FastLane Group
‘ Together We Build Better Business ’
An Entrepreneur’s
Guide to
Incorporating
in China
©FastLane Group February 2020
FastLane Group I An Entrepreneur’s Guide to Incorporating in China
About FastLane
Founded in 2013, The FastLane Group is an
accountancy and advisory firm with a presence
in Hong Kong and Shenzhen. We combine
innovation and technology to provide
professional services with a particular focus on
entrepreneurs, start-ups, fast growing
technology companies, angel investors and
venture capitalists.
The FastLane Group provides best in class
services for businesses looking to operate in
Hong Kong, China and the ASEAN region.
Offering a diverse range of professional
services, including accountancy, auditing,
company formation and payroll management
and HR advisory assistance, The FastLane Group
is able to provide a holistic and comprehensive
suite of services to our clients.
Our group entity, FastLane CPA Limited is a CPA
practice registered with the Hong Kong Institute
of Certified Public Accountants (“HKICPA”) which
allows us to provide accountancy and auditing
solutions. We are also licensed with Hong Kong
Company Registry to provide corporate services
in Hong Kong and other jurisdictions.
Our Mission
We strive to establish a secure and rewarding
partnership with our customers to enable
successful business operations within
(SME market) Hong Kong.
We facilitate and introduce our customers to
cutting edge technologies across a suite of
professional services, allowing the autonomy to
build efficient and effective organizations.
We are a business builder, professional advisor
and accountant.
©FastLane Group November 2019
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the FastLane, please email:
[hello@fastlanepro.hk ]
This eBook was first published in February 2020
©FastLane Group 2020
Disclaimer
This material has been prepared for
informational purposes only, and is not
intended to provide, and should not be relied
on for, tax, legal or accounting advice.
You should consult your own tax, legal and
accounting advisors before engaging in any
transaction.
FastLane Group I An Entrepreneur’s Guide to Incorporating in China
Table of contents
1
How to select the best investment vehicles for your business?
2
Company types
Basic structure of a WFOE
Benefits of incorporating a WFOE
Advantages of forming a WFOE in the Greater Bay Area
Profit Repatriation
2
What is the WFOE incorporation process?
7
Pre-registration
Pre-registration name approval
Tenancy agreement / lease certificate
Notarization of documents
Registration
Name search and registration
Registration of business license
Registration record filing with MOFCOM
Post-registration
Carving of company chops
Opening bank accounts
Tax registration
Foreign exchange registration
Estimated time frame for incorporation
Common mistakes when incorporating
3
Annual compliance requirements
Monthly tax filing
Filing of annual audit report
14
FastLane Group I An Entrepreneur’s Guide to Incorporating in China
Introduction
Interest in expanding into China is gaining
given the country’s continued development as
an international economic hub.
This is because incorporating a company in
China has perhaps become the most efficient
way to gain exposure to this developing
economy. However, what is the most effective
way to incorporate a company? What type of
company should I incorporate? What are the
benefits in doing so?
In this eBook, we aim to share insight on how
to effectively incorporate a Chinese company
through the most efficient investment vehicle
for foreigners.
©FastLane Group February 2020
FastLane Group I An Entrepreneur’s Guide to Incorporating in China
1
How to select the best investment
vehicle for your business?
1.0
Company Types
There are three varying forms of Foreign
Invested Enterprise (“FIE”) that are most
commonly utilized when foreigners expand
into China. These are Wholly Foreign Owned
Enterprises (“WFOE”), Representative Offices
(“RO”) and Joint Ventures (“JV”).
negotiating and signing contracts, issuing
invoices and rendering paid services to any
organization other than its foreign parent
company are prohibited. Furthermore, RO’s
are not allowed to remit profits out of China.
FIE’s will primarily utilize RO’s for the purpose
of marketing activities and developing a local
network.
Each of these company structures carry their
own unique set of pro’s and con’s.
