Establish a WFOE in China

ESTABLISH A WFOE IN CHINA

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Establishing a Wholly Foreign Owned Enterprise in China

WFOE Wholly Foreign Owned EnterpriseFIE Foreign Investment EnterpriseJV Sino-foreign Joint VentureRO Representative OfficeMOFCOM Ministry of CommerceAIC Administration of Industry and CommerceAOA Article’s of Association

Glossary

Chapter I: What Is a WFOE?

Chapter II: Considerations before Establishing a WFOE

Chapter III: Management Structure of a WFOE

Chapter IV: Analysis and Evaluation of Register Capital Issues

Chapter V: Articles of Association

Chapter VI: WFOE Establishment Procedure in China

Chapter VII: Rent an Office

Chapter VIII: Human Resource Issues

Chapter IX: Tax and Accounting Related Issue

Index

ESTABLISH A WFOE IN CHINA | 1

When deciding to invest and carry out business in China there, are three legal forms of Foreign Investment Enterprise (“FIE”) to choose from: a Representative Office (“RO”), a Sino-Foreign Joint Venture (“JV”), or a Wholly Foreign Owned Enterprise (“WFOE”). This guide focuses on issues related to the establishment of a WFOE in China.

Preface

2 | ESTABLISH A WFOE IN CHINA

Chapter I: What is a WFOE?

A WFOE is a company wholly invested by one or more foreign investor(s) and no local Chinese investors. The foreign investor(s) may be either individual(s) or enterprise(s).

A WFOE is an independent legal entity which is allowed to carry out business, issue formal RMB invoices (Fapiao), hire its own employees, enter into contractual agreements, set up branches in China, receive payment in RMB, and convert RMB into designated foreign currency for profit repatriation. The following sections summarize the key differences, advantages, and disadvantages of a WFOE compared to other types of FIE: Representative Offices and Joint Ventures:

A WFOE Compared with RO:

A WFOE is an independent legal entity in China, while a RO is not. A WFOE is allowed to carry out business in line with its registered business scope in China, receive payments in RMB, issue formal invoices in RMB (“Fapiao”), and hire its employees directly. A RO can not perform any of these functions.

The notable disadvantage of establishing a WFOE is a registered capital requirement which means that at the initial stage of setting up your business in China, you’ve already been required to invest a certain amount of capital. We discuss registered capital planning and requirements in more detail in Chapter IV.

A WFOE Compared with JV:

Both a WFOE and a JV are regarded as independent legal entities in China. As a WFOE is wholly owned by the foreign investor(s) it enjoys a higher level of foreign managerial control than a JV, and allows easier allocation of


profits back to its foreign investor(s).

Since a WFOE is invested without Chinese partners(s), it must seek facilities, hire staff, and establish business channels without the assistance a local partner may be able to provide.

Chapter II: Considerations before Establishing a WFOE

Changing business scope, registered capital or total investment, and other key company information registered in relevant government authorities during the establishment of WFOE can be costly and time-consuming. Therefore, we strongly recommend considering the following issues before establishing a WFOE:

a Total Investment and Registered Capital

The following chapter illustrates total investment and registered capital in more detail. It is important to thoroughly assess the level of required investment: the amount of funds necessary to invest sufficient to ensure smooth operation of your WFOE before it will be able to commence profitable operation.

The practical level of required capital is often greater than mandatory minimum requirements of registered capital legally required. It can take several months to increase registered capital once a WFOE is established; insufficient levels of registered capital can have a serious impact on a WFOE’s operations, especially in the period shortly after being established.

a Business Scope

The business scope of a WFOE refers to the type of business it is permitted to carry out, and it’s registration with relevant government authorities


relating to those activities. Before being permitted to carry out business in any new area its business scope must be changed and approved, this can be a time-consuming process.

a Location of Your WFOE

In China many different cities, even districts and business zones within cities, may have different policies and incentives related to different types of business and industry. Examples include tax incentives, differing mandatory capital requirements, or preferential zoning policies. Before establishing a local presence, local policies affecting your WFOE should be analyzed and thoroughly understood.

Chapter III: The Management Structure of a WFOE

III)-1 Highest Authority of a WFOE

In line with relevant Chinese laws and regulations, the Shareholder’s Meeting shall be the highest authority of a WFOE and the Board of Directors (“Board”) or the Executive Director shall be responsible for the WFOE’s normal affairs.

Below is an illustration of the typical allocation of rights between the Shareholder’s Meeting and the Board or Executive Director:

c Issues to be decided by the Shareholder’s Meeting

(1) determining the WFOE’s operational guidelines and investment plans;(2) appointing and changing the Directors or Executive Director,

Supervisor, and determining matters concerning their remuneration;(3) deliberating and approving the reports of the Board;


(4) deliberating and approving the reports of the Supervisor;(5) deliberating and approving annual financial budget plans and final

account plans of the WFOE;(6) deliberating and approving profit distribution plans and loss recovery

plans of the WFOE;(7) making resolutions on the increase or decrease of the WFOE’s

registered capital;(8) making resolutions on the issuance of corporate bonds;(9) adopting resolutions on the assignment, division, change of company

form, dissolution, or liquidation of the WFOE;(10) extending the WFOE’s business term;(11) changing the WFOE’s business scope or the establishment of a branch

or subsidiary of the WFOE; (12) revising the Articles of Association (“AOA”) of the WFOE; and(13) approving any disclosure of any trade secret of the WFOE.

c Issues to be decided by the Board or Executive Director

(1) reporting the operation of the WFOE to the Shareholder’s Meeting;(2) carrying out the resolutions made by the Shareholder’s Meeting;(3) examination of operational and investment plans;(4) drafting the WFOE’s annual financial budget plans and final account

plans;(5) drafting the WFOE’s profit distribution plans and loss recovery plans;(6) drafting the WFOE’s plans on the increase or decrease of registered

capital, as well as on the issuance of corporate bonds;(7) drafting the WFOE’s plans on merger, division, change of the WFOE’s

company type, dissolution, and related issues;(8) making decisions on the establishment of the WFOE’s internal

management departments;(9) the appointment and dismissal of the general manager and other

senior management personnel, and the determination of their salaries


and benefits;(10) establishing basic rules and policies of the WFOE for day-to-day issues.

III)-2 Board of Director or Executive Director

According to relevant Chinese laws, a WFOE shall either have a Board of Directors or an Executive Director. The Executive Director has the same rights and responsibility as the Board mentioned above.

III)-3 Board of Director

The Board of a WFOE shall be established on such WFOE’s establishment date. The Board shall be composed of 3 to 13 directors appointed by the shareholder(s) and shall have one Board Chairman. The method of appointment for the WFOE’s Board Chairman and Vice Chairman shall be prescribed in the WFOE’s AOA.

