The most popular entity for doing business in China is the Wholly Foreign Owned Enterprise (WFOE), which is a company established in China according to Chinese laws and wholly owned by one or more foreign investors. A WFOE is a Limited Liability Company (LLC) that can:
• Conduct business activities and generate revenue based upon a limited business scope;
• Hire local employees directly and, in many cases, has no limit for the number of foreign employees.
A WFOE’s registered capital must be declared during the licensing phase of the company set-up process. This should cover initial investment expenses and may be used immediately for the company’s operations. From commencement of the registration process, you should anticipate four to six months before a company is fully operational, depending on location.
What is the minimum investment required to set up a WFOE?
In 2014, China amended its Company Law to abolish minimum capital requirements. However, nearly every city with significant foreign investment can impose its own capital requirements for setting up a company. Furthermore, if your business is subject to additional licensing requirements, then a minimum capital investment may be imposed.
For most companies, the amount of minimum capital will depend on the location and the nature of the business. In other words, the officials reviewing your application will determine whether the amount you intend to invest is sufficient for your business activity. Authorities in the Tier 1 cities – Beijing, Shanghai and Guangzhou – generally regard CN¥1 million (approx. $160,000) as a baseline and work on the basis that the capital investment should be sufficient to cover two years of expenses. Ultimately the investor should invest sufficient capital to cover operating expenses until such time as it is anticipated that the WFOE will be cash flow positive.
It should be borne in mind that a company’s registered capital can affect more than its registration. It is also relevant in the following circumstances:
- Local employees’ residence permits – With a low registered capital, companies may not be able to sponsor temporary residence permits for local employees who reside outside the administrative district where the company is located. This could forcibly limit a company’s talent pool.
- Foreign employees – Certain administrative districts in China will limit the number of foreign employees that a company can employ based on that company’s registered capital.
- Future adjustments – The ability to make changes to a company’s structure or set up branch offices could be hindered by a low registered capital.
- Tax bureau relationship – General VAT taxpayer status and export VAT rebate applications may be held up by the local tax bureau.
It may be that none of these four issues currently applies in the administrative district where a company is looking to establish. However conditions can change suddenly at the local level and this could have an impact on a company’s future operations.
Closing down a China WFOE
There are many reasons why a foreign-invested company might seek to close their China operations – financial difficulties, bankruptcy, reorganisation or merger, relocation or a change in circumstances to an overseas parent company – but dissolving and liquidating a Wholly Foreign-Owned Enterprise (WFOE) in China can be a confusing and frustrating process.
We have received a number of queries recently from clients asking for advice and assistance and it therefore seems like a good time to explain the process that needs to be followed to close a foreign invested enterprise in China, and highlight the many related issues that you will need to address if you want to achieve a clean exit.
Whatever the reasons for exiting, there are strict procedures that must be carried out to ensure that the company’s final bills are settled, tax is paid, and all the company’s remaining liabilities and statutory responsibilities are correctly discharged. This will ensure that there are no adverse repercussions for either the company or its management.
It may come as a surprise to learn that closing a WFOE can be even more expensive and time consuming than opening it; in some cases it can take up to two years to complete the process. It is therefore advisable for any company that is considering entering China to also devise an exit strategy and pay close attention to the formalities.
This article will briefly outline the steps involved in liquidating your China WFOE and highlight some of the major points to note:
- The Administration of Industry and Commerce (AIC) must be informed of the decision to close within 7 days of the board decision.
- Once the shareholders have decided to close a WFOE, a ‘liquidation committee’ must be appointed. The committee’s responsibilities include liquidate the assets of the company, preparing financial statements, settling taxes and dealing with creditor claims. The committee must be established within 15 days of the board decision to close the WFOE.
- A public announcement in at least one newspaper must be issued within 60 days of the liquidation committee being established.
- A liquidation report must be submitted to the Board of Directors and the relevant authorities.
- Preparation of a liquidation audit by a Certified Public Accountant (CPA) detailing the financial performance and transactions of the company for the last three years before the date of declaring liquidation.
- De-registration from Ministry of Commerce and cancellation of the Approval Certificate.
- De-registration from local tax bureau and State Administration of Taxation Bureau. All tax payments must be settled before the dissolution registration.
- Customs Certificate cancellation.
- De-registration from Administration of Industry & Commerce (AIC).
- Close all bank accounts.
In addition, some companies in particular sectors may have other specialised registrations that will need to be closed off.
Sovereign China can provide specific details on, and assistance with, all aspects of your company set up or closure. Please contact us for further information.