Introduction to WFOE

Table of Content

(Click on the links below for easy navigation.)

Part 1: Introduction:

  • About WFOE
  • Types of WFOE
  • WFOE Advantages
  • Can you do business in China without WFOE?
  • When is the right time to set up WFOE?
  • Business Structure

Part 2: Pre-registration:

  • Stages of Registration

  • Business Address

  • WFOE Office Lease

  • Chinese Business Name

  • Registered Capital 

  • Business Scope 

  • Articles of Association

  • Organizational Chart

  • The State AMR

  • The Negative List 

  • Foreign Investment Law

Part 3: Post-registration

  • Business License
  • Post Licensing
  • Chops 
  • Annual Statutory Audit
  • Corporate Tax Filing 
  • WFOE Annual Report

Explore the World of Wholly Foreign-Owned Enterprises (WFOEs) in China.

Introduction to WFOE

Introduction to WFOE

About WFOE

Ever pondered how to navigate China’s business scene? Meet the Wholly Foreign-Owned Enterprise, also known as WFOE.

A wholly foreign-owned enterprise is a type of business entity in China that is 100% owned by foreign investors. It is a popular choice for foreign companies looking to establish a presence in China, as it allows them to fully control their operations and make all business decisions without the need for a local partner.

WFOEs can be established in a variety of industries, including manufacturing, trading, consulting, technology, and investment. The process of setting up a WFOE in China involves choosing a business structure, selecting a business name, choosing a location, obtaining necessary permits and licenses, and registering the business with the relevant government agencies. It is important to have a thorough understanding of the local regulations and business environment in China before setting up a WFOE.

WFOEs offer many advantages for foreign companies looking to do business in China, including access to the vast Chinese market, the ability to fully control operations, and the potential for tax benefits. However, they also come with challenges, such as navigating the complex regulatory environment and managing relationships with local partners. To provide a better understanding of what is possible with a WFOE and what is required by Chinese law, we have prepared this extensive introduction to WFOE. It addresses the most important topics that should be considered when beginning the process of WFOE registration.

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Types of WFOE

There are three traditional types of WFOE:

Consulting WFOE is a type of WFOE that provides professional services such as consulting, training, and research. These companies typically do not engage in any production or sales activities and are generally easier to set up than other types of WFOEs.

Trading WFOE is a type of WFOE that imports and exports goods and products. These companies are typically involved in the wholesale and retail trade of goods and may also provide related services such as transportation and storage.

Manufacturing WFOE is a type of WFOE that is engaged in the production of goods. These companies may produce a wide range of products, from consumer goods to industrial equipment. Setting up a manufacturing WFOE can be more complex than other types of WFOEs, as it often requires larger investments in machinery and equipment.

Advantages of establishing a Wholly Foreign-Owned Enterprise (WFOE) in China.

  • Full control: As a WFOE is 100% owned by foreign investors, the company has complete control over its operations and decision-making processes.
  • Access to the Chinese market: A WFOE allows foreign companies to tap into the vast and growing Chinese market.
  • Potential tax benefits: In some cases, WFOEs may be eligible for certain tax benefits, such as a reduced corporate income tax rate.
  • Ability to issue VAT invoices: WFOEs are permitted to issue official Value-Added Tax (VAT) invoices in Chinese Renminbi (RMB), known as fapiao, and collect their sales revenues in RMB.
  • Greater flexibility: WFOEs have more flexibility in terms of the types of business activities they can engage in, compared to other business structures such as joint ventures (JVs). WFOEs are allowed to engage in a variety of business activities, including trading, servicing, and manufacturing (as long as they are not prohibited or restricted by the Chinese government), within the approved business scope.
  • Greater legal protections: WFOEs are afforded the same legal protections as domestic companies in China and are subject to the same regulations.
  • Independence: A WFOE does not require a local partner, allowing foreign investors to manage their own HR matters, operations, and growth strategies.
  • Ability to hire both foreign and local employees: WFOEs can hire both foreign and local Chinese employees without any limitations on the number of foreign employees (in most cities).
  • Remittance of profits: Once certain reserve fund thresholds are met, WFOEs can remit their profits made in China back to the company’s investors as dividends.

