In 2016, China’s government passed a new foreign investment law (the Foreign Invested Enterprises Law) designed to make the PRC a more attractive environment for foreign investors. In connection with this new law, the Chinese government, through the Ministry of Commerce (MOFCOM), also issued new regulations regarding the formation and registration of wholly foreign-owned enterprises (or WFOE’s) in October 2016. A WFOE is a common investment vehicle which foreign parties typically use to incorporate a foreign-owned limited liability company in the PRC. These recent changes to the procedures for establishing and registering a WFOE significantly changed the process for establishing a WFOE to make it simpler and more streamlined. The new process for establishing, registering, and beginning the operations of a WFOE under the new MOFCOM regulations is described in greater detail below.
The New Steps to Form, Registering and Beginning Operations with a WFOE in the PRC under the October 2016 MOC Regulations
The new process for establishing, registering and beginning the operations of a WFOE for a foreign investor consist of five basic requirements. Each requirement is described generally below but, to the extent you have further questions regarding any individual step or the process as a whole, we would encourage you to reach out to our expert Chinese attorneys for any guidance or assistance you may need in understanding or implementing the process of establishing a WFOE under the new regime. This is a process that can seem simple but can contain traps for the unwary that could either prevent a foreign investor from being able to commence operations in the PRC or else significantly delay the investor’s ability to do so, potentially resulting in lost revenue or business opportunities in the PRC.
The Five Steps
- WFOE name approval
The first step under the new regulatory regime is to receive approval of the WFOE’s new name. In order to do so, the foreign investor who is intending to establish the WFOE must submit paperwork to the State Administration of Industry and Commerce (SAIC) to ensure the requested corporate name is indeed available and obtain SAIC approval to utilize that corporate name. This process typically takes 5-10 business days and results in that name being reserved solely for us by that foreign investor.
- Online registration of the WFOE with the Ministry of Commerce
One of the major changes to the regime regulating establishment of WFOE’s is that previously the MOC was required to approve the establishment of each WFOE, whereas now each foreign investor who establishes an WFOE has a much simpler burden that only requires them to register with the MOC. This requires completion of an online form and can be achieved 100% on the Internet, which is perhaps the biggest change from the previous regime regulating the establishment and registration of a WFOE. The previous WFOE name registration process typically used to take 15 business days, but with the new requirement that only requires registration with the MOC, a significant amount of the time necessary for a foreign investor to establish a WFOE has been shortened due to the changes to this particular step.
- Application to form WFOE submitted to the local Administration of Industry and Commerce (AIC)
Once these first two steps have been established, the WFOE is required to the local AIC in order to actually form the WFOE.
- Issuance of business license by AIC
This step is accomplished by submitting a variety of paperwork corresponding to the industry the WFOE is planning to operate in, its owners, as well as other required documentation regarding the proposed business’s operations.
- Start the appropriate business processes
Once the other four steps have been completed, the WFOE must formalize its operations by taking the necessary steps to open bank accounts, open tax and other government accounts, set up daily bookkeeping and reporting to the local government, execute written employment agreements with employees, and open employee tax/social benefit accounts for each of its Chinese employees.
Conclusion: With These New Processes, the Chinese Government Has Taken Steps to Encourage Foreign Investment
The Chinese economy is currently dominated by large state-owned enterprises in many industries. In an effort to encourage further foreign investment, the PRC government has made major changes to streamline and simplify the process for a foreign investor to establish a WFOE to do business in China. While these changes have indeed made the process simpler and less time-consuming, reducing the time required under the pre-October 2016 process to establish a WFOE by 2-3 months as compared with the new process. Nevertheless, this is still a process that can be difficult to understand and follow for those new to the Chinese market. Therefore, if you have questions concerning the process or simply need assistance in establishing and registered a WFOE, feel free to contact one of our experienced Chinese attorneys today.