3 Crucial Tips For Running A WFOE In China Successfully

 
Today more foreign companies than ever are opening a WFOE and it makes sense.

A WFOE gives overseas businesses an enviable opportunity to compete in China with a totally level playing playing field, operating as a fully legal, recognised company able to trade, manufacture, export, hire local and foreign staff, and, most importantly, only answer to themselves.

So, given that this company type is so important, let's explore our 3 key tips for running a WFOE in China successfully...


Why Open A WFOE In China?


No longer are you forced to create a joint venture and rely upon a local partner's good graces like in the bad old days of the 90's and early 2000's, or worse, exist in the grey zone of not operating completely legally in China.

We've written loads of blog posts about WFOEs, so take a look at them for even more information.
But opening a WFOE isn't always simple.

You may know that rarely in China are things completely simple and straightforward, although the best things in life seldom are. So in this post let us share with you 3 crucial tips for running a WFOE successfully, and manage it in a compliant manner moving forward when doing business in China...
Before we share the tips, let's just go over some of the key benefits that your Wholly Foreign Owned Enterprise will offer your business once it's up-and-running:

• You have total control of the business, not local partners
• You're legally able to hire both foreign and local staff
• Since you're not working with outsiders it's much easier to protect trademarks in China and other IP
• All profits belong to you and can be transferred abroad
• Your business license is valid for 15-30 years
• You may invoice in RMB and take payments locally
• These days the minimum registered capital threshold for a new WFOE is often zero (although this depends on city, region, and industry)
• Importing and exporting products is easier and cheaper, as you do not need to rely on a middleman

So this business allows you to trade or manufacture in China with very little impediment.

 

3 Crucial Tips For Running A WFOE In China Successfully

1. Decide if you're opening it with your overseas company, or starting a business in Hong Kong to do so

 

There is no problem with opening the WFOE using your overseas company, let's say in the USA for instance, as an investment vehicle for it.

However it may be that by opening aHong Kong company first and using it to open a WFOE you get additional benefits. 

You'll potentially benefit from:

• A streamlined and cheaper way to repatriate profits, as international financial transfers are easier, not restricted by amounts, and cheaper in Hong Kong.
• Hong Kong companies can open a WFOE in China faster and with less demands than other foreign companies.
• The ability to deal with Mainland clients through the HK company and be protected by the territory's stricter rule of law.

There are other benefits too, but basically the key one for foreign companies who're looking at opening a China WFOE is that using an HK company to open it may give them an easier time in the short and longer terms.

TCBC can register your Hong Kong company for just RMB 6,800 (excl. government fees), and in around 2 weeks at most.

2. Be prepared to make the WFOE application

How do you prepare for something where the information is vague, mostly in Chinese, and involves processes and documentation which are often unfamiliar to you?

Good question - it's tough.
That's why we created a WFOE setup checklist to guide you through the process and documents required by all foreign companies planning on opening their company here in plain English.

Perhaps the biggest issue facing you is one of language, since you'll need to deal with a lot of Mandarin Chinese, and also create a Chinese name for your new company (the English name is not legally recognised to the same degree, such as when on contracts).

For this reason it's going to be a lot easier and less time-consuming to get help from local experts who know the procedure inside and will get the company started ASAP. The sooner you're running, the sooner you're making money in China!

3. Take steps to make sure you're running your WFOE in a compliant manner

Just setting up the WFOE in China isn't really enough these days.

China takes accounting very seriously, and is constantly vigilant for fraud. Whilst you may not be intending to do something wrong, just one small accounting error could have your business under the spotlight for all of the wrong reasons.

This is why making a plan to tackle China accounting, taxes, and annual auditing is important straight from go.

You could hire anaccountant, or outsource, but either way you're going to find that accounting, which is filed monthly, is very different to that of your home country.

Here at TCBC we suggest outsourcing, and since our accounting services are undertaken by expert local accountants who speak English and understand your company's needs, as well as starting from only RMB 1,200 per month for WFOEs, you'll find that this is far cheaper then hiring an accountant who could cost between RMB 5,000 to 8,000 per month in salary alone (and that's conservative).

Have your say on opening a China WFOE...

Are you currently thinking about starting a business in China? Whereabouts, and in which industry?