Can you do business in China without WFOE?

A WFOE is not required to:

Promote your product.

A WFOE is not required to promote your product or business. You can promote your product or business through other means, such as using marketing agencies or individual agents.

However, if you want to sell your product or offer your services directly to customers in China, you will need a WFOE or other legal entity registered in China.

Employ local or foreign talent.

You can hire local employees directly through a local employment agency or a foreign-invested enterprise (FIE), such as a representative office or a joint venture.

Similarly, if you want to employ foreigners in China and obtain visas and work permits for them, you do not need to set up a WFOE.

Import and sell products to China.

Claiming an import VAT refund, storing products in a warehouse or logistics center, and selling products in China can all be done without setting up a WFOE.

A WFOE is not required to sell products and issue RMB VAT invoices (also known as Fapiao). You can do so through an FIE or by partnering with a local company, such as Sapience Pro.

HR and payroll

In terms of managing HR, finances, and other business operations in China, a WFOE is not necessary. You can manage these tasks through HR-licensed entities, such as Sapience Pro.

WeChat or website.

Setting up a Chinese website, an e-commerce store, or registering a WeChat account can also be done without setting up a WFOE. You can do so as a foreign company or by partnering with a local company.

Office Space.

In terms of office, you do not need to have a WFOE to sign a lease agreement or rent an office. At Sapience, we have plenty of options for your office needs, including the virtual office option. However, it is important to keep in mind that having a physical office space is often a requirement for obtaining certain business licenses and permits in China. 

When is the right time to set up WFOE in China?

In general, it depends on the specific business needs and the overall industry, but you should always consider the following:

Market Demand.  It’s important to assess the demand for the company’s products or services in the Chinese market before committing to setting up a WFOE.  It’s also important to consider the level of competition in the market and whether there is room for the company to differentiate itself and succeed in China.

Loyal Team. Consider whether you have several loyal employees who have proven themselves professionally. A WFOE allows you to hire local Chinese employees, which can be beneficial if you have a team in place that you trust and want to retain.

Income Stream. Consider the stability of your market and income. If your business is experiencing consistent growth and stability, it may be a good time to consider setting up a WFOE. This will allow you to formalize and protect your operations in China.

Partners and distributors. Partners and distributors can help you establish your brand and get your products or services into the market, while agents can assist with a range of tasks such as finding suppliers, negotiating contracts, and handling shipping and logistics. Building strong relationships with these partners early on can help to ensure that your business has a solid foundation in China and can grow and succeed in the long term.

Legal and regulatory environment. It’s essential to understand the legal and regulatory environment in China and ensure that the company can comply with all relevant laws and regulations. Also, for special licenses such as manufacturing or medical, you need to establish WFOE.

Lastly, it is necessary to set up a WFOE to obtain an ICP (Internet Content Provider) license for an e-commerce structure.

Business Structure: Key Points

When setting up a wholly foreign-owned enterprise in China, it is important to carefully consider the business structure and type of WFOE that are most suitable for your business.

The choice of business structure will have a significant impact on the legal and financial liabilities of the company and its owners. Different business structures have different requirements and implications, and it is important to choose the one that best meets the needs of your business.

For example, some business structures may be more suitable for certain industries or business activities than others. Therefore, it is important to consult with experts and professionals in the field to determine the best option for your business. Consulting with experts from Sapience Pro before proceeding can help you make an informed decision.

Limited Liability Company (LLC)

A limited liability company (LLC) is a popular choice for WFOEs, as it provides limited liability protection for the company’s owners. This means that the owners are only responsible for the amount of money they have invested in the company, and are not personally liable for the company’s debts and obligations.

In Practice:

While an LLC is a popular choice for WFOEs due to its provision of limited liability protection for the company’s owners, which limits their financial responsibility to the amount of capital they have invested in the company, it is important to note that in practice, this may not always be the case.

In instances where a local lawsuit is brought against the company and a judgment is rendered in favor of the plaintiff, owners may still be liable for a percentage of the registered capital that exceeds their initial investment. It is therefore crucial to consider the amount of registered capital to be invested in the company and to have a thorough understanding of the nuances associated with LLC WFOEs before making a decision.

