How to Cancel and Liquidate a China WFOE?

How to start the cancellation and liquidation of China WFOE according to the Chinese law and leave nothing illegal behind? Are there some regulations the foreign investors need to be aware of? Business China lists five regulations on cancellation and liquidations of WOFE in China.

 (1) Liquidation Term of China WFOE

The starting date of enterprise liquidation is the date when the operation period of the China WFOE (Wholly Foreign Owned Enterprise) expires, or the date when the enterprise approval authority approves enterprise dissolution, or the date when the people’s court judges or the arbitration agency rules to terminate the enterprise contract. The enterprise liquidation term is from the starting date of the liquidation to the date of submitting the liquidation report to the enterprise approval authority, and shall not exceed 180 days. If the liquidation term is required to be prolonged due to special circumstances, the liquidation committee shall apply to the original enterprise approval authority within 15 days before the liquidation term expires. And the prolonged period shall not exceed 90 days.
 

 (2) Liquidation Committee of China WFOE

Within 15 days after the starting date of the liquidation, the Board of Directors of the enterprise shall organize and establish the liquidation committee consisting of at least 3 persons, whose members are generally selected among the directors and served by the accountants and lawyers registered in China employed. The main duties of the liquidation committee are:

1. Sort out the enterprise’s properties, compile the balance sheet and list of property and make liquidation scheme;

2. Announce to the unknown creditors and notify the known creditors in writing;

3. Deal with the uncompleted obligations of the enterprise related to the liquidation;

4.Propose the basis for property evaluation and computation;

5. settle the owned taxes;

6. Take back the funds payable but not paid by the shareholders;

7.Sort out the claims and debts;

8.Deal with the residual properties after the enterprise pays off the debts.

9.Respond to and file a lawsuit on behalf of the enterprise.
 

 (3) Liquidation Notice and Announcement of China WFOE

The enterprise shall notify relevant units such as enterprise approval authority, enterprise competent department, the Customs, foreign exchange management authority, industrial and commercial registration authority, tax authority and enterprise opening bank in writing within 7 days after the starting date of the liquidation, if the enterprise has the state-owned property, it also must notify the state-owned property management department. In addition, within 10 days after the date when the liquidation committee is established, the known creditors shall be notified in writing to declare the claims, and within 60 days after the date of establishment, announcement shall be published at least twice on one national newspaper and one local provincial or municipal newspaper. The first announcement shall be published within 10 days after the date when the liquidation committee is established.
 

 (4) Distribution of Liquidated Properties 

The enterprise and Chinese and foreign investors must legally distribute the liquidated properties and shall not arbitrarily dispose of them. According to relevant laws, the liquidated properties shall be paid off according to the following order after being used for paying the liquidation expenses (including the expenses required for managing, selling off and distributing the liquidated properties as well as the expenses required for announcement, lawsuit, arbitration and others) with priority.

1.Staff’s salary and labor insurance premium;

2.National taxes.

3.Other debts.

The residual properties after the enterprise pays the liquidation expenses and pays off all its debts shall be distributed as per the actual contribution rate of the investor; however, except for those otherwise stipulated by the laws and regulations as well as contract and articles of association. In addition, it shall be noted that as for the claims (such as mortgage and pledge) with property guarantee, the creditor has the right of priority of compensation for such guarantee. Moreover, during the liquidation, if it is found that the enterprise properties are insufficient to settle the debts, the liquidation committee shall apply to the court for announcement of enterprise bankruptcy, and those legally announced to be bankrupt shall be handled as per the laws and regulations on bankruptcy liquidation.
 

(5) Liquidation Termination of China WFOE

After completing the above property settlement, the liquidation committee will make liquidation report and submit to the enterprise approval authority for filing after being confirmed by the Board of Directors. Within 10 days after the date when the liquidation report is submitted to the enterprise approval authority, the liquidation committee must respectively handle cancellation registration to the tax authority and the Customs and within 10 days after such formalities are completed, the liquidation committee must handle enterprise cancellation registration to the industrial and commercial registration authority, with business license handed in and canceled. Meanwhile, it must announce termination of the enterprise on national newspaper and one local provincial or municipal newspaper.

