How to Setup WFOE – Wholly Foreign Owned Enterprise in China?

China is the second-largest economy on the planet, and a huge amount of foreign capital has been coming in recent decades.

One of the main objectives of the new PRC Foreign Investment Law (FIL), which entered into force on 1 January 2020, is to fulfill the country’s pledge to open its markets further, fostering inbound investment from abroad and strengthening transparency in regulation.

The Foreign Investment Law (FIL) superseded the 3 of former regulations overseeing foreign investment and foreign-invested enterprises (FIEs) in China, namely the Chinese-Foreign Equity Joint Venture Law, Chinese-Foreign Cooperative Joint Venture Law, and the Wholly Foreign-Owned Enterprise (WFOE or sometimes referred to as WOFE) Law.

According to the FIL, the provisions outlined in the WFOE Law and Joint Venture (JV) Laws are no longer enforceable. Instead, all Foreign-Invested Enterprises (FIEs) in China must adopt one of the legal structures specified, including Limited Liability Company, Company Limited by Shares, or Partnership.

However, despite these changes, the terms ‘WFOE’ and ‘JV’ are commonly utilized for ease of communication when referring to pertinent investment structures.

As mentioned in our article ‘FastLane is delighted to announce the opening of our new office located in Shenzhen China!’, the FastLane Group has successfully expanded our business presence into Mainland China. As the Greater Bay Area holds great potential for businesses, we are keen to help our clients take advantage of the growing opportunities in this region. In this article, we will discuss how to expand into China through setting up a WFOE and what you have to consider before incorporations.

What is a WFOE?

A Wholly Foreign-Owned Enterprise (WFOE) is a type of limited liability company in China that is wholly owned by foreign investors, including individuals or corporate entities, such as those from Hong Kong. A WFOE has the capability to undertake various activities similar to any other Chinese company, including:

• Trade freely in China: A WFOE can engage in various trading activities within China’s domestic market without the need for a local partner. This includes buying and selling goods and services, entering into contracts, and conducting business transactions independently.
• Make revenue in CNY: A WFOE can generate revenue in Chinese Yuan (CNY) through its business operations conducted in China. It can receive payments from customers in CNY for the products or services it provides.
• Invoice (produce fapiao) in CNY: Fapiao is an official invoice issued by the Chinese tax authorities for the sale of goods or services. A WFOE can issue fapiao to its customers in CNY for the goods sold or services rendered, which is essential for compliance with Chinese tax regulations.
• Employ staff: A WFOE has the authority to hire local and foreign employees to support its business operations in China. It can recruit staff directly, set up employment contracts, and provide benefits and salaries to its employees according to Chinese labor laws and regulations.
• Transfer profits back abroad: One of the key advantages of a WFOE is the ability to repatriate profits back to its foreign investors or parent company abroad. After fulfilling tax obligations in China, a WFOE can remit its profits overseas, subject to certain regulatory procedures and foreign exchange control regulations.
• Export goods: A WFOE can export goods manufactured or sourced within China to international markets. It can engage in export activities, including obtaining necessary export licenses, shipping goods, and complying with customs and trade regulations, to sell products to customers outside of China.

Frequently, a WFOE is established as an overseas-based foreign company’s subsidiary, functioning autonomously as an independent entity within China.

WFOEs can be classified into 3 sub-categories: 

• Manufacturing WFOE: Engaged in the manufacturing sector.
• Trading WFOE: Operates in trading, wholesale, retail, or franchise industries.
• Consulting WFOE: Provides consulting and services within various sectors.

Pros and Cons of a WFOE

A WFOE in China is a great opportunity for foreign investors who want to take advantage of the country’s developing economy. On the other hand, there are some challenges and factors that should be considered. Let’s delve into the pros and cons of setting up a WFOE in China:

Pros

• Separate Legal Entity and Limited Shareholder Liabilities: The main benefit of establishing a WFOE is that it functions as a distinct legal entity. This architecture provides shield to shareholders, who are only liable to the extent of their investment in the company. In case of legal disputes or financial problems, the personal assets of shareholders are protected from possible losses.
• No Requirement for Chinese Partner: Other business models in China, such as Joint Ventures (JVs), do not require a Chinese partner, unlike WFOEs. This removes the requirement to split profits or management control with a local entity, giving foreign investors total control over their business operations and strategic decisions.
• Operational Independence: WFOEs have operational freedom, which prevents them from having to be under the control of a local business partner. Such independence allows more variability in the implementation of business practices, marketing strategies, and the scale of operations that are adjusted to the needs of the Chinese market.
• Intellectual Property Protection: WFOE formation gives foreign investors more control over their intellectual property (IP) assets. WFOEs provides a safe haven to protect valuable IP assets from infringement or unauthorized use by competitors in the light of China’s changing IP laws and enforcement mechanisms.
• Capability to Conduct Transactions in CNY: WFOEs can invoice clients and receive payments in Chinese Yuan (CNY). This will make the local market transaction smoother and thus, increase the company’s competitive advantage by meeting the demands of the Chinese consumers.
• Currency Conversion and Profit Repatriation: WFOEs are allowed to convert currencies and transfer profits overseas, which allows foreign investors to hedge foreign exchange risks and bring home their earnings.

