Many foreign investors eager to capitalise on China’s potential have started up a Wholly Foreign-Owned Enterprise (WFOE) to take advantage of this opportunity. While WFOEs have their benefits, as with any company, they are also complex due to the local legislation which can make it difficult for business owners to ensure they remain compliant.
To help you ensure your WFOE is following necessary legislation, we’ve put together a list of the five most important things to watch out for when running your business in China
1. Check the Negative Lists
Before you even register your WFOE, you need to make sure the industry you want to operate in is not found in any of the Negative Lists. The Negative Lists specify what industries restrict foreign and local investments in different regions.
The three documents that all prospective investors should refer to include the Negative List for Foreign Investment, the Negative List for Foreign Investment in Free Trade Zones, and the Negative List for Market Access. Staying up to date with any revisions made to the Negative Lists can prevent violations to foreign investment policies.
2. Tax compliance
Investors are often confused about the tax structure in China as it consists of a number of documents that include Faipiao invoices, and ambiguous VAT tax rates overseen by the State Administration of Taxation. Due to the general complexity of tax regulations in China, it is recommended that you consult a trusted accountant for tailored advice.
Under the current legislation, WFOEs are subjected to two types of tax in China:
- Corporate Income Tax (CIT): Calculated on an accrual basis, most industries start at a rate of 25% of their total income less allowable deductions.
- Value Added Tax (VAT): A consumption tax ranging from 0–13% of invoiced sales by a company, depending on the industry a company is operating in.
In addition, certain regions in China, such as the Free Trade Zones also benefit from tax incentives like lower CIT rates.
Failure to comply or delayed payment will result in payment surcharges of 0.05% on the amount of unpaid tax at a daily basis rate, as well as other tax-related punishments such as an interest-based penalty.
3. Legal document review
WFOEs should check whether they have all of the required documentation to operate their business in China. This includes, but is not limited to, an office leasing contract, a business licence, bank reference letters, and the Feasibility Study Report (FSR).
Depending on the industry that your WFOE is operating in, you may be required to produce additional documents. For instance, businesses in the manufacturing sector will need to conduct an Environmental Impact Assessment.
Companies should ensure that all their documents contain the most updated information and are still valid.
4. Trademark registration
Registering a company name or trademark is also an important step in protecting your business and not infringing on copyright legislation in China. Since China maintains a first-to-file trademark registration process, the party to first register the trademark owns the rights to distribute their goods and services under that name in China. Therefore, if you are looking to operate in China under a particular name, you should register it as soon as possible to avoid becoming the victim of trademark hoarding.
Recent revisions to legislation require businesses to use their registered trademark at least once in three years or risk losing their trademark through a non-use cancellation petition. As a WFOE, it is crucial that you understand the updated trademark registration legislation in order to ensure your intellectual property is safe.
5. Labour policies
As a business owner, you need to be mindful of China’s extensive and complex labour policies as there are numerous legal punishments if businesses are not compliant.
Most of your employees in China should fall within one of the two main employment status types:
- Full-time employees are required to sign a written contract with their employer either under a fixed-term labour contract, open-term labour contract, or specific-task labour contract. Employers cannot abruptly terminate full-time employees unless specified in the written contract.
- Part-time employees are not required to sign a written contract with their employer. However, it is recommended that they do so in order to avoid any potential disputes of employment terms in the future. A part-time employee can work up to 24 hours a week and is subject to termination at the employer's discretion.
Written contracts in China are required to have provisions on working hours and leave, the company’s legal representative and social insurance information. You should ensure that all of your employment contracts are formatted correctly or seek out a legal professional for advice regarding China’s labour policies.
Protecting your WFOE
Legislation in China is constantly being updated and it can become tedious and inefficient for businesses to regularly review policies to ensure that your paperwork is correct. We recommend that WFOEs consult with a professional services provider to review and ensure that all documents are up to date and compliant with the law.
If you want to find out more about WFOE compliance and legislation in China, download our 2021 WFOE Checklist.