How to Form a WFOE in China, Part 8: Forming a WFOE subject to industry-specific regulations

Our previous two posts in this series emphasized the need to establish the proper scope for your WFOE before formation. This is particularly true for foreign entities seeking to form a company that will be subject to industry-specific regulations.

Take advertising companies. If you are thinking about forming an advertising WFOE in China, the key initial inquiry is whether your WFOE will be making ad buys in China. That is: will your WFOE purchase advertising space or time from a Chinese media entity (e.g., magazine, newspaper, radio station, television station, Internet site, or billboard operator)? If so, your WFOE’s scope needs to clearly state that it will be providing advertising services. On the other hand, if your WFOE will not make ad buys, and will limit itself to such activities as creating advertising campaigns, designing websites, producing advertisements, and overseeing brand management, then you probably don’t need to include advertising in the WFOE’s business scope and could register it as a consulting company.

Including advertising in your WFOE’s business scope has nontrivial short-term and long-term implications. In the short term, the local SAIC will probably require an additional approval for an advertising WFOE, and as part of that will impose additional advertising-specific documentary requirements such as:

1. Audited financial reports for the WFOE’s parent company from the past three years, specifically indicating that at least 50% of the parent company’s revenues have come from advertising.
2. A certification of industry involvement or letter from an industry trade association, specifically indicating that the parent company has been involved in the advertising industry for at least 3 years.

The above two requirements seem simple, but can add weeks to the formation process. Many private companies do not have audited financial reports. As a result, when our firm works to set up a China Advertising WFOE we usually end up negotiating with the local SAIC to establish a set of documents our client can reasonably provide and that the SAIC will accept. Similarly, many advertising agencies do not belong to industry associations and it can be challenging to find a substitute document (like a properly authenticated industry award) the SAIC will accept.

Note that the Regulations on the Administration of Foreign Invested Advertising Enterprises (外商投资广告企业管理规定), which mandated that advertising WFOEs gain advance approval from the SAIC, were abolished earlier this year, and in theory the same sort of SAIC preapproval is no longer needed for advertising WFOEs. But as with the changes to the minimum capital requirements, just because the official rules have changed doesn’t mean anything is different on the ground.

The long term consequences of forming an advertising WFOE are more subtle and potentially more serious. Advertising companies are responsible for the content they provide to Chinese media entities – and under the revised Advertising Law (effective as of September 1, 2015) the penalties are increasingly onerous. Providers of advertisements can be held liable for (among other things) ads that are deemed misleading, ads that aren’t clearly identified as ads, ads that use children under the age of 10 as endorsers, and ads that are out of line with public morality or the interests of the state. These stepped-up penalties are in keeping with a number of new content-specific regulations in China governing all sorts of media, from film to online music to streaming video.

Another tricky question is what to do if you have no immediate desire for your WFOE to make ad buys in China, but want the flexibility to do so in the future. As a general rule, it is easier to narrow your business scope than to enlarge it, and in sophisticated cities like Shanghai and Beijing, the local authorities will usually not require that a WFOE engage in all of the activities listed in its business scope. So if you register your WFOE as an advertising company but never place any ad buys, you’ll probably be okay. But whenever there is a mismatch between your registered business scope and your actual business activities, you open yourself up to scrutiny by the local officials.

The one silver lining is that forming an advertising company in China has gotten easier. Before China joined the WTO, a joint venture was the only option, which explains why big-name advertising agencies like Leo Burnett and Ogilvy & Mather still have JVs in China.

The post How to Form a WFOE in China, Part 8: Forming a WFOE subject to industry-specific regulations appeared first on China Law Blog.

We will be discussing the practical aspects of Chinese law and how it impacts business there. We will be telling you what works and what does not and what you as a businessperson can do to use the law to your advantage. Our aim is to assist businesses already in China or planning to go into China, not to break new ground in legal theory or policy.