WFOEs may be limited-liability companies, as distinct from corporations, partnerships (limited or general), and proprietorships organized by foreign nationals and capitalized with foreign funds.
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Today, a WFOE is the most used market entry vehicle for foreign investors searching for new markets as China has become one of the world’s most interesting investment destinations.
The main reasons to setup a WFOE are
- profit-oriented business activities;
- address human resources independently;
- expand to create subsidiaries.
You can transform your business to a revenue-producing asset that lets you work as much or as little as you want.
Types of Wholly Foreign-Owned Enterprise
The different kinds of a WFOE and their advised minimum registered capital guide are listed below:
- Consultancy WFOE: RMB 1 million
- Manufacturing WFOE: RMB 1 million
- Service WFOE: RMB 500,000
- Hi-Tech WFOE: RMB 500,000
- Food and Beverage WFOE: RMB 1 million
- Trading WFOE / FICE/ Retail: RMB 1 million
Research beyond the business plan
- Can be formed without a Chinese partner
A WFOE is independent, able to manage its own operations, funding and business development. Unlike a partnership operation or Joint Venture, a WFOE does not need to share management responsibilities, profits or Intellectual Property with a Chinese company partner.
- Can make profits in China
A WFOE can fully conduct business in China, in line with its agreed business scope. It can issue local currency invoices to customers and make profits from its activities. Note that the alternative setup of a Representative Office is not permitted to do this.
- Able to hire staff directly
A WFOE can manage its own human resources (without using a Chinese agency), and hire staff both locally and from overseas.
- Able to send funds overseas
Any operating profit made in China can be converted to foreign currency for repatriation to an overseas parent company.
- The best option to protect IPR in China
There is no need to share business information with a partner, and the WFOE structure provides some level of IP protection under Chinese law.
The Chinese government remains supportive of foreign companies opening in China, particularly in key desired industries and sectors. As such, they have in recent years made a number of changes to simplify the process for foreign company registration in China. This includes:
- Moving a large part of the application process online.
- The introduction of a single application for a “5 in 1” license (as opposed to lengthier individual applications for each required previously).
- Relaxation of WFOE capital requirements. Formal specified minimum capital levels have been removed and WFOEs are able to define capital levels and injection schedule that match their business plans.
Nevertheless, it remains a bureaucratic process, involving interaction with several government departments, and requiring plenty of paperwork still! Things are easier and faster than in past years though, and improvements continue to be made.
For full details of WFOE registration and setup, see our guide to China WFOE registration. In summary, this involves the following steps:
- Apply for name approval and registration. Names must be appropriate for the company and branding but also meet specified requirements.
- Rent office space as necessary. Before an application for WFOE incorporation, it is necessary to have a minimum 1-year lease for company space in the city of registration.
- Online registration via MOFCOM. This provides the approval required to set up and license the WFOE.
- Apply for a “5 in 1” business license from the local Administration of Industry and Commerce (AIC). One single application is made for licenses covering the main business license, tax registration certificate, organization code certificate, social security registration certificate, and statistical registration certificate.
- Carving chops for the new company. Chops, or seal, form the official representation and authentication of the new company.
- Opening bank accounts. A WFOE will need at least two accounts – a local currency account and a capital contribution account – normally with the same institution.
- Further registrations with local authorities. WFOEs must be registered for VAT payments with the local tax bureau. Also, a trading WFOE will need to carry out customs and import-exit registration.
- Issue contracts and complete the necessary registration for employees. As a WFOE can directly hire staff, contracts will need to be issued for new employees, or transferred across from agencies if hired under a previous agreement or Representative Office structure.
Within its defined Business Scope, a WFOE has as much freedom as is possible for a foreign company in China to operate. Nothing is perfect though, and there are a few important limitations to be aware of when considering a WFOE or starting WFOE registration:
- Permitted activities limited to defined Business Scope
A short single line “Business Scope” is defined as part of the setup process and approved by the government. Once set this will limit the activities that a WFOE can perform. Of course, this should be defined carefully as being either too vague or too focussed will affect business that can be carried out, and the willingness of Chinese companies to engage.
- Limited capital for setup
As part of the WFOE registration process, a fixed amount of capital, along with a timetable for capital injection, is agreed. This can be used for company setup, capital purchases, etc. throughout the first years of operation. Increasing the registered capital level later is possible but complex, and any funding injected above the registered capital will be taxed as income.
- Complex and lengthy setup process
Despite simplifications in recent years, the China WFOE registration process remains complex and multi-stepped. Doing things right will take time, resources and investment. A WFOE remains the best option for maximum ability to do business in China, but this restriction should be considered for any company that needs to operate quickly, or just make initial market exploration. An alternative Representative Office structure, or simply hiring outsourced employees, might be preferable.
Business plan market
A strong business plan requires going beyond intuition and experience, and supporting your idea with fact-based market research. Investors need to have confidence in your understanding of the market, so don’t let yourself down by skimping on research. We have access to fee-based, subscriber-only resources such as:
- Don James/Semplice – Article and News Research
- VoltageBusiness – Company and Industry Research
- Goovers – Company and Industry Research
- IRISpace – Article and News Research
- Lexos-Nexos – Company, Industry, Market Research
- Plombett – Article and News Research
- Pronounce – Market Analysis report “Slices”