WFOE stands for Wholly Foreign-Owned Enterprise. As the name suggests, a WFOE (sometimes called WOFE) is an organization established in China and entirely owned by a foreign investor. Further, it represents a 100% autonomous financial and legal entity bearing lawful obligations independently.
For incorporation service in China, please consult our dedicated page.
Today, a wholly foreign-owned enterprise, sometimes called 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. It offers foreign investors a highly flexible market entry.
Find out more about the practical steps to take when expanding into China at 9 Steps to Starting a Business In China as a Foreign Company.
Please note that as of 1 January 2021, companies intended as a foreign investment vehicle need to be set up as a Foreign Invested Enterprise (or FIE). Read more about these at What is a Foreign Invested Enterprise?
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Why should a WFOE be incorporated in China?
The concept was created from China’s desire to encourage manufacturing activities that are either trade-oriented or presented cutting-edge technology. The primary reasons a company will want to set up a WFOE include:- profit-oriented business activities;
- address human resources independently;
- expand to create subsidiaries.
Registered Capital vs. Starting Capital – Investment costs of a WFOE
The rules on a WFOE’s registered capital, as opposed to the business’s actual starting capital in China, may seem confusing to foreign investors.
The Chinese government has in fact eliminated regulations regarding the amount of starting capital and registered capital in order to ease the WOFE incorporation for foreign investors. In theory, no capital needs to be invested upfront except for the actual costs of the registration.
However, in order to facilitate the administrative process of obtaining a certificate of registration, we strongly advise foreign investors to declare a registered capital no lower than 1,000,000 RMB when registering. (subject to the business activity and district for incorporation).
Note that this amount does not need to be injected into the WFOE in the beginning, or in a single transaction. Rather, it should be the amount of funds that is planned to be generated by the WOFE within a fixed period of 29 years. The registered capital can be used to support the costs of the newly established WOFE’s activities, as payment of the salaries, office or facilities rental, purchase of a product, etc.
In summary, it can be simple and straightforward to setup a WFOE even with a rather low starting capital.
Types of Wholly Foreign-Owned Enterprises
A WFOE can only operate within its specific registered business scope as stated forward in its business license. If it chooses to engage in a different exercise than the ones specified in its Scope of Business, it is imperative to gain approval from the local authorities.
The different kinds of WFOE and their advised minimum registered capital guide are listed below:
There are several advantages to establishing a WOFE, including:
- Consulting & Services WFOE
- RMB 500,000 to 1 million
- Manufacturing WFOE
- RMB 1 million
- Trading WFOE & FICE (trading, wholesale, retail or franchise)
- RMB 1 million
There are several advantages to establishing a WOFE, including:
- Unrestricted operations are available through this type of company setup.
- A WFOE has the same legal treatment and advantages as a domestic company. There are also regulations in place that prohibit the Chinese government from giving preference to domestic companies over Wholly Owned Foreign Enterprises.
- Autonomy and flexibility to execute the overall methodologies of its parent organization without considering the contribution of a Chinese partner.
- Capacity to do business as opposed to fundamentally work as Representative Office and being able to issue sales to clients in RMB and get wages in RMB.
- Profits made in RMB can be remitted to the parent company outside China, after converting to US Dollars.
- Protection of intellectual property and technology is possible through the formation of a WFOE. One of the biggest complaints that foreign investors have with joint ventures is the vulnerability of their IP to their domestic partner. WOFEs are designed to solve this problem.
- Complete autonomy over human resources. You directly control the actions of your staff and are the direct employer.
- Greater efficiency in operations, management, and future development.
- Investment does not need to be built up for over 2 years, contrasted with a Representative Office’s parent organization that is required to have been set up for more than 2 years.
Disadvantages of a WFOE
There are also several disadvantages to setting up a WFOE, such as:
- The establishment is difficult, with endorsements required by multiple authorities.
- Consolidation is costly, 15% of the investment is required within the first three months.
- There are restrictions and prohibitions on certain industries, hence foreign investors are streamlined to only the encouraged industries.
- Increased liability because you are the official employer of record, so you must familiarize yourself with complex laws and regulations related to employment, contracts, payroll, and tax.
Administration Requirements
WFOEs are required to designate no less than 3 individuals (of any nationality and residency) as the structure, which means a legal representative, a supervisor, and a financial officer are appointed. The legal representative also has to be at least the director and/or the general manager of the WFOE (or both).
Consequently, an annual audit report is prepared by the foreign enterprise, in addition to filing the annual taxes and submitted to the local Administration for Industry and Commerce (AIC).
Registered Address of a WFOE
During the establishment of a wholly-owned foreign enterprise in China, foreign companies must provide a valid registered address to the local authorities (either a plant for manufacturing or an office for other types of foreign enterprises). The workplace of a WOFE cannot be in a residential or living arrangement building nor a living arrangement and business (R&C) joined building.
Some cities allow a virtual address to be chosen as a registered address for Consulting WFOEs. Such a service can be provided by Horizons. The registered address during establishment must match the specified operational location.