10 Knowledges of Chinese Tax Invoices (Fapiao) Foreigners Need to Know

How to issue the Chinese tax invoices for Chinese clients after the China WFOE set up? How many types of tax invoices currently exist? How to apply for Chinese tax invoices? How to invoice correctly? How to keep the invoice in a proper way? How to obtain an official tax invoice in China?

China official tax invoices (Fapiao), as an important means for tax authorities to “manage and supervise tax by methods of China official invoices”, are the receipt and payment vouchers during business operations, as well as the original vouchers for business activities, and are the main vouchers for the production and business accounting for enterprises and individuals.



China official invoice (Fapiao) is not only proof of the buyer’s expenditure, but also the seller’s income. It is commonly recognized as the legal proof of rights protection for the buyer, which can be explained why China official invoices are super important as long as you target the Chinese consumers. Business China organizes the following 12 basic pieces of knowledge of China invoices for foreign investors

First, Chinese Invoices' pages, usages, and basic content

Chinese invoice has three pages at least. Invoice page is the accounting voucher for the purchaser to calculate the purchase cost and VAT input tax, the deduction page is provided to the buyer to submit to the tax authorities for certification and retention on the voucher, bookkeeping page is used as the sales party accounting sales revenue and VAT sales tax accounting vouchers.

Receipts or vouchers are issued at the time of receipt and payment of non-business activities. They are proofs of the receipt of current payments, but they cannot function as the Chinese invoices (Fapiao) to be tax vouchers or legal vouchers.

The basic contents of the invoice include: invoice name, invoice code and number, serial number and usage, customer name, bank and account number, product name or business item, unit of measure, quantity, unit price, amount inscribed, biller, and billing date, billing unit (individual) name (chapter) and etc.

Second, how many types of tax invoices currently exist?

There are mainly four categories of China invoices, i.e. VAT ordinary invoices, VAT special invoices, electronic VAT invoices and ordinary invoices (Hint: For other provinces and municipalities invoice types, please consult local 12366).

Third, how to apply for Chinese tax invoices?

According to Article 15 of the "Procedures for Invoice Management of the People's Republic of China", enterprises and individuals who need to apply for invoices shall bring business license and the ID or passport original of the applicant, plus with invoice special chapter stamps to the tax authorities. If all the documents are complete and meet the requirements, the blank invoice will be issued on the spot.

If you apply for a special VAT invoice, you must register in advance as a VAT general taxpayer (excluding small-scale taxpayers from the lodging industry to issue invoices), and apply a maximum billing limit approval, a tax control card, or a gold tax disk.

Fourth, how to invoice correctly in China?

When issuing invoices, the enterprises and individuals shall, in accordance with the prescribed time limit and sequence and stamped special seals.

Enterprises and individuals shall, when selling commodities or providing labor services and services, issue invoices to the payer on their own initiative. They may not refuse to issue invoices for any reason or excuses, and may not issue receipts and other vouchers for any reason or pretext. The issuing of invoices that do not comply with the regulations shall not be used as evidence of financial reimbursement, and any enterprises or individual has the right to refuse to accept them.

If the purchaser requests the seller to issue a special value-added tax invoice, it must provide the purchaser's name (not a natural person), taxpayer identification number, address telephone number, account opening bank, and account number, but it does not need to provide the business license and other relevant documents or other certification materials.

When an individual consumer asks for an ordinary VAT invoice, he or she is not required to provide the taxpayer with the taxpayer identification number, address telephone number, account opening bank and account number information, and does not need to provide relevant certificates or other certification materials.

No entity or individual may have the following acts of virtual invoicing: (1) Invoices for others and for themselves are inconsistent with the actual business operations; (2) Others are required to issue invoices inconsistent with their actual operations; (c) Introduce other people to issue invoices that are inconsistent with actual business operations.

Fifth, how to keep the invoice in proper way?

