased some raw materials with the amount of RMB10,000.
In this case, the Input VAT of Company A is 10000*17% = 1,700.
For most goods, Input VAT is allowed to be deducted from current period’s
Output VAT. According to the old VAT rule, Input VAT related to the
purchase of fixed assets was not allowed to be deducted from Output VAT.
This rule has been revised, now Input VAT paid on the purchase of certain
fixed assets is allowed to be deducted from current’s period Output VAT.
2) Output VAT
Output VAT is calculated at 17% of the sales value. For example, after
processing and manufacturing, the goods are sold as RMB20,000. In this
case, Output VAT of Company A is 20,000*17%=3,400.
The tax payable is the gap between Input VAT and Output VAT. In
the above example, the tax payable for current period is RMB(20,000-
10,000)*17%=1,700.
a Import and Export VAT
Import VAT is calculated at the imported goods value * 17%. It is part of

the importation cost of the WFOE.
For exported products, some tax paid may be reclaimed by the Company
from the government. For most manufacturing enterprises, the tax refund
method is known as “Exemption, Deduction and Refund.”
a Administration of VAT
The VAT should be declared and reported within TEN days of each
accounting month.
We illustrate more detailed information and examples of treatment for all of

the above cases in our upcoming technical book, Turn-Over Tax in China.
2-3 Consumption Tax (“CT”)
If a WFOE is involving in business relating to manufacture, processing

or importing of goods for consumption, they are likely to have to pay
consumption tax.
About Our
Technical Books
As an effective information channel, we published five technical books in
2008, they are talking different financial, accounting and tax topics including:
“Expatriate Individual Income Tax Guide”

“Establish a RO in China”
“Establish a FICE in China”
“Corporate Income Tax Implementation Rule Guide”
“Application High and New Technology Enterprise Guide”
All of above technical books are provided to clients for free.
Please contact us if you are interested in the books:

booksales@brookharvest.com
Establishing Expatriate Individual EXP

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Income Tax Guide

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Table of Items and Applicable Rates (Amount) of Consumption Tax
Tax Tax rate/

Taxable Items Scope of taxation
unit amount
I. Tobacco
1. Cigarettes, category A Including imports 45%
2.cigarettes, category B 40%
3. Cigars 40%
4. Cut tobacco 30%
II. Alcoholic drinks, alcohol

1. Distilled spirits from cereals 25%
2. Distilled spirits from potato 15%
3. Rice wine Ton 240 Yuan
4. Beer Ton 220 Yuan
5. Other alcoholic drinks 10%
6. Alcohol 5%
III. Cosmetics Including cosmetic sets 30%
IV. Skin-care and hair-care products 17%
Including all kinds of gold,

V. Jewelry and precious stones silver, jewels and precious 10%
stone ornaments
VI. Firecrackers and fireworks 15%
VII. Gasoline Liter 0.2 Yuan
VIII. Diesel oil Liter 0.1 Yuan
IX. Motor vehicle tires 10%
X. Motorcycles 10%
XI. Motor cars

1. Cars with cylinder capacity of 2200ml
or more
8%
-- Cars with cylinder capacity of 1000 -
5%
2200ml
3%
-- Cars with cylinder capacity of less than
1000ml
2. Jeeps (4-wheel drive)
Those with cylinder capacity of 2400ml or
more 5%
Those with cylinder capacity of less than 3%
2400ml
3. Minibus and vans Of less than 22 seats
With cylinder capacity of 2000ml or more 5%
With cylinder capacity of less than 2000ml 3%
2-4 Stamp Duty (“SD”)
Stamp Duty is payable on financial and legal documents such as a Business

License, Purchase and Sales Contracts or Purchase Orders.
As it’s name implies, Stamp Duty can be bought like stamps in advance;
an accountant can calculate the tax payable according to the value of the
financial/legal documents and stick related value stamps to the documents.
The tax payer, tax rate and relevant categories are illustrated below.
Table of Items and Rates of the Stamp Tax
Item Applicable Scope Tax Rate The Note