The terms of office of the directors shall be decided by the shareholder(s) and shall be provided for in the WFOE’s AOA, but in no circumstance should the director’s term of office exceed 3 years. The directors may, after the expiry of their terms of office, hold a consecutive term upon re-election. If no reelection is timely carried out after the expiry of the term of office of the directors, or if the number of the members of the Board is less than the quorum due to the resignation of some directors from the Board prior to the expiry of their term of office, the original directors shall, before the newly elected directors assume their posts, exercise the authorities of the directors according to laws, administrative regulations, as well as the WFOE’s AOA.

The Board meeting shall be convened and presided over by the Board Chairman. If the Board Chairman is unable or does not perform his duties, the Board meeting may be convened or presided over by the Vice Chairman. The discussion methods and voting procedures of the Board meeting shall


be prescribed by the WFOE’s AOA, unless it is otherwise provided for by relevant Chinese laws and regulations. The Board shall make records of the decisions on the matters discussed at the meetings thereof. The directors who attend the Board meeting shall affix their signatures to the records.

III)-4 Supervisor

A WFOE shall set up a board of supervisors, which shall comprise at least 3 supervisors. A WFOE which is relatively small in scale choose to use 1 or 2 supervisors instead of establishing a board of supervisors. The term of office of a supervisor is statutorily 3 years, and is renewable by the shareholder(s). The directors and management personnel shall not serve concurrently as the supervisor of the WFOE.

The supervisor’s responsibility is as follows:

(1) inspect and examine the financial affairs of the WFOE; (2) demand any director or management personnel to make corrections if

his act has injured the interests of the WFOE;(3) supervise the duty-related acts of the directors and management

personnel, and bringing forward proposals on the removal of any director or management personnel who violates any law, administrative regulation, the WFOE’s AOA or any resolution of the Board;

(4) propose interim Board meeting and convene the interim Board meeting in case the Board Chairman fails to convene or hold the Board meeting in accordance with the WFOE’s AOA;

(5) bring forward proposals to the Board;(6) initiate actions against director or management personnel in the

event that they violate the provision of relevant Chinese laws and regulations, the WFOE’s AOA and result in loss of the WFOE;

(7) other responsibilities provided for by the Chinese Company Law and the WFOE’s AOA


Chapter IV: Analysis and Evaluation of Register Capital Issues

Chinese law and regulations state that a WFOE is required to have its registered capital contributed by its shareholder(s) within a certain period after the WFOE’s establishment. Issues of registered capital are often a point of confusion for foreign investors. Therefore we would like to share some experience and analysis in this area.

a Registered Capital and Total Investment

c Registered Capital

The Registered Capital of a WFOE is the capital subscribed and contributed by the investors for setting up the WFOE. The amount of registered capital shall be registered with relevant Chinese local government authorities, and the registered capital shall be contributed completely by the WFOE’s investor(s) within the period stipulated in the WFOE’s AOA. The WFOE’s registered capital belongs to the WFOE and may be used for the WFOE’s operation, rent, purchase of equipment, payment of salaries, and other costs incurred by the WFOE. After the WFOE’s liquidation or termination, the shareholder(s) is entitled to recover the registered capital remaining after payment of all the WFOE’s outstanding debt obligations. Responsibilities are respectively allocated to the shareholder(s) based on their subscribed capital contribution to the WFOE.

A WFOE’s costs are likely to be greater than its revenues for the period immediately after its establishment; the shortfall is funded by the WFOE’s registered capital. If the WFOE’s registered capital is not sufficient to cover its cost before it starts to record a profit, the WFOE shall choose either to borrow a foreign loan or to apply to the relevant government authorities to increase its registered capital. Increasing registered capital is costly in terms


of money and time. We strongly recommend investors to carefully plan and calculate the likely level of capital required until profitable operation.

c Total Investment

Total Investment of a WFOE is the total amount of capital needed for the WFOE to establish its operations in line with the business scale stipulated in the WFOE’s AOA.

Total Investment = Registered Capital + Loans

Total Investment shall not be less than Registered Capital. The balance between Total Investment and Registered Capital is not required to be contributed by the investor(s).

In the case of a WFOE with registered capital insufficient to cover its costs, the WFOE is entitled to obtain foreign debt either from its shareholder(s) or from a foreign bank for the amount of the balance between its Total Investment and Registered Capital. Note that in no circumstances should the amount of foreign debt exceed such a balance between Total and Registered Capital.

If a WFOE’s Total Investment stipulated in its AOA is equal to its Registered Capital, and if such WFOE’s Registered Capital proves insufficient to cover costs before profitable operation is established, the WFOE will not be entitled to obtain foreign debt until the application for increasing its Registered Capital and Total Investment has been approved by relevant government authority.

According to relevant Chinese laws and regulations, the amount of total investment shall be equal to or higher than the WFOE’s registered capital, and shall not exceed the proportion stipulated in relevant regulations; the minimum statutory proportions of registered capital to total investment are:


(1) Total investment < 3 million USD: the registered capital shall not be less than 7/10 of the total investment.

(2) 3 million USD ≤ total investment < 10 million USD: the registered capital shall not be less than 1/2 of the total investment and shall not be less than 2.1 million USD.

(3) 10 million USD ≤ total investment < 30 million USD: the registered capital shall not be less than 2/5 of the total investment and shall not be less than 5 million USD.

(4) 30 million ≤ total investment: the registered capital shall not be less than 2/5 of the total investment. If the total investment is less than 36 million, the registered capital shall not be less than 12 million.

a Minimum Registered Capital

The minimum permitted registered capital of a WFOE is 30,000 RMB. If a WFOE is invested by only one investor (either a foreign individual or a foreign enterprise), the minimum registered capital of such a WFOE shall be not less than 100,000 RMB.

As we have mentioned before, sufficient Registered Capital is an important issue for a WFOE, especially in the period immediately after its establishment. Legal minimums for registered capital requirements are not sufficient for the vast majority of WFOEs to establish and make profitable their operations. The procedure of applying for increasing the registered capital levels is complicated and time consuming. An outline of this procedure:

(1) Apply for registered capital increase with the original approving authority (usually the local bureau of commerce);

(2) Apply for changing the WFOE’s Business License with the local administration of industry and commerce;

(3) Apply for the modification of registered capital information with the local branch of State Administration of Foreign Exchange, for approval


of the additional investment;(4) Engage a Chinese public registered accounting firm to issue a Registered

Capital Verification Report;(5) Modify relevant information in local tax bureaus; and (6) Other procedure required by local government authorities.

In our experience, the completion of the whole procedure to increase registered capital takes 2 to 3 months. Your business will be affected by this delay.

a Registered Capital Injection

The shareholder(s) of a WFOE may make capital contributions in currency, in kind (such as equipment), in intellectual property rights, or by other non-currency means that may be assessed on the basis of currency value and transferred according to Chinese law. The value of non-currency contributions shall be assessed and verified by a China-qualified appraisal organization and are not permitted to be either under or over-valued. The amount of the capital contributions in currency paid by all the shareholders shall be not less than 30% of the registered capital of the WFOE.