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Part 2. Pre-registration

Stages of registration.

Office Lease

The shareholder must sign a 12-month office lease contract or secure a plant space for a manufacturing WFOE, and the leasing agreement will be transferred to the WFOE’s name upon obtaining the business license.

Chinese Business Name and Registered Capital

There is no requirement for a minimum registered capital for a WFOE in China. It is not necessary to contribute any capital upfront if it is not needed for daily operation.

Business Scope and Impact Assessment

The business scope listed on the company’s license should be as comprehensive as possible and include all current and future activities of the WFOE.

Approval

Once the local Administration for Market Regulations (AMR)  accepted the application, the business license will be issued, and the Chinese  WFOE entity will be formed.

Business Lisence

The business license, organization code, tax registration, social security, and statistical registration collectively constitute the official documentation confirming the legal registration of a company in China, enabling it to conduct business activities in the country.

Incorporated

A WFOE in China must have at least two bank accounts: one for RMB transactions (day-to-day operations) and one for foreign currency transactions (receiving capital from overseas).

Business Address.

When establishing a WFOE in China, it is important to secure a registered address for the company. This address will need to be provided during the name approval stage of the incorporation process. However, the lease agreement must be signed in the name of the WFOE. Therefore, in practice, the official agreement is typically signed after the company name has been approved.

Key Requirements:

  • The registered address must be a physical location where the company will carry out its business operations. It can be a virtual address (in some cities), but it must follow certain regulations.
  • The registered address must be located within the city or province where the company is being registered. It cannot be in a different city or province.
  • The office or plant (if the WFOE is a manufacturing company) should be rented before the incorporation process begins. A rental agreement of at least 12 months, starting from the date of application submission to the Administration for Market Regulation (AMR), is required.
  • The registered address must be able to accommodate the company’s business activities. For example, a manufacturing WFOE will need a larger space than a consulting WFOE.
  • The registered address must be approved by the local government and relevant authorities. It is advisable to consult with a legal professional or a business consultant to ensure that the chosen registered address meets all relevant requirements and to assist with the registration process.
  • It is possible to change the registered address of a WFOE after it has been registered, but this process can be time-consuming and may require additional documentation and approvals. It is advisable to choose a suitable registered address that will meet the company’s needs for the long term.

It is important to carefully consider the registered address and ensure that it meets the requirements and will be suitable for the company’s business operations. A legal professional or business consultant can provide additional guidance and assist with the registration process.

WFOE Office Lease.

Below are some practical key considerations for WFOE business addresses and what to keep in mind when signing an office lease:

  • Office Qualified Address. Make sure that the office space you intend to lease is qualified for WFOE registration by checking with the landlord. If the landlord cannot provide such information, contact consultants to help you check with local authorities.
  • Sole Office Space. A sole office space means that the office location is used exclusively for the registered business, and no other company or entity is registered at the same address. Such arrangements ensure compliance with regulations, licensing, and taxation purposes. 
  • Co-Working. While co-working spaces can be a convenient and cost-effective option, it is important to note that many co-working centers do not meet the requirements for WFOE registration. It is essential to check with the co-working center to confirm that they have qualified office spaces that meet the requirements for WFOE registration.
  • Government Incentives. It is also important to take into account any governmental incentives offered by different districts and municipalities, as some industries may have better incentives in certain areas. For example, if your industry has better incentives in a district outside of the city center, you may want to consider registering in that district while maintaining a main office in the preferred area.
  • Special Arrangement. Some districts, cities, and special zones may also offer special office space for business registration purposes and special space for registration of certain licenses, such as for the medical industry, which can greatly reduce overall expenses on office rental and help you comply with registration requirements.
  • Later Changes. It is also important to note that if you decide to change your address later, the process can be time-consuming and subject to approval by government departments, so choosing the right address should be given serious consideration.

Chinese Business Name

When it comes to the operations of a wholly foreign-owned enterprise in China, the selection of the business name is of great importance. The name of the WFOE must follow a certain structure to be accepted and approved by the authorities.

