China WFOE Formations: The Personal Touch

Our China WFOE formation lawyers constantly fight the temptation to use the sort of hackneyed phrasing usually found in inspirational corporate desk calendars, tech startups’ mission statements, and ironically titled albums on Bandcamp. “Expect the unexpected.” “Embrace the contradiction.” “Winners never quit. Quitters never win.” But WFOE work can be so frustrating and counterintuitive that speaking in clichés often seems like the only appropriate response. Dignifying the Chinese authorities’ actions with measured analysis and rational thought is a path to madness, or at least extreme frustration.

The latest annoyance is that during the WFOE formation process, an increasing number of districts (even in China’s largest cities) are requiring the WFOE’s legal representative appear in person at the Public Security Bureau (PSB), passport in hand, to prove their identity. Setting aside the inefficiency of requiring a personal appearance, what makes this request truly bizarre is that the same local authorities have already required the legal representative submit an authenticated copy of their passport. The exact procedure for producing an authenticated passport copy can vary by state, but a typical example would be as follows:

1. The WFOE’s legal representative goes to a notary public, photocopies their passport, and signs the photocopy in front of the notary.

2. The notary then signs and stamps the photocopy.

3. The notarized photocopy then goes to the county clerk’s office of the county in which the notary is commissioned, which produces a written document with a seal confirming that the notary is in fact a commissioned notary public.

4. That document then goes to the Secretary of State of the state in which the county is located, which produces another written document confirming that the county clerk is in fact the official county clerk of that county.

5. That document then goes to the U.S Department of State, which produces another written document confirming that the Secretary of State of the relevant state is in fact the duly elected official of that state.

6. That document then goes to the Chinese Embassy in Washington, DC, which affixes a certificate on the back of the U.S. Department of State documents, authenticating that the documents were in fact created by the U.S. Department of State.

This process usually takes several weeks and costs a few hundred dollars, assuming everything goes smoothly. The procedures for countries in Europe are roughly similar.

The purported reason China requires so much rigmarole to prove the identity of the legal representative is because they receive so many forged documents, and the Chinese Embassy’s imprimatur is the only way to confirm authenticity.

See if you can guess why we are now being asked to produce the legal representative in person. Remember the clichés at the beginning. And … wait for it … yes, it’s because the Chinese authorities allege they have been receiving counterfeit Chinese Embassy authentications.

At its very core, this new procedure makes no sense. The whole point of Embassy authentication is to guarantee the authenticity of the document: local country notarization and then embassy authentication is the “gold seal” for guaranteeing  document authenticity. If the PRC abandons that international practice due to its massive internal corruption, then the whole system China created to deal with these issues will collapse. No one benefits from that.

The bottom line is that to form a WFOE, the parent company will likely need to make the WFOE’s legal representative available to spend a couple weeks in China to make a personal appearance at one or more government agencies, producing their passport and signing documents as necessary. If the parent company is unable or unwilling to make the legal representative available, they take the risk of having their WFOE formation delayed, or perhaps even cancelled. Our lawyers in China, along with our local agent, are working hard to try to find a solution to this and there is at least a decent chance that we will. Yet this requirement seems to be spreading and based on the way things so often go in China, this requirement could very well become entrenched (or not) in the near future.

Ultimately, the only way to stay sane if you do China WFOE formations is to keep a sense of humor about the process. You could get angry, but what’s the point? Like Homer Simpson says, “It’s funny because it’s true.”