taxpayer
1. Including contracts on Stamps to the The parties

Purchase supplies, order on purchase, equivalent of 0.003% establishing
or sales procurement, purchase and of the value of a the contract
contracts marketing, coordination, transaction
regulatory supplies,
compensation trade, barter
trade
Contracts on processing with material equivalent of 0.05% establishing
processing or design provided, repair of the value of the the contract
and services and renovation, printing, deal
advertising, surveying and
testing
3. Including contracts of Stamps to the The parties
Contracts on surveying, prospecting and equivalent of 0.05% establishing
construction, designing of the deal the contract
engineering
prospecting
and survey
and
designing
Contracts building, installation equivalent of 0.03% establishing
on building, engineering work of the deal the contract
installation
engineering
work
5. Including leasing houses, Stamps to the The parties
Contracts vessels, aircraft, engine- equivalent of 0.1% of establishing
on leasing driven vehicles, machines, the value of the lease the contract
property tools and other equipment or one Yuan if 0.1%
of the lease is less
than one Yuan
6. Including contracts on Stamps to the The parties Vouchers
Contracts shipment by civil aviation, equivalent of 0.05% establishing used as
on cargo railway, ocean shipping, of the fare for the the contract contracts
shipment inland shipping, shipment on shipment shall be
roads, and through shipment affixed with
stamps
7. Including contracts on Stamps to the The parties Stamps for

Contracts on warehousing and custody equivalent of 0.1% establishing contracts
warehousing of the charges on the contract shall be
and custody warehousing affixed to
warehouse
instruments
used as
contracts
8. Including contracts on loans Stamps to the The parties Stamps
Contracts on between banks and other equivalent of 0.05% establishing affixed to
loans banking institutions with of the loan the contract instruments
borrowers (excluding inter- used as
bank financing) contracts
9. Including insurance contracts Stamps to the The parties Stamps
Contracts on on property, liability, equivalent of 0.03% establishing affixed to
insurance on security, credibility of the value of the the contract instruments
properties insurance policy used as
contracts
Contracts on technological development, equivalent of 0.03% establishing
technologies transfer, consultation and of the deal the contract
service
11. Including deeds on transfer Stamps to the The parties
Deeds on of proprietary rights over equivalent of 0.05% establishing
transfer of property, copyright, trade of the deal the contract
proprietary mark, patent right, know-
rights how
12. Account books in production Stamps to the The party
Business and business operation equivalent of 0.05% establishing
account of the original value the account
books of the fixed asset book
and the circulating
capital. A stamp with
a face value of five
Yuan to be affixed to
other account books
each.
13. Including house title deeds, A stamp of 5 Yuan The party

Deed of industrial and commercial affixed to each accepting
ownership or business licenses, certificates document the deed
permit of trademark or patent right
registration, certificate of
land use right issued by
government departments
Section Two: Accounting Environment and Requirements, Including

the Selection of Accounting Software
As a legal entity, a WFOE needs to prepare complete accounting records

periodically such as Accounting Vouchers, Sub-Ledgers, General Ledger
and Financial Statements. The accounting period in China is calendar year
and month, as such, financial statements need to be prepared as monthly
reports, quarterly reports and as an annual report.
As new-comers to the Chinese regulatory environment, many WFOEs

choose to engage an accounting firm to play the role of Bookkeeper and
Tax Filer on behalf of the WFOE. In most cases, the accounting firm
should be able to assist the WFOE in preparing it’s financial statements; the
WFOE must appoint a person to collect the financial documents from the
accounting firm, however,
There are several popular software applications that can fulfill the role
of creating financial reports. These include Kingdee, User-Friend, Quick
Book and Little Bee. We often recommend User-Friend as it is also provides
a mini ERP system. The financial module is only a part of the complete
system, and allows data recorded in the financial module to be linked with
inventory, purchasing and sales modules.
All of the above mentioned software products can create both Chinese and
English versions of financial reports. The China tax authority requires
financial data to be recorded and reported in Chinese. If needed, an
English version of reports can be created separately, a useful function for
foreign management and staff.
Section Three: Profit Allocation
An increasing amount of Foreign Invested Enterprises face the question of

how best to best repatriate their profits back to their home or, or to other
overseas office.
Repatriation of profits has become a simple process for Enterprises that

have paid China related taxes without issue, that have kept up to date with
filed accounts, and followed other legally required regulations.
The Corporate Income Tax Law, effective from 1st January 2008, requires
a Dividend Tax be paid when dividends are repatriated outside of China.
The standard Dividends Tax rate is 10%, but a HK based Holding or Parent
Company can enjoy a rate of 5% due to a the tax treaty signed between
Mainland China and the HK SAR Government.
Section Four: Annual Audit and Inspection
A Foreign Invested Enterprise must be audited by a qualified CPA firm at