Choosing a Company Name
The business name for a wholly foreign-owned enterprise must be in the Chinese language, and the following are to be considered when choosing the name.
- The company name follows a rigid structure; the first word is the company name or product, the second word is the intended business activity or operation, the third word is the location of the establishment and the fourth word is the company structure (ex: Ltd.)
- The company name must not be the same as some other company enlisted in your same sort of business
- The State Administration of Industry and Commerce (SAIC) requires that the WOFE provide at least ten proposed names during registration, the final name of the WFOE is decided only by the SAIC.
- After selecting a company name that fits both your brand and the standard structure of a Chinese business name, you must organize all required documents for your company’s registration. This includes the lease contract if you are renting an office space in China, a “Feasibility Study Report”, and a reference letter from your bank in China.
Registering For Taxes
After your company has been granted its official business license, you must register to pay taxes with both the local and state tax bureaus. In addition to bringing the required documents, you will need to also make sure you have a company stamp that will function as your company’s signature for all legally binding documentation in China.
Tax Information
Corporate tax: 15% – 25% (Varies by WFOE industry and market).
Income tax: rates up to 35% of profits.
Consumption tax: 1% – 56% of sales revenue. (Exports are exempt).
Stamp duty tax: 1%
Land appreciation tax: 30% – 60% of transfer gains.
Resources tax: 1% – 20%, depending on the specific materials needed.
COVID-19 Impact
Since the outbreak of the COVID-19 pandemic, the Chinese government has instituted new tax relief policies to aid the unexpected operational challenges the pandemic has created for businesses across nearly every industry. COVID-19 has had a large impact on WFOEs specifically.
Due to the implications of the travel bans surrounding COVID-19, foreign investors have had to face additional challenges in the process of opening the necessary bank accounts needed to legally operate in China.
To alleviate this problem, banks in China created an alternative solution for these foreign business owners. Instead of needing to visit the bank in-person, foreign investors were allowed to participate in a video conference call to complete the check confirmation process. Some banks also allowed for virtual interviews, which were done under the condition that the documentation must be legalized at the Chinese embassy of the business’s country of residence.
These new procedures brought challenges to Chinese officials, as the process for obtaining bank documentation and legal WFOE status had previously been incredibly stringent. After approximately 4 weeks of this new system being in place, China enacted new policies to further regulate these banking processes to meet the country’s regulatory compliance standards.
The new requirements state that Chinese banks should strongly recommend that the legal representative comes to the bank in-person with their official passport to open the account.
China WFOE: What Are The Next Steps?
After fulfilling the requirements for forming a WFOE as listed above, there are additional steps that may need to be taken, depending on the location and scope of your business.
If your business is located in Shanghai, you will need to apply for additional relevant licenses after establishing your corporation’s name. These may include the following:
- Certificate of Approval by Ministry of Commerce or Foreign Economic Cooperation Bureau
- Business License with SAIC
- Organization Code License by Technical Supervision Bureau (TSB)
- Tax Certificate by Taxation Bureau
- Registration and approval with State Administration of Foreign Exchange (SAFE)
- Statistics license registration
- Import/export license (applicable for trading and manufacturing WFOE)
- Customs registration
In order to meet all relevant criteria for your business type, you may need to take additional steps during the establishment process. These include:
- Obtaining official company chops from the Public Security Bureau (PSB). There are multiple types of chops available, so it is important to be knowledgeable on the relevance of each when meeting with the PSB.
- Injecting capital from the investor’s overseas bank account. This allows the investor to use a portion of their personal equity in order to aid the establishment of their business in China.
- Obtaining a Capital Verification Report by a Certified Public Accountant (CPA). This process typically takes 3-4 weeks to complete and be issued the proper form by the CPA.
- Obtaining a financial certificate registration. The WFOE certificate of approval will contain an approval number, the date of approval, total investment, and other relevant information.
It is worth noting that activities such as marketing, branding, business development, quality control, etc. do not necessarily require the setup of an entity in China. Horizons will simply become the “Employer of Record” of your staff in China. Further, we will ensure that the employee signs a compliant labor contract in China, with our local entity.
Horizons HR team will take care of the payroll and tax declaration, while the employee will be exclusively working for your project as a normal employee.
Conclusion
In summary, compared to registering a business in most Western countries, registering a business in China is challenging work filled with paperwork.
A WFOE finds it difficult and tasking to submit the application documents to local authorities, hence, making it practically impossible to complete the registration procedure without a consulting company service.
Additionally, it would only need to ensure that the company is capable, qualified, and has incredible affiliations; procedural knowledge, and relationship with the local authorities, as this makes the application process easy and time-saving.
Further, the registration process can be confusing and discouraging for foreign investors. However, thanks to the support of Horizons the process will be smooth, time-saving, and cost-effective.
Horizons expert team will handle all the paperwork and bureaucracy requirements on your behalf. Thanks to our support your WFOE can be established within a short timeframe and your business will be quickly operative in China.
For more information about setting up a wholly-owned foreign enterprise in China, detailed requirements, and procedures, contact us today and we will provide the needed assistance.
