Guide to Setting up a Trading Company (Foreign Invested Commercial Enterprise or FICE) in China
Introduction to Foreign Invested Commercial Enterprise (FICE)
With China’s WTO accession, further opening up to foreign investors, restrictions on certain foreign-invested trading projects have been gradually phased out. Chinese government issued “Measures for the Administration on Foreign Investment in Commercial Fields”, starting from 11 December 2004, foreign investors have been allowed to establish wholly foreign owned commercial enterprises (wholesaling and retailing WFOE) in the PRC. The term used for this type of company is Foreign Invested Commercial Enterprise or in short “FICE”, still mainly in the form of a Limited Liability Company. Greater discretion for foreign investors as WFOE can now freely purchase and sell domestically.
The “Foreign Invested Commercial Enterprises” shall refer to the enterprises with foreign investment which undertake the following business activities:
1. Commission agency: selling agents, brokers, auctioneers or other wholesalers for goods, who sell goods of other people and provide relevant attaching services through collecting fees on the basis of contract;
2. Wholesale: Selling goods to retailers, customers of industry, commerce and organizations, or to other wholesalers or providing relevant attaching services;
3. Retail: providing goods for consumption and use of individuals or groups or offering relevant attaching services in the fixed places or through television, telephone, mail order, internet, and automats;
4. Franchising: authorizing other people with using its trademark, trade firm, or mode of management through signing contract for gaining remunerations or franchising fees.
Foreign companies, enterprises, and other economic organs or individuals shall carry out the business activities as prescribed in items 1, 2, 3, and 4 of the preceding paragraphs through foreign-funded enterprises established within China.
Business Scope of a FICE (alternative “WFOE”)
A trading WFOE (FICE) may operate the following business upon approval:
1. For the foreign-funded commercial enterprises that undertake retailing business:
1. Retailing of commodities;
2. Importing of self-managed commodities;
3. Purchasing domestic products for export;
4. Other relevant matching businesses.
2. For the foreign-funded commercial enterprises that undertake wholesaling business:
1. Wholesaling of commodities;
2. Commission agency (excluding auction);
3. Importing and exporting of goods;
4. Other relevant matching businesses.
A foreign-funded commercial enterprise may authorize others to open stores by way of franchising. A foreign-funded commercial enterprise may, upon approval, undertake one kind or several kinds of sales businesses. The kinds of commodities it manages shall be specified in the contents regarding business scope as prescribed in the contract or articles of association.
FICE Registration Application Procedures
The following documents shall be submitted when applying for establishing a foreign-funded commercial enterprise:
1. Application letter;
2. Feasibility study report signed by all the investors together, the report should include the market forecast of the project;
3. Contract, articles of association (for a foreign-funded commercial enterprise, only the articles of association should be submitted) and the attachment;
4. Bank credit certificates of all investors, notarized registration certificate (photocopy), certificate of the legal representative (photocopy), if the foreign investor is an individual, his/her identity certificate shall be provided;
5. The audit report of all investors in the recent one year, which is audited by accountant firms;
6. The evaluation report on state-owned assets invested into the Sino-equity joint venture or contractual joint venture commercial enterprises by Chinese investors;
7. Catalogues of import and export commodities of the planned foreign-funded commercial enterprise;
8. Name list and ID card of the members of the board of directors of the planned foreign funded commercial enterprise and the power of attorney for directors of each investor;
9. Notice of pre-approval of the enterprise name as issued by the administrative department for industry and commerce, enterprise name should comply with <PRC enterprise name registration administrative regulation> and consists of: Company name+ industry character+ organization mode;
10. The certificate documents (photocopy) of the use right of the land used for the planned store and (or) house lease agreement (photocopy), except when the business area of the store to be opened is less than 3,000 square meters;
11. The documents of statement in conformity with the requirements for city development and urban commercial development as issued by the competent commerce department of the government at the locality of the store. In case that the documents are signed by a person who is not the legal representative, the power of attorney of the legal representative shall be issued.
Minimum Registered Capital (Paid up Capital) Required
1. RMB 500,000 for wholesaling enterprises.
2. RMB 300,000 for retailing enterprises
Please note that the government may have special capital requirement for enterprise that engage special goods trading with large value such as car and tanker etc.
In accordance with the China Company Law, at least 15% of the registered capital must be contributed and remitted to China to the bank account of the FICE within three months after the date of incorporation and the balance be contributed and remitted within 2 years after incorporation. The FICE could in its Articles of Association state otherwise but the minimum amount of first installment must always be more than 15% of the amount of registered capital.
Duration and Termination
The common duration of operation of a FICE is 10 to 30 years, 20 years for consulting company. The enterprise can apply to prolong the duration term when the enterprise is expires. 50 years for those large scale investment project, long time build-up project, lower profit return project, complicated production project, high-tech project and the project with international competition. Special project approval by PRC State Council can prolong to 50years.