When selecting a name for a WFOE, a company should abide by the legal requirements concerning the format, being especially careful to avoid forbidden words and symbols. Also, the characteristics of the Chinese name, such as its meaning, pronunciation, and how similar it may sound to the English name of the company, should be taken into account.

Business name structure

  1. City or province where the company will be registered. For example: “Shanghai”
  2. The company’s name should reflect the company’s branding and identity. For example: “Sapience Pro”
  3. The industry and the type of business activity that the company will engage in. This should be specific and accurately reflect the types of services or products that the company will offer. For example: ” Consulting”
  4. The structure of the company, such as “Company Limited” or “Limited Liability Company,”

[City] + [Company Name] + [Industry] + [Company Limited]

[Company Name] + [City] + [Industry] + [Company Limited]

[Company Name] + [Industry] + [City] + [Company Limited]

When registering a WFOE in China, it is important to note that the official company name must be in Chinese. While it is possible to choose an English name as an unofficial company name, the Chinese name will be required for use on official stamps and seals (known as “chops”).

It is generally recommended to submit 6–10 Chinese name options for the company, as the first choice may not always be approved. A higher number of Chinese characters in the company name may increase the chances of approval.

Registered Capital

When forming a WFOE in China, the registered capital is the amount of money that must be provided upfront. This is to prove that the organization has enough money to support itself during the beginning period until it becomes profitable. The funds are used to pay for setting up the company, like getting the necessary equipment, procuring an office space, and hiring personnel. There is no definite regulation on the minimum registered capital for a WFOE. It is essential to understand that the registered capital isn’t necessarily the actual amount of money the company has to invest. The registered capital is simply the minimum amount of money that must be contributed to the startup.

It is noteworthy that the registered capital does not necessarily need to be paid in full before its use, and there is no requirement to infuse money if it is not necessary for the daily running of the business. Instead, the capital contribution can be made anytime before the expiration of the company’s term, generally 30 or 50 years. Furthermore, the contribution is usually exempt from taxes and can be made in the form of cash (foreign currency or overseas RMB), technology, machinery, or other assets.

In practice:

  • The standard practice is to have an adequate amount for the registered capital of the WFOE, enough to cover the operational expenses for the first 2 years of operations, without taking any possible profits into account.
  • Having adequate registered capital is seen as a plus point by customers, associates, local governments, and local financial institutions, including commercial banks, as it might convey that the firm is financially secure and has the resources to meet its financial commitments. On the other hand, minimal registered capital may show financial instability and could be interpreted as a sign of an unreliable business partner, adversely affecting the company’s reputation with customers and other companies. 
  • If the registered capital is too low, it can impede the overseas transfer of additional funds in case the expected income goals are not met, because increasing the registered capital is a bureaucratic process that takes time. In some cases, it can also influence the issuance of working visas for foreign employers.
  • If the registered capital is too high, it can put the company at risk for future operations and cause it to assume certain legal liabilities. If the firm were ever to face a lawsuit in China, the shareholders of WFOE would be responsible for the firm’s obligations and liabilities up to the registered capital, which could cause certain financial setbacks for the company.
  • It’s important to strike a balance when determining the registered capital.  At Sapience Pro, we understand the importance of finding the right balance when it comes to registered capital to avoid any excessive financial risks, liabilities, and setbacks. We can provide guidance and support for registering and setting up your WFOE in China.

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Business Scope

The operational jurisdiction of a Wholly Foreign-Owned Enterprise (WFOE) in China is of utmost importance as it determines the sort of ventures the company can partake in. It is of utmost importance to precisely specify the business scope of your WFOE in the articles of association (or corporate bylaws) and make sure that it does not conflict with any laws or regulations.

In China, every organization has to have an approved business scope by the government. This business scope is typically broken down into two sections: the primary business activities and the supplementary business activities. The primary business activities are the key activities of the company, while the secondary or ancillary activities are supportive or additional. By carefully considering the business scope of your WFOE, you can ensure that your company can operate legally and effectively in China.

The business scope is a “one-sentence description” that appears on the company’s license; it should encompass all present and future WFOE operations and be as broad as feasible.