The shareholder(s) may choose to inject capital contributions in the form of a lump sum or by installments. If the registered capital is chosen by the shareholder(s) to be injected in a lump sum, the shareholder(s) must contribute the whole registered capital within 6 months after the WFOE has obtained its Business License. If the shareholder(s) intend to inject the capital contribution in installments, the first installment should not be less than 15% of the capital contribution subscribed by the shareholder(s) and must be injected within 3 months after the WFOE has obtained its Business License, the rest of the registered capital must be completely injected within 2 years after the WFOE has obtained its Business License.


Chapter V: Articles of Association

The Articles of Association (“AOA”) are the fundamentals of your WFOE’s management and operations. The AOA will govern you and your WFOE for 20-30 years, a template or pre-made AOA is unlikely to be a good fit for your actual needs and requirements; carefully considering each aspect of your AOA is likely to several significant long term difficulties with your WFOE.

A sample AOA is outlined below. Please note that this sample is only a basic draft of an AOA commonly used in China. As mentioned above, your AOA should be re-drafted based on the particular requirements of your WFOE and future needs of your business. The following draft AOA is in English, after customizing, the draft shall be accurately translated into Chinese and submitted to the necessary government authorities. We strongly recommend you entrust a professional firm to work on this with you to help both anticipate future difficulties and create the basis of a more efficient company.

ChinaInfo is a monthly technical journal issued by Brook & Harvest, it is issued in the first week of each month and will have ten issues in each year. (January & February will be one combined issue and July & August will be one combined issue.)

We will introduce our analysis and comments to below topics:

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ChinaInfoAbout

Please contact us for free hard-copy of any issued ChinaInfo you are interested in at [email protected]@[email protected]

ChinaInfo

December 2008

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Dear Client:

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Newsletter

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A Sample AOA:

Chapter 1 General Principles

Article 1In accordance with “Law of the People’s Republic of China on Wholly Foreign Owned Enterprise”, “Company Law of the People’s Republic of China” and other relevant Chinese laws and regulations, [investors name] intends to set up [WFOE’s name] (hereinafter referred to as the “Company”) in [city], China. For this purpose, this Articles of Association hereunder are produced.

Article 2Company Name: Legal Address:

Article 3Shareholder’s Name: Nationality:Address:

Article 4The organization form of the Company is a limited liability company. The Shareholder is liable to the Company within the limit of its capital subscription, and the Company shall assume external liabilities with all of its assets.

Article 5The Company has the status of a legal person in China and it subject to the jurisdiction and protection of Chinese laws concerned. All its activities shall be governed by Chinese laws and other pertinent rules and regulations. The Company should observe common courtesy, morality of commerce, and


honesty and trustworthiness, accept the supervision of governments and the social citizens, and take up their social responsibility.

Chapter Two Purposes and Business Scope

Article 6The purpose of the Company shall be as follows: [ ]

Article 7The business scope of the Company shall be as follows: [ ]

Article 8The business scale (production scale) of the Company:The Company predicts an annual sales volume of [ ] RMB.

Chapter Three Total Investment and Registered Capital

Article 9The total investment of the Company is: [ ] RMB.The registered capital of the Company is: [ ] RMB.

Article 10The Shareholder shall contribute the registered capital [please choose: with a lump sum or by installments].

Article 11After the capital contribution of the Company to any installment, the Company shall engage certified public accountants registered in China to verify the capital and present a report on the verification of capital. And after the issuance of the report on capital verification, the Company shall present a certificate of capital contribution to the Shareholder.


Chapter Four Organization of the Company

Article 12The shareholders shall decide the important issues of the Company, and exercise the following authorities:(1) determining the Company’s operation guidelines and investment plans;(2) electing and changing the Director and Supervisor and determining

the matters concerning their remuneration;(3) deliberating and approving the reports of the board of directors;(4) deliberating and approving the reports of the Supervisor;(5) deliberating and approving annual financial budget plans and final

account plans of the Company;(6) deliberating and approving profit distribution plans and loss recovery

plans of the Company;(7) making resolutions on the increase or decrease of the Company’s

registered capital;(8) making resolutions on the issuance of corporate bonds;(9) adopting resolutions on the assignment, division, change of company

form, dissolution, liquidation of the Company;(10) extending the Company’s business term;(11) revising the Articles of Association of the Company; and (12) approving any disclosure of any Trade Secrets.

Article 13The following decisions made by the shareholders shall be written down and signed by all the shareholders and then filed with the Company:(1) amendment of the Articles of Association;(2) increase or decrease of the registered capital;(3) Split of the Company or merger with other economic organizations;(4) dissolution of the Company, or change of the Company form,


Article 14The Company shall set up the Board of Directors with [ ] members who will be appointed by the shareholders. The term of the directors shall be [ ] year(s), renewed if continuously appointed by the shareholders.

The Board of Directors has one chairman who shall be appointed by the shareholders.

The duties of the Board of Directors are as following:(1) reporting the operation of the Company to the shareholders;(2) Carrying out the resolutions made by the Shareholders;(3) Examine the operation plans and investment plans;(4) Working out the Company’s annual financial budget plans and final

account plans;(5) Working out the Company’s profit distribution plans and loss recovery

plans;(6) Working out the Company’s plans on the increase or decrease of

registered capital, as well as on the issuance of corporate bonds;(7) Working out the Company’s plans on merger, division, change of the

company type, dissolution, and etc.;(8) Making decisions on the establishment of the Company’s internal

management departments;(9) The appointment and dismissal of the general manager and other

Senior Management Personnel, and the determination of their salaries and benefits;

(10) Lay down the basic rules and policies of the Company.

Article 15The Company shall have [ ] Supervisor appointed by the Shareholder. The term of office for the Supervisor shall be three (3) years, renewable by the Shareholder.


Article 16The Supervisor shall have the following responsibilities:

(1) checking the financial affairs of the Company;(2) supervising the duty-related acts of the Directors and senior managers,

and bringing forward proposals on the removal of the Directors or Senior Management Personnel who violates any law, administrative regulation, the Articles of Association and the decision made by the shareholders;

(3) demanding the Directors or Senior Management Personnel make rectifications if his act has injured the interests of the Company;

(4) To lie a proposal for the shareholders;(5) According to the article 152 of “Company Laws of P.R.C.”, to file a

lawsuit against the board members and senior managers of the Company;

The supervisor shall have right to attend the Board of Directors meetings.

Article 17The Company shall setup the management department which shall be decided by the general manager.

