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Wholly Foreign Owned Enterprise in People’s Republic of China-Routine Compliance

The wholly foreign owned enterprise in People’s Republic of China shall be subject to following laws inter-alia;

1. The Company Law of People’s Republic of China of 2005;

2. The Law of the People’s Republic of China on Wholly Foreign Owned Enterprises  (Adopted 12 April 1986 at the 4th Session of the 6th National People's Congress. Revised 31 October 2000 at the 18th Meeting of the Standing Committee of the National People's Congress by the Decision on Revision of the "Law of the People's Republic of China Concerning Enterprises with Sole Foreign Investment")

 
[Note: The phrase "Enterprises with Sole Foreign Investment" in this paragraph is also known and bears the same meaning as "Wholly Foreign-owned Enterprises".];

3. Detailed Rules for The Implementation of The Law on Wholly Foreign-Owned Enterprises (Approved 28 October 1990 by the State Council. Issued 12 December 1990 by the Ministry, of Foreign Economic Relations and Trade Revised 12 April 2001 in accordance with the Decision of the State Council to Revise the Detailed Rules for the Implementation of the Law of the People's Republic of China on Sole Foreign Investment Enterprise. Re-promulgated 12 April 2001 by Order No 301 of the State Council)

Summary of Relevant Post Incorporation Provisions

S. No.

Particulars

Relevant Requirement of Law

Remarks

1.

The Company Law of People’ s Republic of China of 2005

Article 59- The minimum amount of registered capital of a one-person limited liability company shall be RMB 100,000 Yuan. The shareholder shall, in a lump sum, pay the capital contribution as specified in the articles of association. One natural person is allowed to establish merely one one-person limited liability company which shall not set up any further one-person limited liability company.

Residual Clause thus Applicable on Wholly Owned Foreign Enterprise.

Article 60 A one-person limited liability company shall, in the company registration, give a clear indication that it is solely-funded by one natural person or one legal person, and the same shall be specified in the business license of the company.

Applicable

Article 61 The articles of association of a one-person limited liability company shall be formulated by the shareholder.

Applicable

Article 62 A one-person limited liability company may not set up the shareholder’s assembly. When the shareholder make a decision on any of the matters as listed in Article 38 of this Law, it shall make it in written form, and preserve it in the company after signed by the shareholders.

Applicable

Article 63 A one-person limited liability company shall make a financial statement at the end of every fiscal year, which shall be subject to the audit by an accounting firm.

Applicable

Article 64 If the shareholder of a one-person limited liability company is unable to prove that the property of the one-person limited liability company is independent from his own property, he shall bear joint liabilities for the debts of the company.

Applicable

Article 218 The limited liability companies and joint stock limited companies invested by foreign investors shall be governed by this Law. Where there are otherwise different provisions in any law regarding foreign investment, such provisions shall prevail.

Applicable

2.

The Law of the People’s Republic of China on Wholly Foreign Owned Enterprises

Article 2 Enterprises with sole foreign investment as referred to in this law are those enterprises established within Chinese territory, in accordance with the relevant Chinese laws, with their capital provided totally by a foreign investor. It does not include branches in China of foreign enterprises or other economic organizations.

Applicable

Article 11 An enterprise with sole foreign investment shall carry out its operation and management in accordance with the approved articles of association of the enterprise and free from interference.

Applicable

Article 12 An enterprise with sole foreign investment employing Chinese staff and workers shall sign contracts in accordance with the law. Such contracts shall contain clear provisions relating to matters such as employment, dismissal, remuneration, welfare, labour protection and labour insurance.

Applicable

Article 14  An enterprise with sole foreign investment must set up books of account in China, conduct independent auditing and, in accordance with the regulations, submit its accounting statement to and accept the supervision of the financial and taxation authorities.

Should an enterprise with sole foreign investment refuse to maintain books of account in China, penalties may be imposed by the financial and taxation authorities, and the industrial and commercial administrative authorities may order the enterprise to cease operation or may revoke its business license.

Applicable

Article 16 The various types of insurance of an enterprise with sole foreign investment shall be taken out with insurance companies in China.

Applicable

3.

Detailed Rules for The Implementation of The Law on Wholly Foreign-Owned Enterprises

Article 15 The articles of association of a wholly foreign-owned enterprise shall include the following contents:

(1) name and address;

(2) purpose and scope of Operations;

(3) total amount of investment, registered capital and investment term;

(4) organizational framework;

(5) internal organizational body, its powers of office and rules of procedure, legal representative and the powers, duties and functions of the general manager, chief engineer and chief accountant;

(6) principles governing finance, accounting and auditing and related systems;

(7) labor management;

(8) duration of operations, termination and liquidation;
(9) procedures for amendment of the articles of association

Applicable and Articles of Association should be in compliance of this requirement.

