"How to Start a Trading Company in China" - Article by Hawksford

Dear Members and Friends,

The China-Italy Chamber of Commerce is glad to share an article that its Member Hawksford has published on How to Start a Trading Company in China.

In China, a trading WFOE allows non-PRC companies to work in trading, wholesale, retail or franchises. Here, Hawksford provide an overview of setting up a trading company in China including basic incorporation requirements, procedure and timeline.

What is a wholly foreign-owned enterprise (WFOE)?

A wholly foreign-owned enterprise (WFOE) is a limited liability company that is wholly owned by foreign investors, either individuals or corporate entities.

As the involvement of a mainland Chinese investor is not a must, establishing a WFOE enables foreign parties to independently operate a business in China. In general, a WFOE is necessary to carry out any kind of business activity on the Chinese territory.

There are three common types of WFOEs, which are:

1. Trading WFOEs
2. Consulting (services) WFOEs
3. Manufacturing WFOEs

In China, a trading WFOE allows non-PRC companies to work in trading, wholesale, retail or franchises.

To set up a trading WFOE, the standard process usually takes around three to five months.

This process is generally divided into two parts: pre-registration and post-registration. Pre-registration requires the submission of several business-related documents while post-registration are administrative activities done after the business license is obtained, typically carve chops, tax registration, opening bank accounts and customs registration.

Pre-Registration

The goal of pre-registration is to get a business license. The investor of a WFOE can be an individual or a company.

If the WFOE investor is a company, the company should initially get notarisation of investors’ identification certificates issued by a local public notary and verified by the closest Chinese embassy in the investor’s home country. The notarisation can take weeks or months depending on the efficiency of the local office and is valid for six months upon issuance, so it is a good idea to begin the process as soon as possible.

To incorporate a legal entity in China, WFOEs also need to nominate one director or a board of directors, one legal representative, one general manager, and one supervisor. The investor who is an individual can be a director and the legal representative of the WFOE, but cannot be the supervisor.

Articles of Association

Articles of Association (AoA), are required for a company to conduct business in China, and they have to be approved by the Chinese authorities.

AoA provide an overall understanding of the company to national regulators and explains the legal relationship between the shareholders.

Mandatory items for the AoA include the company’s name and address, the business scope of the company, the registered capital and the names of shareholders.

Business Scope

Business scope is one of the most important elements in the WFOE application because the WFOE can only conduct business within its approved business scope, which ultimately appears on the business license.

Of course, it is possible to change the business scope on a later stage and this requires an update of the business license subject to approval of the competent offices.

Registered Capital

Although there is no minimum registered capital requirement, the capital should be enough to cover business expenses until the company is able to generate positive cash flow.

In practice, proposed registered capital contributions will be closely examined by the Ministry of Commerce (MOFCOM) to assess whether the amount is enough to keep the WFOE running for at least one year after establishment. Otherwise, it will be difficult to get the application approved.

The amount considered ‘sufficient’ capital differs depending on various factors, such as the industry and the region of incorporation.

It is important to note that the whole registered capital amount does not need to be injected immediately at the beginning. The registered capital must be injected by the overseas investor from outside China regardless of whether it is paid in a lump sum or instalments.

The registered capital cannot be freely wired out of China once it is inside. The only case it can be returned to investor is when the company closes and there is a surplus of capital which has not been used.

Company Name

Companies must register their names at the State Administration for Market Regulation (SAMR) and the official company name of the WFOE should be in Chinese.

Normally, SAMR requires five to ten proposed names to be provided and they have the final say about whether a name is permitted or not.

The name of the company must follow the order below (in Chinese):

• Name of the company + Industry + Geographical name + Ltd.
• Geographical name + Name of the company + Industry + Ltd.
• Name of the company + Geographical name + Industry + Ltd.

Office Location

It might sound ridiculous to find an office before submitting forms to set up a WFOE in China, but doing so is necessary to get a valid address in advance.

An office lease contract and housing ownership certificate with official stamps are required by the Chinese authorities.

Any typical office building will work, but be aware that the registered address of the WFOE cannot:

1. Be in a residential or residence and commerce combined building
2. Be a virtual address
3. Be different from the operation address

Since office relocation can be a real headache, it’s widespread throughout China that using a virtual address or using a different address from the operation one, which are actually not allowed in theory.

Business License

Once all the above criteria have been met, SAMR will issue the business license of the company, which means that the company now legally exists.

With the business license, the company can carve seals (sometimes referred to as a chop or stamp), register at the tax bureau, open bank accounts at a preferable bank, hire staff and sign contracts.

Post-Registration

In terms of establishment, the company has now set up a legal entity in China. However, to begin operations, there are still a few more steps to take.

Post-registration formalities include registering at the tax bureau, opening a bank account and obtaining custom certificate.

Carving Chops

A company may have a wide range of chops in China. Depending on the nature of the business, some companies may need multiple chops while, for some businesses, having two chops are enough, namely legal representative chop and finance chop.

Different types of chops in China are shown below, each being for different purposes and documentations:

• Company Chop
• Financial Chop
• Invoice/Fapiao Chop
• Contract Chop
• Legal Representative Chop

Opening Bank Accounts

Opening bank accounts enables companies to make or receive payments, so starting the process as soon as the chops are ready can help companies run their businesses.

A WFOE will need two bank accounts, with one being a Foreign Capital Account and the other being an RMB Basic Account.

As stated in the name, a Foreign Capital Account is only used for the injection of registered capital and an RMB basic account is to withdraw and collect RMB. Typically, companies use an RMB Basic Account for daily or monthly payments, such as purchase of goods, pay rent and employees salary.

Import and Export Registration (Only for Trading)

As a trading WFOE, it is also necessary to apply for the ‘Import & Export Right’ if a company wants to engage in foreign trade after obtaining a business license.

Tax Registration

VAT taxpayers are individuals and enterprises that are engaged in taxable activities and services within the territory of the People's Republic of China.

There are two types of VAT taxpayers:

• Small-Scale Taxpayers
• General Taxpayers

If a company wants to issue a fapiao which is usually asked by the local Chinese clients upon payments, the company can register either as a Small-Scale Taxpayer or as a General Taxpayer. The only difference is that General Taxpayers are allowed to deduct VAT at a certain rate while Small-Scale Taxpayers cannot.

Small-Scale Taxpayers can be exempted from VAT if their sales revenue is lower than a certain amount. However, once a Small-Scale Taxpayer whose sales revenue exceeds RMB 5 million during a business operation period of less than 12 months or four quarters, or it has a sound accounting system, the entity has to register as a General Taxpayer.

For more details related to VAT, please refer to China VAT Reform in 2019.

How Can Hawksford Help?

Hawksford is an established provider of company registration and outsourced corporate services in China. With more than 100 multilingual professionals based in Hong Kong, Shanghai, Beijing, Suzhou, Guangzhou and Shenzhen, we are able to offer the very best local knowledge to our international clients.

The full article is available here.

Kind Regards,

CICC Team