Difference from the Rep Office and WFOE

1, Legal Status

WFOE is with independent legal personality. So, not only natural person but also company can be its investor. Rep Office is just an office of foreign company in China . There are some differences between them.

2, Employees

WFOE can hire Chinese employees by itself. But Rep Office can not hire China employees directly. Rep Office shall appoint HR companies to do it.

3, Business scope

The business scope of WFOE may be trading, consulting or manufacture. But the business scope of Rep Office is just a liaison between its clients and foreign company. So, Rep Office has not a direct income in China . But it shall pay tax also.

4, Tax

WOFE pays the tax based on income and profit. Rep Office pays tax based on expense. Because China Government think the Rep Office has sent profit to their foreign company indirectly and the offshore profit is duty free in most of countries.

5, Bank account

WFOE can set up a bank account for receiving money from his clients. The bank account of Rep Office just receives money from his foreign company.

6, Expense of business

WFOE runs its business with registered capital from investor and its profit from clients. Rep Office launch business with money received from foreign company.

7, Registered address

The registered address shall be commerce property. And the registered address of Rep Office shall be chosen among buildings appointed by Government.

First step, you shall prepare two documents overseas. One is the certificate of foreign company with notarization and China embassy legalization (View the sample). The other one is bank letter (view the sample) with notarization and China embassy legalization.

The second step, confirm the name and business scope of Rep Office. The name shall be translated based on the name of foreign company directly. Business scope can not over the scope of foreign company. Some industries shall be pre-approved by China Government, for example, finance, trip agency and shipping. And some industries will not be approved, for example, HR agency.

The third step, To rent an office space in shanghai. The office space shall be in the buildings appointed. We can provide office space solutions for you.

The fourth step, we will prepare some legal documents and these documents shall be signed by director or other authorized signer of foreign company.

The fifth step, Registration of commerce, registration of code, registration of tax and other registrations.

The sixth step, To employ an accountant to deal with tax monthly.

NOTE:

The buildings only appointed by Shanghai Municipal Commission of Commerce can provide the 6,7 documents at said list.

If the Chinese hold the thief representative, he must be sent to the representative office by a human agency instead of signing the work contract with him directly. [cancelled]

State Administration for Industry & Commerce of People's Republic of China has issued the new rule about Representative Office at 4th JAN, 2010. To compare with former rules, there are different articles as below,

1, The foreign company whom will set up a new Rep Office in China shall be established over two years;

2, When applying for set up a Rep Office, besides company's certificate of incorporation, the letter issued by bank shall be notarization and embassy legalization also.

3, The period of validity of Rep Office shall be 1 year. Rep office shall renew certificate every year. And the office shall submit the documents to certify the foreign company is in operation still. These documents shall be issued by governmental office and notarization and embassy legalization also.

4, Total amount of representatives shall be less than 4;

5, Our government will check and punish the Rep office if there's difference between registered address and business address.

It had been adjusted since 01-03-2011.

In china, some industries are limited or prohibited and some industries shall be just allowed by JV. For example, Companies of films making, issuing and business are prohibited. Banks, financial leasing companies, finance companies, trust investment companies, currency brokerage companies are limited. The industries limited are allowed and shall be approved by a high-class department. Before setting up the WFOE, please check the < Catalogue for the Guidance of Foreign Investment Industries> (click here to download) at first. This catalogue just targets WFOE and JV. And there are some rules about special industries targeting all companies including locate and foreign. You may contact us and list your industry. We will give some advices to you.

The registered capital of a foreign-funded enterprise refers to the total amount of capital registered with the administrative department for industry and commerce for the purpose of establishing the foreign-funded enterprise, i.e. the total amount of investment that the foreign investor undertakes to contribute.

The amount of registered capital of a foreign-funded enterprise must be in keeping with the enterprise's operation scale, and the ratio between the registered capital and the total amount of investment shall conform to the relevant Chinese provisions.

According to <Company Law>, when the company has one shareholder only, the registered capital shall be CNY 100,000.00 at least.

But in the <the details of Law of the People's Republic of China on Foreign-Capital Enterprises> article 20, the registered capital shall be suit to the marketing capacity of company. It is an ill-defined terms and concepts.

Usually, USD140,000.00 is a number accepted by examination and approval department. Of course, the registered capital below USD140,000.00 may be approved some time. In your < Feasibility research report >, we must to prove the business may be launched with the registered capital below USD140,000.00. It is difficult.

The investor shall pay the 15% of its registered capital at least first and pay others in two years.