It is critical to solely conduct operations within a company’s allowed business scope in China. Extending the proclaimed business scope may result in fines or possibly the termination of the company license. To avoid such problems, it is important to update the company license before engaging in illegal operations. Because modifying the business scope can be a complicated procedure, we recommend extensively reviewing anticipated actions before applying to establish a WFOE. While having a wide range of operations within the scope of the firm may appear to be more convenient at first, this method may lead to complications with the Chinese tax office in the future.

Some things to consider when defining the business scope of your WFOE in China include:

1. Nature of the business:

Think about the products or services that you plan to offer and how they fit within the business scope of your industry.

2. The laws and regulations:

Make sure that your business activities are not prohibited or restricted by any laws or regulations in China.

3. Your resources and capabilities:

Consider the resources and capabilities of your company and how they align with your business goals.

4. Future business operations:

Include all potential future business operations in your business scope, as any subsequent changes to the company scope need additional approvals and applications, etc.

Articles of Association - AOA

When establishing a Wholly Foreign-Owned Enterprise (WFOE) in China, the articles of association (also known as the articles of incorporation or the corporate bylaws) are an essential document.

The articles of association are a legal document that outlines the laws and regulations that must be followed when establishing a WFOE in China.

They provide information such as the company’s name, registered capital, business scope, and the shareholders’ and directors’ rights and obligations. Before the WFOE can be registered and legally constituted in China, the articles of organization must be submitted to and authorized by the Chinese government.

Some key things to consider when drafting the articles of association include:

  • The business’s purpose and scope: Identify the WFOE’s purpose and business scope, including the sorts of commercial operations it will engage in in the future, as the scope is the one-sentence description.
  • Shareholder rights and obligations: Specify the shareholders’ rights and duties, including their voting rights and the processes for transferring shares.
  • Board of directors: Determine the board of directors’ size and structure, as well as its responsibilities and obligations.
  • Decision-making and meetings: Establish meeting and decision-making processes, including quorum requirements and voting rules.
  • Amendments: Describe how to amend the articles of organization in the future.

The Organizational Chart: WFOE Organizational Structure.

In the overall WFOE organizational structure, the chairman is the highest-ranking executive in the firm, responsible for strategic decisions and representing the company to external stakeholders. 

The board of directors is in charge of supervising the overall operation of the firm and making decisions on behalf of the shareholders.

The general manager oversees the company’s day-to-day operations and reports to the board of directors.

Department managers are in charge of various departments within the organization and report to the general manager.

Employees are accountable for carrying out the tasks and obligations delegated to them by their superiors.

WFOE structure

It is usually necessary to appoint at least three figures in a WFOE in China: a legal representative, a supervisor, and a financial officer.

Administration of Market Regulations - AMR

Administration for Market Regulations (AMR), is a government organization in charge of regulating and monitoring the market economy as well as protecting consumers’ and enterprises’ lawful rights and interests. It is a vital agency to consider when establishing a business in China since it is in charge of giving licenses, permits, and approvals for various commercial operations.

The AMR is in charge of enforcing several laws and regulations concerning market competition, consumer protection, intellectual property, and quality standards. It also regulates corporate activity, including investigations and enforcement actions against corporations that engage in illegal or unfair acts.

The AMR is a central-level agency under the State Council of China, and It has branches at the provincial, city, and county levels to ensure that market regulation efforts are coordinated and effective across the country.

The AMR works closely with other government agencies and departments, such as the National Development and Reform Commission and the Ministry of Commerce, to ensure the smooth functioning of the market economy.

The Negative List.

The “negative list” is a list of industries or sectors that are off-limits or restricted for foreign investment in China. It is an important consideration for foreign companies seeking to set up a Wholly Foreign-Owned Enterprise (WFOE) in China, as it determines which business activities can be included within the business scope of the WFOE.

The negative list is published and updated by the Chinese government on an annual basis, and it applies to all foreign investors, including WFOEs. It consists of two parts: a general list and a special administrative measure list. The general list applies to all sectors and industries, while the special administrative measure list applies to specific sectors or regions.

Business activities that are not on the negative list are considered “permitted” or “restricted” for foreign investment, depending on the level of foreign ownership allowed. Business activities that are on the negative list are generally “prohibited” for foreign investment.