Article 18The Company shall have one (1) general manager with the term of [ ] year. The general manager shall be appointed by the board of directors. The general manager shall be responsible to the Board of Directors, and carry out the responsibilities as following:(1) carrying out the resolutions adopted by the board of directors;(2) Implementing the annual business development plans and investment

plans;(3) make the internal management organization of the Company;(4) formulating the basic policies of the Company;(5) make the rules of the Company;(6) suggest to appoint and dismiss the deputy general manager and


financial manager of the Company;(7) appointing and dismissing other employees except the ones shall be

appointed or dismissed by the board of directors.(8) as well as drafting and submitting to the Board of Directors for its

approval the employment terms and benefits for all other Senior Management Personnel and Company employees

Article 19The Company exercises general manager responsibility system under the leadership of the Board of Directors. The general manager is directly responsible to the Board of Directors and organizes the daily management and operation of the Company. The deputy general managers shall assist the general manager in his/her work.

Article 20After being appointed by the board of directors, the chairman and board members may take the position of general manager, deputy general manager and other senior managers.

Chapter Five Legal Representative of the Company

Article 21The [chairman of the Board of Directors or general manager] is the legal representative of the Company. The legal representative shall be appointed by the Shareholder. The term of the legal representative is [ ] year(s), renewable by the Shareholder.

Article 22The duties of the legal representative are as follows:(1) Supervise the implementation of the resolution made by the

shareholders and report to the shareholders; and(2) sign the relevant documents on behalf of the Company.


Chapter Six Taxation, Foreign Exchange, Financing and Accounting, Labor Management, Trade Union

Article 23 The Company shall establish its own financial and accounting bylaws according to laws, administrative regulations and provisions of the treasury department of the State Council, and put on records to authorities.

Article 24The matters, involving the recruiting, dismissal, salary, welfare, labor insurance, labor protection, labor discipline, and other staff retention, should be dealt pursuant to Chinese regulations of labor and social insurance.

Article 25All employees of the Company shall have the right to establish a trade union and to organize labor union activities in accordance with the Trade Union Law of the People’s Republic of China. Trade union activities shall be conducted in accordance with Chinese Law and shall not interfere with the normal operation of the Company. The Company shall pay the trade union monthly fees equivalent to 2% of the Company’s monthly total wage bill. The labor union shall use such fees in accordance with the Administrative Rules Concerning the Usage of Labor Union Funds as promulgated by the All China Labor Union.

Chapter Seven Business Term, Termination and Liquidation

Article 26The company business term will be [ ] years, which starts from the date of issuing of the corporate certificate.

Article 27The company should submit the board resolution and the application letter signed by the Shareholder to the former approval authority for the extension of


the company business term. The application for the business term extension should have been done with 180 days before the termination of business term. After being approved by the former approval authority for the extension of the business term, the company should take the related registration amendment work later on.

Article 28If the company wants to stop the operation before the termination of the business term, it must be approved by both Shareholder and the former approval authority.

Article 29 The company could stop operations should there be any circumstances as follows. (1) For force majeure event, preventing the continuation of operations. (2) The company has many years of red deficits and is unable to carry out

continuous operation.(3) The Shareholder hasn’t implemented the responsibility of required

capital within the prescribed terms. (4) If the Company experiences financial difficulties and the Shareholder

deems it necessary to dissolve the Company or the Company is unable to carry out its business in a manner acceptable to the Shareholder;

Article 30 For expiration of the business term of a company and/or terminate the operation before the date of the expiration, the Shareholder should compose a liquidation committee to liquidate the assets of the company.

Article 31When the liquidation completed, the company should submit the valuation report to the former approval authority and take the deregistration procedure from the former registrar. The company should hand over the


corporate licenses and publicize it outside. After the company dismissed, the Shareholder should retain all types of account files.

Chapter Eight Applicable Law

Article 32 The conclude of the Articles of Association, its effectiveness, implementation and settlement of dispute are all abided by the law of People’s Republic of China.

Chapter Nine Miscellaneous

Article 33 The amendment to this AOA shall bear the signature of both the Shareholder and the Legal Representative with Company seal on it.

Article 34These AOA shall come into effect upon approval by the Approval Authority and the amendment to this AOA shall come into effect upon approval by the Approval Authority.

Article 35 These AOA are executed in Chinese. The two versions shall have the same legal effect.

Article 36 These AOA is signed by the shareholder in Beijing on [date].

[Investor’s name][Signature][Date]


Chapter VI: Steps in the Establishment of a WFOE in China

The following procedures are necessary steps in the establishment of a WFOE and compliance with relevant Chinese laws and regulations:

(1) Apply for pre-approval of the WFOE’s Chinese name at the local administration of industry and commerce;

(2) Submit the Feasibility Study Report (“FSR”) for setting up the WFOE and the WFOE’s AOA, and submit required information regarding the WFOE to the local bureau of commerce for approval;

(3) Apply for the WFOE’s Certificate of Approval from the local bureau of commerce;

(4) Apply for the WFOE’s Business License from the local administration of industry and commerce;

(5) Apply for the WFOE’s Enterprise Code Certificate from the local technology supervision bureau;

(6) Register the WFOE’s Company Seal, Financial Seal and Legal Representative Seal with the local public security bureau;

(7) Apply for the WFOE’s Foreign Exchange Registration Certificate from the local administration of foreign exchange;

(8) Tax registration of WFOE at the local and national Tax Bureau and application for the WFOE’s tax registration certificate;

(9) Apply for registration with the local customs bureau;(10) Register with the local bureau of commerce to carry out import and

export business;(11) Apply for approval for the WFOE to open RMB and foreign currency

capital accounts;(12) Apply for the WFOE’s Finance Registration Certificate from the local

financial bureau; and (13) Apply for the WFOE’s Statistic Certificate from the local statistical

bureau.


The government has advised a time-frame for completion of the procedure of around 4 months.

Chapter VII: Rent an Office

After obtaining the WFOE’s name pre-approval from local administration of industry and commerce, and before engaging later steps in establishing the company, a lease contract is required to be concluded between the proposed WFOE and a landlord for the rental of office space to be used by the WFOE. As this important step sometimes leads to confusion by investor(s), we would like to provide some guidance based on our experience of common question raised:

a Finding an Office

The type of building in which the office of the WFOE can be established shall be registered only for commercial use. If the building is approved by the local construction bureau for residential use, or for both commercial and residential use, establishing the office of a WFOE in such a building will be difficult. Sometimes, a building may not have been approved for commercial use even if it is like a commercial building in appearance; visual inspection of a building is insufficient to conclude it is registered solely for commercial use. We recommend before signing a lease agreement, the investor(s) employ a professional registration agent to check and verify the landlord’s Premises Ownership Certificate.