The WFOE can terminate its operation in case of following situations:
1. Heavy lose
2. Cannot maintain its operation
3. Under force majeure situation
When a FICE decides to cease its operation, it needs to go through formal deregistration application procedures.
Registration Time Frame
It normally takes 60 days from receiving instructions and full particulars and necessary documents form the applicant to issue the Approval Certificate. Thereafter, the Post-establishment Registration procedures take about 60 days.
Applicable Taxes Applicable to a FICE
A FICE (WFOE) is subject to or responsible for collection and payment of the following taxes:
1. Enterprise Income Tax (EIT)
In accordance with China Enterprises Income Tax Law, a FICE is subject to Enterprise Income Tax on income derived from sources outside and in China. The taxable income is the net income after deduction of the relevant costs of running the business, such as administration, marketing and financial expenses, costs directly incurred in purchase, taxes on sales and depreciation.
The standard EIT tax rate of FEIT is 25%. For those enterprises established before March 16,2007 in special economic zone with 15% tax rate originally, there is a 5-year grace period, e.g. 18% in year 2008, 20% year 2009,22% year 2010, 24% year 2011 and 25% from year 2012.
2. Value Added Tax (VAT)
According to the China Provisional Regulations for Value Added Tax (“Provisional Regulations”), VAT applies to individuals and enterprises on importation of movable goods into China, sale of movable goods in China and provision of processing and repairing services in China.
Rate:17% basic rate
13% grains, edible plant oil, utilities, publications and certain agricultural products
0% export.
VAT payable
For general taxpayers, VAT payable on the purchase of goods is deductible from the VAT payable on sales.
VAT payable = output VAT – input VAT during the period
Output VAT = turnover x tax rate
Small scale taxpayers as defined in the Provisional Regulations are chargeable to VAT at 4% on their turnover without any deductions.
For small scale taxpayers, the amount of annual sales for wholesale or retail commercial enterprises is less that RMB 1.8 million. Small scale taxpayers are not entitled to claim input tax credits for the VAT paid on their purchases.
The VAT paid for purchase goods used in exports of an FIE is refunded at the tax rates of 5%, 13%, 15% and 17% depending on which kind of products are exported.
Tax Return Filing and Payment of Taxes
When a trading company is subject to PRC taxes, it shall file its provisional EIT and VAT returns on a monthly basis in accordance with the tax regulations. However, the tax bureau will usually accept EIT quarterly filing whereby the tax returns shall also be submitted to the tax bureau at the same time as tax payment.
Accounting and Auditing of Annual Financial Statements
Accounting records are required to be kept in Chinese or Chinese with English. Annual audit of financial statements by a local auditor is required.
Annual Examination
Annual examination (also known as Annual Inspection or Annual Renewal) is a system that is peculiar to corporations in China. The Administrative Bureau for Industry and Commerce, together with other departments concerned (e.g. tax authority, customs, foreign exchange) are authorized by law to conduct an annual examination of the enterprise. In brief, the objective of the examination is to investigate whether the enterprise abides to the laws, regulations and the conditions for granting its licenses. In particular, the examination will concentrate on the following areas:
1. Registered capital: whether the capital has been paid up according to the constitution and conditions for application and proposal.
2. Operations: whether the company is still operating within the approved activities, at the approved location and within the approved scale and employees.
3. Registration details: whether there are any changes in registration details.
4. Financial details: whether the company is still a profitable enterprise, whether necessary tax and customs duties are paid and whether foreign exchange is used according to government policies and regulations.
The annual examination is in the form of a report to be completed by the enterprise concerned annually (together with the payment of an annual fee). The Administrative Bureau for Industry and Commerce will examine the report and make necessary enquiries.
The annual examination will be conducted from January to May every year. Those enterprises unable to fulfill the requirements of the annual examination may risk having their business licenses revoked.
How Kaizen Could Help You
Kaizen can help you to:
1. Prepare pre-establishment documents (minutes, power of attorney etc.), arrange translation; notarization and certification form various authorities.
2. Engage Registration Agent and supervise the registration work.
3. Draft the necessary project proposal, feasibility study report.
4. Engage auditors for the examination of capital injection and annual examination.
5. Locate suitable business address and arrange for leasing.
6. Set up office, including arranging telephone, fax and broadband, acquisition of office machine and furniture
7. Employ local staff and complete formalities in accordance with labor laws
8. Application working visa and residence permit for aliens
9. Post-establishment registration work
10. Open bank account
Through our offices and staff in China and Hong Kong and Singapore, Kaizen shall follow through the establishment process and save investors time and trouble.