A (WFOE) wholly foreign-owned enterprise or (WOFE) Wholly Owned Foreign Enterprise, is an investment vehicle for China-based business wherein foreign parties can incorporate a foreign-owned limited liability company.
A WOFE is a Limited Liability Company in which shareholders can either be legal persons or natural persons. Deciding to set up a WFOE is recommended in contrast to the Joint Venture as it gives a clear advantage in management and strategy control.
Why set up a WFOE in China?
The WFOE concept was created from China’s desire to facilitate manufacturing activities that are either trade-oriented or present cutting-edge technology.
The main reasons a company will want to set up a WFOE include profit-oriented business activities, addressing human resources independently, or expanding to create subsidiaries.
Also, a WFOE is intended for foreign investors aiming to exclusively control their China investment and activity, with no Chinese shareholder, while being able to invoice the local customers in Chinese currency and invoice their overseas clients in either USD or EUR.
WOFE categories in respect of their main activity
- Services and business consulting WOFE: this type of WFOE is allowed to do consulting & services
- Trading WOFE: this WFOE is allowed to do trading, wholesale, retail, or franchise in China. This WOFE can obtain Import-Export Rights, buy and sell local or imported products to their clients in China, and/or export them. They are sometimes called FICE (Foreign-Invested Commercial Enterprise).
- Production or assembly WOFE: these types of WFOE companies are involved in all types of industries that process raw materials or secondary materials to produce other goods and services for import, export, and domestic wholesale.
Regulatory WOFE news
On January 01, 2020, a Law on foreign investments in China specifies the previously required Registration Approval Receipt is now canceled if the nature of the investment doesn’t belong to the foreign investment negative list.
Essentially, this means the incorporation or articles of association revision of a WOFE follows administrative procedures in line with those related to the Chinese-invested enterprises.
Also, for individual entrepreneurs’ business activities, a new regulation of the Market Management and Supervision Administration came into force in 2020. It approves the registration of a sino-foreign joint venture between a Chinese natural person and a foreign legal or natural person.
Classification of investment activities for foreign investors in China
All business areas run by foreign-invested projects must fall into one of the following categories according to the revised Foreign Investment Catalogue, as assembled by the National Development and Reform Commission and the Ministry of Commerce:
- Encouraged
- Restricted
- Prohibited
- Permitted
Areas where WFOEs are encouraged are specifically the industries that are encouraged in the “12th Five Year Plan”.
Restricted industries include financial services, mining, and media. But to access these industries, multinationals may be expected to enter into a joint venture with a Chinese enterprise.
Areas that are prohibited from foreign investment are very specific. They include cultural, sports, and entertainment industries, specific types of scientific research, and education.
Industries that are not listed in these three categories are open to foreign investment.
Minimum registered capital requirement for a WOFE
The cost of setting up a WFOE generally varies depending on the type of WFOE you plan to setup, as well as any extra requirements such as:
- The business field of activity considered, with respect to its classification in the Negative List
- The geographical area where the WOFE will be incorporated
- And Specific area’s requirements
However, there are 2 primary costs involved in setting up a WFOE, namely:
- Setup costs: these vary only according to the type of WFOE you set up and not according to the size or scope.
- Registered capital: WFOEs are not required to assign a set amount of registered capital, but they should assign an appropriate amount as it is a requirement for businesses to operate in China.
With respect to a WOFE subsidiary: the WOFE’s direct parent company will bring the initial registered capital as soon as the bank accounts of the WOFE are opened and functional.
Administration Requirements
WFOEs are mandated to assign no less than 3 individuals to the structure, which means a legal representative, a supervisor, and a financial officer must be appointed. The legal representative must also be at least the director and/or the general manager of the WFOE.
The appointment and liability of managerial functions are defined in the WOFE’s Articles of Association and they concern the Legal Head. They also concern other managerial functions (such as executive director and/or a general manager).
Hiring employees for your Chinese WOFE
A WOFE subsidiary has legal ability and can sign a direct employment contract with its Chinese and foreign employees.
Recommendations before setting up your WOFE subsidiary in China
This list is quite long but in summary:
- The foreign investment application permission is, except in special cases, commissioned to several provincial or municipal authorities.
- The significant filling of WOFE’s application for registration requires drafting an investment feasibility report.
- Regarding taxation, a WOFE is subject to all applicable Chinese business taxes.
- WFOEs in China have to keep their business constrained to the activities stipulated during the application process.
- A WOFE provides complete independent management of all procedures, which can be positive, but also comprises the negative aspect of having to manage China’s complex legal framework.
It is useful to conduct at first a broader analysis before initiating your WOFE registration in China.
Dormant company status in China
Since March 1, 2022, a new clause in Chinese business regulations permits a company or subsidiary to apply for a suspended activity status. According to the new law, if the company has encountered operational complications due to special situations, the company can apply for business suspension. Upon finishing the business suspension filing, the company’s status will turn to business suspension, meaning the company can retain its existence in a low-cost model within a period of up to three years and return to the market when it is ready.
For further details concerning legal requirements and processes of establishing your WFOE in China, let’s go ahead and contact your Damalion expert now.