Representative Office (“RO”)
RO’s are FIE entities that allow a foreign
company to have a physical presence in
China, and will allow them to send foreign
staff there to conduct business activities.
RO’s have several benefits to FIE’s, but bring
about the most value to parties who are just
starting to venture into this region.
RO’s also allow FIE’s to have an office space
in China, granting the ability to meet with
potential clients and suppliers. No registered
capital is required to set up a RO, meaning
that of all the forms of FIE’s available, RO’s
are the most efficient to incorporate. In the
best-case scenario, the RO incorporation
process only requires approximately 2 weeks
to complete.
However, RO’s possess many disadvantages
which inhibit FIE’s willingness to proceed with
this form of company. Perhaps the biggest
disadvantage is that RO’s are not permitted
to conduct any business activities which
drives profits. Such activities include
©FastLane Group February 2020
2
Best Investment Vehicle
Joint Venture (”JV”)
1.1
JV’s are partnerships between a foreign party
Basic Structure of a WFOE
and a Chinese investor. Together, these parties
will share the JV’s profits and losses and will
jointly manage this entity.
JV’s are incredibly common in China whereby
certain industries, dictated by the PRC Foreign
Investment Industrial Guidance Catalogue,
often require a foreign party enter into a
partnership with a local Chinese party.
Local partners offer tangible benefits such as
providing access to established distribution
channels and business connections, in addition
to providing significant knowledge of the local
market.
There are many disadvantages to incorporating
a JV as opposed to the other forms of FIE
available. Firstly, the incorporation process for a
JV will generally take between 4 to 6 months. In
comparison to RO’s and WFOE’s, the incorporation process is much more inefficient. For
parties who require promptness, this option
may not be particularly appealing.
Partnering with a local Chinese firm can often
bring about its own set of unique challenges.
Conflicting management styles and interests
are common, and the division of a JV’s profits to
its shareholders may be frequently discussed.
Wholly Foreign-Owned Enterprise
WFOE’s all maintain the following
structure:
One shareholder, one director, one general
manager, one legal representative, one
supervisor and one finance controller
Shareholder can be a natural person or
corporation
Director must be a natural person, there is
no restriction on nationality
Legal representative must be a natural
person, there is no restriction on nationality
Legal representative shall be served by
Chairman of the Board (if Board of Directors
is established), or Executive Director (if they
are the sole director), or General Manager
Supervisor must be a natural person, there
is no restriction on nationality. However, a
Director or General Manager cannot serve
as Supervisor at the same time
Finance controller must be a natural
person, there is no restriction on nationality. However, the Legal Representative
cannot simultaneously serve as the Finance
Controller
Wholly Foreign Owned Enterprises (“WFOE”) is
the most favoured investment vehicle for
non-Chinese enterprises. Pursuant to Chinese
corporate laws, WFOE’s are recognized as the
China-based business entity designated for
non-Chinese enterprises to establish their
limited liability company in China.
Given WFOE’s popularity among foreign parties,
the incorporation process for WFOE’s and their
unique attributes are further highlighted and
detailed below.
3
FastLane Group I An Entrepreneur’s Guide to Incorporating in China
1.2
Benefits of Incorporating a WFOE
WFOE’s maintain several advantages which
make it the preferred investment vehicle for
non-Chinese enterprises. Firstly, as WFOE’s are
entirely foreign owned and managed, there is
no need to locate a Chinese partner to assist
you with your business operations as foreign
investors have 100% control over the equity of
their WFOE.
Firms looking to utilize their WFOE to aid in
their expansion into China will find that this
business structure will allow a firm to employ
both foreigners and local Chinese directly
without having any limitation on the number of
foreigners employed. For international businesses, perhaps one of the greatest benefits is that
WFOE’s allow all profits made in China to be
repatriated to the parent company as
dividends.
In China, many local businesses will request for
the other party to settle invoices in RMB for
“fapiao” purposes. WFOE’s, being recognized
Chinese companies, are able to open company
bank accounts which may handle such matters.
