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The lure of huge market potential coupled with the promise of tax holidays,
tax incentives and financial rebates has helped China attract foreign direct
investment (FDI) and to become the biggest recipient and utilize of FRI
in the world. A significant factor contributing to that is the reduced minimum
registered capital requirement for the formation of WFOEs.
Previous Requirements
 Consulting/IT/Design/Manufacturing
WFOE USD 140,000
Retailing
WFOE Not Permitted
Trading
WFOE- USD 200,000 permitted to be incorporated only in the Waigaoqiao Free
Trade Zone (WGQ FTZ) and
not eligible for Import/Export (I/X) License.
In the past, only large multinationals and medium-sized corporations were
able to afford the above-mentioned registered capital requirements and were
willing to take greater risks when venturing into China. However, their
subsequent success then created a ripple effect on their supplier/service
providers outside of China, including the smaller companies. This then initiated
the next phase necessary to sustain the influx of FDI into China.
Following the amendment of the Company Law and the Administrative regulations
for the Registration of companies, it is now possible to incorporate WFOEs
with the following paid-up registered capital:
Consulting/IT/Design
WFOE RMB 100,000
Retailing
WFOE RMB 300,000
Trading
WFOE inside WGQ FTZ- RMB 500,000 for small-scale tax payer and RMB 1 million
if 17% Value-Added tax (VAT) status is required. Import/Export License can
now be issued.
Domestic Trading (i.e. buying and selling of goods within China) can now
be added into the business scope of a trading WFOE. To differentiate this
newly approved structure, the term Foreign-Invested Commercial Enterprise
(FICE) has been introduced. Minimum paid up registered capital is RMB 500,000
for small-scale taxpayers and RMB 5 million if 17% VAT status is required
but certain districts may allow application with RMB 3 million paid-up registered
capital.
Manufacturing
WFOE RMB 500,000 and not subjected to additional paid-up registered capital
in order to apply for 17% VAT status.
As an added incentive, the regulations for the administration of the registration
of companies paid-up registered capital were amended to allow a longer period
of capitalization as follows:
First
3 months- 20% of paid-up capital subject to a minimum of RMB 30,000.
Within
24 months - remaining 80% of paid-up capital.
As part of this significant reduction in the paid-up registered capital
requirement for WFOEs, there are now several far-reaching implications
for changes in regulations:
1. The Representative Office (RO) has become more or less a redundant
structure due to its inherent weakness, which includes the following: not
a legal entity licensed to conduct business in China; cannot receive revenue
in China nor issue official tax invoices; cannot hire local staff directly
unless through government agencies; chief representative full salary will
be taxed according to the number of days spent in China, monthly tax submission
will still have to be filed even if the chief representative does not enter
China during that calendar year; all expenses incurred by the RO (including
staff salary and rental) will be taxed at 9.82%.
2. A local company formed with two local PRC nationals acting as nominee
shareholders is not only severely risky but also unnecessary. A foreign
beneficial owner bears a tremendous amount of risk in such arrangements
because the so-called contracts signed between the foreigner and the locals
is not recognized by the courts in China and there is no nominee law to
protect the investment of the foreigner. Dividend are taxed at 20% as opposed
to zero for a WFOE. A local company or an RO is popularly used for carrying
out market studies, as a liaison office for customers and suppliers or die
to either a lack funds to risk USD 140,000-200,000 before a final investment
decision is made. Nonetheless, under the new law, a foreign investor can
set up a WFOE with a minimum paid-up registered capital of RMB 100,000-500,000
even for this sole purpose and yet avoid the inherent weaknesses outlined
above. The only exceptions are industries closed to foreigners where only
an RO structure is permitted e.g. banks, securities companies and law firms.
3. Trading WFOEs and FICEs with Import/Export License: need not be
restricted in setting up within WGQ FTZ, establishment in all other districts
in Shanghai is now possible; can conduct both domestic and international
trading, including importing and exporting. Need not pay 1-5% on sales value
to use the license of a local Import/Export company for importing/exporting.
Need not take receipts of payments for goods sold through a third-party
local I/X company; customers of trading WFOEs deal directly with the company
and will not know the supplier or Original Equipment Manufacturer (OEM)
through import-export document trail or through bank account details.
4. Retail WFOEs can be owned 100% by foreigners and need not form a joint
venture nor require two PRC nationals to hold shares under a local company.
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