- Underestimating additional licensing requirements

Certain WFOEs have other specific licenses that they may need to obtain in order to operate. These can often be far more difficult to process and obtain than the original license. For example, import and sale of consumable products, trading of certain metals, rare earths, fuel and pharmaceuticals all require additional licensing applications and need a full understanding of the processing of these in order for you to dovetail all regulatory demands into your business operations in a timely manner.

Post registration matters: minimum registered capital requirements

One of the most common and most serious problems with WFOE applications, especially for small businesses, is the issue over registered capital. Confusion exists, and many ill-advised investments are made in China due to misinterpretation of the local government term "minimum registered capital." This is meant as a guideline only, and is not supposed to be a ruling on how much you need to invest.

It is important to note that tax collection is administered centrally, while the approval process is at a local level. This means conflicts can and do arise between what the local government says and what the tax bureau then says.

Actually, the amount of registered capital needed in the business depends on a number of different factors:

- Location: Some regions in China apply different levels of capital requirements from others to reflect their lower or higher regional operational costs.

- Scope of business: For certain industries or services, the applicable registered capital amount can be quite high.

- Cash flow: This is critical and often overlooked. Registered capital is also required to fund the business operations until it is in a position to fund itself. The business can come to a shuddering halt if the registered capital amount is insufficient to support the operation cash flow. It is not just a simple matter of wiring additional funds to China. Procedures have to be followed:

--Application to increase the registered capital with the original licensing authority;

--Re-issuing of business license as the registered capital amount is also the limited liability status of the business;

--Application to the SAFE to transfer funds into China;

--Bank-to-bank fund transfer.

The above steps take six to eight weeks. It is vital you properly capitalize your business in China, in accordance not just with government guidelines over minimum registered capital, but also pure economic and operational realities. Businesses can and do go broke in China because of this issue.

Chris Devonshire-Ellis is the Senior Partner of Dezan Shira & Associates-www.dezshira.com