All in all, WFOE’s allow greater flexibility and
efficiency when operating in China.
Advantages of forming a WFOE in the
Greater Bay Area
The Greater Bay Area (“GBA”) is essentially the
rebranding of the Pearl River Delta. The GBA
integrates the cities of Guangzhou, Zhaoqing,
Foshan, Huizhou, Jiangmen, Dongguan, Zhuhai,
Jiangmen, Zhongshan, Shenzhen, Macau, and
Hong Kong into a global economic and
business hub.
©FastLane Group February 2020
The aim of the GBA is to utilize the varying
strengths of each participating city to further
develop this hub into a global economic
competitor in finance, entertainment and
industry.
The GBA holds great potential for individuals
looking to expand into China. At the time of
writing, several policies have been enacted to
incentivize both individuals and corporations to
participate in the GBA project.
For individuals, there are immigration facilitation pilot schemes to assist foreigners in
establishing a presence in China with higher
education institutions and scientific research
institutions also being able to utilize such
immigration schemes.
Corporations can utilize the various tax relief
schemes which have been introduced by
municipal governments. In order to support the
talent development of corporations in the GBA,
the Ministry of Finance and State Administration of Taxation have granted individual tax
exemption for overseas workers in the GBA.
Individuals who are contemplating incorporating a WFOE can expect greater assistance for
their firm. With the various incentives offered
by the Chinese government on both a local and
company level, in addition to being exposed to
the development of the GBA and its international allure, there are clear benefits to incorporating a WFOE in the GBA.
Please consult FastLane should you
require advice to determine the right
business structure for your company.
4
Best Investment Vehicle
Profit Repatriation
Multinational firms operating in China have
always been faced with the issue of profit
repatriation. Given China’s strict system of
foreign exchange controls, profit repatriation is
a highly regulated activity which hinders a
business ability to operate efficiently.
Individuals looking to utilize a WFOE to
repatriate profits to a foreign holding company
will find that WFOE’s provide the necessary
flexibility in structuring an efficient profit
repatriation scheme.
In general, profits can be repatriated through
dividends payments, inter-company
transactions or inter-company loans. However,
when planning a profit repatriation scheme, it
is important to consider the various factors
which may inhibit the ease of profit
repatriation. For example, individuals should
consider the potential tax liabilities to be
incurred under each repatriation method and
whether the repatriation amount or method
will be scrutinized by Chinese government
authorities or the restrictions on the
repatriation amount.
5
FastLane Group I An Entrepreneur’s Guide to Incorporating in China
1.3
Disadvantages of
Incorporating a WFOE
The incorporation process for a WFOE is
lengthy and can take several months to
complete. In addition, an applicant must
receive a series of authorizations from various
Chinese regulatory bodies such as the Ministry
of Commerce and the State Administration for
Industry & Commerce.
1.4
What are the important
positions to be held in a WFOE?
A WFOE must fill at least three positions in
their company, General Manager, Supervisor
and Legal Representative.
General Managers are responsible for overseeing the day-to-day operations of the WFOE.
Their specific responsibilities will be outlined in
the WFOE’s Articles of Association.
Supervisors are responsible for overseeing the
performance of the company’s duties by its
directors as well as its senior management. In
other words, their primary role is to ensure the
smooth and legal operations of the WFOE.
Legal Representatives are the focal management figure of the WFOE and are responsible
for the WFOE’s compliance with all relevant
laws. As the Legal Representative’s name
appears on the WFOE’s business license, they
are seen as being responsible for WFOE and
its operations in the eyes of the Chinese
government.
Chinese Company Law does not impose any
restrictions on the nationality of the legal
representative.
©FastLane Group February 2020
6
Incorporating a WFOE
2
What is the
Incorporation Process?