Cons

• Lengthy Setup Process: The establishment of a WFOE in China is a long process, and it normally takes more than two months to be accomplished. The duration is business-specific, and in some cases, market entry and business operations may be delayed due to industry regulations and local administrative procedures.
• Limited Access to Government Support: While JVs, for example, can be eligible for various incentives, subsidies, and support programs from the government, WFOEs may not enjoy such benefits. This lack of government support may present issues with WFOEs in terms of financing, infrastructure building, or market development.
• High Minimum Capital Requirements: Some industries, especially financial sector, set high minimum registered capital requirements for WFOEs. Some enterprises might find it quite difficult to meet such capital requirements which may limit investment opportunities and growth prospects.

Which is the best place to start your WFOE?

China has a huge market with industries that are concentrated in particular regions. As an example, Shenzhen is famous for its high-tech and innovation industries, Guangzhou for advanced manufacturing, and Chenghai for the toy industry. The choice of the best location for Chinese company, especially such as Wholly Foreign-Owned Enterprise (WFOE), plays the key role in its success. Hence, using the local knowledge of China’s regional industrial landscapes is vital for making intelligent choices. Such knowledge allows businesses to align their operations and with regional industry focus and therefore maximize opportunities for growth and competitiveness.

Minimum registered capital

Earlier, Wholly Foreign-Owned Enterprises (WFOEs) were required to have a minimum registered capital to operate, although the law did not specify the amount.

Nonetheless, amendments in the foreign investment legislation have removed the requirement of a minimum registered capital for most business activities, with some exceptions of financial-related activities. This modification is aimed at lowering the entry barriers for foreign firms that are interested in setting up WFOEs in China.

Although there are general rules, the question of the proper registered capital remains an individual one. It is recommended to consult the corporate services providers for the exact information that is suitable for the particular circumstances.

For those who are flexible in terms of the WFOE location, the comparison of the conditions for different areas might be helpful.

However, the process of registration of increase of share capital in China is quite complex. Therefore, it is wise to create a budget plan that will guarantee that the initial registered capital is enough to maintain business operations for a reasonable period.

WFOE Registration Process

The process of registering a WFOE entails several stages, and the laws and regulations related to it may vary depending on the region or location.

That means while the main sequence of events will be more or less the same for all WFOE businesses, the related details could differ depending on the type of business and the location specific to the start-up.

Seeking the assistance of a professional for personal advice is inevitable on the successful application of a WFOE.

The general WFOE registration steps are:

1. Select a Business Name: Select a name that complies with the Chinese business name specifications, taking into account cultural and linguistic subtleties.
2. Prepare Incorporation Documents: Collect required documents such as Articles of Association, lease agreements, and a Feasibility Study Report that is specific to your business type and location.
3. Apply for Business License: Submit applications for business license to both the Ministry of Commerce (MOFCOM) and the local Administration for Industry and Commerce (AIC).
4. Register for Business Taxes: Register for business taxes at the state and local level and to comply with the appropriate tax regulations.
5. Register with Other Authorities: If your business is of a certain nature, you may need to register with other authorities like Customs or e-Port registrations for some regulatory needs.
6. Obtain Company Chops: Request company chops, such as company chop, financial chop, and legal representative chop, from the local Public Security Bureau.
7. Register with Foreign Exchange Bureau: Finish registration with the Foreign Exchange Bureau to allow for currency transactions and to comply with foreign exchange regulations.
8. Open a CNY Bank Account: Set up a Chinese Yuan (CNY) bank account to help in operations and transactions within China.

The process of gathering all the necessary documentation for the WFOE application, in most cases, is so hectic and exhausting. You will generally need to provide the following documents: 

• Passport copies of company director(s)
• Passport copy and details of the legal representative
• Passport copy and details of the company supervisor
• Rental contract for the company office lease
• Chinese name of the company
• Business scope
• Copies of overseas company registration documents (if the foreign investor is a corporate entity)

How many days are required to set up a WFOE in China?

The time for the WFOE registration process usually depends on the WFOE type.

Establishing a Consulting WFOE is quite easy in the sense that they are limited to services and not in the sale of goods. Unlike Manufacturing or Trading WFOEs, Consulting WFOEs do not need additional certificates like Import/Export Licenses or environmental impact assessment reports.

The registration of a WFOE takes an average of 1.5 to 2 months to be completed, but it may take more time in some cases.

How Can FastLane Help You?

The process of gathering all the necessary documentation and the WFOE application can be so hectic and exhausting. With our incorporation service, Fastlane can take care of the full WFOE application process and make sure the WFOE is incorporated according to all the legal requirements for your business. 

We also offer additional corporate services like a company secretary, accounting, and audit. With the depth of knowledge of our team, we can help your company meet all compliance requirements and guarantee that the procedure is efficient, timely, and complete with all necessary documentation. 

Get in touch with us to find out more about how we can support your success!