The Cost Of Setting Up A Wfoe In China
Our firm, Dezan Shira & Associates, has been involved with legal establishment and tax work in China for nearly 20 years
. In fact, the practices 20th birthday is November next year, so well be having some parties to celebrate. Over the years, we have constantly been engaged in setting up wholly foreign owned enterprises (WFOEs) for our clients and, during that time, weve seen considerable changes to how WFOEs can operate, and what they can do. Weve also written about WFOEs many times in dealing with the updates, and continue to do so our popular guide Setting Up Wholly Foreign Owned Enterprises in China is now in its third edition.
Yet one question that always crops up is How much does it cost to set up a WFOE? often without any reference to what the WFOE scope of business is expected to be. Its an impossible question to answer at such a basic level, as WFOEs can be extremely diverse. Lets look at a few examples:
Trading Buying and Selling in China (Import and Export)
Business Consulting
Service Industry
Retail
Franchising
Manufacturing
Different criteria apply to each of these. Just the trading aspect can provide problems if importing and selling, is an additional license required to sell the product? Some service industries are restricted and many require additional approvals. Retailing can have its own problems (we dealt with a very high-end New York-based jewelry house once, they had millions of dollars of diamonds stuck in China customs) while manufacturing can involve all sorts of issues, from the importing of machinery to environmental protection. Consequently, when it comes to nearly all business in China, the required scope of business drives the type of operating license needed.
This became apparent in an email I received just today, in which I was asked: I am looking to register a WFOE in China and I wanted to ask you, whats a fair price for WOFE assistance in China right now? How much is too much, and when is a price so low that I should be suspicious? I have spoken with many lawyers and services and everyone is quoting something different.
I completely sympathize, and its a far from uncommon problem. I replied as follows:
Thank you for your email. Its a difficult question to answer, as there are several different components to setting up a WFOE and you need to ensure all of these are included. Cheaper prices may not include the full scope of services that is required. Let me break these down as follows:
Legal Establishment. This is basically a legal administrative process, and although relatively straight forward, can be time consuming. This typically takes a minimum 3-4 months (partly depending upon response times from the investors side over supporting corporate documentation) and involves about nine different government departments.
Legal Due Diligence. Not so much of this is usually needed, however it is necessary to check certain documents are in order, such as landlord agreements and so on. If the business activity is restricted, it will be necessary to look into this and ascertain how these can best be overcome, or what additional licenses may be required.
Tax Planning. This is often left out of the process, however is probably the most important part. It is vital to work out the extent of tax liability for the business in China as this impacts upon cash-flow, and importantly, upon the actual amount of registered capital that is required to be injected.
Financial Planning. In some cases, incentives may be gained from particular areas, both in terms of location and in some industries that enjoy encouraged status. Other planning impacts upon areas such as the initial expected turnover of the company. This affects for example your status as a VAT payer which in turn affects a potential bond that may need to be lodged with customs which impacts upon capitalization issues.
For all of the above, it is also important to ascertain exactly what it is you wish to accomplish. For some WFOEs (simple trading for example), the procedure may not be so complicated and could perhaps cost less. For others, which may for example be in manufacturing and include the importation of plant and machinery, or others working in areas that require additional licensing, such as pharmaceuticals, it could be higher as more work has to be carried out. So it is a bit difficult to provide a figure without knowing what it is you want to do first. For items 3 and 4, good practical experience of China is required from the consultant. For items 1, 2 and 3 the consultant should demonstrate possession of both legal and accounting expertise within China. Expenses should also be agreed upon and capped at costs, as some consultants will add these in later to top up their initially lower fees.
by: Chris Devonshire-Ellis
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