The process for incorporating a WFOE can be
separated into three distinct phases; the
pre-registration phase where applicants gather
the necessary documentation to submitfor
submission, the registration phase whereby the
formal WFOE incorporation process begins, and
the post-registration phase where a WFOE must
ensure compliance with ongoing responsibilities.
2.0
Pre-registration
Before the formal incorporation process for a
WFOE begins, applicants should devote time to
ensure that their documents to be submitted
are appropriately prepared.
Names which may mislead consumers or hinder
fair competition, damage or challenge Chinese
national unity, policies, social ethics, culture or
religion are not permitted.
Pre-registration name approval
In addition, special characters are not permitted
and certain words which can imply business
operations in certain industries (e.g., banks or
insurance companies) require special approval.
Lastly, words such as ‘China’, ‘National’, ‘State’ or
‘International’ also require special approval
The first step to incorporating your WFOE is to
decide on an appropriate name. Chinese
company law dictates that certain requirements
must be adhered to when deciding upon a
company name.
Typically, Chinese company names must incorporate the following:
Administrative region name of the
company’s incorporation
Brand name
Industry or business the company
is operating in
The company name must include
“Company Limited”
Upon deciding on a company name, the name
must be reserved with China’s Market Supervision Administration (“MSA”). If the search
indicates that the preferred company name is
available for registration, the applicant party will
apply for the reservation of the preferred name
with the MSA.
Chinese legislation outlines certain restrictions
in respect of what is not allowed in a company
name or what may require special approval
from Chinese government authorities.
7
FastLane Group I An Entrepreneur’s Guide to Incorporating in China
This step is vital during the incorporation phase
as the registered office address will be listed on
a WFOE’s business license. In addition, acquiring
an appropriate registered office address will
assist in routine compliance procedures
conducted by Chinese authorities.
It is also important to note that careful consideration should be made in selecting your city
location of incorporation. As certain city names
in China carry varying levels of prestige,
credibility and support, consideration should be
made as to which city is most appropriate for
your business. Relocation is a taxing and
expensive process and may potentially require
registration with a new tax authority, revision of
bank account information, business licenses
and other company certificates.
It is common for Chinese authorities to conduct
ad-hoc inspections on Chinese company offices.
To the extent that the Chinese authorities does
not consider the registered office address listed
on a WFOE’s business license is facilitating the
running of daily business operations, a WFOE
can expect various penalties and fines.
Tenancy Agreement / Leasing
Certificate
When incorporating a WFOE, applicants must
provide documentation to demostrate it has
obtained a tenancy agreement (of not less than
12 months) to utilize as a registered office
address where the business will operate from.
Applicants should submit a document showing
their utilization of this registered address in the
form of a copy of the lease contract or a
property deed.
Notarization of documents
During the incorporation process, it is vital that
the documentation provided to Chinese government authorities have been properly notarized.
Notarization of application documents should
be performed by a notary firm that has been
officially recognized by the Chinese government.
Generally, Chinese consulates and embassies
are appropriate institutions to perform
notarization.
It should be noted that under current Chinese
laws and regulations, it is prohibited to apply for
incorporation when utilizing a virtual office as a
registered office address. It is recommended
that the address be located in a commercial
building.
©FastLane Group February 2020
8
Incorporating a WFOE
2.1
Registration
Contact FastLane now to reserve your
preferred company name
Name search and registration
As previously mentioned, upon deciding on a
company name, the name must be reserved
with China’s Market Supervision Administration
(“MSA”). During the incorporation process, the
name may be formally registered.
Registration of Business License
Upon receiving approval for a WFOE name and
obtainment of a registered office address, a
business license must be obtained from the
local State Administration for Industry and
Commerce (“SAIC”).
To prepare for document submission, it is
important that applicants compile the following
documentation:
Documentation evidencing that their
company name has been approved
Proof a registered office address
Business scope (the incorporated WFOE
will only be able to conduct business
activities the outlined business scope)
Identification documents of the
shareholders
Proof of registered capital to be injected
On average, it takes approximately 7 business
days to obtain a business license. Although
there are post-registration activities to complete, a WFOE is deemed to be a legal person duly
recognized to conduct business under Chinese
law upon obtainment of a business license.