Enterprises and individuals that purchase tax invoices from the tax authorities should deposit and keep the invoices in accordance with the regulations of the tax authorities and must establish a strict custody system to properly preserve the invoices and must not arbitrarily destroy the invoices.

The invoice stubs and invoices that have been issued must be kept for five years. The expiration of the preservation period should be reported to the tax authorities for inspection and destruction.

If the loss or theft of an invoice occurs during the process of keeping the invoice, the enterprise shall report to the tax authority in writing on the date of the loss, and declare it as invalid. At the same time, the tax authorities shall accept the case in accordance with law.

Sixth, how to obtain an official tax invoice in China?

Enterprises and individuals that sell goods, provide services, and engage in other business activities shall receive payment from the buying parties. The payee shall issue an invoice to the payer.

When consumers purchase goods or receive services, they should take the initiative to request invoices while making payments. For invoices that do not meet the requirements, they have the right to reject or report to the tax authorities. When asking the seller to issue an invoice, he must not ask for a change in the name and amount or fill in the invoice for himself.

No entity or individual may introduce other people to transfer invoices. The false invoices cannot be issued, transferred, stored, carried, mailed, or transported.

Seventh, is it possible to apply for an ordinary invoice printed with the enterprise's name

If you have gone through tax registration according to law and have fixed office address, plus with a sound financial and invoice management system, you can apply to the tax authority to print the ordinary invoice printed with your company’s name.

Eighth, special provisions for special VAT invoices

VAT special invoices shall be subject to the administrative licensing management of the maximum billing limit, that is, the total amount of the invoices issued for a single special invoice shall not exceed the upper limit, and the maximum billing limit shall be applied by the general taxpayer according to law.

Ninth, how to check the authenticity of invoices?

The tax authorities provide the following channels to verify the authenticity of the invoices: (1) You can call the province's 12366 tax service consultation telephone; (2) You can log on to the National VAT Invoice Inspection Platform (https://inv-veri.chinatax.gov.cn) to conduct electronic invoice information consistency query; (3) You can carry the original invoice to the tax authorities for authenticity identification.

Tenth, penalties for breach of invoice management regulations

If an enterprise or individual violates the relevant provisions of the "Procedures for the Administration of Invoices of the People's Republic of China", it shall be punished according to legal procedures; if it constitutes a crime, it shall be transferred to the judicial organ for criminal responsibility.

Understanding China's accounting and tax system for setting up a business in China

Every country in the world has its unique accounting and taxing system, and China is no exception.


If you are planning on starting a business in China as a foreigner (you are a resident of another country) it will be prudent of you to acquaint yourself with the local Chinese accounting system and how the country's taxing system works because although the Chinese government gives many rebates and facilities to foreign investors, compliance with local laws is very important for a long-term business plan.

Having said that, if you partner with a Chinese business set up consulting agency like ours, you can rest assured that you will be provided with all the needed local help to make your business transition from your country to China as seamless as possible.

The PRC Company Law makes it compulsory for all Foreign Invested Enterprises (FIEs) in China to comply with statutory yearly audit and other processes.

Without complying with the statutory audits and without settling the relevant tax liabilities you won't be able to repatriate your profits or dividends back to your home country.

While preparing your annual financial reports as a foreign business in China, you will have to follow the Chinese Generally Accepted Accounting Principles (GAAP), which are also known as Chinese Accounting Standards (CAS). The Chinese Accounting Standards framework is based on

1. Accounting Standards for Business Enterprises (ASBEs)
2. Accounting Standards for Small Business Enterprises (ASSBEs)

The good thing is, these standards are pretty much in alignment with International Financial Reporting Standards (IFRS).

Since ASBEs are more structured around the conventions of the Generally Accepted Accounting Principles of the United States (US GAAP) and IFRS, most of the foreign invested enterprises adopt ASBEs for their annual financial reports.

Is it difficult to adapt to the Chinese accounting system as a foreign business in China?

