Wholly Foreign Owned Enterprise (WFOE)
The Wholly Foreign Owned Enterprise (WFOE or WOFE) is a Limited liability company wholly owned by the foreign investor(s). In China, WFOEs were originally conceived for encouraged manufacturing activities that were either export orientated or introduced advanced technology. However, after China’s entried into the WTO, these conditions were gradually abolished and the WFOE is increasingly being used for service providers such as a variety of consulting and management services, software development and trading as well. With that, any enterprise in China which is 100% owned by a foreign company or companies can be called as WFOE.
WFOE has great potential in China as companies seek new markets, executives say that by 2014 China will be the world’s top investment destination.
The registered capital of a Wholly Foreign Owned Enterprise (WFOE) should be subscribed and contributed solely by foreign investor(s). A WFOE does not include branches established in China by foreign enterprises and other foreign economic organizations. The Chinese Laws on WFOE do not have a clear definition of the term of “branches”. The term of “branches” should include both the branch companies engaged in operational activities and representative offices, which are generally not engaged in direct business activities. Therefore, branches and representative offices set up by foreign enterprises are not WFOE.
2. Advantages of WFOE
The advantages of incorporation a WFOE, compared with other types of enterprises, include, but not limited to:
- Independence and freedom to implement the worldwide strategies of its parent company without having to consider the involvement of the Chinese partner;
- Ability to formally carry out business rather than just function as a representative office and being able to issue invoices to their customers in RMB and receive revenues in RMB;
- Capability of converting RMB profits to US dollars for remittance to its parent company outside of China;
- Protection of intellectual know-how and technology;
- For Manufacturing WFOE, no special requirements for Import / Export license for its own products;
- Full control of human resources
- Greater efficiency in operations, management and future development.
3. Articles of Association
Articles of Association is Company Rules in China and it will mention exactly how the WFOE can operate, the official version of Articles of Association must be in Chinese.
4. Business Scope
According to WFOE regulations, “Foreign investors are permitted to setting up a 100% foreign owned enterprise in industries that are conducive to the development of China’s economic benefits, and not prohibited or restricted by China government.” The Catalogue of Guidance to Foreign Investment” [-Latest Catalogue of Guidance EN–CN-]categorises fields of potential investment as “prohibited,” “restricted” and “encouraged”. It is advisable to fully comprehend the interpretation of these categories. In China, Business scope of a business is a “one sentence description” covering all of the present and future activities of the WFOE; it is essential this encompasses every envisaged scope of future activity. The WFOE can only conduct business within its approved business scope, which ultimately appears on the business licence.One of the most important issues in WFOE application is business scope. Any amendments to the business scope require further application and approval. Business scope of a company in China is not as broad and general as in other countries. Generally business scope includes investment consulting, international economic consulting, trade information consulting, marketing and promotion consulting, corporate management consulting, technology consulting, manufacturing, etc. After China’s entry into WTO, more and more business is open to WFOE especially in Trading, Wholesale and Retail business, check the Catalogue of Guidance to Foreign Investment which was Amended in 2007 [-Latest Catalogue of Guidance-] (PDF, 325 KB)
5. Registered and Paid up Capital
Registered Capital: USD$140,000 is a good idea for all kinds of WFOE, with USD$ 140,000 investment it’s easy to get approved. Initial Paid-up would be 20% of the registered capital, the balance should be remitted within 2 years.
Registered capital is the amount that it’s required to run the business until it can break even – the ‘registered capital’ is a guideline only. If you do looking for a minimum registered capital, for instance RMB 30,000 (which is impossible to establish a WFOE in China) this means you will run out of money pretty soon, which leads to increased costs in reapplying for permission to increase capital, additional licensing fees and renewals of business licenses and so on. The WFOE needs funding via it’s registered capital until it’s about to support itself from it’s own cash flow.
However the amount of registered capital is dependent upon factors like Scope of Business and Location. In reality local authorities will review the feasibility study report (and check the lease contract) approve the investment on a case-by-case basis; reduced registered capital could be negotiated in some cases.
The minimum registered capital guides for various industries according to our practice in China, for instance Beijing, Shanghai[100k RMB registered capital Sample], Guangzhou, Shenzhen, Hangzhou, Dalian, Ningbo are given below:
|Type of WFOE||Minimum Registered Capital|
|Consulting WFOE||RMB 100000 ~ RMB 500000|
|Service WFOE||RMB 100000 ~ RMB 500000|
|Hi-Tech WFOE||RMB 100000 ~ RMB 500000|
|Trading WFOE / FICE/ Retail||RMB 500000 ~ RMB 1 million|
|Food & Beverage WFOE||RMB 500000 ~ RMB 1 million|
|Manufacturing WFOE||RMB 1 million or USD 140000|
6. Office address of WFOE [Very important]
Before submit the application forms of forming a WFOE in China, the foreign investor must rent a plant(manufacturing WFOE) or an office in advance(ridiculous? ), the office of WFOE can’t be in a residence building nor residence and commerce (R&C) combined building. **Virtual address is not allowed to be registered a WFOE there although it’s widely existing for local companies. Anyway, a normal office building in China will be OK for register a WFOE.
