Over the last few years, there have been a number of changes to the wholly foreign owned enterprise (WFOE) establishment process in China. Primarily, the latest update to the Catalogue for the Guidance of Foreign Investment Industries, which lifts regulatory thresholds for certain industries such as the energy and finance sectors, affects the record filing process with MOFCOM. In addition, obtaining a business license has become easier with the introduction of the new five-in-one license: previously, five different certificates had to be acquired from different authorities. These new considerations for investors looking to set up a WFOE in China are advantageous, widening the scope of investment and speeding up the application process.
The establishment process of a WFOE can vary somewhat depending on the chosen structure, namely a service WFOE, manufacturing WFOE, or trading WFOE, and its associated business scope. For instance, a trading WFOE also needs to register with authorities such as Customs after obtaining a business license, while a manufacturing WFOE must complete an environmental impact evaluation report. Other country-specific issues, such as bank accounts with different currencies and official company seals, may also affect investors’ business operations in China. Therefore, it is advisable for potential investors to enlist professional assistance when navigating the establishment procedures in order to ensure the venture’s success and to guard against any future issues. The following steps offer a rough guideline of the establishment process.
Step 1: Name approval
One of the first steps for foreign companies is to decide on an appropriate name for the Chinese market. The key pieces of legislation governing this are the Regulations on Registration and Management of Enterprises Name and the Implementation Measures on Registration and Administration of Enterprise Names, which detail how a Chinese company name should be structured. It includes:
1.Administrative region name of incorporation;
3.Industry or business;
Additional guidelines restrict the content of names, forbidding the use of content that either misleads consumers or hinders fair competition, or damages or contradicts national unity, policies, social ethics, culture, or religion. Special characters, such as Arabic numerals, foreign symbols or alphabets, are not permitted, and certain words such as ‘China’, ‘Chinese’, ‘National’, ‘State’ or ‘International’ can only be used under limited circumstances. An English translation or transliteration of the company name is not required to be registered with the AIC, but may have equal legal validity as a Chinese company name providing there is enough evidence to associate the English name of a company with its Chinese name, such as a bilingual company chop bearing the two names.
Companies should conduct market research on the naming strategy of industry competitors, thereby understanding the types of names that are typically successful. The name should be consistent with preexisting brand strategy, clearly reflecting the brand’s key attributes and appealing to its target demographic. Careful attention should be paid to the nuances of the Chinese language, with subtleties in character meaning or pronunciation potentially leading to a negative connotation and interpretation.
The availability of names can be checked by searching trademark and business registration databases, such as the Trademark Office of the Administration for Industry and Commerce (AIC) (http://www.saic.gov.cn/sbjEnglish) or the China Trademark Office (http://www.chinatrademarkoffice.com), as reference. Applications can then be made to the local AIC, which will reserve the name and process the approval.
Step 2: Office/facility space lease
As the company name contains the city of registration, careful consideration should be made before engaging an estate agent or landlord. In some cases, the city name can affect operations, as certain city names carry prestige and credibility that may impact sales, business development, and governmental relations. Relocation, especially cross-district, is a taxing and expensive process, as it may implicate registration with a new AIC and tax authorities, in addition to the MOFCOM filing record procedures, business license, bank information, and other company certificates that must be revised.
If the intended facility space is not owned by the investor, it needs to be leased for legal operation in China. The lease should be made before submitting the application for incorporation, and a rental period of at least 12 months starting from the application submission date to the AIC is also required. Leases should be made with correct formatting, and registered with the local real estate authority. A land rights certificate and personal documentation should also be obtained from the landlord to ensure the legitimacy of the property. It is recommended that a clause be included in the contract stating that, in case of WFOE application rejection, the lease can be voided. A copy of a Certificate of Premise Ownership (CPO) issued by the real estate authority needs to be submitted to the local AIC, with the owner making the application.