Business in Wonderland: Requirements For a China WFOE

Jeff LoCastro, July 29, 2011

Founder & President, NCCREA

Regardless from where you hail, China seems to always be on the other

side of the planet.  For those of us living and working in China, it often

feels as if we're all operating in "upside-down world"; as if we dropped

down the rabbit hole into the Mad Tea Party.  Welcome to China.  For

example, let's suppose an American company wants to come to China to

set up shop and the company doesn't want Chinese partners.  The

company must apply for and receive PRC approval and a license (as is

required for most things in China) to operate as a Wholly Foreign Owned

Enterprise or WFOE.  But here's where the Mad-Hatter steps in.  In China,

the prospective WFOE must first lease appropriate space before it

receives government approval to exist as a WFOE.  But how can a 

non-entity do anything, much less lease space?  In the "right-side-up

world", anything or anyone must have capacity before it can conduct

business.  In upside-down world you must first conduct business in order

to have capacity.  Once you have capacity, you can then apply for WFOE

status.

As one would expect, in upside-down world, it's not that easy.  There are

a set of standard lease documents for leasing to a Chinese entity or to an

already existing WFOE.  The lease document makes no provision for

dealing with the situation of leasing to an entity in preparation for

formation of a WFOE.  In fact, the lease document requires you to

provide a business license before you execute the lease.  Obviously, one

cannot do that since the WFOE does not yet exist as a lawful entity.

Therefore the process requires the company to rent space, so they can

apply for WFOE status, get their permit, then receive their license...so

they can rent space.  Upside-down world.  So how do you navigate this? 

You need a willing and accommodating landlord.  You should contact the

landlord and confirm, repeatedly, that the landlord understands your

exact situation.  If the landlord understands and agrees that they will

cooperate, then the future WFOE can post-lease execution addendum

the language necessary to qualify for WFOE formation by the Chinese

Government.  The landlord should be aware that the lease will initially be

in the name of a WFOE shareholder and then will be transferred to the

WFOE upon successful formation of the WFOE.  The landlord must agree

to that transfer in advance and agree to cooperate fully in the WFOE

formation process.  In addition, the landlord must warrant that the

premises can be approved for the use to which you intend to make of

the premises and the lease will be registered with the applicable

government real estate administration in the city or province in which

the space is located.  Of course, this means that the landlord will need to

make all tax payments and provide tax receipts to you as the tenant.

As is the tradition in China, most transactions at least initially operate

just below the surface.  It certainly requires a new paradigm to wrap

ones head around upside-down world.  It's often confusing.  Consistently

aggravating. And always interesting.  But we do it.  We do it because

China is the most chaotic, dynamic, profitable, big-bang marketplace in

the world.  Welcome to the tea party.

COPYRIGHT 2011 JEFF LOCASTRO
DISTRIBUTED BY NCCREA
CHANGZHI, SHANXI, PRC

Contact the author at:  Jeff@NCCREA.com or  Jeff@CaliforniaSecured.com

The article not intended to be legal advice and is only intended to disseminate information of a general nature and cannot substitite for the advice of a licensed professional, i.e., an authority with specialized legal knowledge who can apply it to the particular circumstances of your situation.  Please contact your lawyer, solicitor, or barrister (as the case may be) before making any decisions regarding your situation.