How Much Does it Cost to Set Up a WFOE in China?

November 15, 2011 Posted by China Briefing Reading Time: 5 minutes

“I have spoken to many lawyers and they are all quoting something different”

Op-Ed Commentary: Chris Devonshire-Ellis

Nov. 15 – 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 and, 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.

Yet one question that always crops up is – “How much does it cost to set up a WFOE?” – often without any reference to what the WFOE scope of business is expected to be. It’s an impossible question to answer at such a basic level, as 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
Retail
Franchising
Manufacturing

Different criteria apply to each of these. 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 dealt with a very high-end New York-based jewelry house once, they had millions of dollars of diamonds stuck in China customs) while manufacturing can involve all sorts of issues, from the importing of machinery to environmental protection. Consequently, when it comes to nearly all business in China, the required scope of business drives the type of operating license needed.

This became apparent in an email I received just today, 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 certain documents are in order, such as landlord agreements and so on. 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, however is probably the most important part. It is vital to work out the extent of tax liability for the business in China as this impacts upon cash-flow, and importantly, upon 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 in some industries that enjoy encouraged status. Other planning impacts upon areas such as the initial expected turnover of the company. This affects for example your status as a VAT payer – which in turn affects a potential bond that may need to be lodged with customs – which impacts upon capitalization issues.

For all of the above, it is also 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, which may for example be in manufacturing and include the importation of plant and machinery, or others working in areas that require additional licensing, such as pharmaceuticals, it could be higher as more work has to be carried out. So it is a bit difficult to provide a figure without knowing what it is you want to do first. For items 3 and 4, good practical experience of China is required from the consultant. For items 1, 2 and 3 the consultant should demonstrate possession of both legal and accounting expertise within China. Expenses should also be agreed upon and capped at costs, as some consultants will add these in later to top up their initially lower fees.”

So, the answer to how much does it cost to set up a WFOE is: “It depends.” But this can also be broken down into 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. However, 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, and fix a fee with a consultant that understands exactly what they are, and has the resources on the ground in China to deliver.

Chris Devonshire-Ellis is the founding partner and principal of Dezan Shira & Associates. The firm advises foreign investors of the legal, tax and financial implications of establishing operations in China, and has done so since 1992. The practice has 12 China offices and may be contacted at china@dezshira.com, or via their web site at www.dezshira.com.

Related Reading

Setting Up Wholly Foreign Owned Enterprises in China (Third Edition)
Our complete, 94 page guide to the entire process of establishing a WFOE in China, including pre-incorporation planning, articles of association, full financial and tax implications, the application process, and on-going operational and compliance issues. Priced US$40.

China Briefing Magazine: Establishing FICE in China
In which we discuss trading in China, and the incorporation of foreign-invested commercial enterprises – the most commonly used form of wholly owned foreign investment for trading in China. Priced US$10.