Foreign businesses looking to establish a presence in China for the first time have several different options when it comes to deciding on an appropriate legal entity. Of the four options available, the Wholly Foreign-Owned Enterprise (WFOE, but sometimes written incorrectly as WOFE) is the most common, with around 83% of businesses choosing to use that structure to enter Chinese markets. WFOEs are especially popular with companies wishing to establish a presence in China for the long-term.
What is the attraction of a WFOE in China?
One of the major attractions to setting up a WFOE (WOFE) is that the business need not secure the support of a Chinese investor. Other legal structures – such as Joint Ventures (JVs) – require this kind of partnership, and that can be problematic – even prohibitive – for companies that have few contacts in the region or are unable to secure a compatible partner for other reasons. WFOEs, on the other hand, help businesses overcome those issues by allowing foreign investors to incorporate foreign-owner limited liability companies in China. With a WFOE, the capital invested in foreign-owned, the owners maintain a much higher degree of control over the business strategy and operations, and local management is much more flexible.
While most of the WFOEs set up in China tend to be for the establishment of manufacturing operations, WFOEs are suitable for a range of opportunities in China, including movement into high growth areas like technology, education, finance, automotive, and business-to-business (B2B) activities. Indeed, WFOEs are subject to fewer limiting legal regulations, making them suitable for a greater range of business activities.
Are there any reasons not to open a WFOE in China?
WFOEs offer the greatest benefits to foreign investors looking to enter Chinese markets, but they come with their own drawbacks. While none of these drawbacks are insurmountable, serious investors should consider them carefully and plan ahead to avoid unnecessary delays or issues in the WFOE registration process.
- Investment in the business must come from foreign sources.
- It may take a long time to set up a WFOE in China because several departments are involved.
- The paperwork is complex and errors can be fatal for the business’s application.
- Regulations may be more restrictive than anticipated, and legal advice is therefore highly recommended.
Thankfully, organizations exist to help foreign companies set up a WFOE in China, so these considerations need only be borne in mind until expert advice can clarify any difficult points.
How to register a WFOE in China
If foreign businesses want to set up a WFOE in China, each business should ensure they are meeting all regulations for their particular activities and industry (for example, manufacturing businesses must conduct an environmental impact assessment as part of their WFOE registration). That said, the general process for establishing a WFOE involves the following steps:
- Name Approval: Among other things (such as ethics and existing company names), regulations dictate that, to be approved, a Chinese company name should follow a certain structure: administrative region name of incorporation; brand name; industry or business; followed by ‘Company Limited’.
- Securing Premises: A company must own or lease business premises to operate legally in China, and details of the space must be submitted with applications for registration of a WFOE.
- Filing Records with MOFCOM: Companies must submit certain documents to the Ministry of Commerce. These include: application forms; commitment letter from investors or their representatives; business license or pre-approval documents in the name of the WFOE; identity documents of investors and legal representatives, and certain power of attorney documents.
- Obtain Five-in-One License: Companies must obtain this comprehensive license, which covers: business license, organization code, tax registration certificate, social security certificate, and statistical registration certificate.
- Acquire a Company Seal: All businesses operating in China must have an official seal, which must be round in shape and bearing the official company name in Chinese and English (where applicable).
- Opening Bank Accounts: Companies must have a foreign exchange account and a local Renminbi (RMB) account for their daily cash and other business transactions in China.
- Registering as a Taxpayer: Depending on the situation, companies must register either as small-scale taxpayers or as general taxpayers by filing the relevant documents with the local tax bureau.
WFOEs are the most popular legal structure for foreign-owned companies establishing a presence in China for a reason. Despite their potential drawbacks, WFOEs offer the greatest flexibility and control and should be top of the list of options for companies planning to expand into China. Another alternative is to use a China PEO & EOR, which allows companies to expand without creating a company in China.