Monthly Archives: September 2012



What could go wrong when incorporating a WFOE in China

Based on my many years’ experience in this industry, I summarize here a list of areas where could go wrong when setting up your WFOE in China.

Legal Representative of WFOE

The legal representative of a WFOE is the person with authority to legally bind the entity.
Under the PRC Company Law, a legal representative shall have duty of loyalty and duty of diligence towards the company for which he/she serves. If the legal representative fails to perform his/her statutory duties under the law and cause losses for the company, he/she shall take the liabilities for the company.

Documents needed from parent company when incorporating WFOE in China

When incorporating a WFOE in China, the following documents ( two copies)should be provided from the parent company:
1. 需开业证明、法定代表人有效证明文件(包括投资方股东名单、董事会名单、董事会授权签字代表的决议)(作为企业或其他经济组织的外国投资者的主体资格证明应经其本国主管机关公证后送我国驻该国使(领)馆认证。)

Capitalization for WFOE in China

It is important for foreign investors to understand the concept of the registered capital of a limited liability company. The common law concepts of authorized and issued capital are not used in connection with foreign investment in China. The registered capital of a limited liability company is a commitment of funds that has to be directly invested by the investor into the company in accordance with the law and the company’s articles of association (and joint venture contract, where applicable). Thus, the term “registered capital” refers to the parties’ equity in the venture.



Repatriation of dividend from WFOE to parent company

Pursuant to Chinese laws, a WFOE should use its profits by the following
sequential order:

First, make up any losses and pay for tax;
Second, appropriate no less than 10% of the after-tax profits as reserve
surplus till the accumulated reserve surplus amounts to 50% of the WFOE’s
registered capital;
Third, if the WFOE’s board of directors opts to do so, appropriate a
certain amount for employee incentive and welfare fund;
Fourth, distribute the remaining profits to the foreign investor.


The Foreign Trade Law of the PRC (《中华人民共和国对外贸易法》) was promulgated on May 12, 1994 by the Standing Committee of the National People’s Congress of the PRC (全国人民代表大会) (“Standing Committee”) to develop foreign trade including the import-export of goods, technology, and international service, maintain foreign trade order and promote the advancement of China’s economy. the Foreign Trade Law mandates foreign trade dealers to register with the relevant division of foreign economic relations and trade under the State Council and to obtain permission for their trade operation. In addition, the Foreign Trade Law addresses issues such as intellectual property infringement, unfair competition, tax evasion, and also establishes civil and criminal liabilities for violations of the foreign trade orders,