Our firm, Dezan Shira & Associates, has been involved with legal establishment and tax work in China for nearly 20 years. In fact, the practice’s 20th birthday is November next year, so we’ll be having some parties to celebrate.
Over the years, we have constantly been engaged in setting up wholly foreign-owned enterprises (WFOEs) for our clients. During that time, we’ve seen considerable changes to how WFOEs can operate, and what they can do. We’ve also written about WFOEs many times in dealing with the updates, and continue to do so – our popular guide, “Setting Up Wholly Foreign Owned Enterprises in China,” is now in its third edition.
How Much Is Too Much?
One question that always crops up is: “How much does it cost to set up a WFOE?” It’s an impossible question to answer at such a basic level because WFOEs can be extremely diverse. Let’s look at a few examples:
- Trading – Buying and Selling in China (Import and Export)
- Business Consulting
- Service Industry
Different criteria apply to each type of WFOE. Just the trading aspect can provide problems. If importing and selling, is an additional license required to sell the product? Some service industries are restricted and many require additional approvals.
Retailing can have its own problems. We once dealt with a very high-end New York-based jewelry house, which had millions of dollars of diamonds stuck in China customs. Manufacturing can involve all sorts of issues, too, from the importing of machinery to environmental protection.
Scope of Services
This became apparent in an email I received, in which I was asked: “I am looking to register a WFOE in China and I wanted to ask you, what’s a ‘fair price’ for WOFE assistance in China right now? How much is too much, and when is a price so low that I should be suspicious? I have spoken with many lawyers and services and everyone is quoting something different.”
I completely sympathize, and it’s a far from uncommon problem. I replied as follows:
“Thank you for your email. It’s a difficult question to answer, as there are several different components to setting up a WFOE and you need to ensure all of these are included. Cheaper prices may not include the full scope of services that is required. Let me break these down as follows:
Legal Establishment. This is basically a legal administrative process, and although relatively straight forward, can be time-consuming. This typically takes a minimum 3-4 months (partly depending upon response times from the investors’side over supporting corporate documentation) and involves about nine different government departments.
Legal Due Diligence. Not so much of this is usually needed. However, it is necessary to check that certain documents are in order, such as landlord agreements. If the business activity is restricted, it will be necessary to look into this and ascertain how these can best be overcome, or what additional licenses may be required.
Tax Planning. This is often left out of the process, although it is probably the most important part. It is vital to work out the extent of tax liability for the business in China as this has an impact on cash flow, and importantly, the actual amount of registered capital that is required to be injected.
Financial Planning. In some cases, incentives may be gained from particular areas, both in terms of location and involvement in industries that enjoy encouraged status. Other aspects of financial planning have an impact on the initial expected turnover of the company, for example. This affects your status as a VAT (value-added tax) payer – which in turn affects a potential bond that may need to be lodged with customs , and which in its turn has an impact on capitalization issues.
Paying for Assistance
For all of the above, it is important to ascertain exactly what it is you wish to accomplish. For some WFOEs (simple trading for example), the procedure may not be so complicated and could perhaps cost less.
For others, the cost could be higher as more work has to be carried out. This may be the case, for example, in manufacturing that includes the importation of plant and machinery, or sectors like pharmaceuticals that require additional licensing.
For items tax planning and financial planning, good practical experience of China is required from the consultant. For items legal establishment, legal due diligence and again tax planning, the consultant should demonstrate possession of both legal and accounting expertise within China.
Expenses should be agreed upon and capped – some consultants will add more costs later, topping up their initially lower fees.
So the answer to how much it costs to set up a WFOE in China is: “It depends.” However, the cause of clarity can be served by answering the following defining questions:
- What is the precise scope of business?
- Are any additional licenses required?
- Do any available location or industry incentives apply?
- What is the expected turnover? (This affects capitalization and the potential provision of customs bonds)
- Are all the potential costs of business catered for? (capitalization)
- What are the tax implications? How can I minimize these?
The answers to these are driven by actual costs, and then the price of hiring a consultant who understands each of these issues. The first part can be identified, while the second can be negotiable. Negotiating a price that excludes the provision of addressing any of the issues listed above is a false quote.
Investors wishing to know how much it costs to set up a WFOE – or any other business in China – should be aware of these basic issues. They should fix a fee with a consultant that understands exactly what the basic issues are – and as the resources on the ground in China to deliver.
About the Author
Chris Devonshire-Ellis is the founding partner and principal of Dezan Shira & Associates, a specialist foreign direct investment practice that provides advisory services to multinationals investing in emerging Asia. This article was first published in China Briefing and was reedited for clarity and conciseness. For further details or to contact the firm, please visit www.dezshira.com.
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