**Beijing will be special on this regulation, it’s OK for investor to register a WFOE in R&C building if all landlords of this building agreed to allow the registration there and landlord committees register the building with local State Administration of Industrial and Commerce. Check with our Beijing Contacts on the right side before you doing so.
Make sure that investor put a note in the lease contract that the office will be OK for registere a WFOE and landlord should refund all deposit and rental in case it failed to register the WFOE which caused by documents of address. Landlord must provide documents of address like: 1. Lease contract [-Sample-] (280 KB); 2. Identification of landlord for instance: individual[- I.D. copy -](180 KB) Company[ Business license copy ](321 KB); 3. Landlord’s [- property ownership certificate -](1,166 KB) etc. Make sure Item 2 is accordant with Item 3.
In China, one office room could only register one business. An already taken office can’t been registered again. There is no public resources to find out if an address been registered or not although local SAIC has the internal database to access it. How to solve it and reduce the risks? To have the landlord check with local SAIC and put terms in a lease contract.
Registered address and operation location can’t be different, although it’s widely existing in China that a company registered in one address operate in another.
Office relocation will bring lots headaches since all the licenses with business address on it should be updated to the new office address and Tax Clearance Declaration Report may be involved if the office relocate to another district.
In Shanghai Municipality. Since most applications would be approved through District Government level, If you rent an office in Jing’an District of Shanghai and operate the business there, after 1 year you want to relocate the office to another office building of Jing’an District, you will apply for change all the licenses to another building of Jing’an.
If you rent an office in Jing’an District of Shanghai and operate the business there, after 1 year you want to relocate the office to Pudong district, the CPA firm should provide Tax Clearance Declaration Report, which is just as complicated as an audit report. You could then apply for change all the licenses to Pudong district.
7. Choosing WFOE Company Name
Choosing the business name The official company name of a WFOE in China should be in Chinese. The Chinese name should be formatted as: first word -company name/product(For instance: MCK; second word: activity (For instance: business consulting); third word: location/name of city (For instance: Shanghai, Beijing); fourth word – company structure. (For instance: Co., Ltd.) With that a company called MCK register in Beijing engage Business Consulting Service LLC will be called: MCK business consulting (Beijing) Co., Ltd. The name then has to be registered with the local Administrative Bureau for Industry and Commerce (SAIC). The use of the word ‘China’ or ‘International’ in their Chinese name, have to have a minimum capital of US$10,000,000 instead of US$ 100,000. These words will have to be avoided therefore , although they are permitted in the non-Chinese name. Prior to any of the following applications, the investor(s) should reserve a name for its prospective WFOE with the local SAIC. This is called “Name Pre-registration” in China. SAIC requires that a proposed name and FIVE-EIGHT alternative names be provided. The State Administration of Industry and Commerce (SAIC) has the final say in whether a name is allowed or not.
8. Business License
Business license [WFOE business license: sample]is the key offical document of the WFOE (like Certificate of Incorporation in Other countries).
Once your business licence is approved by State State Administration of Industry and Commerce (SAIC) (SAIC). Having obtained certificate from the tax authority, you are now legally entitled to open foreign exchange and RMB accounts and can start to hire staff, sign contracts, apply for work permit and residence permit and the WFOE is now in business in China.
9. General Tax Information
Since Jan. 1, 2008, China’s new corporate income tax [-Corporate Income Tax Law-] (193 KB) rates begins with 25% although some industries still enjoy a lower rate which is15%, the rate depends on the places where the company is registered and the industry that a company engaged. Please check the latest Corporate Income Tax Law of China above. All enterprises are required to report to the Tax Administration Department monthly, quarterly, annually. Path To China provides part time accountant service for our clients, you are welcome to contact us for more information.
10. Annual Audit Report
Any limited companies in China should summit annual audit reports to the relevant authorities. The audit reports are including: balance sheets and income statements for their annual Chinese audit. The annual audit and licenses renewal cost is about RMB 6,000. Any company will be subject be to a fine if the Annual Audit Report is not submitted in a timely manner. (June 30th is the deadline of an annual audit report submission and licenses renewal in China)
11. Profit Repatriation
China Government allows Foreign Invested Enterprises remit their profits out of the country and such remittances do not require the prior approval of the State Administration of Foreign Exchange (SAFE). Dividends cannot be distributed and repatriated to oversea if the losses of previous years have not been covered while dividends not distributed in previous years may be distributed together with those of the current year. Repatriating the Registered Capital to home countries is forbidden during the term of business operation.
12. Terms and Termination
In China, terms of 15 to 30 years are typical for a manufacturing WFOE (although some may have a longer term). It is also possible to obtain extensions of the WFOE’s duration. For projects in which the amount of investment is large, or the construction period is long and the return on investment low, projects producing sophisticated products using advanced or key technology provided by the foreign partner, or for projects producing internationally competitive products, the term of WFOE may be extended to 50 years. With special approval from the State Council, the term may be even longer than 50 years.
The WFOE may be terminated under certain conditions. For example, the inability of the WFOE to operate due to heavy losses, or in the occurrence of an event of force majeure, etc.