We have experience with some WFOEs seeking to establish their office in the same location as an earlier established RO. A WFOE is not allowed to be registered in a RO’s current office; registering the same office will cause a delay in the establishment of your WFOE. Three common solutions include: (i) terminate the RO before applying to establish the WFOE; (ii) move the RO to


another office before applying to establish your WFOE and register the WFOE in the RO’s former office; or (iii) rent a new office for the WFOE’s registration.

a Landlord Document Verification

Before entering into a lease agreement, it is advised to check whether the potential landlord is legally entitled to lease the office offered. The landlord should be able to provide sufficient legal documentation. Not checking this may cause later problems for your WFOE.

a Signing a Lease Agreement

When leasing an office the landlord will often provide a draft lease agreement for your signature. We strongly recommend you engage a legal professional to review and revise the lease agreement before you sign it, in order to mitigate future risks or uncertainties caused by clauses in the contract.

The lease agreement must be signed by the landlord in China. If the landlord happens to have a parent company or affiliate in your home country, they are not permitted to lease this property. This is because:

(1) As the landlord and its parent company are different independent legal entities, you are not entitled to rent the office without the landlord’s signature.

(2) A foreign company shall carry out commercial business only through its subsidiary in China. Therefore, a lease agreement signed between you and the landlord’s parent company in your country will be deemed illegal in China.

(3) If you pay the rent to the landlord’s parent company in your country, you will not be able to obtain the “Fapiao” issued by the landlord in China which is required by the Chinese local tax bureau for your WFOE’s registration.


Chapter VIII: Human Resource Issues

China has recently enacted a new Labor Contract Law which, together with existing regulations and laws, broadly increases worker protection. It is important to have a thorough understanding of the laws and regulations applicable to staff employment.

a Staff Engagement

A WFOE is allowed to employ and engage its own staff. However, many foreign investors choose to employ staff through Chinese domestic HR service companies, including FESCO, ADP, as well as others, rather than employ them directly.

A commonly cited advantage of HR service companies relates to the cost of meeting social welfare regulations. These regulations bring compliance and implementation overhead; social welfare law and regulation is complex, non-standard across cities and within cities, and regularly changes. HR service companies may bring savings in compliance costs and potential fines until the economies of scale of employing a dedicated HR staff become feasible. Labor Contract

According to the Labor Contract Law of the P.R. China, a WFOE shall conclude a written labor contract with its employee within one month of the date on which the WFOE started to use such employee. This contract ensures certain benefits for employees. Failure for an employer to enter into a contract with an employee after this period opens the WFOE to potential compensation payments.

a Mandatory Provisions in Labor Contracts


A labor contract shall include the following provisions:

cName, domicile and legal representative or main person in charge of the employer;

cName, domicile and number of the resident ID card or other valid identity document of the employee;

cTerm of the labor contract;cJob description and the place of work;cWorking hours, rest and vacation;cLabor compensation;cSocial insurance;cLabor protection, working conditions and protection against occupational

hazards; andcOther matters which laws and statutes require to be included in labor

contracts (such as disclosure of occupational disease or ailment that occurs as a result of work or occupational activity).

aProbationary Period

In a labor contract, the employer is entitled to stipulate a probationary period to assess an employee for potential regular employment. There are limitations to this probationary period:

cMandatory maximum probation periodQmonths ≤ labor contract term < 1 year: not exceed 1 monthQ1 year ≤ labor contract term < 3 years: not exceed 2 monthsQ3 years ≤ labor contract term, open-ended labor contract: not exceed 6

months cExtension of probation periodQthrough negotiation with employeeQif the probation period has reached the mandatory maximum, the


employer may extend the probation period by extending the labor contract term

Qin no circumstances should the probation period be longer than 6 months

c Circumstances to which probation period is not applicableQthe labor contract term is less than 3 monthsQthe labor contract is for the completion of a certain job, not for sustained

employmentQthe probation period is included in and equal to the labor contract term Note: an employer may stipulate only one probationary period with the

same employee.

c Salary during the probationary periodQmay not be less than the lowest wage level for the same job with the

employer or less than 80 percent of the wage agreed upon in the labor contract

Qmay not be less than the minimum wage rate in the city or district where the employer is located

c Termination of labor contract during the probationary periodQTermination raised by employee

(a) 3 days notice to the employer in advance is the only requirement (written or verbal)

(b) any training expenses of the employee during the probationary period is not allowed to be compensated by the employee

QTermination raised by employer

(a) the employee is proved during the probation period not to satisfy the conditions for employment (only applicable during the probationary period)


(b) termination due to employee’s fault (Article 39 of Labor Contract Law)

(c) termination not due to employee’s fault (Sub-article (1) and (2) of Article 40 of Labor Contract Law)

(d) except for the situation mentioned in the above (a) (b) and (c), the employer shall not terminate the labor contract during the probationary period.

(e) notice in advance to the employee is not necessary

a Severance Pay

If an employer intends to terminate a labor contract with an employee, the employer is required to provide severance pay to the employee where required by Chinese law and regulation. When the Labor Contract Law of P. R. China came into legal effect on January 1st, 2008, the scope of severance pay was significantly enlarged. Application of severance pay is often a point of confusion for employers, key aspects are outlined below:

The issue of severance pay is covered mainly by Article 28 of the Labor Law of P. R. China, Article 46 of Labor Contract Law of P. R. China and the Regulation on severance pay for Breaching or Terminating Labor Contract issued by the Labor Ministry of P. R. China. According to these laws severance pay is based on the number of years an employee worked with the employer at the rate of one month’s wage for each full year worked. Any period of not less than six months but less than one year is treated as one year of employment; any period of less than six months is treated as a half year of employment and severance pay applied at one-half of such an employee’s monthly wages. If the monthly wage of an employee is higher than three times that of the average monthly wage of employees in the city in which the employer located (as published by the local government authority), the maximum rate for the severance pay paid to such an employee shall be three times of the average monthly wage and no more than that employee’s wage over 12-months. We can classify employment contract


termination into 7 types, based around the reason for contract termination:

c Type A: Employee’s Termination of Labor Contract.

The employer shall pay severance pay to the employee only if the employee is forced to terminate the labor contract due to circumstances stipulated in Article 38 of the Labor Contract Law. For example, if an employer fails to provide the labor protection or working conditions specified in the labor contract, or if an employer uses violence, threats or unlawful restriction of personal freedom to compel an employee to work, such employer must give severance pay to such employee when such employee terminates the labor contract.

c Type B: Employer’s Termination of Labor Contract through Negotiation with Employee.

This type of severance pay occurs only when the employer raises the intention of terminating the labor contract with the employee and the employee agrees to such termination. If the intention of terminating the labor contract is raised by the employee first, the employer is exempt from paying severance pay.

c Type C: Employer’s Termination of the Labor Contract in line with the Labor Law and Labor Contract Law.