Article19 The total amount of investment of a wholly foreign-owned enterprise shall refer to the total amount of funds required to establish the enterprise, namely, the sum total of capital construction funds and the amount of production liquid capital required in accordance with the enterprise's production scale. (Note: It may be interpreted in the context of Consultancy/Service WOFE)

Applicable  

Article 20 The registered capital of a wholly foreign-owned enterprise shall refer to the total amount of capital registered with the administrative authority for industry and commerce for the establishment of the enterprise, namely, the total amount of investment subscribed by the foreign investor. The amount of registered capital of a wholly foreign-owned enterprise shall suit its scale of operations and the ratio of registered capital and total investment shall comply with relevant Chinese regulations.

Applicable

Article 32 After the payment of each installment by the foreign investor, a wholly foreign-owned enterprise shall engage an accountant registered in China to examine the payments and issue a certificate of capital verification. Details shall be filed with the examining and approving authorities and the administrative authority for industry and commerce.

Applicable

Article 57 The fiscal year of a wholly foreign-owned enterprise shall be from 1 January to 31 December of the Gregorian calendar year.

Applicable for compliance

Article 58 From the profit remaining after payment of income tax in accordance with Chinese tax law provisions, a wholly foreign-owned enterprise shall allocate money for a reserve fund and employee bonus and welfare funds. That allocated as the reserve fund shall be no less their 10% of the after-tax profit amount. If the accumulative total of allocated funds reaches 50% of an enterprise registered capital the enterprise shall not be required to make any further allocation. The allocation ratio for the employee bonus and welfare funds may be determined by a wholly foreign-owned enterprise itself. A wholly foreign-owned enterprise shall be prohibited from distributing dividends unless the losses of previous years have been made up. Dividends not distributed in previous years may be distributed together with those of the current year.

Applicable and Needs to be complied with

Article 59 All vouchers, account books and accounting statements prepared by a wholly foreign-owned enterprise shall be written in Chinese. If written in a foreign language, a Chinese translation shall be attached.

Applicable and to be complied with.

Article 61 A foreign investor may engage an accountant in China or overseas to examine an enterprise's account books. All related costs shall be borne by the foreign investor.

Optional not mandatory for Parent Company

Article 62 A wholly foreign-owned enterprise shall submit its annual balance sheets and profit and loss statements to finance and taxation authorities and report the details to the examining and approving authorities and the administrative authority for industry and commerce for their records

Applicable

Article 80 The various items of insurance taken out by a wholly foreign-owned enterprise shall be underwritten with an insurance company within Chinese territory.

Applicable

Article 81 Where a wholly foreign-owned enterprise signs a contract with another company, enterprise or other economic entity, or an individual, the Contract Law of the People's Republic of China shall apply.

Applicable

Routine Compliance

Filing of annual financial statements and other filings

WOFE shall be subject to a fine if annual audit report is not submitted in a timely manner. (June 30th of each year is the date of submission of annual audit report and renewal of license.)

On or before June 30 in relation to financial year.

5% Turnover tax is applicable on the invoicing done.

Applicable

Income Tax on Company Profits is at 25%. Profit after tax are repatriable with timely tax filings and exchange bureau controls.

Applicable and to be complied with

Minimum of 3 Directors are required.

Applicable

Any number of Branch Office can be registered with a WOFE formation

Applicable and already formed branch

Accounting Compliances

Accounting Set-up, Book-keeping Supporting Documents

For WFOEs, all accounting vouchers, ledgers as well as financial statements should be prepared and maintained under PRC Generally Accepted Accounting Principles (GAAP).

a. Source documents, Journal Vouchers (JVs) and ledgers should be in Chinese.

b. Standard China Chart of Accounts (COA) should be adopted.

c. All JVs in the prescribed format should be filed and bound according to China’s standard accounting practice.

d. The bank book, cheque records and bank reconciliation should be maintained as part of the accounting records.

Financial Statement Format/Content

a. Since ours is not a trading WOFE we are may not be required to monthly statutory filings of the balance sheet and profit & loss statement.

b. Financial statements should be prepared under PRC GAAP using the defined format.

c. Financial statements to be submitted to the Tax Bureau should contain the company stamp before submission.

Group Reporting Reconciliation

When Parent company prepares the balance sheet and profit/loss statements for the WFOE under IFRS to consolidate inter-company accounts, such group reporting statements should be prepared and reconciled to the PRC financial statements.

