What is a Wholly Foreign-Owned Enterprise (WFOE)?
A Wholly Foreign-Owned Enterprise (WFOE) refers to businesses in China which are 100% foreign-owned, as opposed to joint ventures which involve at least one domestic (mainland Chinese) partner.
WFOEs were previously subjected to strict restrictions, such as the capital requirements which were set at levels within the resources of only large multinational and medium-sized firms. However, the positive effects of Foreign Direct Investments in China have prompted the government to ease the requirements on WFOEs to encourage the inflow of foreign capital. For instance, the capital requirement for firms seeking to start a consulting business was previously USD 140,000 but has now been reduced to RMB 100,000 (approximately US$15,000). In addition, foreigners can now be issued an Import/Export License, while they were ineligible to do so before.
Advantages of a WFOE
The first advantage of setting up a WFOE in China is the independence of operations that the firm is entitled to. As the involvement of a domestic Chinese investor is not required, the WFOE model allows the firm to operate in consistency with the interests of the parent-company, without the lengthy negotiation processes which would otherwise take place under a joint venture.
The WFOE possesses the additional business advantage of existing in China as an autonomous legal entity with the operational functions of a registered company. It has the operational flexibility to implement sales and marketing plans, recruit staff, issue invoices, receive revenues in RMB, and apply for trading licenses- all of which are not allowed under the purely administrative functions of a representative office.
The recognized legal identity of the WFOE also accords it a greater level of Intellectual Property protection, as its legal rights are enforceable within the national jurisdiction of China. A WFOE is also eligible for tax exemptions if it operates within a Free-Trade Zone, Export-Processing Zone, or provinces designated for the set-up of foreign-investment enterprises.
Disadvantages of a WFOE
Foreign firms lacking adequate knowledge and expertise of business customs in China would find it hard to establish a business rapport (guanxi) with clients or suppliers. This might have negative implications for the long-term operations of the WFOE, especially if it is unable to create a supply-chain that is more cost-effective and efficient than those of its competitors.
Setting-up a WFOE can also be a long and tedious process, especially if language barriers further complicate the complex licensing procedures and government bureaucracy. The establishment of the WFOE could take between four to six months, depending on the nature of its operations and the license-requirements that it is subjected to.
Incorporating a WFOE might not be an economically viable option for smaller operations with limited resources, as the setting-up process can be expensive. A WFOE must pay a minimum 20% of the registered capital into a corporate bank account within the first three months of corporation, and the remaining 80% within two years. The pledged sum of capital has to be invested into the firms operations in China, and it has to be shown that the return on this capital contributes to the Chinese economy (eg. by creating employment or contributing to the development of regional infrastructure).
While a WFOE is able to expand in terms of the size of its operations, it is limited where its business scope is concerned. When registering a WFOE, the entrepreneur is required to provide a detailed scope of their enterprise and the nature of their operations; the business scope is subject to approval from the authorities, and thereafter delineates the breadth in enterprise that the firm is entitled.
Procedures for setting up a WFOE
The following provides an outline of the core steps to be taken in establishing a WFOE:
1. Name pre-registration: this reserves the company name with the local Administrative Bureau for Industry and Commerce.
2. Project Proposal Approval: A detailed proposal has to be submitted to the authorities, providing elaboration on:
- The purpose and objectives of the WFOE
- Production and sales plan and forecasting
- Source of financing, financial risks and forecasts
- Land area and locality of the business operation
- Personnel required, wage calculation and distribution
- Planned usage of public utilities and facilities (eg. water, gas, and electricity)
3. Submission of documents to the authorities: these include the Articles of Association of the proposed WFOE, a list of proposed directors, and a Feasibility Study Report addressing the viability of the new business. The authorities would typically give a decision within 5-15 working days upon receiving all the required documentation, thereafter issuing an approval certificate to the firm.
4. Business License Registration: After obtaining the approval certificate, the firm must register and apply for a business license for the WFOE within 30 days. The business license is typically issued within 5-10 days after all required documentation has been received.
5. Registration with Government bodies and authorities, such as the State and Local Tax Bureaus.
Healy Consultants Group PLC provides a comprehensive spectrum of services for investors seeking to set-up a WFOE in China. With our international experience and wide network of business associates, Healy Consultants Group PLC assists entrepreneurs identify advantageous business opportunities and strategies in the Chinese market.