When contemplating setting up a business in China, one needs to consider what structure to use. But before deciding on the structure, it is important to lay out a strategy. Strategy must lead structure. In our previous section we discussed structuring your WFOE, and here we look at setting it up.

Set-up process

Feasibility study report

The feasibility study is one of the first steps in the application process. Reviewed by the Ministry of Commerce or its local counterpart to assess foreign direct investment in China, this non-binding report is also used to assess exactly how much thought and planning have gone into your business. You will need to address your operating budget and the raw material inputs, among other pertinent information. The application follows a standard format and is provided by the authorities to you as part of your application documentation. It needs to be translated into Chinese for application.

Environmental protection valuation report

The Environmental Protection Bureau will issue you a document that is intended to control manufacturing production processes in accordance with specified environmental norms. The bureau will require information about the raw materials used, the machinery and equipment, and consumption and safe disposal of toxic products. Please note that all assembly and manufacturing WFOE applications must obtain approval by this bureau. In some cases, a full report on the environmental impact issued by an appointed agent shall be required (for example, the leather-processing business) and this may represent a major step to go through as it would affect the time frame to get your factory up and running.

Key articles of association

The article of association is one of the most important documents in establishing a WFOE. These are the operating rules of the company and it is vital that they are properly structured, if they are not, you could run into problems later on. Unfortunately, many foreign investors make the mistake of regarding them as a simple formality and do not take the time to properly formulate them. When establishing a company with a limited life span of 40 years, know what you are agreeing to. Here we highlight some of the articles, what they mean and what should be included.

Business scope article

The business scope article expresses the limits of your WFOE's business practice. It needs to be a clear, honest assessment of your intended business scope while leaving the possibility for expansion.

Production scale article

This can be useful for expressing an exit strategy by linking production and profitability scales to unacceptable levels of business, thus permitting liquidation under such circumstances.

Liquidation audit article

A board of director's resolution approves liquidation and termination in conjunction with the production scale article included in your articles of association. Liquidated assets are then paid in the following order: liquidation expenses, employees, outstanding taxes, secured debts, and other debts. Any funds remaining after business deregistration can be repatriated to the investors.

Total investment article

The relationship between your registered capital and your total investment capital can affect debt financing and the ability to obtain parent company loans. Clarity is important.

Profits repatriation article

This gives the parent company the right to bill the WFOE for services, royalties, and R&D costs, for example. This will make it easier to overlay expenses, send money out as an invoice payment and save on your profits tax bill.

Trade union article

In China, the staff has the right to form a trade union but not to strike. They can, however, elect a representative that you will need to deal with. It is wise to attempt to control the union's budget and influence its expenditure.

The articles of association should be studied in great detail and redrafted to fit your business situation. Once completed, they need to be translated into Chinese. It is important to note that the Chinese language version of your articles of association will take legal precedence over any other version. For these reasons, this stage of the application needs to be handled with the utmost precision and care.

This is the final part of this series of articles