each year-end. The audited report is sent to the tax authorities and other
government officials for annul inspection. The audit of a normal foreign
invested enterprise is significantly different from the audit of a Chinese
listed enterprise.
The audit will focus on the Company’s financial statements including the
Balance Sheet, Income Statement and Cash Flow Statement. The deadline
of the annual tax consolidation process is 30 April; the auditor’s report is
required to be issued before 30 April.
There are three tiers of qualified CPA firms operating in the current Chinese
market:
Q Big Four Accounting Firms, mainly focusing on large state-owned
enterprises, multinational enterprises and listed companies;
Q Local CPA firms with firm foreign background and experience, their
target clients include small and medium sized Foreign Invested
Enterprises;
Q Local background CPA firms, cheap and flexible, but experience
problems in clearly communication with and understanding the needs of
international clients and FIEs.
As well as an audit, Foreign Invested Enterprises (“FIE”) are requested

to perform an annual inspection. After the successful completion of the
inspection, the Administration of Industry and Commerce will renew
the Business License of the Enterprise. As part of the inspection process
the Enterprise must provide company documents including it’s current
Business License, Financial Reports and Audited Report.
The annual inspection period is from 1st March to 30th June, enterprises are
encouraged to perform the annual inspection procedure on-line.
极专注道高明
w w w. b ro o k h a r v e s t . c o m
A u d i t • Ta x • A d v i s o r y
Professionals Assisting Performance

Establish A WFOE in China

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Establish A WFOE in China

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ESTABLISH

Horwath Capital China can help you!

Contact person : Teresa Zhang

The Service Briefing of Business Partner:

WFOE Wholly Foreign Owned Enterprise

Chapter I: What is a WFOE?

A WFOE is a company wholly invested by one or more foreign investor(s)

A WFOE is an independent legal entity which is allowed to carry out

A WFOE Compared with RO:

A WFOE is an independent legal entity in China, while a RO is not. A WFOE

The notable disadvantage of establishing a WFOE is a registered capital

A WFOE Compared with JV:

Both a WFOE and a JV are regarded as independent legal entities in China.

profits back to its foreign investor(s).

Since a WFOE is invested without Chinese partners(s), it must seek

Chapter II: Considerations before Establishing a WFOE

Changing business scope, registered capital or total investment, and other

a Total Investment and Registered Capital

The practical level of required capital is often greater than mandatory

The business scope of a WFOE refers to the type of business it is permitted

relating to those activities. Before being permitted to carry out business in

a Location of Your WFOE

Chapter III: The Management Structure of a WFOE

III)-1 Highest Authority of a WFOE

In line with relevant Chinese laws and regulations, the Shareholder’s

Below is an illustration of the typical allocation of rights between the

c Issues to be decided by the Shareholder’s Meeting

(1) determining the WFOE’s operational guidelines and investment plans;

(4) deliberating and approving the reports of the Supervisor;

c Issues to be decided by the Board or Executive Director

(1) reporting the operation of the WFOE to the Shareholder’s Meeting;

III)-2 Board of Director or Executive Director

According to relevant Chinese laws, a WFOE shall either have a Board of

III)-3 Board of Director

The Board of a WFOE shall be established on such WFOE’s establishment

The terms of office of the directors shall be decided by the shareholder(s)

be prescribed by the WFOE’s AOA, unless it is otherwise provided for by

A WFOE shall set up a board of supervisors, which shall comprise at least

The supervisor’s responsibility is as follows:

(1) inspect and examine the financial affairs of the WFOE;

a Registered Capital and Total Investment

The Registered Capital of a WFOE is the capital subscribed and contributed

of money and time. We strongly recommend investors to carefully plan and

Total Investment = Registered Capital + Loans

If a WFOE’s Total Investment stipulated in its AOA is equal to its Registered

According to relevant Chinese laws and regulations, the amount of total

a Minimum Registered Capital

The minimum permitted registered capital of a WFOE is 30,000 RMB. If

As we have mentioned before, sufficient Registered Capital is an important

of the additional investment;

In our experience, the completion of the whole procedure to increase registered

a Registered Capital Injection

The shareholder(s) of a WFOE may make capital contributions in currency,

The shareholder(s) may choose to inject capital contributions in the form

Chapter V: Articles of Association

The Articles of Association (“AOA”) are the fundamentals of your WFOE’s

We will introduce our analysis and comments to below topics:

are deligh Have Bee ed in Insurance

We Clothes opt tion.

The w.b roo

Please contact us for free hard-copy

The first issue of ChinaInfo Newsletter is published at December 2008, as