Relocating Your China WFOE: It’s a Settlement Deal

October 25, 2010 Posted by Chris Devonshire-Ellis Reading Time: 3 minutes

By Chris Devonshire-Ellis and Richard Hoffmann

Oct. 25 – As labor costs rise in China, and especially along the eastern and southern coastlines, many foreign investors are now considering the logistics of relocating their China WFOE. While cost comparisons are relatively easy to make in terms of land and labor, difficulties can then arise with your existing location. Local governments can be reluctant to see a tax paying enterprise leave, and there are issues especially concerning the incumbent staff.

The main issues facing a WFOE in its need to relocate are as follows:

Agreement to redeploy existing staff in a new location or to provide severance
Consolidation of any existing tax breaks in a specific location that needs to be added to or folded into a new locale or entity
Repayment or settlement of any incentives provided that will not now be fully realized given the relocation
Customs clearance issues over the transfer of goods or property held in a bonded area

Relocations may additionally require the merger of one WFOE into another, again this can be accomplished and is mainly a tax consolidation, customs and human resources issue. Local government negotiations need to be handled with some sensitivity as they are losing tax revenues, employment and perhaps prestige, however legally speaking WFOEs may be moved and merged. These are obviously somewhat complicated bespoke administrative matters to execute and can vary considerably on a case by case basis.

Discussions with government will need to be undertaken, however they do not have the right to prevent you from relocating as long as settlement of labor issues, tax, any outstanding incentives and so on have been completed. For these, you will need the assistance of a practice familiar with the tax implications, labor law, and with understandings of audit issues.

The process is relatively straightforward for relocating just one entity, yet can become far more complex if more than one are involved, as incentives and tax breaks at different times of each business’s life, if still applicable, need to be negotiated over to any new entity. This is actually simpler than it used to be as China phased out tax incentives for most standard manufacturing entities some time ago, but merging several entities into one elsewhere can be administratively awkward. That said, our practice completed the local closure of three WFOEs and one JV established in Shanghai, Changchun, Changzhou and Xiamen, and merged them all into one brand-new facility (also in Xiamen), so it can be done. Foxconn, notably, has also recently relocated some of their China factories.

Obviously, the circumstances behind each relocation vary tremendously on a case by case basis; the salient points all need to be addressed, with outstanding amounts calculated and termination of staff agreed and compensation paid. However, the costs associated with this are not as great as can initially be imagined and longer term savings may make the relocation of a China WFOE a viable deal within even the shorter term.

We provided relocation costs on a typical China factory here that may be of use to readers, although the comparison was with China, India and Vietnam, the latter costs can be duplicated for an alternative Chinese location.

The issue to note for an intra-China relocation is that local governments do not have the right to prevent you from leaving, however the usual protocols of legal administration in addition to clarifying labor movement, compensation and tidying tax and customs duties outstanding must be completed – and this will require tax as well as legal administrative and negotiation expertise.

Chris Devonshire-Ellis is the principal of Dezan Shira & Associates, Richard Hoffmann is a senior legal associate with the firm. The practice have been operational in China since 1992 and provide legal administration, establishment and tax planning services, in addition to ongoing compliance and maintenance issues with customs, tax and labor law to investors in the China market. The firm has 10 China offices. Please visit the firm’s web site, e-mail the firm for advice on China WFOE structuring at legal@dezshira.com, or download the firm’s brochure here.

Chris also contributes to the Asia Briefing publications India Briefing, Vietnam Briefing, and 2point6billion.com.

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