Absolutely not. As mentioned above, most of the accounting and taxing standards are in alignment with the international accounting standards. Yes, there are some differences and disparities, but they have more to do with the way accounting systems are maintained locally in China. In fact, the Chinese accounting system is a bit more flexible compared to the rest of the world.

For example, usually, while maintaining the chart of accounts, companies all over the world must follow pretty much the same set up, but in China, they have the freedom to set up the sub-accounts according to their specific business needs.

In the accounting system, you will obviously have to use RMB rather than your own currency, but your accounting software will very easily do the needed conversion for your in-house accounts maintenance.

Talking about the accounting software: you may have to customize your accounting software according to local needs. Your accounting software should allow the Chinese entry into the system. There are some accounting features in the Chinese accounting system that the Western accounting software applications don't normally accommodate, and you may have to take extra steps to facilitate those features.

Another peculiarity (not from China side but from the rest of the world's side) is that the monthly closing needs to be done before you generate the financial reports and once you have generated the monthly closing, no further adjustments can be made to the previous month.

Hence, we believe that it makes more sense to go for a local, Chinese accounting software that is already designed to accommodate the Chinese accounting requirements, rather than struggling with a general, international accounting software. Our business consulting agency can help you choose the right accounting software for you in China.

The accounting documents are also maintained a bit differently and our business consulting agency can help you understand this too.

What about taxing in China for foreign businesses?

Do you know that before 2008 China did not tax foreign investors and we didn't even have the concept of income tax? Consequently, and surprisingly, many old school businessmen, and people who have spent their early years in China and have now grown up, believe that taxing isn't a problem in China, whereas, it is, provided, you are not well prepared. The Chinese government is serious about collecting its dues.

So yes, once you decide to set up your business in China, you need a tax expertwho understands the intricacies of the local tax laws and who can help youstreamline your books accordingly.



China is also very serious about providing a socially and economically safe environment for its citizens. All active Chinese employees of any company must be enrolled under the government's social security system. A tax of approximately 25% is imposed on the employee's salary and unlike in most Western countries, the income tax has to be paid by the employer and not the employee.

The country is quickly establishing a tax system that is in line with the international taxing standards. We are seeing some very progressive corporate tax reforms to attract businesses from all over the world.

Nonetheless, it will be of tremendous help if you partner with a local business consulting agency to hold your hand while you establish your accounting and taxing procedures to fully comply with the Chinese laws and run a profitable business in the People's Republic of China.

7 Mistakes to Avoid when Setting Up a Wholly Foreign Owned Enterprise in China

The corporate landscape in China has gone through remarkable changes over the last few decades. The country's entry into the World Trade Organization (WTO) in 2001 resulted in the liberalization of different industries. This opened up new opportunities for both local and foreign companies to earn high profits by investing in China.



If you are also looking for the next big business opportunity, you should consider setting a wholly foreign owned enterprise (WFOE) in China. This can be a viable option for you as you will be free to chart the course of your business while remaining within the confines of local business laws. Also, setting up a WFOE in China will allow you to convert your profits from RMB to local currency and transfer it to a parent company located outside of China.

Having helped many foreign companies in setting up a WFOE in China, we have seen many entrepreneurs make common mistakes that resulted in difficulties later on.

Here, we have listed seven common mistakes that you should avoid when establishing a WFOE in China. 

Mistake 1. Declaring Less Registered Capital than Required

One of the common mistakes in setting up a WFOE in China relates to the declared registered capital for the wholly foreign owned enterprise (WFOE) in China.

While there is no minimum amount for declaring the registered capital, you still need to make sure that the amount declared is reasonable for meeting financial needs. That's why it's important to properly calculate the actual capital needed beforehand.

If you declare an amount that is less than what is actually required, it could lead to cash flow issues. In case you later realize that additional capital is required, you will have to go through a costly and lengthy bureaucratic process to change the registered capital.

Mistake 2. Defining a Scope that is Too Wide or Too Narrow

When setting up a WFOE in China, you need to define the scope of your business. The scope must be mentioned in the company's Article of Association. Unlike in western countries, a business scope has more impact and so must be carefully defined when creating a WFOE company.

