INVESTING IN CHINA | LEGAL ISSUES | HOW TO STRUCTURE AN

INVESTMENT IN CHINA?

In this post we will discuss hereinafter the basic informations about how to invest into China, that is to say how to

structure your investment, company incorporation and so on Do not hesitate to contact me if you need any

information as to how to invest into China at corporate@offshorepremium.com

When the time comes to invest into a foreign country the first question that comes is always how to structure your

investment?

Businesses and Activities Open to Foreign Investors

China has what is called a Catalogue systems. All businesses activities have been divided into 13 categories as

follows:

I. Agricultural, Forestry, Livestock and Fishery Industries II. Mining Industry III. Manufacturing Industries IV. Industries of Production and Supply of Power, Gas and Water VI. Wholesale and Retail Industries VII. Finance Industry VIII. Real Estate Industry IX. Leasing and Commercial Services Industries X. Scientific Research, Technological Services and Geological Exploration Industries XI. Education XII. Cultural, Sports and Entertainment Industries XIII. Other Industries Restricted by the State or by the International Treaties that China has Concluded or

Acceded to

Then China has created three lists which are all based on the same structure of the 13 categories listed above being

specified that there are three lists

The list of activities where foreign investment is encouraged (where foreign investor may receive various incentives in addition of majority foreign ownership (but exceptions)

The list of activities where foreign investment is restricted (where foreign investor may only participate in JV and in general with a minority participation only)

The list of activities where foreign investors are prohibited to invest.

Then there is the default categories. Any activity which is not in the catalogue of encouraged, restricted or prohibited

activities is permited

We have posted the 3 catalogues of activities encouraged, restricted on prohibited on this blog and we invite you to

refer to them. Sorry if the lecture of those enumerations are a bit tedious.

China recognizes several different types of foreign enterprise structures as follows:

Branches of a foreign enterprise, Cooperative joint ventures (CJV), Equity joint ventures (EJV), Foreign enterprises, joint stock companies, and Wholly foreign-owned enterprises (WFOE).

In this post we will only discuss the WFOE because it has become the most popular vehicle used by foreign

investors to invest into China. Contact us if you have questions in regards to the other investments vehicles.

Benefits of Registering a WFOE

WFOE where first introduced in China after the entry of China into the World Trade Organization

The main advantage of a WFOE is that the foreign investor can invest under the form of a 100% foreign owned

company and be in control of his investment without having to have a Chinese partner.

The main drawback is that there are still business sectors or activities which WFOE cannot exercises because those

activities are still closed to foreign investment.

Other advantages are:

Ability to issue invoices to customers in RMB and receive revenues in RMB. Capability of converting RMB profits to US dollars for remittance to its parent company outside of China. Protection of intellectual know-how and technology. No requirement for Import / Export License for its own products. Full control of human resources. Greater efficiency in operations, management and future development. Investor does not have to be established for more than 2 years, compared to a Representative Offices parent

company that is required to have been established for over 2 years.

Shareholder liability limited to sum of original investment.

How to establish a WFOE?

It is the Chinese Ministry of Commerce that is competent to examine and approve WFOE registration application.

This being said the fact is that this is China and that you will also have to deal with the local authorities.

This is why in most cases prior to file your application with the Ministry of Commerce the foreign investor will have to

first complete and submit a report outlining the enterprise to the local authority of the province in which the WFOE is

to be based (in takes in general 30 days to receive this approval)

Within 30 days after receiving a written response from the local authority, the investor can then apply for registration

and a business license for the company with the Ministry of commerce.

Minimum Capital and Structure of the WFOE

Officially the minimum capital in China to set up a company is 30,000 RMB or 4850 USD. Of course no WFOE has

ever been set up with such low capital and none will ever be. While most websites tell you that the minimum

investment of RMB 1M (~ +/- USD 160K), reality is that there is not a standardized minimum capital requirement in

China.

The principle applicable is that the amount or the minimum investment must be the amount required to run the

business until it can break even being specified that this amount will also dependent upon factors like scope of

business and location.

Each province and each city has its own standard minimum requirement for example

Beijing: RMB 100 000 (16,000 USD) Shanghai: RMB 500 000 (80,000 USD) 1 million (160,000 USD) Guangzhou: RMB 500 000 (80,000 USD) 1 million (160,000 USD)

But at the end of the day the final criteria will always be the investment needs of the business to be set up. Also note

that while Beijing has a low capital requirement, the practice is to treat in priority application with a higher capital

requirement. Those who want to go for the minimum capital requirement can wait

Then there is the difference between registered and investment capital. In general the registered capital must

represent at least 70% of the investment the rest being able to come from foreign loan sources and so on For

company which invest more than 3,000,000 USD other rules may be applicable

The first installment representing no less than 15% of the total registered capital must be made within 90 days and

the last installment within three years of the issuance of the business license. Other contributions must be made

pursuant to the published schedule of the investment. Of course Chinese authorities will verify that the foreign

investor is fulfilling his share of the deal.

Process and documents required

The process to set up a WFOE is as follows:

Procedures for setting up a Wholly Foreign Owned Enterprise in China are as follows:

WFOE Company name registration Apply for your Business License with SAIC. Company Chops Organization Code License. Tax Certificate issued by Taxation Bureau. Opening of Company RMB bank account. Capital injection. Financial Certificate of Registration. Statistics License Registration

The process to set up a WFOE will takes anything between 3 to 9 months. It is not possible to be more specific than

this because it depends of the province, the city, the purpose of the investment and so on (in most case it will be 3

to 5 months)

Documents needed to form a WFOE in China:

Passport Copies of all Company Directors:

2 x Passports Copies that are notarized by the local authority and certified by overseas Chinese Embassy or

Consulate.

Parent companys director, China Companys Legal Representative, China companys supervisor:

2 x Bank Reference Letters (Letter of Good Standing) from investors bank, meaning: The bank reference must be

issued by the parent companys (Director(s)/Investor(s) original bank

The China Legal Representative to provide:

(A) 6 photographs (in special official format), and a brief resume CV (from the age of 18) = Passport copy for

foreigner, and ID card copy for Chinese.

(B) Brief Resume.

Articles of Formation or equivalent document:

2 x Certificate of Incorporation of the mother company, certified by overseas Chinese Embassy or Consulate.

Outline Company Structure:

(A) Registered capital

(B) Business Scope

Warning: The business scope needs to be defined because the WFOE can only conduct business within its approved

business scope, which ultimately appears on the business License. Any amendments to the business scope require

further application and approval. Therefore it will be important to have the best define possible business scope and

we will anyway negotiate with the approval authorities to approve as broad a business scope as is permitted.

Generally business scope includes investment consulting, international economic consulting, trade information

consulting, marketing and promotion consulting, corporate management consulting, technology consulting,

manufacturing, etc.

(C) 3 proposed Chinese names of the China Company

Registered Office Address:

(A) 2 x copies of the Property Ownership Certificate of the Registered Office Address.

(B) 2 x copies of the original Lease Contract and Invoice of Registered Office Address.

(C) 2 x copies of Landlord identification

Other required documents that support your WFOE application are normally:

Business plan.

Business plan needs to contain, startup expenses, number of employees, potential customers, expected turnover,

expected profits and so on

Scope of new Company business meaning that in China companies must specify their business parameters, and

are restricted to these areas of operation.

Both of the above to be presented in Chinese and Native Language of foreign partner (Nominally English).

In terms of setting up costs we give an indication of the costs in our Service fees page. Note however that those

tariffs are indicative for a consulting WFOE in Beijin. Prices unfortunately change depending of the business scope

and the province or city of incorporation.