Social Insurance for Local Staff

The main types of social security in China are Pension Insurance, Medical Insurance, Unemployment Insurance, Maternity Insurance, Work-related Injury Insurance and Housing Fund. They are contributed by both employees and employers. The rate and policy for each kind of insurance vary from city to city, and are regulated by the local governments. WOFE is liable for the employer’s contributions for local staff, if any.

Annual Inspection

Annual Inspections are mandatory for all companies registered in China. It takes place between March 1st to June 30 of the calendar concerned for preceding calendar year. A company that fails the Annual Inspection will affect its qualification for a business license. A WFOE should complete and submit the forms and other relevant information of the company for Annual Inspection to the following government departments:

1. Foreign Investment Administration Department;

2. State Administration for Industry and Commerce;

3. Economic Committee;

4. Finance Ministry;

5. Tax Bureau;

6. State Administration of Foreign Exchange

7. Customs Bureau

Applicable and to be complied with

Applicable

Applicable

Applicable

Applicable

Not Applicable

Applicable

Applicable

Applicable and to be complied with

Applicable and to be complied with in respect of local staff.

Applicable

Registration of Changes in WOFE

Whenever Wholly Foreign Owned Enterprise changes either its

a. company name,

b. registered address (business address),

c. legal representative,

d. registered capital,

e. type of enterprise,

f. scope of business or duration of operation,

WOFE should apply for registration of change with the industry and commerce administration authority, submitting the following documents:

1. Application for Registration of Change of Company signed by its legal representative;

2. Resolution or decision of change made in accordance with the Company Law;

3. Other documents and certificate;

4. Where a company change of registered items relates to amending the company Articles of Association, the amended Articles of Association or the amendment of the Articles of Association shall be submitted.

Applicable

China WOFE Statutory Capital Verification Requirement

Capital Verification Procedures and Expected Time

Conversion of Paid-up Capital

According to the Verification of Capital Contributions, after the shareholder (investor) of the a Wholly Foreign Owned Enterprise contributes and pays the registered capital into the WFOE’s Foreign Currency Capital Account, it should arrange to engage a local CPA Firm to perform an audit so as to verify that the capital is contributed and paid in accordance with requirements of the China Company Law and Articles of Association. The capital verification report issued thereafter is deemed as the legal proof of capital contribution. Immediately after the capital verification is done, the WFOE could then convert the capital to RMB and use it for daily operation.

On the whole, the whole process takes about 1 to 2 weeks.

(1) Bank confirmation: Normally 1-3 working days, depending on different banks

(2) Local State Administration of Foreign Exchange (SAFE) confirmation: Normally 3 working days, depending on different cities

(3) Verification process and report issuance by CPA firm: Normally 1 to 2 weeks.

As Per State Administration for Foreign Enterprise’s regulations, capital verification should be conducted on the paid-up capital before its conversion into RMB. The total convertible amount of paid-up capital (in Foreign Currency) should not exceed the accumulated paid-up capital which has been verified by the CPA firm. The converted RMB will be retained in the FIE’s RMB basic account as working capital.

Please note according to SAFE Circular [2008] No.142, when converting amounts greater than US$50,000 into RMB, a detailed documentation is required to justify the conversion.

Applicable and Certificate to be shared

May be noted.

Applicable

May be Noted

Remittance Fee

Amount remitted towards Share Capital should be exclusive of remittance fee, if any, and should be as stated as per Articles of Association. This is to ensure that the amount received in the FIE’s Foreign Currency Capital Account after the deduction of remittance fee, is no less than the amount stipulated in the AOA.

Applicable

Penalty

If the company does not conduct its annual inspection in accordance with the regulations, business registration authority would order the company to complete the inspection on a new deadline. Besides, a company would still face penalty between RMB 10,000 to RMB 100,000. For a branch, non-corporate businesses and their subsidiaries in China engaged in business activities out of China, and other operating units, the penalty should be RMB 30,000 or below. For a partnership, a personal-owned enterprise and their branches, the penalty should be RMB 3,000 or below.

May be noted for compliance

Revocation of business license

If a company cannot complete the annual inspection by the ordered deadline, the business registration authority will issue a public notice. Starting from the date of public announcement, the company would have 60 days to complete the annual inspection, before the business license is revoked by the authority.

Applicable to be complied with

Note: The short synopsis of compliances applicable on Wholly Foreign Owned Enterprise is based on the Law of People’s Republic of China as on the June 2011 and on the basis of research carried by the author and are for broad guidance of readers only.




Category Others, Other Articles by - Vivek Sethia 



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