The WFOE will then have full rights to operate
as a business in China within the scope of its
Business License.
An important consideration to factor is that
companies who have successfully obtained a
business license are only allowed to conduct
business operations as defined in their submitted business scope. As such, applicants should
take careful consideration during the incorporation phase as to what short and long-term
business operations their WFOE will conduct.
Registration record filing with
MOFCOM
Pursuant to Chinese Company Law, WFOE’s
must complete the relevant company registration process during their establishment,
alteration or termination. Registration should
be made with the Ministry of Commerce of the
People’s Republic of China (“MOFCOM”).
FastLane can help assist applicants register
9
FastLane Group I An Entrepreneur’s Guide to Incorporating in China
2.2
Post-registration
Although successfully obtaining a business
license will grant a WFOE full rights to operate
as a business, there are incorporation steps to
address in the post-registration phase.
Carving of company chops
Company chops are essential to the proper
management of a Chinese company as every
contract which involves a Chinese company
must include a company chop. This is because
company chops are used in lieu of signatures
to legally authorize documents on behalf of the
company. Company chop’s have legal authority
over the signature of a WFOE’s legal
representative and has the power to validate
documents and contracts regardless of who
uses it.
Given that the rules and requirements
surrounding Chinese company chops vary
among each city, and multiple forms of
company chops exist, it is important to consult
a relevant professional service provider to fully
understand which type of company chop is
applicable to your firm.
FastLane will help apply for approval for the
making of your WFOE’s Office Stamp (Office
Seal) with the Public Security Bureau and
arrange the carving of your company chops.
when conducting daily business operations in
China. Given that majority of local Chinese
firms prefer to conduct business in RMB, a
local bank account is imperative for WFOE’s.
As this account is the only bank account
whereby a WFOE is able to withdraw RMB
cash, this account will be necessary for settling
payments and tax invoices to other parties.
Because WFOE’s are entirely foreign owned,
profit repatriation is often a key consideration
when planning a company’s business operations. The Chinese government allows WFOE’s
to repatriate their profits out of China to the
extent that prior approval has been granted
by the Chinese State Administration of Foreign
Exchange. In addition, a foreign exchange
account is necessary for a WFOE to receive
capital injection from overseas entities.
FastLane can help assist you with opening a
local company bank account with your preferred bank. A business license is required when
opening a bank account
FastLane can help to assist the bank
account opening with your preferred
bank
Opening bank accounts
A WFOE is able to establish a bank account
with both Chinese and international banks. To
facilitate their business operations, a WFOE will
typically utilize a minimum of two bank
accounts; an RMB bank account and a foreign
currency bank account.
RMB bank accounts are absolutely mandatory
©FastLane Group February 2020
10
Incorporating a WFOE
Tax registration
Upon successful incorporation, a WFOE will be
immediately required to comply with the
various monthly, quarterly and annual filing
and reporting requirements.
Such filing requirements include monthly and
annual tax filings to be submitted to the State
Administration of Taxation (“SAT”) and annual
reports to the relevant government authorities. For completeness, submitted annual
reports must be issued and signed off by a
local CPA firm.
In addition to reporting requirements, it is
important for WFOE’s to register their VAT
taxpayer status with the SAT. General taxpayer
status will permit a WFOE to issue VAT Fapiao
to its clients and customers, an important
aspect to Chinese business whereby Fapiao
receipts can be utilized for tax deduction
purposes.
Foreign exchange registration
Given the Chinese government’s policies
towards capital outflow, profit repatriation has
often been a topic of discussion for foreign
parties conducting business in China. As
previously mentioned, one of the primary
reasons why WFOE’s are the favoured investment vehicle among foreign parties is due to
their ability to remit profits out of China. To the
extent that remittance of profits is vital to a
WFOE, approval to remit profits can be obtained from the State Administration of Foreign
Exchange (“SAFE”). Once initial approval has
been obtained, no further approval is required
for subsequent profit repatriation.