This type of severance pay occurs when the employer terminates the labor contract unilaterally under certain circumstances stipulated in the Labor Law and Labor Contract Law. The statutory circumstances for this type of severance pay are split into three main categories:

(a) after the statutory period of medical care for an illness or non-work-related injury, the employee can engage neither in his original work nor in other work arranged for him by his Employer;

(b) the employee is incompetent and remains incompetent after training


or adjustment of his position; or(c) the labor contract is unable to be performed due to a major change

in the circumstances relied upon at the time of conclusion of the labor contract and, after consultation, the employer and employee are unable to reach an agreement on amending the labor contract.

c Type D: Employer’s Reduction of the Workforce

This type of severance pay occurs when the employer terminates the labor contract unilaterally due to its Reduction of the Workforce under certain circumstances stipulated in the Labor Law and Labor Contract Law.

According to Article 27 of the Labor Law and Article 41 of the Labor Contract Law, if an employer needs to reduce its workforce when it is to be restructured pursuant to the Enterprise Bankruptcy Law of P. R. China, suffers serious difficulties in production and/or business operations, or faces other major difficulties of its operation, an employer may reduce its workforce after it has explained the circumstances to its Trade Union or to all of its employees 30 days in advance, has considered the opinions of the Trade Union or the employees, and has subsequently reported the workforce reduction plan to the local labor administration department. To the employees who have been fired, the employer shall pay severance pay.

c Type E: Termination of Labor Contract when the Labor Contract Expires

This type of severance pay was newly introduced in the Labor Contract Law. According to Article 46 of the Labor Contract Law, when a labor contract ends due to the expiration of its term, the employer shall pay severance pay to the employee unless the employee does not agree to renew the labor contract whereby the conditions offered by the employer are the same as or better than those stipulated in the current labor contract.


c Type F: Termination of Labor Contract due to Employer’s De-registration

According to the Labor Contract Law, if an employer is to terminate a labor contract with an employee when such employer is declared bankrupt, has its business license revoked, is ordered to close or is closed down, or when such employer decides on early liquidation, it shall pay severance pay to the employee.

c Type G: Other Circumstances for Employer to pay Severance Pay.

This type mainly aims at new or supplementary regulations related to severance pay which may be issued by Chinese government authority in the future.

Chapter IX: Tax and Accounting Related Issue

As a registered legal entity, the tax structure of a WFOE is more complex than that of an RO. A WFOE is required to declare and file its taxes periodically and to undergo an audit by a certified public accountant firm (“CPA firm”) on an annual basis. The annual inspection process includes submitting the audited report together with company records (financial statements, business license, etc) to eight key official bureaus:

a State Tax Bureau (“STB”)a Local Tax Bureau (“LTB”)a Customs Officea Foreign Exchange Bureau a Bureau of Commerce and Industry a Finance Bureaua Statistical Bureau


This guide provides an overview of the key ongoing administrative and taxation related issues affecting a WFOE. We outline the key issues involved in:

1) Tax Structure and Payment Treatment;2) Accounting Environment and Requirements (Include Accounting

Software Selection)3) Profit Allocation;4) Audit and Annual Inspection;

We have separately issued technical guides addressing each of these topics at a more detailed level. Brook Harvest would be happy to provide copies of these guides, and other important information affecting your WFOE.

Section One: Tax Structure and Payment Treatment

A WFOE is likely to fall into several different tax categories depending on its business scope and the nature of the enterprise. An introduction to each tax category:

1. Income TaxIncome tax includes corporate income tax (“CIT”) and individual income tax (“IIT”)

1.1 Corporate Income TaxOn 1st January 2008 a new corporate income tax law became effective. This new law resulted in several changes to income tax treatment and payment, including the abolition of the “two years exemption and three years half” incentive for manufacturing enterprises. Alongside this major change was a limitation of freedom for Economic Developing Zones (“EDZ”) and Free Trade Zones (“FTZ”) to issue their own tax incentives: all tax incentives must now be authorized and approved by State Council.


Our technical guidance book: “Guidelines TO Implementing the RuleS of THE New Corporate Income Tax Law” discusses the newly issued China Corporate Income Tax Law and the changes and improvement it makes. The book can be downloaded from our website.

Tax incentives in the newly issued law largely revolve around High/New Technology Enterprises (“HNTE”). If an enterprise can be attributed with the HNTE classification it can enjoy a reduced tax rate of 15% Besides this lower tax rate, the new law brings tax incentives in several other significant areas for HNTEs, We discuss application conditions and requirements on company for becoming HNTEs in our book “Guide to the Assessment and Application Procedures for High / New Technology Enterprises” which can be downloaded from our website.

The new standard corporate income tax rate is 25% for most manufacturing enterprises. If an enterprise also conducts R&D, including R&D projects, it may be able to be classified such operations as “HNTE” projects, income derived from which may enjoy a lower tax rate and other benefits.

Corporate income tax is required to be filed and declare on a quarterly basis. At the end of the year tax needs to be consolidated and cleared. We explain this in more detail in Section Two: Accounting Environment and Requirements.

1-2 Individual Income Tax

Here we limit discussion to the treatment of Expatriate Individual Income Tax.

If the expatriate is employed by the WFOE the expatriate should file and declare his individual income tax if he is resident in China for over 183 days of a year. The filing and declaration process is divided into two stages:


Stage One: Registration with the local tax bureau.

This requires documentation including the employee’s assignment letter, VISA, and other documents relating to his employment and legal residence in China;

Stage Two: Monthly reporting of income tax .

We explain detailed expatriate IIT issuance and illustrate IIT planning in our technical book “The Guide of Expatriate Individual Income Tax”. This book may be downloaded from our website.

In the past we have noted some clients split their salary into two parts: one part paid by the China entity and the other part paid by the overseas Head Office, the intention of which is to reduce overall tax liability in China. We do not recommend clients continue this practice; the China tax office has increased it’s international networking and monitoring network in recent years and in doing so has increased it’s ability to track and demand tax and compensation payments for tax it perceives as unpaid.

Expatriate IIT needs to be reported and declared on a monthly basis. We explain the details of this in Section Two: Accounting Environment and Requirements.

2 Turn-over Tax

China’s taxation structure includes three main types of Turn-Over Tax applicable to a WFOE. We will publish a detailed technical book on these TOTs shortly, providing detailed analysis on tax basis, calculation methods, special treatments, incentives and other applicable themes. Below is a skeleton-summary of TOTs:


2-1 Business Tax (“BT”)

Business Tax is payable by WFOEs that provide services as part of their operations (are a ‘service provider’). Business tax law in China outlines the following broad business activities as defining a service provider: QProvision of service activities;QTransfer of the ownership of intangible assets;QSale of property;

The amount of business tax payable is based on the income derived from undertaking a transaction. If a company has an income derived from providing services and receives an income of RMB10,000, BT will be calculated on that RMB10,000.