A lot of foreign entrepreneurs don't properly align the business scope with actual activities. This creates difficulties when applying for tax incentives and breaks. As an example, suppose that you manufacture a product that results in savings of energy and reduction of pollution. Under the Foreign Investment Guidelines, you are eligible for tax breaks. But if you only write "Manufacturing of equipment", you will not be eligible for the incentive.

Apart from losing out on tax incentives, you can also be fined and your license withdrawn if the local Chinese tax bureau discover that you are not operating according to the defined scope of the WFOE. That's why it's important that you are as accurate as possible when defining the scope of the WFOE company in China.

Mistake 3. Being Careless with 'Chops'

Most western businesses use the signature to validate and legalize documents. However, companies in China use 'chops' or stamps to verify documents.

The chop is a tool to legalize documents. Different types of chops grant different authorities. The four important chops include the following:

• The contract chop
• The legal representation chop
• The company chop
• The executive director chop

Being careless with chops can create difficulties. It increases the chance of internal company fraud that could result in millions in losses for you. For instance, suppose that a person has access to the company chop. The person can use the chop to change the stock structure and take ownership of your company. As a result, you will end up losing control of your established WFOE in China. To avoid this, it's essential that only those people who have authority to make decisions regarding the WFOE have access to the chops or seals.

There have been incidents of foreign companies getting shut out of their operations in China due to losing the chops. A Singapore based company named Gigamedia had bought a WFOE in China named T2CN. The management of Gigamedia was dissatisfied with the CEO of T2CN, Wang Ji, and decided to push him out with a corporate restructuring plan. The CEO retaliated by walking off with all the seals due to which GigaMedia lost control of the company. This is story should serve as a caution for anyone who wants to establish a WFOE company in China.

Mistake 4. Establishing the Wrong Type of WFOE

A lot of times traders select the wrong type of business when setting a WFOE in China. This creates difficulties is registering the company.

Generally, WFOEs can be categorized into trading, manufacturing, technology, consulting, manufacturing, and food and beverage. There are differences in procedures and costs in setting up these businesses. Some are easier to set up than others.

Setting up a service WFOE company in China, for instance, is relatively easier and requires less capital than establishing a manufacturing company. So, make sure that you select the right type of business during the application process to avoid bureaucratic snags later on. 

Mistake 5. Selecting the Wrong Representative 

You should select your company's representative carefully when establishing a WFOE company in China. There are different positions that need to be filled such as:

• Legal representative
• Executive Director
• General Manager
• Board of Supervisor

A legal representative, executive director, and general manager can be the same person. But the supervisor needs to be a different person. Not paying attention to the importance and scope of these roles can create problems later on.

Mistake 6. Selecting the Wrong Location for the WFOE

Often, entrepreneurs don't focus on the location when establishing a wholly foreign owned enterprise (WFOE) in China. However, this is one of the most crucial decisions that could affect the success of your company.

You should select the right location during the application process since changing the location later on — even if within the district — requires a time-intensive and costly procedure. You may have to deregister and then register to another tax bureau. This is something that you could avoid through a careful consideration regarding the location of the company.  

Mistake 7. Underestimating the Difficulties in Establishing WFOE in China

A lot of entrepreneurs underestimate the problems involved in setting up a WFOE in China. The reality is that creating a WFOE in the country involves a lot of complexity. While the Chinese Ministry of Commerce makes laws for setting up a business, each province interprets the laws differently. In addition, the interpretation of laws is different in tier 1, tier 2, tier 3, and tier 4 cities. So, you not only need to know the national rules for setting up a business, but also understand the local interpretation of those rules.

By hiring a professional, you don't have to worry about complex bureaucratic tasks to set up a WFOE in China.A professional consultant will know about the peculiarities of business law in the area where you have decided to start a business. Also, the professional will know key people in the area who can facilitate in establishing and running a business in China. This will save you a lot of trouble when it comes to creating a WFOE company in China.