11
FastLane Group I An Entrepreneur’s Guide to Incorporating in China
2.3
Estimated Timeframe for Incorporation
The incorporation process for a WFOE typically follows the below timeframe. However, the
approximate completion time is determined by the ability of the applicant to gather the necessary
documents and the approval speed of Chinese authorities.
Step Description
Working Days
Preliminary
1
Legalisation Of Incorporation Documents
Investor's
schedule
2
Tenancy (Lease) Agreement And Leasing Certificate (for the office to be used by the
WFOE)
Investor's
schedule
3
Other Documents
Investor's
schedule
Application for registration
4
Name Availability Search
1
5
Application For Approval And Reservation Of The Proposed Company Name
1
6
Application For Business License
3-5
7
MOFCOM Registration And Record
3-6
Post Registration Procedures
8
Application For Approval And Carving Of Company Seals
2
9
Opening Of RMB Basic Account
20
10
Perform Foreign Exchange Registration
10
11
Opening Of Capital Account
10
Total estimate timeline
©FastLane Group February 2020
Approximately 8 -12 Weeks
12
Incorporating a WFOE
2.4
Common Mistakes
Although WFOE’s are very common in China
and are the preferred investment vehicle for
foreigners, common mistakes are often made
during the incorporation process.
Miscalculation of the time required
The application time for incorporating
a WFOE can vary. Factors such as the ability
of an applicant to gather the necessary
documentation and the approval speed of
Chinese authorities impacts the incorporation
process. It is recommended that applicants
apportion adequate time to complete the
necessary procedures and to adjust their
timeline as necessary.
Failure to correctly define business
scope
WFOE’s who have successfully obtained a
business license are only allowed to conduct
business operations as defined in their
submitted business scope. As such, applicants
should take careful consideration during the
incorporation phase as to what short and
long-term business operations their WFOE
will conduct.
13
Compliance Requirements
FastLane Group I An Entrepreneur’s Guide to Incorporating in China
3
Annual
Compliance Requirements
Upon successful incorporation, a WFOE will be
immediately required to comply with the various
monthly, quarterly and annual filing and reporting requirements. As the financial year in China
follows the calendar year, WFOE’s should begin
preparing to complete their annual compliance
procedures at the end of each year.
3.0
Monthly / Annual Tax Filing
Companies in China must submit monthly and
annual tax returns. China’s State Administration
of Taxation (“SAT”) is responsible for handling all
monthly and annual tax returns submitted. The
deadline for submitting a WFOE’s Corporate
Income Tax (“CIT”) return is due May 31st each
year. WFOE’s must also be prepared to provide
supporting documents upon request by the
SAT.
The SAT will issue annual guidelines every year
on how to appropriately reconcile tax returns
and will determine if all tax obligations have
been complied with. Failure to do so can incur
heavy penalties and fines.
3.1
Filing of Annual Audit Report
An annual audited report must be submitted
every year. This audit report must be completed
by a Chinese registered accountancy firm.
However, it should be noted that Chinese
companies adhere to Chinese Generally Accepted Accounting Principles as opposed to the
globally recognized International Financial
Reporting Standards.
As such, to the extent that consolidation of
various audit reports must be conducted for the
WFOE’s parent company, careful consideration
should be made to the differing accounting
practices to avoid inaccuracies.
©FastLane Group February 2020
14
Conclusion
WFOE’s have many inherint advantages to
them which make them the preferred choice
of investment vehicle for foreign parties.
The FastLane Group can assist in the incorporation
process of a WFOE, and various other forms
of enterprises, in the GBA.
Please contact the FastLane Group
if you have any enquiries!
©FastLane Group February 2020
15
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