Business tax ranges from 3% to 20%, a typical rate for income derived from providing business or consumer services would be around 5%. Business tax needs to be filed and reported on a monthly basis and should be paid within initial TEN days of the accounting month.

New rules and implementation guidelines applicable to business taxes were issued at the end of 2008. We cover these in more depth in the December issue of our ChinaInfo Update. The key change these newly issued rules bring is related to The Definition of “Provision of labor service within China”

Under the old definition of services, Business Tax as applied to the definition: “An institution or individual engaged in providing services (hereinafter referred to as “taxable services”), transferring intangible assets or selling immovable property within the territory of the People’s Republic of China as provided in these Regulations shall be a taxpayer of business tax (hereinafter referred to as taxpayer) and pay business tax in accordance with these Regulations.” i.e. only if the service was provided in China was the service taxable. However, the tax rule has been changed at the beginning of 2009,


according to new law, if the enterprise locates in China, they have to pay business tax even though the service is provided outside of China.

For example: Company A, located in China, provides an Internet training service via the Internet to Company B, located in the UK. Under the old law Company A did not need to pay Business Tax in China since the service was provided outside of China. Under the new law, as a service provider within China, even though they are providing a service outside China, Business Tax is applicable.

This is a significant change to the structure of Business Tax. The change decreases the opportunities that existed in the old regime of providing services outside China and avoiding payment of business tax on those services.

2-2 Value Added Tax (“VAT”)

If a WFOE is involved in the activity of production or trading, the Company is likely to be required to pay VAT. Some clients have confused whether their company should pay BT, or whether it should pay VAT. In most cases manufacturing companies are required to pay VAT while companies that provide business services are required to pay BT.

Companies required to pay VAT can be further divided into two groups: General Tax Payers, and Small Scale Tax Payers, the two groups differentiated according to their annual sales turn-over. Again, a change in tax regime has caused a recent change in tax assessment. Under the old system a Small Scale Tax Payer was defined as having an annual sales turn-over of less than RMB1.8mn per year. Under the new system (Clause 28 of the VAT Implementation Rule) Small Scale Tax Payers are now required to meet the following conditions:

1) For tax payers that handle the goods manufacturing and service


providing or the tax payers mainly focus on the goods manufacturing, but also handle the goods whole sales or retail, they will be entitled as “Small Scale Tax Payer” if their annual VAT taxable income is less than RMB500 thousands;

2) Other tax payers besides of above case, they could be entitled as “General Tax Payer” if annul taxable income exceeds RMB800 thousand;

An enterprise is entitled with the status of ‘General Tax Payer’ is allowed to issue VAT invoices, the tax rate of which is 17%, unless the enterprise’s business scope covers certain specially treated areas which have a rate of 13%

A Small Scale Tax Payer not permitted to issue VAT invoices, it may issue Commercial Invoices taxed at a rate of 3 percent.

a Tax Payable

For a Small Scale Tax Payer, VAT payable at the Sales Amount *3%.

For a General Tax Payer VAT paid on inputs can be reclaimed against VAT paid on sales receipts. We outline the process of calculating this below:

1) Input VAT

Input VAT is calculated at a rate of 17% of the purchase costs. For example, Company A purchased some raw materials with the amount of RMB10,000. In this case, the Input VAT of Company A is 10000*17% = 1,700.

For most goods, Input VAT is allowed to be deducted from current period’s Output VAT. According to the old VAT rule, Input VAT related to the purchase of fixed assets was not allowed to be deducted from Output VAT. This rule has been revised, now Input VAT paid on the purchase of certain fixed assets is allowed to be deducted from current’s period Output VAT.


2) Output VAT

Output VAT is calculated at 17% of the sales value. For example, after processing and manufacturing, the goods are sold as RMB20,000. In this case, Output VAT of Company A is 20,000*17%=3,400.

The tax payable is the gap between Input VAT and Output VAT. In the above example, the tax payable for current period is RMB(20,000-10,000)*17%=1,700.

a Import and Export VAT

Import VAT is calculated at the imported goods value * 17%. It is part of the importation cost of the WFOE.

For exported products, some tax paid may be reclaimed by the Company from the government. For most manufacturing enterprises, the tax refund method is known as “Exemption, Deduction and Refund.”

a Administration of VAT

The VAT should be declared and reported within TEN days of each accounting month.

We illustrate more detailed information and examples of treatment for all of the above cases in our upcoming technical book, Turn-Over Tax in China.

2-3 Consumption Tax (“CT”)

If a WFOE is involving in business relating to manufacture, processing or importing of goods for consumption, they are likely to have to pay consumption tax.

Establishment of Foreign Invested Commercial

Enterprise in China

Expatriate Individual Income Tax Guide

EXPATRIATE

INDIVIDUAL INCOM

E TAX GU

IDE

EXPATRIATE

INDIVIDUAL INCOM

E TAX GU

IDE

Guide to the Assessment and Application Procedures for High

/ New Technology Enterprises

Establishing Representative Offices

in China

Guideline of Implementation Rule of New Corporate Income Tax Law

EXPATRIATE

INDIVIDUAL INCOM

E TAX GU

IDE

EXPATRIATE

INDIVIDUAL INCOM

E TAX GU

IDE

EXPATRIATE

INDIVIDUAL INCOM

E TAX GU

IDE

EXPATRIATE

INDIVIDUAL INCOM

E TAX GU

IDE

About our technicAl books

As an effective information channel, we published five technical books in 2008, they are talking different financial, accounting and tax topics including:

“Expatriate Individual Income Tax Guide”“Establish a RO in China”“Establish a FICE in China”“Corporate Income Tax Implementation Rule Guide”“Application High and New Technology Enterprise Guide”

All of above technical books are provided to clients for free.

Please contact us if you are interested in the books:[email protected]

Our Website

Newly Update CompaNy website is loadiNg

More Informenition Will Be Available Soonwww.brookharvest.com


Table of Items and Applicable Rates (Amount) of Consumption Tax

Taxable Items Scope of taxationTax unit

Tax rate/amount

I. Tobacco

1. Cigarettes, category A Including imports 45%

2.cigarettes, category B 40%

3. Cigars 40%

4. Cut tobacco 30%

II. Alcoholic drinks, alcohol

1. Distilled spirits from cereals 25%

2. Distilled spirits from potato 15%

3. Rice wine Ton 240 Yuan

4. Beer Ton 220 Yuan

5. Other alcoholic drinks 10%

6. Alcohol 5%

III. Cosmetics Including cosmetic sets 30%

IV. Skin-care and hair-care products 17%

V. Jewelry and precious stonesIncluding all kinds of gold, silver, jewels and precious

stone ornaments10%

VI. Firecrackers and fireworks 15%

VII. Gasoline Liter 0.2 Yuan

VIII. Diesel oil Liter 0.1 Yuan

IX. Motor vehicle tires 10%

X. Motorcycles 10%


XI. Motor cars

1. Cars with cylinder capacity of 2200ml or more

-- Cars with cylinder capacity of 1000 - 2200ml

-- Cars with cylinder capacity of less than 1000ml

8%5%3%

2. Jeeps (4-wheel drive)

Those with cylinder capacity of 2400ml or more 5%

3%Those with cylinder capacity of less than 2400ml

3. Minibus and vans Of less than 22 seats

With cylinder capacity of 2000ml or more 5%

With cylinder capacity of less than 2000ml 3%

2-4 Stamp Duty (“SD”)

Stamp Duty is payable on financial and legal documents such as a Business License, Purchase and Sales Contracts or Purchase Orders.

