WFOE, RO, or JV?

Firstly, your choice of which vehicle you use to conduct business in China largely depends on what level of business you wish to do in China. I will go through an overview of each, then sum up the pro’s and con’s, then in a follow-up post I’ll illustrate to you my experience thus far in setting up a WFOE.

The 2017 World Bank’s Doing Business report ranks China 78th in the world for overall “ease of doing business” and according to the World Economic Forum, China ranks 28th on the Global Competitiveness Index. The below will indicate why it scores so low, despite being the 2nd largest economy in the world.

https://www.hongdaservice.com
HongDa have some great pages covering the different types of companies you can have in China, worth reading what they have to say about it rather than just listen to me.

Firstly, what do you plan to do in China?
If you just want to pop in and out of China, and not make many orders for products or sell your own, you just wish to visit so you can meet suppliers then you will conduct business with them once back home, then you just need an M visa. Ask the company you are going to meet to write up an invitation letter (stamped, signed, dated), then take it to your local Chinese visa bureau with your passport, a copy of your passport, flight tickets, hotel booking, an application form, and some passport photos and they will give you a visa (currently the standard is a 2 year multiple entry). It doesn’t really matter which bureau you apply with, though the Manchester one is a lot faster and the staff have always been very thorough and diligent with me.

If you wish to have a semi-permanent presence in China, perhaps with an office, and have an (British) employee or two on the ground to routinely visit suppliers, distributors, or exhibitions, then you should apply for a Representative Office. However, you won’t be able to invoice locally, or employ Chinese people. The real purpose of an RO is to have a local point of contact for your organisation, though the entity itself is pretty powerless. Also, your British employees would have to be paid by the UK company, meaning monthly transfer fees to their bank.

If you’ve decided to franchise out your product to the Chinese market, or have yourself a Chinese partner who you trust to handle operations in China, or perhaps you are married to a Chinese national, or you have found a straw man who is willing to do some paperwork in return for a fee, then you should go for a Joint Venture. A JV has the power to invoice, employ, have an office, pay taxes, remit capital, invest, and so forth, and requires less bureaucratic headaches than a WFOE.

Lastly, if you are looking to establish a permanent presence in China with pretty much the same rules, regulations, and rights as a local Chinese company then you should set-up a Wholly Foreign Owned Enterprise. A WFOE can be established with the UK parent company being the sole shareholder or with a single person as the sole shareholder.

In terms of selling goods in China, a foreign company cannot do it. If you are exporting to China, you would issue your invoice from the UK which would be received in China and the payer would have to go through the bureaucratic procedure of converting the cash and transferring the payment abroad to you. Most can and will do it, but as is often the case, the capital controls in place make this a testing process if done regularly. A foreign entity also cannot have a presence on Chinese e-commerce platforms, and normally rely on a Joint Venture or utilise a local distributor, like Little Red Book. With a WFOE, you will be able to sell your products directly on e-commerce sites, individually or wholesale, or run your own shop and sell there, without interference or any delays in payment from capital controls.

 

A WFOE can also remit funds back to the UK (5% tax), which if you know the Chinese market, is normally an extraordinarily difficult thing to do. You can also employ local people, as many or as few as you wish. Bear in mind though that you will need to register with 6 different local government departments and all the paperwork that goes with it, so that you can give your employees all the social care required under law. These include:

1-       Pension Funds (20%)

2-       Medical Insurance (12%)

3-       Industrial Injury Insurance (3%)

4-       Unemployment Fund (2%)

5-       Maternity Cover (1%)

6-       Housing Fund (13%)

To be frank, when it comes to it I will advertise for a job position and once I have selected my candidate, tell them to get all of the above registration done as a test of their organisational skills. Note these are estimated figures for Shenzhen, a Tier 1 city. These figures will change per province and per city. The above estimate says that if you pay an employee £1,000 a month, you’ll also have to pay the government £500 in benefits.

Regarding the legalities of the above, if you are found invoicing customers in China without stamps or an established entity, your operation will be shut down, your visa will be revoked, you’ll probably get a 5 year ban on entering China, and they might put you in prison for financial crimes. I wouldn’t risk taking shortcuts here. This includes cash in hand. You also need to be sure you have the correct visa for what you are doing.

M Visa = Business Visa. Short term trips, exhibitions, visiting customers and suppliers, self-funded, can live in China, not earning money (from within China)

Z Visa = Working Visa. Issued by a sponsoring organisation (i.e. your WFOE) and enables you to work at that company. Can live in China, can collect a salary in China.

 

Representative Office Joint Venture Wholly Foreign Owned Enterprise
X Basically a tool for granting business trip visas without needing a Chinese company to give you an invitation letter Same powers as a WFOE Independent
Full range of abilities
X Can’t invoice, trade, e-Commerce, local salary, nor employ X But you need to share your business with a local Chinese partner i.e invoice, employing, office, marketing, eCommerce, remit etc.
Easy to do, and doesn’t require a lot of commitment in time nor resources X It’s a very complicated procedure to get it going. Lots of red tape
X Expensive launch costs 

It’s also worth noting that all companies in China must have their accounts audited every year. If you are using someone like HongDa to help set-up your company, likelihood is they also offer accounting services, or they can suggest someone who can. HongDa include a year of accounting services in their initial fee.

Estimated costs of setting up a WFOE range from £1,800, minimum service, to over £3,000 if including sponsored office, visa assistance, and book keeping.

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