Many smaller consultants or agents in China may advise investors that it is permissible for the wholly foreign-owned enterprise (WFOE) to register in one location (in a small office building for example), but have its manufacturing facility set up in a different location (such as the countryside). This may be to take advantage of better profit tax rates or other incentives in the office location area, yet effectively operate from a different location. If so, this does cause trouble for post-registration procedures such as environmental appraisal and value-added tax application. This point is often missed by consulting firms and certain lawyers who do not provide post-registration work. It can have serious effects on the client and possibly make their business unworkable.
If a deal looks too good to be true, or seems a bit "strange" (registering in one location, but actual operational premises in another), then someone is trying to fit a square peg in a round hole. You, as the investor, are the one who will end up with painful post-registration splinters in your fingers that will require surgical extraction.
Administration matters as a structural concern
Key to these is the articles of association, which are the operating rules of the company. With the life of a WFOE generally being set at 15 years, you need to get flexibility, as well as some important guiding principles, laid down in these documents, and not just treat them as an administrative hurdle to overcome. Here are some of the key articles and issues that need to be identified.
- Scope of business article
This defines exactly what your company is going to do, and should be detailed. Lazy or deliberately disingenuous business scopes, such as only using the phrase "production of (product)," will not necessarily qualify a WFOE as a production company. You will also fail to qualify for tax holidays, even if the local government approves it, as the tax bureau may require a more detailed and specific explanation. We have encountered numerous problems of this nature, all requiring a scope of business change on the license before the tax bureau is satisfied with exemption status. You need to ensure your business scope is accurate. Attempts to fool the tax bureau into thinking you are one thing; while in fact you are another, even if you can get it past the approval process, inevitably end in failure. Play the game and say what it is you are really doing.
- Production scale article
This can be useful in terms of expressing an exit strategy. If you link production (and profitability) scales to what you would consider unacceptable levels of business, thus requiring liquidation, it makes it far easier to obtain approval for closure if this eventuality occurs. Link production and profitability scales to the liquidation articles later in the document.
- Total investment article
There is a relationship between "total investment" and registered capital, and you need to get this correctly balanced. An imbalance here can affect your ability to obtain further debt or other financing from both your holding company and other financial institutions, so pay attention to this if your business may require additional capitalization funding later. Please see the table below for the required ratios between registered capital and total investment capital.
1. If it is stipulated in a contract or the articles of association that the registered capital shall be contributed by one time, all investors shall contribute all subscribed investment within six months after the business license is issued.
2. If it is stipulated in a contract or the articles of association that the registered capital shall be paid in installments, all investors shall contribute at least 15 percent of its subscribed investment and shall be paid within three months after the business license is issued.
3. If the foreign-invested enterprise increases its investment, the proportion of the increased registered capital and the increased investment shall follow the above table.