Would you consider starting a business in Hong Kong first before entering the Mainland?

Which elements of opening a China WFOE are attractive, or worrying to you?

Let us know any questions or concerns you may have by leaving them in the comments section at the bottom, and we'll answer them ASAP!

China Accounting: Employee Taxes & Social Insurance You Should Pay

Having opened your Chinese company you're now able to operate locally and start doing business here.

That's great news, but foreign businesses also need to be aware of which China taxes they should be paying, and their obligations towards paying China social insurance for their employees.

While it is getting easier to start a business here, the intricacies of China accounting laws and procedures can still be hard to grasp for overseas companies. After all, they're often quite different.
The purpose of this blog post is to introduce China taxes and China social insurance in simple terms so you're able to get ahead of what you're obligated to do, and run a compliant business in China.

China Accounting Laws Affect Your Company

 

Foreign companies running a WFOE, JV, or rep office naturally come under scrutiny in China in the same way that local companies are policed.

Just because China is a large developing country doesn't mean that they don't have rules and regulations in place to protect their economy and workforce.

So an essential part of China company setup for foreign businesses is to make sure that your accounting system is watertight as soon as you start operating.

When everything is in Chinese it's easier to make mistakes, especially when you're relying on others to handle your accounting (unless of course you are an expert in accounting here, in which case that's useful for you).

While an accounting snafu is unlikely to be serious, left unchecked your company could run into problems down the line when being audited.

A simple way to avoid these kinds of issues is to have a grasp of which tax and social insurance obligations companies have in China.

Individual Income Tax (IIT)

 
All employees must pay IIT each month, and this is one of the China taxes which falls on their shoulders alone. However, as employer you (or your accountant) must make the deduction and then submit it to the local tax authority.

The tax rate for employees is set at 7 different levels from 3% up to 45%.
 

Image source: Wikipedia


The tax exemption is pegged at 3,500 RMB for local employees and 4,800 RMB non residents (foreign staff).
Therefore, to calculate their IIT we follow this equation:

monthly tax = (taxable income - tax exemption) * tax rate - quick deduction

Please note that IIT rates are subject to change, so please check with your accountant to make sure that there are no new changes before performing calculations.

China Social Insurance / Security

 
Employers and employees must contribute to China social insurance for both local and foreign staff, but only Chinese staff must have the housing fund contribution.
China's social insurance includes the following:

• Medical insurance
• Pension
• Unemployment insurance
• Industrial injury cover
• Maternity leave cover

The contributions are broken down in the following table:

 
Table courtesy of SJGrand

Please note that social insurance rates are subject to change and that the information above is only to be used as a guide. Your accountant will be able to confirm current rates in your city or region.

While employer and employee may be obligated to pay different percentages of contributions, the employer will make the entire payment to the local authorities, deducting the employee's contribution from their gross salary.

Employers with coordinate payments with the local Ministry of Human Resources and Social Security of China (MHRSS).

It is also important to note that foreign staff must usually be registered for social insurance, but upon the end of their contract they will be entitled to 'cash out' their unused social insurance contributions.

China Housing Fund

 
The China housing fund is an equal contribution between employer and employee, and is a way for staff to save money towards the purchase of their own home.

This interesting benefit builds up a 'pot' of money where the balance may only be withdrawn for a deposit, purchase, construction, or renovation of a house; and also to pay off a mortgage, or for certain emergency situations such as urgent costly medical treatment.

When employees retire, if they have not yet used the fund they may withdraw it and use it for any reason that they wish.

After setting up your company you will need HR to go to the local Housing Fund Bureau and register your business's details with them in order to be authorised to automatically pay the contributions.

Conclusion

Foreign companies, no matter whether you have a WFOE in China or a joint venture, must be aware of their financial obligations regarding China taxes and social insurance, as well as that of their employees too.

Typically you will need to calculate the monthly tax and insurance payments based on your city's regulations, and whether your staff member is a foreigner or a local. You will also need to make the entire payment (both yours and your employee's contributions) to the local authorities.

Are you currently running a business in China, or planning on doing so soon? Where, and which industry?

What are the accounting issues that you have faced when doing business here? How did you overcome them?

Do you have your own in-house accountant in China, or do you outsource?

