In 2018, Shanghai ranked fifth in the Global Financial Centers Index and was the third most competitive after Singapore and Hong Kong. It is China’s financial center, and a very popular place for foreigners to set up a company. How do you do that? Well, mostly, you'll form a WFOE.
What is a WFOE?
A Wholly Foreign-Owned Enterprise (WFOE – pronounced woofee) is a private limited liability company set up in China in which all shareholders are foreign and makes up 65% of the organizational structures for foreign investors. The original concept of a WFOE was to introduce advanced technology to Chinese industry, but since China’s entry to the World Trade Organization (WTO) in 2001, the conditions under which WFOEs are allowed to set up have changed slightly. These days they are categorized into three of the most common types.
A Manufacturing WFOE can be set up if you’re looking to create your own plastics products, automobiles or consumer products.
Consulting WFOEs would be established for consulting and services. For example, market strategists and business advisors for Chinese companies trying to break into the global market.
Trading WFOEs, also known as Foreign Invested Commercial Enterprises, give you product import/export privileges and allows you to trade within China. A company that imports foreign alcohol then distributes it around China will need to have a Trading WFOE, or sometimes, if food and beverage is involved, an F&B WFOE.
The cost of the set-up can vary. International law firms that offer top-drawer services, speak multiple languages and do all the legwork for you can cost anywhere up to 100,000rmb. This is for big companies. There are cheaper business services providers that may offer excellent services but limited languages for somewhere between 10-20,000rmb. The cheapest option would be to employ a sole trading China business expert which is risky, or do it yourself which is basically impossible if you don’t read and speak fluent Chinese. Both can cost below 10,000rmb. Import/export licenses cost extra.
Brief Step-By-Step Guide
If you are thinking about starting your own WFOE, you will need the help of an agency. A list of companies is at the bottom of this article, but here is a brief outline of the steps you will eventually take once the process is under way.
Step 1 – Pick the right name and register it. This includes four parts: location, company name, industry, and limited. Here are the fixed guidelines when choosing what your WFOE is called. This is pretty much the only step you can do by yourself; the rest will require an agency.
Step 2 – Prepare legal documentation for company registration, including from the investor: business license, bank reference letter, and copies of passports and photos. From the new company, necessary documents include information about your business (name, scope, registered capital, business term and a lease on an office/facility), info about the directors of the new business, cash flow estimations, articles of association and an environmental protection report (if applicable). If all the info is good, the authorities will then issue you with an approval certificate and temporary business license.
Step 3 – Once you’ve been granted the business license, you’ll need to register for taxes at the State and Local Tax Bureau. This needs to be done within 30 days of receiving the temporary business license. You’ll also have to set up ‘chops’ for your new company, which is a form of representation and authentication regarded as a signature, like a stamp or a seal.
Step 4 – Register with the other 12 relevant authorities, such as the Technology Supervision Bureau, the State Administration and Foreign Exchange, the Financial Bureau and the Statistical Bureau. Your agency should do the legwork for this step.
Step 5 – Set up a Chinese bank account. You’ll need an RMB Current Account for daily business operations in China like paying staff salaries and receiving payments, then a Foreign Currency Capital Account to receive capital injections from overseas.
Does Location Make a Difference?
Yes. Some districts will have a beneficial tax system and cheaper office space. Take Jing’an for example; a district already teeming with business that doesn’t need to lower prices on anything. The Shanghai Free Trade Zone is also somewhere to consider, as certain policies make it attractive for foreign investment. For example, the time it takes to set up a WFOE in the FTZ can be reduced a lot, and trade goods get cleared faster than say downtown Jing’an which saves companies time and money.
The Advantages of a WFOE
- The first and biggest advantage would be the autonomy you have with a WFOE. You are free to do business as you wish, of course within Chinese law.
- It also gives you the capability of converting profits from RMB to USD or any other currency and send it outside of China to a parent company.
The Disadvantages of a WFOE
- It’s not easy. The process (like many other things of a similar vein in this country) is fraught with bureaucracy, which is why involving an agency is pretty much essential. Many things could go wrong like missing a document or forgetting to register with an authority.
- It can also take a long time. If everything goes well, the minimum amount of time you’re looking at is 3-4 months. If you balls it up or pick a bad agency and they balls it up, it could take anywhere between 6-18 months.
- Being independent isn’t always a good thing. It can mean missing out on local business knowledge and a lack of government support.
- The activities of a WFOE are largely restricted to those that were outlined in the application process. This can limit any adjustments to the business model you might want to make down the line.
Shanghai HengYu Consulting – as well as company registration, they specialize in bookkeeping, declaration of taxes and HR services. Languages include English and Mandarin.
Shanghai J&J Certified Public Accountants Firm – company registration, auditing, accountancy, bookkeeping, legal services and investment outside of China. Languages include English and Mandarin.
Shanghai Zixiao Financial Consulting Co. Ltd – company set-up, office relocation, tax planning, import/export, bank management and equity changes. Languages include English and Mandarin.
Stone Compass Associates – company registration, outsource accounting, CFO function, tax compliance & advisory, financial due diligence, fraud prevention & investigation and internal audit & control. Languages include English, Mandarin, Cantonese, Japanese, and German.
Evertrusty Enterprise — company registration, accounting and taxation, visa service, HR Service, legal and trademark registration. Languages include Mandarin and English.
World Wise Consulting Limited - provide business consulting services for clients interested in starting their business and assisting companies to establish and structure their entities in China, Internationally & Offshore.
Browse all Business Registration Companies in Shanghai here.