As it’s name implies, Stamp Duty can be bought like stamps in advance; an accountant can calculate the tax payable according to the value of the financial/legal documents and stick related value stamps to the documents.

The tax payer, tax rate and relevant categories are illustrated below.

Table of Items and Rates of the Stamp Tax

Item Applicable Scope Tax Rate The taxpayer

Note


1. Purchase or sales contracts

Including contracts on supplies, order on purchase, procurement, purchase and marketing, coordination, regulatory supplies, compensation trade, barter trade

Stamps to the equivalent of 0.003% of the value of a transaction

The parties establishing the contract

2. Contracts on processing and services

Including contracts on processing with material or design provided, repair and renovation, printing, advertising, surveying and testing

Stamps to the equivalent of 0.05% of the value of the deal


3. Contracts on construction, engineering prospecting and survey and designing

Including contracts of surveying, prospecting and designing

Stamps to the equivalent of 0.05% of the deal


4. Contracts on building, installation engineering work

Including contracts on building, installation engineering work



5. Contracts on leasing property

Including leasing houses, vessels, aircraft, engine-driven vehicles, machines, tools and other equipment

Stamps to the equivalent of 0.1% of the value of the lease or one Yuan if 0.1% of the lease is less than one Yuan


6.Contracts on cargo shipment

Including contracts on shipment by civil aviation, railway, ocean shipping, inland shipping, shipment on roads, and through shipment

Stamps to the equivalent of 0.05% of the fare for the shipment


Vouchers used as contracts shall be affixed with stamps


7. Contracts on warehousing and custody

Including contracts on warehousing and custody

Stamps to the equivalent of 0.1% of the charges on warehousing


Stamps for contracts shall be affixed to warehouse instruments used as contracts

8. Contracts on loans

Including contracts on loans between banks and other banking institutions with borrowers (excluding inter-bank financing)

Stamps to the equivalent of 0.05% of the loan


Stamps affixed to instruments used as contracts

9. Contracts on insurance on properties

Including insurance contracts on property, liability, security, credibility

Stamps to the equivalent of 0.03% of the value of the insurance policy


Stamps affixed to instruments used as contracts

10. Contracts on technologies

Including contracts on technological development, transfer, consultation and service



11. Deeds on transfer of proprietary rights

Including deeds on transfer of proprietary rights over property, copyright, trade mark, patent right, know-how



12. Business account books

Account books in production and business operation

Stamps to the equivalent of 0.05% of the original value of the fixed asset and the circulating capital. A stamp with a face value of five Yuan to be affixed to other account books each.

The party establishing the account book


13. Deed of ownership or permit

Including house title deeds, industrial and commercial business licenses, certificates of trademark or patent right registration, certificate of land use right issued by government departments

A stamp of 5 Yuan affixed to each document

The party accepting the deed

Section Two: Accounting Environment and Requirements, Including the Selection of Accounting Software

As a legal entity, a WFOE needs to prepare complete accounting records periodically such as Accounting Vouchers, Sub-Ledgers, General Ledger and Financial Statements. The accounting period in China is calendar year and month, as such, financial statements need to be prepared as monthly reports, quarterly reports and as an annual report.

As new-comers to the Chinese regulatory environment, many WFOEs choose to engage an accounting firm to play the role of Bookkeeper and Tax Filer on behalf of the WFOE. In most cases, the accounting firm should be able to assist the WFOE in preparing it’s financial statements; the WFOE must appoint a person to collect the financial documents from the accounting firm, however,

There are several popular software applications that can fulfill the role of creating financial reports. These include Kingdee, User-Friend, Quick Book and Little Bee. We often recommend User-Friend as it is also provides a mini ERP system. The financial module is only a part of the complete system, and allows data recorded in the financial module to be linked with


inventory, purchasing and sales modules.

All of the above mentioned software products can create both Chinese and English versions of financial reports. The China tax authority requires financial data to be recorded and reported in Chinese. If needed, an English version of reports can be created separately, a useful function for foreign management and staff.

Section Three: Profit Allocation

An increasing amount of Foreign Invested Enterprises face the question of how best to best repatriate their profits back to their home or, or to other overseas office.

Repatriation of profits has become a simple process for Enterprises that have paid China related taxes without issue, that have kept up to date with filed accounts, and followed other legally required regulations.

The Corporate Income Tax Law, effective from 1st January 2008, requires a Dividend Tax be paid when dividends are repatriated outside of China. The standard Dividends Tax rate is 10%, but a HK based Holding or Parent Company can enjoy a rate of 5% due to a the tax treaty signed between Mainland China and the HK SAR Government.

Section Four: Annual Audit and Inspection

A Foreign Invested Enterprise must be audited by a qualified CPA firm at each year-end. The audited report is sent to the tax authorities and other government officials for annul inspection. The audit of a normal foreign invested enterprise is significantly different from the audit of a Chinese listed enterprise.


The audit will focus on the Company’s financial statements including the Balance Sheet, Income Statement and Cash Flow Statement. The deadline of the annual tax consolidation process is 30 April; the auditor’s report is required to be issued before 30 April.

There are three tiers of qualified CPA firms operating in the current Chinese market:Q Big Four Accounting Firms, mainly focusing on large state-owned

enterprises, multinational enterprises and listed companies;Q Local CPA firms with firm foreign background and experience, their

target clients include small and medium sized Foreign Invested Enterprises;

Q Local background CPA firms, cheap and flexible, but experience problems in clearly communication with and understanding the needs of international clients and FIEs.

As well as an audit, Foreign Invested Enterprises (“FIE”) are requested to perform an annual inspection. After the successful completion of the inspection, the Administration of Industry and Commerce will renew the Business License of the Enterprise. As part of the inspection process the Enterprise must provide company documents including it’s current Business License, Financial Reports and Audited Report.

The annual inspection period is from 1st March to 30th June, enterprises are encouraged to perform the annual inspection procedure on-line.


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Establish a WFOE in China