FAQs of Establishing a WFOE to operate trading, technologies, supports, sales, installation.

This is a chat record of one of our previous US customer. We discussed the various matters of foreign-owned enterprise registration and the topics he cares about. This customer discussed with our online lawyer for nearly one hour and telephoned for half an hour. This customer signed a contract immediately with our team to prepare the certification documents of notarization and authentication and started to set up environmental protection technology, trade and technical support WFOE in China.

This customer plans to establish a trading WFOE with environmental equipment/products technologies, with three main functions:

(1) Trading for buying/selling environmental equipment/products (13% VAT, when VAT applies);

(2) Technical consulting/services function (6% VAT, when VAT applies);

(3) Mechanical/electrical integration installation engineering function (9% VAT, when VAT applies).

(3) Also plan to engage SMEsChina Legal Firm for ongoing accounting and financial support and annual compliance for the WFOE.

To achieve our corporate goals for the WFOE, we have the following questions. Please provide responses. The final product integrated by WFOE will have components from parent company and from WFOE (purchased locally in China), but sometimes also from 3rd party international suppliers. Note that the factory in the USA can supply complete products from USA too, similar to its WFOE.

Note for questions/answers below for your studies:

Question is: How it works for the Chinese WFOE for international transactions?

SMEsChina Lawyer answer: Sure, you can purchase from local market or oversea suppliers, and your WFOE needs to apply for the import license and export permit in the future when you deciding to register as WFOE as a limited company in mainland China. Any Chinese companies can purchase components and the raw materials from local suppliers and foreign market.


Question: Please confirm which of the tax functions can be performed by our planned trade WFOE.

SMEsChina Lawyer answer: OK, according to the Chinese tax regulations, you have to apply for 3 types of business activity.

– Trading (purchase and sale), current VAT is 13%, your sale VAT can deduct the purchase VAT (known as: VAT return).
– Technical support (such as: after-sales service, equipment repair and maintenance), current VAT is 6%.
– Installation engineering, the current VAT is 9%.

You have to apply for above 3 types for your business scope, then can be approved to obtain 3 VAT rates from local tax office. You can refer to this guidance to select the business activities for a WFOE.


Question: Trade in environmental technologies. Parent company can procure components from Chinese suppliers in USD and deliver to WFOE for part of product sales.

Understand need to pay RMB in China (quote may be USD, but always trade in RMB with Chinese supplier). Just to confirm, can parent company buy in RMB in China and deliver to WFOE?

SMEsChina Lawyer answer: Because RMB is legal currency in mainland China, you must use RMB to deal with Chinese suppliers, and deliver parts of product to new WFOE. Meanwhile you have to ask them issuing local official VAT fapiao ( invoices ) to WFOE as the purchase costs to deduct the sales VAT amount.

Sure, can buy products from parent company in US ( but must use USD because this the international trade ). Even if possible, it may make more sense for WFOE to buy Chinese components, per Question 1. And international trading you can use USD currency to transfer payments of purchase cost, ( example, some key parts of products purchase from US and import to China entity/WFOE ).


Question: Parent company can procure and ship components from non-Chinese suppliers, including parent company foreign offices, to WFOE for integration into products for local sales in China.

SMEsChina Lawyer answer: if products import from oversea to local WFOE, you have to appoint a forwarder / logistic agent to submit the application of the Customs Clearance, after paid The Customs duties and import VAT tax as purchase VAT amount for purchase certificate for deducting. Future, will list business activities for tech supporting and engineering projects to apply for 9% VAT rate for installation. For business scope of installation, our suggestion is: environmental protection engineering construction, other services , tech supporting and sales, we can discuss later once you start the procedure of WFOE registration.


Question: So this can be like sending imported good from parent company to WFOE where we get VAT purchase certificate for refund, like section 1. Other approach is for WFOE to buy components directly from international non-parent company suppliers, with possibility reduced VAT.

SMEsChina Lawyer answer: Agree, all of purchase costs (Chinese suppliers or import from oversea suppliers and parent company are also can get purchase VAT invoice from supplier and the China Customs to deduct VAT amount when you sales products.)


Question: Trading WFOE can procure components (under parent company direction) from Chinese suppliers in RMB and deliver to WFOE for part of product sales, parent company can sell technologies in USD to Chinese customers and WFOE can deliver the products in China.

SMEsChina Lawyer answer: sell technologies from US to local customers? Why do not use local WFOE providing services and technologies. To Chinese customers? Because local WFOE can issue VAT fapiao/invoice to your customers as VAT deducting for your clients.


Question: I agree this is unusual, but sometimes our parent company sells in USD to Chinese customers that pay parent company in US with USD. International business use USD it correct , want to be able to decide if we supply from the USA (parent factory) or from WFOE. It makes more sense to supply from WFOE to Chinese customer, but sometimes customer proposal requires USA delivery, or due to stock and speed situation, we want to mix part WFOE/part USA. Need to confirm: Is this possible? If not, we may be forced to assemble 100% in USA in parent company factory for projects with USD order.

SMEsChina Lawyer answer: Yes, Chinese customers can place orders from US or local WFOE, but local WFOE can issue VAT invoice to local customers to deduct their VAT, that’s why your Chinese customers prefer to use your local WFOE to sign agreements.


Question: Parent company can sell technologies in RMB to Chinese customers and WFOE can deliver the product in China.