The registered capital may be used to be the costs of launching your business, including to paying wage, rental and buying materials etc. But you can not remit it back to personal account of shareholder. The shareholder can share the profit from the company. And if the company was terminated, the shareholder could share the redundancy money of company.

The total amount of investment of a foreign-funded enterprise refers to the total amount of funds required for opening the foreign-funded enterprise, i.e. the sum total of the funds invested in capital construction in accordance with the production scale and the circulating funds for production.

Sometimes, the company need get debt from the foreigner or foreign company including investor self. When they reply the debt, they may send this money to creditor without dividend tax as it a debt not a profit. Of course, this is not a enforce policy.

So, many companies tend to increase the total amount of investment as much as possible.

But the debt must be limited in the balance of registered capital and amount investment. It listed on < The information about improving on the management of auditing of capital and debt issued by SAFE > (2004-05-17).

Article 3 The proportion of registered capital and total amount of investment of Chinese-foreign equity joint ventures shall abide by the following provisions:

1. Where the total amount of investment of the Chinese-foreign equity joint venture is less than 3,000,000 U.S. dollars (including 3,000,000 U.S. dollars), the registered capital shall account for seven tenth of the total amount of investment at least.

2. Where the total amount of investment of the Chinese-foreign equity joint venture is between over 3,000,000 U.S. dollars to 10,000,000 U.S. dollars (including 10,000,000 U.S. dollars), the registered capital shall account for half of the total amount of investment at least. Where the total amount of investment is less than 4,200,000 U.S. dollars, the registered capital shall be not less than 2,100,000 U.S. dollars.

3. Where the total amount of investment of the Chinese-foreign equity joint venture is between over 10,000,000 U.S. dollars to 30,000,000 U.S. dollars (including 30,000,000 U.S. dollars), the registered capital shall account for two fifths of the total amount of investment at least. If the total amount of investment is less than 12,500,000 U.S. dollars, the registered capital shall be not less than 5,000,000 U.S. dollars.

4. Where the total amount of investment of the Chinese-foreign equity joint venture is over 30,000,000 U.S. dollars, the registered capital shall account for one third of the total amount of investment at least. If the total amount of investment is less than 36,000,000 U.S. dollars, the registered capital shall be not less than 12,000,000 U.S. dollars.

AND

Article 6 The proportion of registered capital and total amount of investment of Chinese-foreign contractual joint ventures and foreign invested enterprises shall be executed with reference to these provisions.

Upon approval, a trading enterprise may operate the following wholesaling and retailing business,

<Measures for the Administration on Foreign Investment in Commercial Fields >

1, Wholesaling

Wholesaling of merchandise;
Sale of goods and related subordinated services to retailers, industrial, commercial and institutional users and wholesalers

Commission agency (excluding auctioning);
Sale of the goods of others and related subordinated services pursuant to a contract and for a fee by sales agents, brokers,

Import and export of merchandise;

Other related accessory business.

2, Retailing
Sale of goods for individual or collective consumption and related subordinated services from a fixed location or via television, telephone, mail order, internet or vending machines

The company shall rent a retail shop for retailing business. The retailing without shop, for example internet or TV shopping, will be approved also. But it shall be examined by the Ministry of Commerce of PRC.

1, Chinese government permits foreign companies, enterprises, other economic organization or individuals to establish equity joint ventures together with Chinese companies, enterprises or other economic organizations. Said article is from <Law of PRC on Chinese-Foreign Equity Joint Ventures>. So, we know the Chinese investor or your Chinese partner shall be a company, not an individual.

2, The highest authority of the joint venture shall be its board of directors. It shall decide all major issues concerning the joint venture.

Decisions on the following matters shall be made only after being unanimously agreed upon by the directors present at the board meeting:
(1) Amendment of the articles of association of the joint venture
(2) Termination and dissolution of the joint venture
(3) Increase or reduction of the registered capital of the joint venture
(4) Merger or division of the joint venture

A board meeting requires a quorum of over two-thirds of the directors.

So, who occupies the seats over two-third of the directors will control the company in fact.

Q: will the WFOE be approved with only one investor?
A: Yes. but the natural person investor who had set up a WFOE with only one investor will not be approved to register the second company with one investor in China.

Q: Is the board of director necessary?
A: In WFOE (not JV), we can appoint a executive director instead of board of directors. And every comapny shall have a supervisor. The duty of supervisor is monitoring the acts of the directors or the senior officers in the course of performance of their duties. So, the director or senior officers can not hold the supervisor.