Please share any experiences, questions, or comments that you may have for our community by leaving them as a comment at the bottom of the page, and we will answer them as fast as possible.

How to set up a WFOE in China: Don't overlook these 8 items!

 

How to set up a WFOE in China so things go according to plan

 

A WFOE is one of the more popular investment vehicles for foreigners looking to take on China due to the fact that it is solely owned and managed by the foreign party. Owners take all the profits, they are in full control of their business and enjoy a much higher level of security.

WFOEs in China are mainly categorized into 3 different types that foreign investors can choose from:

1. Consulting WFOE
2. Manufacturing WFOE
3. Trading WFOE (FICE)

Foreign companies and individuals have the legal right to apply for a WFOE on their own, but doing so would require an experienced China hand as their are many tiny details that, if overlooked, may hamper the WFOEs ability to successfully conduct  business on the mainland.

It is highly recommended that foreign business owners make use of aregistration agent with local knowledge to help smooth over theentire registration process. This being said, it is equally important for companies to invest enough time in planning and knowing what they should be looking out for, all the better to help lay a solid foundation for their WFOE to function the way it is supposed to.

With that I wish to share with you 8 critical items every would-be WFOE applicant should absolutely not overlook!

8 critical items for WFOE set up in China

I recently came across a whitepaper published by Mike Bellamy, owner of PassageMaker, a US-owned, China-based company that offers clients manufacturing in China access to remotely managed virtual workshops & offices with dedicated staff. His whitepaper on manufacturing options in China for foreign brands goes into some detail about WFOE set up, and points out 8 critical items that those looking to set up a WFOE must not overlook:

1. Scope of Business

If your WFOE is set up to export shoes and later you wish to do electronics, you may have significant roadblocks to deal with.

Companies that engage in operations that fall outside of their business scope run the risk of being fined by local authorities or even having their licenses revoked. It is important for foreign business owners to clearly define the entire scope of their business operations in the AoA so as to avoid having too narrow a scope and transgressing the law. 

2. Trading WFOE vs Manufacturing WFOE

Are you clear on the difference and sure which one is best for your needs? Did you know VAT rebates are slightly different for the two WFOEs?

3. Need Additional Licensing (domestic sales? Import/export? VAT?)

It is of vital importance for foreign companies to clarify whether or not they are required to obtain additional licenses. This will depend on which type of WFOE you intend on registering and the industry/business you go into.

Here are some examples of licenses for different businesses:

Factory

Environmental approvals

Restaurant

Food and beverage service license 

Food trading

Food circulation permit

Import and export business

Customs register license

Record of foreign trade operators

Electronic port card

Self inspection record 

Wine trading

Food circulation permit

4. Are there location or industry incentives offered by China government to the WFOE? What’s the catch?

Taking advantage of government incentives offered to certain industries or in certain locations can certainly help a business get a jump start. For instance, in Shenzhen's Qianhai New District companies in finance, IT, logistics, ecommerce and science and technology are offered special tax breaks such as corporate income tax rate of just 15% (lower than Hong Kong’s 16.5%).
Furthermore, it is also important that you consider a place's infrastructure, its proximity to shipping ports and customer focus according to your industry.

5. China Tax Planning

In China the WFOE has to report monthly and annually, so not only do you need good tax planning, but you also need to budget for the man power to process all the paperwork.
Having your own company in China means that you will have to abide by the accounting standards set in the New GAAP (Generally Accepted Accounting Principles). This means reporting both monthly and annually, which means that some planning has to be done to ensure that enough resources are available to handle this.

6. Global Tax Planning 

The tax rates in HK, PRC and your home country are not the same. Structure your business in China to avoid unnecessary tax exposure while not breaking any laws in any of the jurisdictions where you operate.

Companies typically will use a middle company (such as in HK or in BVI) to hold a China company. This way the company can try to take advantage of any one of these country's low income tax rate, and to keep profit there. At the end of the day it is also based on the operations of the company, its goals and the markets they want to get into.

7. Plan for Profit Repatriation 

Making money in China is nice. Spending it back home is even nicer. Make sure you have a plan for how to get your earnings overseas into your pocket back home.

8. Budget

Get a firm handle on the true costs to set up and run your business.  It is not
uncommon for the investor to sink money into a WFOE only to lose that investment
because they were underfinanced and never got the point where the doors were
open and revenue could be realized.

