A Wholly Foreign-Owned Enterprise (WFOE) refers to enterprises in China that are 100% foreign-owned, as opposed to joint ventures that involve at least one domestic (mainland) partner.
WFOEs were previously subject to strict restrictions, such as capital requirements set at levels within the resource limits of only large multinational and medium-sized companies. However, the positive effects of foreign direct investment in China prompted the government to relax the requirements for WFOEs to encourage the inflow of foreign capital. For example, the capital requirement for companies wishing to start a consulting firm used to be $140,000, but has now been reduced to 100,000 RMB (about $15,000). In addition, foreigners can now obtain an import/export license even if they were not eligible.
Benefits of a WFOE
The first advantage of setting up a WFOE in China is the independence of the activities to which the company is entitled. Since the involvement of a domestic Chinese investor is not required, the WFOE model allows the business to operate in accordance with the interests of the parent company, without the lengthy negotiation processes that would otherwise take place under a a joint venture.
WFOE has the added business advantage of existing in China as a stand-alone legal entity with the operational functions of a registered company. It has the operational flexibility to execute sales and marketing plans, recruit staff, issue invoices, receive RMB revenue and apply for business licenses – all of which is not allowed within the purely administrative functions of a representative office.
WFOE’s recognized legal identity also gives it a higher level of intellectual property protection, as its legal rights are enforceable within the national jurisdiction of China. A WFOE is also eligible for the tax exemption if it operates in a free trade zone, an export processing zone or provinces designated for the establishment of foreign investment enterprises.
Foreign companies that lack the knowledge and expertise of business practices in China would find it difficult to establish a business relationship (guanxi) with customers or suppliers. This could negatively impact WFOE’s long-term operations, particularly if it is unable to create a more profitable and efficient supply chain than its competitors.
Setting up a WFOE can also be a long and cumbersome process, especially if language barriers further complicate complex licensing procedures and government bureaucracy. Setting up the WFOE can take four to six months, depending on the nature of its business and the licensing requirements to which it is subject.
Integrating a WFOE may not be an economically viable option for small operations with limited resources, as the setup process can be costly. A WFOE must deposit a minimum of 20% of the share capital in a corporate bank account within the first three months of operation and the remaining 80% within two years. The amount of committed capital must be invested in business activities in China and it must be demonstrated that the return on this capital contributes to the Chinese economy (for example, by creating jobs or contributing to the development of regional infrastructure).
Terms of WFOE
While a WFOE is able to grow in terms of the size of its business, it is limited in its scope of business. When registering a WFOE, the entrepreneur must provide a detailed scope of its business and the nature of its business; the size of the business is subject to regulatory approval and then outlines the scope of business to which the business is entitled.
1. Pre-Registration Name: This will reserve the business name with the local Administrative Office of Industry and Commerce.
2. Approval of the project proposal: A detailed proposal must be submitted to the government, explaining:
The purpose and objectives of the WFOE Production and sales plan and forecasts Source of funding, financial risks and forecasts for best advice visit Moore MS Advisory. Area and location of business operations Personnel required, calculation and distribution of salaries. Intended use of utilities and utilities (e.g. water, gas and electricity).
