Setting Up a Wholly Foreign-Owned Enterprise (WFOE) in China
Sept. 11 – A wholly foreign-owned enterprise (WFOE) is a company established in China according to Chinese laws and wholly owned by one or more foreign investors. A WFOE is a limited liability company, meaning that the liability of the shareholders is limited to the assets they brought to the business. Unlike the simpler representative office setup which is subject to a number of limitations, a WFOE can make profits and issue local invoices in RMB to its customers, which is crucial as invoices are the basis for obtaining tax deductions in China. Compared to a joint venture, a WFOE has greater freedom and independence, and can better protect its intellectual properties. It can also employ local staff directly, without obligation to employ services from employment agencies. Although there is no legal restriction on the number of foreigners a WFOE can employ, in practice the number of foreign employees does depend on the amount of registered capital (discussed below) that the respective company injects.
The Chinese government’s initial aim in permitting the establishment of WFOEs in 1986 was to introduce advanced technology into China and to encourage export-oriented manufacturing activities. Since then, the scope of business allowed to WFOEs has steadily increased.
After joining the World Trade Organization in 2001, WFOEs were allowed in consulting and management services, software, development and trading. Further sectors have been progressively opened up in the course of the past few years.
The fundamental legal bases for WFOEs are:
Law on Foreign-invested Enterprises (“WFOE Law
”), effective April 12, 1986 and subsequently revised on October 31, 2000;
Implementing Rules of the WFOE Law, effective December 12, 1990 and subsequently revised on April 12, 2001; and
Company Law, effective January 1, 2006.
WFOE StructuresThere are three distinct WFOE structures:
While all three structures share the same legal identity, they differ significantly in terms of setup procedures, costs and the range of commercial activities in which they are allowed to engage. Trading WFOEs and Manufacturing WFOEs must derive the majority of their revenue from that main business, but can also provide associated services. Meanwhile, some Service WFOEs can also conduct trading activities related to their services.
When applying to set up a WFOE, the business scope must be specified in the application. The business scope is a one sentence description of the business activities in which a business will engage, and will appear on the business license. Note that the WFOE can only conduct business activities within its business scope and any amendments to the business scope require further application and approval, and can be quite time consuming. We include examples of the business scope for each WFOE setup below.
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