Setting up a WFOE: A Guide to Setting Up Your First Company in China 

Key Takeaways: 

• A China WFOE (Wholly Foreign-Owned Enterprise) is a Chinese company that is not required to appoint a local shareholder, allowing foreign investors full independence to do business in China 
• Setting up a WFOE can take 3 to 6 months, and having a physical office in China is a requirement
• WFOE minimum capital requirements range from RMB100,000 to several million, and shareholders must pay up subscribed capital within 5 years after incorporation
• After incorporation in China, companies are subject to monthly, quarterly, and annual tax filing requirements. 

You are no stranger to seeing “made in China” written on product packaging. China offers low labour costs, a robust business ecosystem, low taxes and duties, and relaxed commercial regulations; it’s no wonder that it has become “the world’s factory.” 

For entrepreneurs all over the world who wish to work in closer proximity with Chinese suppliers and customers, registering a Chinese entity is a wise choice. Foreigners may set up multiple kinds of business entities in China, but the WFOE is the only one that can be 100% owned by a foreigner. Below, you’ll find all you need to know about setting up your first WFOE.  

What is a WFOE? 

WFOE stands for “Wholly Foreign-Owned Enterprise.” As the name suggests, this corporate vehicle allows foreign investors to do business in China without collaborating with a local shareholder. 

As with Hong Kong companies, both individuals and companies are eligible to be shareholders. The Chinese government permits WFOEs in most industries. However, some industries (e.g. telecommunications, film production, tobacco trading) remain subject to foreign investment restrictions in China. 

A List of WFOE in China

There are 3 kinds of WFOE in China. These are: 

1. Trading WFOE 

• Main activities can include
  • export and import of any products to and from China 
  • Wholesale and retail, and granting franchises in China 
• If the traded products are pharmaceuticals, construction, or food, special operating licenses from relevant ministries might be required.

2. Consulting WFOE 

• Main activity is the provision of consulting services (e.g. business consulting) in China 
• Does not require special licenses, unless the WFOE operates in a regulated industry (e.g. financial consulting)

3. Manufacturing WFOE 

• Main activity is the manufacture of products in China 
• Likely subject to more licensing requirements compared to Consulting WFOEs and Trading WFOEs 

China WFOE: the Pros and the Cons   

Pros

Cons

~Limited Liability Protection  ~No limits on the number of shareholders  ~Operational Autonomy: WFOEs aren’t required to appoint local shareholders, giving foreign owners full control over internal management ~Conducting business in RMB, the local currency: WFOEs can issue fapiao (invoices) and receive payments in RMB, simplifying transactions with local business partners ~Profit repatriation: Once the WFOE fulfils its tax obligations, it may convert all profits from RMB to foreign currencies and remit them overseas as a dividend.

~High registered capital requirements: the minimum registered capital for a WFOE ranges from RMB100,000 to a few million RMB, creating a barrier for smaller investors. The exact number depends on the industry. *A 2024 law amendment requires that shareholders fully pay the subscribed registered capital within 5 years of company incorporation. ~Limits on business activities: WFOEs can only conduct business activities they have declared during the application process. This can limit possibilities of expanding into other sectors in the future. ~Ineligibility for government subsidies: WFOEs might not be eligible for the same support programmes that the Chinese government offers to joint ventures (an entity co-owned by both foreign and local investors)

Incorporation in China: timeline and procedures  

Though the Chinese government has streamlined the process of registering a WFOE, the entire process can still take around 3 to 6 months. Below, we list out the exact procedures, and the time required for each step. 

Step 1: Procure a physical office space

Chinese WFOEs require a physical operating address in China.

The location of the company’s office dictates where the application will be submitted. Therefore, when choosing your office’s location, take the following into consideration: 

• Tax benefits offered by the office’s district
• Flexibility of local regulations 
• Proximity to city centre 
• Proximity to talent and clients 

With so many factors to weigh, finding the right location for your WFOE’s office can be a protracted process. 

Step 2: Prepare registration documents 

In addition to registration forms, the following documents are required to set up a WFOE: 

• Passport copies of directors, investors, and all representatives of the WFOE 
• The WFOE’s lease agreement  
• Articles of Formation 
• Photos and resumes of legal representatives in China 
• Shareholder resolution for WFOE incorporation 
• Legalized and notarized company documents and business license of foreign parent company (if applicable)

Step 3: Choosing a Company Name 

In the wake of recent measures to eliminate foreign words in China-based companies, official company names on business registrations are exclusively in Chinese.  

Due to strict regulations, careful consideration is necessary to avoid unintentional cultural  associations.

Once you come up with a name, submit an application for company name pre-approval to the local Administration of Industry and Commerce (AIC), who will reserve the name and process the approval within 2 business days.

Step 4: Providing basic information to the Ministry of Commerce (MOFCOM)

This is done for statistical purposes, and may be done through the MOFCOM’s official online platform.  

The documents you’ll provide at this stage include: 

• Registration forms 
• Pre-approval documents for the WFOE’s name 
• Identification documents of legal representatives and company owners

Step 5: Filing at the Administration for Market Regulation (AMR)

The MOFCOM will issue an approval certificate, and within 30 days of its receipt, you may submit the relevant documents to the AMR through its online business registration system. This government body will then issue the following documents in just a few business days (scroll to ‘formal examination only’): 

• Business license 
• Statistical registration certificate
• Organisation code certificate 
• Tax registration certificate 
• Social security registration

Step 6: Open a Corporate Account

WFOEs must open both a foreign currency and a RMB bank account. 

The purpose of the former is to handle cross-border transactions and manage currency exchange risks, while the latter is for conducting business with local suppliers and customers. In most cases, the appointed legal representative of the company must visit the bank for a physical bank interview. 

Step 7: Company Chops 

In China, company chops must contain the company’s full Chinese name, and are requirements when submitting official documents, signing contracts, and banking. They even carry the same legal weight as a signature in the West. 

You may obtain your chop from chop manufacturers approved by the public security bureau. Once you obtain the chop, you must file it at the Public Security Bureau (PSB).

What comes after setting up a WFOE?: Key Compliance Requirements

• Find a CPA registered firm in China for audit report preparation
• File for corporate income tax, VAT, and other taxes on a monthly, quarterly, and annual basis, depending on the tax type. Here are some examples of major taxes in China
  • Corporate income tax is usually 25%, but lower rates might apply, depending on the business’s size and activities
  • VAT ranges from 3% to 13% of sales revenue* 
  • Consumption tax ranges from 1% to 45% of sales revenue*
  • Resources tax ranges from 1% to 20%, determined based on the required materials
• Conduct annual financial reporting through the National Credit Information Publicity system before June 30 of every year. As this system supports simultaneous reporting to multiple government agencies, this is known as “many in one” annual reporting

*Exports are exempt 

As we can see from the tax rates and the frequency and number of tax filings, it can be costly and challenging to keep abreast of compliance matters in China. This is precisely why setting up a company in Hong Kong continues to be an attractive alternative for entrepreneurs everywhere. Not only may Hong Kong companies benefit from more relaxed tax policies and reporting requirements, they also provide proximity to Chinese suppliers and customers. To learn more about just how simple it is to incorporate a company, click on the button below! 

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