Foreign investors should carefully review the negative list when setting up a WFOE in China to ensure that their business activities are not prohibited or restricted.

Foreign Investment Law

Foreign investment, as defined by the FIL, is any direct or indirect investment activity conducted within China by foreign investors (including foreign individuals, enterprises, or other organizations), including but not limited to the formation of FIEs, the acquisition of equity interests or assets in Chinese companies, and investment in greenfield construction projects.

  • The FIL aims to create a more stable, transparent, and predictable legal framework for foreign investment in China.
  • It establishes a “negative list” approach, which means that foreign investment is generally allowed in all sectors except those specifically prohibited or restricted.
  • It provides for national treatment of foreign investors, meaning that they should be treated no less favorably than domestic investors in similar circumstances.
  • It strengthens intellectual property rights protection and introduces a new system for handling complaints and disputes involving foreign investors.
  • The FIL applies to all foreign investment activities in China, including the establishment of foreign-invested enterprises (FIEs), mergers and acquisitions, and the expansion of existing FIEs.

The main government authorities for foreign investment review include MOFCOM, NDRC, and the State Administration for Market Regulation (SAMR).

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Our team specializes in registering and managing these types of businesses in China. Let us support your operations and make the process as seamless as possible

Part 3. Post-registration

WFOE Business License

A WFOE (Wholly Foreign-Owned Enterprise) business license is a document issued by the Chinese government that allows a foreign company to legally operate in China as a WFOE. This type of business license is required for all WFOEs in China and must be obtained before the company can start doing business in the country.

The WFOE business license is issued by the local government where the company is registered and is valid.

After receiving approval for the company name from the Administration for Market Regulation (AMR), you can apply for a business license at the AMR.

A business license is a comprehensive document that combines the following applications into one document, called a 5-in-1 business license, for simplicity and ease of conducting business:

  1. Original business license
  2. Organization code certificate
  3. Tax registration certificate
  4. Social Security registration certificate
  5. Statistics registration certificate

Once you submit all the business license documents to the Administration for Market Regulation (AMR), it is their responsibility to distribute the necessary documents to the relevant departments. 

E-Business License

An e-business license is an electronic version of the traditional business license, and it serves the same purpose as the physical version. In other words, an e-business license is an official document issued by the Chinese government that grants a company the right to engage in business activities in China. Obtaining an e-business license can be more convenient and efficient than the traditional process, as it can be done online and does not require physical copies of documents to be submitted. However, it is important to note that an e-business license is only valid in combination with a physical “Five-in-One” business license. 

Note: The E-Business License is authorized by the legal representative of WFOE and requires a Chinese mobile number and self-identification to obtain the e-license. 

Post Licensing

There are a few post-registration procedures that should be completed after setting up a WFOE in China.

  1. Bank account opening. A WFOE is required to open a local bank account in China. This can be done only after the business license has been issued. A WFOE in China must have at least two bank accounts: one for RMB transactions (day-to-day operations), called an operational account, and one for capital injection, called a capital account. The capital injection can be made in currencies such as UDS, EUR, and offshore RMB. Other accounts could be established in different currencies, depending on your business needs.
  2. Tax registration. The WFOE must register for tax purposes with the local tax bureau within 30 days of starting operations. In practice, however, the timeframe for registration could be longer.
  3. Employment registration. If the WFOE will have any local employees, it is necessary to register with the local labor bureau and social insurance bureau.
  4. Import/export registration. Changes in the China Foreign Trade Law took effect on January 1, 2023. China Cancels Registration Requirements for Foreign Trade Operators.
  5. Special licenses and permits. Depending on the nature of the business, the WFOE may need to obtain special licenses and permits such as Food & Beverage, Alcohol, Medical Device, Manufacturing,  safety, and health permits from the local work safety administration.

Chops, Seals & Signature

When doing business in China, it is critical to understand cultural differences as well as legal requirements. One feature that sets China apart from other countries is the use of chops, seals, and signatures for legally binding documents. If you are a foreign corporation looking to establish a WFOE in China, you should become acquainted with the numerous legal methods used to authenticate paperwork.

There are several types of chops, each with a specific purpose, that are widely used in China for different business activities.

