WFOE’s Registered Address, A Bit More Complicated Than You Think
The Companies Law of the People’s Republic of China requires that all foreign-owned corporate entities have a registered physical address in China. However, many foreign investors have gambled (and lost) that Chinese authorities will not catch on if they simply use an inappropriate address (whether it be a virtual office or an address that has not been authorized as an address usable for registration purposes) when registering their corporate entity. This has resulted in applications being rejected, or in some cases, if the registration is approved using a non-authorized address, the entity is subject to being audited or worse, have the license terminated along with having the investors pay a hefty fine. In recent years, increased audits and inspections of companies by various Chinese government agencies like the State Administration of Industry & Commerce (SAIC) or the Ministry of Commerce have resulted in many companies (domestic and foreign alike) having to immediately relocate their offices and risk termination of their license or a fine, usually both.
Many foreign investors have found that by registering their Chinese corporate entities using a shared work space in addition to or in place of a minimalistic SAIC approved office as their corporate entity’s official listed address in China has many benefits. It allows the foreign investor access to:
a) a premium office space when needed
b) an official meeting place or conference room for greeting clients and officials alike
c) a community of entrepreneurs and seasoned businessmen who have made innovation and collaboration the central theme of their business strategy.
Shared office space through vendors such as the Chinese startup WePlus is rocking the entire office leasing business with their unique blend of style, convenience, innovation and practicality. Perhaps their interpretation of shared offices has finally arrived for foreign investors in China.
The Wholly Foreign-Owned Entity
The WFOE is a common investment vehicle by which non-Chinese nationals or non-Chinese corporate entities can incorporate a foreign-owned limited liability company in mainland China. A WFOE is a limited liability company which is wholly-owned by foreign investor(s). The unique feature of a WFOE is that involvement of a mainland Chinese investor is not required, unlike most other investment vehicles available for foreigners to utilize to set up a corporate entity in mainland China. Although this type of Chinese corporate entity was originally mainly utilized in connection with manufacturing activities, exporting businesses or introducing advanced technology to China, this business vehicle has since been expanded to many other industries. It is worth noting that the WFOE can only be utilized to engage in certain industries in which foreign participation is allowed. In order to set up a WFOE in China, a number of documents are needed, including certificates of incorporation; articles of corporation; reference letters from a foreign investor’s bank stating that he or she is in good standing; a copy of the passport of the parent company’s director if the WFOE is being established by a foreign corporate entity. Once the required documents have been gathered, a foreign investor or foreign entity which seeks to establish a WFOE must submit the documents to several Chinese government agencies, including the Ministry of Commerce, registration of the WFOE’s name in Chinese with the SAIC, among other requirements. However, the foreign investor cannot do so him or herself but must instead do so through a Chinese corporate entity or Chinese national that acts as a sponsor on behalf of the foreign investor or foreign corporate entity seeking to establish the WFOE.
It is worth noting that the WFOE can only be utilized to engage in certain industries in which foreign participation is allowed. In order to set up a WFOE in China, a number of documents are needed, including certificates of incorporation; articles of corporation; reference letters from a foreign investor’s bank stating that he or she is in good standing; a copy of the passport of the parent company’s director if the WFOE is being established by a foreign corporate entity.
Once the required documents have been gathered, a foreign investor or foreign entity which seeks to establish a WFOE must submit the documents to several Chinese government agencies, including the Ministry of Commerce, registration of the WFOE’s name in Chinese with the SAIC, among other requirements. However, the foreign investor cannot do so him or herself but must instead do so through a Chinese corporate entity or Chinese national that acts as a sponsor on behalf of the foreign investor or foreign corporate entity seeking to establish the WFOE.
Requirements for Corporate Offices for WFOE’s under Chinese Law
WFOE entities must have a registered address within mainland China. This must be an actual physical address with a street number that can be verified during an in-person visit by Chinese government officials. It is important to understand that, under Chinese law, an individual or corporate entity cannot simply rent a virtual office and establish a company, as is the case in many countries. The rationale for this rule is so that Chinese authorities can locate an agent for service of process if the WFOE is sued in a Chinese court or some sort of official document needs to be delivered to the WFOE. Indeed, it is not uncommon for the China’s State Administration of Industry and Commerce or the Chinese Taxation Bureau to make unannounced office site visits to ensure compliance with the Company Law of the P.R.C. and the Law on Wholly Owned Foreign Entities (the Law on WFOE’s). If the government officials cannot locate the responsible party or otherwise during a site visit the WFOE’s business license can be revoked or the WFOE may be ordered to cease operations.
Shared Office Space: A Concept Whose Time Has Come for WFOE’s
However, a cost-effective solution that many WFOE are currently utilizing is the concept of shared office space. Many of China’s largest business centers, like Shanghai and Beijing, have some of the most expensive office space rental rates in the world. Therefore, instead of paying the often exorbitant rates for their own office space, many WFOE’s are utilizing services that provide shared office space. As recently reported by global real estate firm Colliers, co-working and office-sharing has increasingly become popular in China. Often companies such as WePlus will offer this service for a fee which is much less than it would cost a foreign investor to rent an actual address. This fee typically will include a whole host of amenities, including access to conference rooms, a kitchen, offices and other facilities on a needed basis, This arrangement also will include the ability to network with others who share the same office space. Most importantly, it can also ensure that someone will be present if a government official from the Taxation Bureau or the SAIC shows up unannounced for an inspection. Utilizing shared office space can therefore result in decreased legal exposure as well as substantial cost savings for the foreign investor who is hoping to establish a presence in China through a WFOE.
Often companies such as WePlus will offer this service for a fee which is much less than it would cost a foreign investor to rent an actual address. This fee typically will include a whole host of amenities, including access to conference rooms, a kitchen, offices and other facilities on a needed basis, This arrangement also will include the ability to network with others who share the same office space. Most importantly, it can also ensure that someone will be present if a government official from the Taxation Bureau or the SAIC shows up unannounced for an inspection. Utilizing shared office space can therefore, result in decreased legal exposure as well as substantial cost savings for the foreign investor who is hoping to establish a presence in China through a WFOE.