Michelle Ho, TMF Shanghai, looks at the options available to inbound investors looking to operate in mainland China.
For foreign companies looking to expand their businesses into the highly attractive but complex Chinese market, it is essential to select the optimum corporate structure(s). There are a number of options, each with its own advantages. In setting up such structures, the compliance requirements and restrictions which are applicable must be well understood, and adhered to, in order to ensure your business is able to prosper.
Below we look at two of the most common vehicles, FICE and WFOE, and explain how proper evaluation of these options can set you on the path to success in the mainland Chinese market.
Wholly Foreign Owned Enterprises (WFOE)
A WFOE is a Limited Liability Company wholly owned by the foreign investor. Unlike most other investment vehicles, the involvement of a mainland Chinese investor is not required. A WFOE utilises registered capital and may generate income, pay tax in China, and enjoy full control of Human Resources. Profits may be repatriated to the investor's home country providing certain criteria are met. Any enterprise in China which is 100% owned by a foreign company, or companies, can be registered as a WFOE.
WFOEs offer inbound investors the potential to undertake a much broader range of activities, e.g. manufacturing, in China – although there are some key restrictions.
There are broadly four types of WFOE – Manufacturing, Trading (FICE), Services and Consultancy – and these enterprises are only permitted to conduct business within their approved business scope.
Foreign investors are required to inject a minimum amount of funds from the direct parent investor company into the WFOE. This is called the Registered Capital (RC), and must be stipulated under the Articles of Association, and also be indicated within the Business License and other corporate certificates.
There is a minimum RC figure required – in theory this is RMB 30,000, but in practice a greater amount is required in order to receive the necessary approval. This figure depends on factors, such as business scope, location and financial planning, but generally USD 140,000 is an accepted amount, subject to local government requirements.
WOFEs need only have one director (there are no restrictions on nationality or residence), and one shareholder (who may be any nationality but may not be resident in China). There is no requirement to have a Company Secretary and tax exemptions may be claimed if the enterprise is located in a Free Trade Zone or Export Processing Zone.
Foreign-Invested Commercial Enterprises (FICE)
FICEs are one of the types of WFOE chosen by investors when they wish to engage in trading, wholesale, or retail in mainland China. This type of enterprise was introduced in April 2004 by the Ministry of Commerce of the PRC, allowing a FICE to distribute both imported products and manufactured products locally. For businesses looking to target the local import, export and retail sectors, the FICE offers a simplified and effective trading structure and is a common vehicle for distributing products anywhere in mainland China.
Once an application receives the necessary approval, a FICE may operate a broad range of agency, wholesale, retail, franchise and related service activities. This covers most products, although there remain some restrictions on certain goods, e.g. print materials and some commodities. FICEs are categorised as either Wholesale or Retail operations, and are subject to further compliance requirements.
For any incorporated WFOE which wishes to gain approval to operate as a trading business, a new/ stand-alone FICE may be set up; alternatively an application may be made to expand its business scope from the maintenance of a representative office to the commencement of trading operations.
The RC requirements vary according to whether the FICE has trading rights, wholesale rights or retail distribution rights. In general a FICE may be set up more quickly and affordably than a WOFE.
How TMF Group can help
Speak to us for free consultation on which option is best for your business. If you would like to learn more about the variations between FICEs and WOFE structures, please contact Michelle Ho. She and her colleagues in our offices in China can explain the process and potential costs of establishing either a FICE or WOFE. Tel 0086-21-6135 6070 or email michelle.ho@tmf-group.com