The official chop, also known as the company chop, is the most important of the three. It is used to represent the company in legal and official documents and must be registered with the relevant authorities. The design of the official chop is standardized, including the company’s name and address. The English name is optional on the chop. Depending on the location, sometimes the chop can also have a chop filling number.

Legal Representative Chop: As the name suggests, this chop is the name-chop of the company’s legal representative and is linked to the specific individual. The legal representative’s name is typically found on the rectangular-shaped stamp, which is mainly used for banking purposes to represent the will of the legal representative.

Financial chop: This chop is used in banking operations, primarily for issuing checks and verifying statutory documents. The financial chop ensures that financial transactions are properly authorized and recorded.

Contract Chop: While this chop is not compulsory, it is often used to sign contracts with employees and form binding agreements with clients and suppliers. The contract chop is used to delegate authority to managers who need to handle these matters without giving them access to the company chop.

Invoice (Fapiao) Chop: This is a mandatory chop for stamping invoices and tax receipts. Despite the ongoing digitalization of fapiaos, the fapiao chop remains an important tool for companies doing business in China.

Signatures are used to verify the authenticity of documents and transactions, and they must be written in blue or black ink. It is highly recommended that foreign companies seek the assistance of a professional consulting firm to ensure that their chops are properly registered and used.

Practical Advice:

An English name on a company’s chop is a common practice, especially for foreign companies, for branding purposes. It is crucial to remember that registration of English names with authorities is not required. 

However, if you prefer to have your English name on the official chop, make sure it matches your bank account details. Commercial banks and customs, however, may, under certain conditions, examine the English name on chops. It is best to have both Chinese and English versions to ensure these entities have access to both.

Annual Statutory Audit

Annual Statutory Audit

The annual statutory audit is a crucial part of ensuring compliance with Chinese financial and accounting standards and maintaining transparency in the financial dealings of a company. Statutory refers to the legal requirement or obligation that the annual audit be conducted following the laws and regulations in China, including financial accounting standards and tax laws. The annual statutory audit is mandatory for some entities, such as listed companies or subsidiaries, but optional for others.

What is an annual statutory audit?

An annual statutory audit is a comprehensive review of a company’s financial statements performed by a Chinese-registered Certified Public Accountant (CPA). The purpose of this audit is to ensure that the financial statements accurately reflect the financial position, operating results, and cash flow of the company in all material aspects. The audit report, which includes the auditor’s opinion, must conform to the Chinese financial accounting standards, commonly referred to as PRC GAAP. Local CPAs will follow PRC GAAP standards and can also prepare separate reports for the company’s management and provide advice upon request.

Why is it important?

An annual statutory audit is mandatory for listed companies, specific industries, and subsidiaries. In some instances, different tax authorities might require an annual audit.  However, even if a company is not listed, there may be instances when it needs to present an annual statutory audit report to local authorities, foreign customs departments for visa purposes, potential customers, financial institutions, or overseas headquarters. If a company is applying for a bank loan, it must provide a 3-year audit. The report provides credibility to the financial information presented by the company and proves its financial stability.

In addition, an annual statutory audit is also a valuable tool for management to assess the efficiency and compliance of the company’s operations. A management letter from the auditor, which is included in the audit report, highlights any inefficiencies or non-compliances identified during the audit. This information can be used by management to make informed decisions and implement necessary changes to improve the company’s operations.

Our Take:

As a professional consulting company, we strongly recommend that all WFOEs in China conduct an annual statutory audit, even if it is not mandatory. The annual statutory audit provides a valuable opportunity to assess the financial stability of the company, ensure compliance with Chinese financial accounting standards, and identify areas for improvement in the company’s operations. We have a team of experienced professionals who can assist you in navigating the annual statutory audit process, ensuring that it is completed efficiently and effectively.

Corporate Tax Filing

Annual Corporate Income Tax Filing for WFOE in China

As a foreign-invested enterprise (WFOE) operating in China, it is important to comply with all relevant tax regulations, including the filing of annual corporate income tax (CIT) returns. WFOEs are subject to the same tax obligations as domestic companies in China, including corporate income tax (CIT). Here we aim to provide a comprehensive overview of the CIT filing process for WFOEs in China, as well as important considerations to keep in mind throughout the year.