SMEsChina Lawyer answer: Parent company in US, if sell tech. To local customers, must use USD currency and apply for foreign exchange procedure, why do not use local WFOE to use RMB to Chinese customers, like above view, local WFOE can issue VAT fapiao/invoice to your customers as VAT deducting for your clients.


Question: WFOE (under parent company direction) can sell technologies in RMB to Chinese customers and WFOE can deliver the product in China.

SMEsChina Lawyer answer: yes, from our design for your company structure, we think the WFOE does tech, sale and engineering projects with 3 different tax rate for VAT with 3 taxpayers.


Question: Parent company can sell technologies in USD to Non-Chinese customers and WFOE can deliver the product from China on behalf of parent company (Would this be a sell transaction from WFOE to Parent? Is this a case where a FTZ WFOE would help? Can the FTZ WFOE feature be added later, or is that a separate WFOE?). For now, but if we wanted to add FTZ WFOE in future, can we do this?

SMEsChina Lawyer answer: FTZ suits for export business ( actual products for exporting ), I think no any benefits for your WFOE, because your mainly business is for importing parts to be here, if export products why do not use parent company in US to deal, Chinese foreign exchange procedure is a big limits for export business, but FTZ must rent physical office/warehouse and hire minimum local 1 employee then can approval for general taxpayer (VAT degree).


Question: Perform integration engineering and testing of components (for sale): this includes quality control by air pressure/water pressure testing, inspection, integration engineering (no material forming and no temperature changes, just hand work performed by staff).

SMEsChina Lawyer answer: I listed the business scope for environmental protection engineering construction, this suits for all installation activity.


Question: Perform technical consulting services to support products, including in- house and field inspection, commissioning, integration engineering and testing of components.

SMEsChina Lawyer answer: these are standard business scope can be get approval of business registration easily, no problem.


Question: Establish the WFOE by placing an order with SMEsChina Legal Firm assuming a final proposal is provided. All required paperwork from the US-based company should be listed clearly and provided to us by the week ending January And we will work to collect this information during Chinese New Year vacation period.

SMEsChina Lawyer answer: Sure, we have sent all procedure and timeline, quotation to you before for WFOE establishment, and I hope you confirm the form with I sent you by previous email, if you have free time you should complete it and I will list requirements prepared in US. And then we will start the procedure after making payment of 50% deposit.


Question: Assuming the above schedule, and noting that the legal representative and supervisor will be based in the USA and will travel to China for bank account opening, can the WFOE be established by end of March 2019?

SMEsChina Lawyer answer: no problem, because need to issue notarized passport from China embassy in US office, so do need come here in person for corporate account ( current policy ). and all procedure for WFOE registration, bank account, import export license I think 2- 3 months is enough if you prepare all required documents from China embassy in US office.


Question: Please confirm our understanding of the capital and operating bank accounts: capital account received all money capital injection money from parent company and this is transferred to the operating account for running the business? Which account is used to remit money from WFOE to Parent company?

SMEsChina Lawyer answer: Excellent question, in mainland China WFOE as a foreign entity registered from local different government offices, we will assist you opening 2 accounts here, 1st is basic RMB account ( functions: local transactions, make payments for different local suppliers, salaries of staff, purchase etc.

The main functions is that can receive foreign currencies from foreign customers, need to apply for foreign currencies exchanging around 2-3 weeks, and also can use basic RMB account to exchange foreign currencies to purchase products from oversea market). Another is capital account, can receive the INVESTMENT CAPITAL from shareholder’s oversea account to operate daily costs or expenses. About the 2nd account we call it registered capital account with USD currency, only one function ( to receive registered capital from shareholder’s account in USD and also need to apply for the foreign exchange procedure for capital check and verify).


Question: Assume capital account funds can be transferred to basic account as needed?

SMEsChina Lawyer answer: Yes, if capital transferred from shareholder in US, around 2-3 weeks be approved and will be put into basic account from USD to RMB(current exchange rate ).


Question: So capital account balance can be less than registered capital, but need to put back to full registered capital value, before can issue dividend?

SMEsChina Lawyer answer: Capital amount can be used for management and running costs in the future, can not be returned to shareholder, dividend must use basic account after make profits.


Question: is dividend or service agreement with WFOE better for remitting funds to parent company? We can discuss later once we get into WFOE setup.

SMEsChina Lawyer answer: dividend wants to back parent company, only 1 way, is dividend after make profits, can get back from basic account (after RMB exchanging to USD currency).


Question: Ongoing WFOE payroll support services from SMEsChina legal firm, does this include paying expense forms to our employees monthly (there is 1 now, maybe 3 more added in 2019).

SMEsChina Lawyer answer: no problem, because our price is for each employee.


Question: Does your price include monthly accounting closings, and chop management.

SMEsChina Lawyer answer: This included our secretarial service, you can check our prices from this page: China Company Formation Prices


Question: If the proposal needs to be revised due to above questions, please do so as soon as possible, and provide to us. Please provide bank details to receive USD payment for the 50% down payment.

SMEsChina Lawyer answer: OK, quotation do not need to change, all of them included the proposal, and will send invoice soon to your email.

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SMEsChina focus on the growth of enterprise and providing a variety of business solutions in the area of strategy consultancy, business registration, company formation, finance and audit services, HR and payroll, corporate bank account, resident permit, immigration and visa, trademarks and legal compliance. If you have everything to set up a private business in Mainland China, you can get in touch with our teams to get more useful information and online guidance. Email: [email protected]

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