In July 2017, China's Ministry of Commerce (MOFCOM) announced changes to the registration process for foreign-invested enterprises to speed up and ease market entry for foreign investors. While there are many types of legal entities that could be registered, the wholly foreign-owned enterprise (WFOE) is generally the most commonly used vehicle to establish operations in China due to the fact that it represents a new independent legal entity wholly owned by foreigners and has the most international mobility of funds. The previous WFOE registration process took between three and six months, depending on the proposed business scope and industry sector one wanted to invest in. Under the new reforms, a well-prepared application could be completed in a little over one month. We look at the new pre-registration practicalities of incorporating a WFOE in China, which can be broken down into four basic steps as follows:
1. Name registration with State Administration for Industry and Commerce (SAIC)
Here one would need to submit five to 10 Chinese names for the proposed legal entity. When selecting a name, ensure that it appeals to one's target market and encompasses the brand's key attributes. Many large corporations invest in market research as it is imperative to understand the nuances of Chinese culture and the language when selecting an appropriate name for one's legal identity in China. The SAIC will evaluate these names against two criteria. First, they do not clash with brands, trademarks or corporate entities that are already registered in China. Second, the suggested names are not in conflict with the public interest. It is not uncommon that options are rejected, but a company name approval would typically take one to five working days.
2. Lease registration and issuance of registered business address
This is the most challenging step and essentially determines how long the registration process will actually take. Registering a business in China requires a capital commitment and the first outflow will be leasing suitable business premises. This often proves to be a stumbling block for capital-constrained investors as an upfront outflow is required long before any revenues have been secured. It is important that one has an agent or representative on the ground to help source suitable premises and negotiate terms of the lease with the landlord. It is highly recommended to include a clause in your lease agreement that the contract may be voided if the WFOE registration and application is unsuccessful.
Furthermore, rental rates in big cities like Beijing, Shanghai, Guangzhou and Shenzhen are, in some cases, as high as that in London, but these city names in registered business titles carry credibility and status. It is very difficult and costly to relocate at a later stage, especially if this requires moving between municipal tax authorities. So it's imperative to get this right in the first place. Also make sure that the lease contract is formatted correctly and registered with the local real estate authority and that one has obtained the personal identification and land rights certificate from the landlord as proof of legal ownership and legitimacy of the lease agreement.
3. MOFCOM approval letter and certificate
The records that need to be filed with MOFCOM are the official application forms, copies of the approved documents from steps one and two above, business scope, and signed commitments by all investors accompanied by copies of their identity
documents. In the case of the investors using representatives, the power of attorney and the representatives' proof of identification would also be required.
This would typically take five to 10 days if physically submitted to MOFCOM or three days if all documents are filed online. It is important to note that this accelerated option is only available to WFOE registrations that do not seek to operate in China's restricted industries.
4. SAIC business license
Once the approval certificate from MOFCOM has been issued, one can apply for the business license from SAIC, which typically would take another five to 10 days. Previously, one would have been required to apply for licences from various departments, but the process has been streamlined and now incorporates the business license number, organization code, tax registration, social security and statistical registration codes. Once the new five-in-one business license has been issued, the WFOE exists as a full legal entity.
Jon Newton is a Shanghai-based entrepreneur, China start up specialist, keynote speaker and Adjunct Professor of Chinese business. He can be contacted at email@example.com or on LinkedIn at: www.linkedin.com/in/jonnewton/