WFOEs are required to file CIT returns annually, based on their financial results for the preceding year. This includes both the calculation of taxable income and the payment of CIT to the local tax authorities.

Taxable Income

  • The taxable income of a WFOE in China is the difference between its total revenue and tax-deductible expenses.
  • Tax-deductible expenses include costs related to the WFOE’s operations, such as salaries, rent, utilities, and depreciation.
  • Any other expenses that do not directly relate to the WFOE’s operations are not tax-deductible.

Tax Rates

  • The standard CIT rate in China is 25%.
  • Some WFOEs may be eligible for tax incentives, such as reduced tax rates, tax exemptions, or tax holidays.
  • WFOEs should consult with a professional tax advisor to determine if they are eligible for any tax incentives.

WFOEs must submit comprehensive and accurate financial information, such as audited financial statements, tax bills, and other supporting papers.

WFOEs must keep accurate and full records of their financial transactions throughout the year. On request, these documents should be made available to local tax authorities. Incorrect or incomplete files may result in penalties, fines, and higher tax assessments.

Factors to consider:

Tax treaties: WFOEs should familiarize themselves with any tax treaties that may apply to their operations, as these can impact the calculation of taxable income and applicable tax rates.

Transfer pricing: For WFOE, transfer pricing refers to the value of transactions between the WFOE and its related parties, such as parent companies, affiliates, or subsidiary companies. This is important because if the prices are not deemed to be at arm’s length, the Chinese tax authorities can adjust the pricing and potentially increase the tax liability for the WFOE.

Double taxation: WFOEs should also be aware of potential double taxation, which may occur when income is taxed in multiple jurisdictions. To mitigate this risk, WFOEs may consider applying for a double taxation agreement with the relevant tax authorities.

Tax Incentives: Incentives such as reductions in tax rates, tax holidays, tax credits, and deductions can be offered by governments to encourage investment in specific industries or regions. The incentives are usually short-term but can help WFOEs significantly lower their tax obligations.

WFOE Annual Report

Annual Unified/United  Report 

Foreign-invested enterprises (WFOEs) operating in China must submit an annual report. The purpose of this report is to ensure the accuracy and completeness of the company’s business, finance, tax, and foreign exchange information, as well as to verify compliance with regulations. The annual report process is carried out by multiple governmental authorities, including the Administration for Market Regulation (SAMR), the Ministry of Commerce (MOC), and the State Administration of Foreign Exchange (SAFE). 

The annual report is facilitated by the National Enterprise Credit Information Publicity System, a unified platform for WFOE to file its annual report. The report includes financial and non-financial information, such as basic company information, shareholder information, financial information (revenue, cost, profit, tax payments, etc.), and information on assets and liabilities.

Here is a step-by-step guide to the WFOE annual report process:

Register and log into the annual inspection online system (https://www.gsxt.gov.cn/)

Complete the online report with the following information:

  1. Basic company information (including website and online store information)
  2. Shareholder capital contribution information (股东出资信息)
  3. Information on foreign investment (对外投资信息)
  4. Asset status information (资产状况信息)
  5. Information on any shareholding changes (股权变更信息)
  6. External guarantee information (对外担保信息)
  7. Business, finance, tax, and foreign exchange information
  8. Financial information (e.g. revenue, costs, profits, tax payments)
  9. Creditors rights and debts (not publicized)
  10. Tax reduction and exemption for imported equipment (not publicized)
  11. Assets and Liabilities
  12. Subsidiary information (if applicable)

After all the information is collected, the accountant needs to submit the report and await review from the authorities. Make sure to prepare hard copies of documents and visit the annual inspection office for final check and approval

The annual report process requires comprehensive and accurate information, and WFOES should seek the assistance of professional tax and accounting services to ensure compliance. In addition, WFOEs should prepare all necessary information and documents well in advance to avoid any potential delays or complications during the inspection process. Overall, the WFOE annual inspection is an important aspect of operating in China. By following the steps outlined above and working with professional tax and accounting services, WFOEs can ensure a smooth and successful annual inspection process.

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