WFOE

A Wholly Foreign-Owned Enterprise (WFOE), also known as Wholly Owned Foreign Enterprise, is a limited liability company established within the territory of China through foreign investment only.

WFOEs are becoming increasingly more popular, mainly because of the fact that there is no involvement of any Chinese investor thus giving the foreign company complete control over the newly established business.

Even though this complete control might sound rather tempting to foreign investors, one should take into consideration that the lack of a Chinese partner often puts a serious strain on the development of good personal relationships, something of which the importance in China should not be underestimated. The duration of a WFOE is usually between 15 and 30 years, with possibilities of extension to 50 years or longer (Only for certain types of projects and with special approval from the State Council).

The registered capital requirement for the establishment of a WFOE varies depending on the type of industry and the area where the company will be located. The minimum amount, however, is RMB 1.000.000, roughly US$ 100.000. Another important aspect of a WFOE is its business scope.

A WFOE can only operate within the business scope as set forth in its business license. If it decides to pursue other activities than the ones mentioned in its scope of business, it will first have to gain approval from the relevant authorities.

While it used to be the case that certain criteria had to be fulfilled by a company before it would be allowed to establish a WFOE, like for example being conducive to the development of the Chinese national economy or having most of its products focused on the export market, this no longer holds true. This is due to China's entry into the WTO, which forced it to abolish these requirements.  

Process

Establishing a Wholly Foreign-Owned Enterprise
If a foreign company wants to establish a WFOE, it will first have to reserve a name for the company with the SAIC (The so-called pre-registration of a name).

Approval

After having reserved the name for the WFOE, certain documents have to be submitted to the approval authorities in the area where one intends to open the company. 

A project proposal which should contain the following points:

•A detail report

- The purpose, scope of business, scale of operation and production plan of the WFOE
- The technology, equipment, public facilities and sites that will be used
- The financing of the project, the forecasts and evaluations as well as the wages of the personnel

•A written application letter for the establishment of a WFOE, along with a feasibility study report, proof of the pre-registration of the company name with the SAIC as well as an office lease agreement

•A list of the members of the board of directors, including the proposed chairperson, and their respective appointment letters

•Document of incorporation as well as a credit certificate of the WOFE investor

•The articles of association of the company

Once the approval authorities have received all the necessary documents, they have 90 days during which they will have to decide whether or not they will grant the approval to establish a WFOE. The actual decision is, however, often given within 30 days.

Registration

Within 30 days of having received the Approval Certificate, the foreign investor will have to go to the SAIC to register and apply for a business license. This license has to be issued within 30 days. After the registration with the SAIC has been completed the company should take care of its registration with tax authorities, banks, etc. 

Legal Information

1. Status

Such a company is registered with foreign capital in China and under Chinese law. Board of directors and legal representatives are appointed by the foreign mother company. The WFOE abides by the Chinese company law and regulations like any other Chinese company.

It is generally treated the same, with some differences, sometimes favourable sometimes not. In general the differences are reducing and I would not consider that WFOE are at a disadvantage against Chinese companies from a legal and regulatory point of view.

2. Legal liability

The WFOE is liable to its assets like a limited liability company in Western legal practice. The minimum capital to be registered is usually around USD 200'000.-.

3. Commercial Activity

Chinese corporate law restricts companies to their business scope, i.e. the range of business activities it can perform. A WFOE is also restricted in such a way. The business scope of a WFOE is usually restricted to a manufacturing or processing activity. Certain special economic zones allow WFOEs to have a purely distribution activity for products of the mother company's group. Pure trading as a business scope (i.e. just buying and selling as a third party between 2 partners) is normally not allowed for a WFOE.

Within its business scope, the WFOE can have normal commercial activities of buying materials, transforming them and reselling its products, locally or abroad. If it approved to do so, it can just buy, store and distribute and act as its mother company's Chinese agent.

The WFOE can declare customs, import and export according to its business scope.

Local currency can be exchanged against hard ones provided it is for legal buying activities in respect with the business scope.

Profits can be repatriated, in foreign currency.

4. Personnel

Local staff is hired directly under the Chinese labor law. All its dispositions must be respected. They do not make it difficult to hire and fire people. Trade unions are encouraged but not obligatory. In any case, they have proved to be no hindrance to the management.

Foreign managers can be apointed and receive work and residence permits as well as the apropriate visas.

5. Premises

They can be any premise in China. Restrictions occur in case a WFOE applies for a business scope only available in a special zone. Premises must then be bought or rented in that zone. Foreigners are still restricted to live in approved housing.

6. Taxes

WFOE pay income tax as Chinese companies (usually 33% of the net profit).

Tax breaks can be obtained for encouraged industries or export-oriented industries.

In addition WFOE normally obtain the right to import all of their production equipment free of VAT and customs tax.

Personal income tax of the WFOE must be paid by the employer. 

7. Requirements for Registration

The WFOE must be approved to be registered. This approval will include checking:

• -Checking up the documents and preparing the legal forms
• -Checking and registering the company name
• -Obtaining the approval certificate (from the relevant district's office for Industry and Commerce)
• -Applying and obtaining the business license.
• -Applying for the enterprise code license
• -Registering with the local bureau of statistics
• -Registering with the local tax bureau
• -Obtaining the bank account and foreign exchange certificates
• -Opening the foreign exchange and RMB bank accounts
• -Obtaining the health certificate for the legal representative
• -Obtaining the residence permit for the legal representative
• -Checking the registered capital
• -Obtaining the import-export license & the VAT invoices (Trading companies/FICE only)
• -Local customs registration (Trading companies/FICE only)