China, being the world’s second largest economy and one of the world’s most attractive emerging markets has become an international economic hub. Foreign investment has increased in China over the past decades, and among the various forms of foreign invested enterprises (“FIE”) that are commonly utilized when expanding into China, Wholly Foreign Owned Enterprises (“WFOE”), sometimes referred to as WOFE, are the most favoured investment vehicle for non-Chinese enterprises. Pursuant to China company laws, a WFOE is a China-based business entity designated for non-Chinese enterprises setting up a company in China. It allows non-Chinese enterprises to establish their limited liability company in China.
The WFOE formation is simple with clearly defined requirements. Firstly, a WFOE must fill three main roles within the company, the legal representative, supervisor and a director. Upon identifying individuals who can fill these roles, a company name must be chosen. Chinese authorities maintain strict guidelines on what names are considered appropriate for a WFOE. Please refer to our WFOE incorporation guide for further details on the rules surrounding WFOE naming requirements.
A registered address must be utilised for WFOE registration purposes. During the WFOE registration process, applicants must provide documentation demonstrating that a registered office address has been obtained. Under China company laws, it is prohibited to utilize a virtual office as a registered address during WFOE registration.
Finally, there are no fixed rules regarding the minimum registered capital required, though it is recommended to inject sufficient capital for a WFOE to conduct their business operations.
Very briefly, the WFOE incorporation process is as follows:
The above steps are the absolute minimum steps required to set up a WFOE. Upon obtaining your company chops and opening a company bank account, your WFOE will be able to operate normally. However, to the extent that a WFOE engages in industries which requires a license, the WFOE may need to obtain further licenses and register with the relevant authorities.
Please refer to our blog for the complete guide on the WFOE registration process!
As the WFOE registration process can be lengthy and subject to approval from various Chinese Government authorities. To set up a WFOE in China, the process can take approximately 6-8 weeks to complete if all the required documents are in order.
China Company Laws have a reputation of being complicated and rigid. As such, foreign investors will commonly utilize a Hong Kong holding company between their ultimate holding company in their home country and their WFOE in China.
One such benefit of utilizing a Hong Kong holding company is that the profit repatriation process becomes more economical. Companies who are operating in multiple jurisdictions can utilize the various double taxation treaties concluded by Hong Kong and its various co-signatories to minimize potential tax liabilities commonly incurred during repatriation of profits.
In addition, Hong Kong offers a good option to exit from your investment in a Chinese WFOE. As all equity transfers of companies in China require approval from the Chinese authorities, the process can be considered comparatively inefficient. Aspects of the equity transfer such as the price, condition and timeline of the payment can be challenged. In comparison, Hong Kong companies are not required to obtain approval for the transfer of shares.
In China, company chops are used to legally authorize documents and are used in lieu of signatures. Company chops are necessary for doing business in China, especially when signing legal documents such as when opening a bank account. Company chop’s have legal authority over the signature of a WFOE’s legal representative and have the power to validate documents and contracts regardless of who uses it.
WFOE’s can expect to utilize a variety of chops as follows:
During the WFOE registration process, careful consideration should be made to your WFOE’s business scope. The Chinese Government maintains the right to prohibit or restrict a WFOE’s business activities if its business scope is deemed to not align with Chinese laws and regulations. To avoid any unnecessary complications upon commencement of your business operations, take time to ensure that your business scope aligns with the long-term goals of your WFOE.