One of the biggest mistakes that any WFOE owner can make is investing an amount that is not big enough to keep their business running for long enough to reap the rewards of their labor.

There is no minimum amount of registered capital required when setting up a WFOE, but we advise our clients to invest:

Trading WFOE: 300,000RMB
Manufacturing WFOE: 500,000RMB
Consulting WFOE: 100,000RMB

Conclusion

It's without a doubt that a WFOE in China is very useful indeed for foreign companies aiming to open a business here, but the process can be complex.
A WFOE offers unmatched autonomy in China, allowing you to avoid any grey areas, operate legally, make money, and build a strong and stable business foundation in China.

These 8 items are a good start on getting your WFOE off the ground, especially bearing in mind things like the scope of business and tax planning which could often be confusing.

Now you have the knowledge, will you be opening a WFOE? What benefits do you feel it will offer your company? Are you already running a WFOE? Let us know how it's going in the comments below please.

How To Open A Bank Account In Hong Kong For Your Business [Update]

 
Recently some foreign businesses have been asking us how to open a bank account in Hong Kong bearing in mind that it is harder these days.

Some have been rejected, affecting their business. Some have found it hard to fulfill the banks' requests, many of which are more detailed and exacting than before.

So the questions we'll answer are: Why is this happening, can you still open a business bank account in Hong Kong, and what can you do in order to be successful?

 

Why has it become harder to open a business bank account in Hong Kong?

This is largely to due to anti fraud measures brought in after 2012 which affected HSBC amongst others, and have since caused Hong Kong banks to increase their due dilligence to levels where certain companies have found it hard to open an account. It has got to the point where the local government has got involved in order to calm the situation and make it easier for SMEs to open accounts while still being vigilant for fraud, for fear that Hong Kong's economy and status as a global financial centre is being affected.

Before almost any company representative could open an account with ease, but now the banks are worried that they will be held accountable should someone open a business account with them for nefarious reasons.

While you merely want to open a bank account, an essential part of any Hong Kong company setup, the banks are so worried that some, in particular HSBC, are willing to turn away your business these days.

 

Is it still possible to open a Hong Kong business account?

Firstly, don't worry, it is.
Even if you have been rejected by some banks, it is possible to get approved. You will need to:

• Craft your business story which helps the bank understand that you are not a liability for them
• Collate the documents they will want to see
• Make appointment/s to visit the Hong Kong banks

Typically in order to visit a bank to discuss opening an account for your company you'll need to create scanned copies of all of the documents from your green HK company registration "box."
Including:

•   Director’s ID
•   Address proof(s) - Residential proof such as rental lease or property license under your name
•   Company documents, such as Business Registration, Cert. of Incorporation, M&A as well as Register books.

As part of our Hong Kong company setup service, TCBC's experts will work with you to make sure that you will obtain a bank account successfully, using our experience to prepare your documents for your bank meeting, and make appointments with the banks who we have a good rapport and success rate with. 

 

How to open a bank account in Hong Kong for businesses successfully?

The good news is that you can, despite the current climate, open a Hong Kong business bank account. So aside from the above standard documents they would want to see, what else could help you be successful?

The name of the game is reducing your perceived liability in the banks' eyes. We have found that many banks may also request to see originals of:

1. Director's passport (original）
2. The Annual return 2016(original)
3. Residence address proof
4. Business proof, such as contracts, quotation, invoices, shipping notes, etc

Items 3 and 4 can be quite complex, because how do you as an individual know if you're giving the banks the right information? 

This is to do with crafting your 'story.' If you appear as a company who exists, has good standing, stable cash flow, an audited bank account, and who is actively doing business, then of course the banks will take this as being favourable.

 

Need help?

Unfortunately, getting rejected for your Hong Kong company's business bank account is a very real possibility.

This leaves you unable to do business, and with your Hong Kong investment on ice until such a time as you can open an account.

TCBC can help.
Our Hong Kong business experts will make sure that you have the documents you'll need, that your business story is compelling and will be accepted, and that you are going to visit banks with whom we already have a good relationship and high success rate.

First speak to us about your plans in a free no-strings-attached consultation, and we'll discuss how to go about successfully opening your Hog Kong account.