WFOE Guide

Wholly Foreign-owned Enterprises (WFOEs) are a type of Limited Liability Company (LLC) set-up under Chinese law. Unlike a Joint Venture, WFOEs are completely owned and managed by foreign investors without any compulsory involvement from a Chinese partner. WFOEs are a type of limited liability company, and thus give rise to a new “legal person” completely separate from their investors. As such, investor liability is limited to the contributions made to the Registered Capital of the WFOE. In this regard, serious attention should also be paid to the major differences between a WFOE and a Representative Office (RO).

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WFOE versus a Joint Venture

Advantages

Simpler establishment than a Joint Venture.

Complete control over all aspects of the
company including major decisions, strategy,
location, management, operations and corpo-
rate culture.

Lower risk of Intellectual Property Rights
infringement than with a Joint Venture.

No risk of a dishonest or incompetent partner
damaging the business.

Easier to terminate than an Equity Joint Ven-
ture.

Disadvantages 

Investor must bear the burden of the full
upfront investment as there is no Chinese
partner with which to share.

No assistance from a knowledgeable local
partner. The foreign investor must navigate all
aspects of running the company himself. (Of
course, Chinese advisers can be hired to assist
in this respect.)

Characteristic
WFOE
Legal Form Limited liability company having
an independent legal personality
Foreign Equity 100%
Articles of Association Yes
PRC Ministry of Commerce Approval Yes
SAIC Registration Yes - Additional procedures may be required for Manufacturing WFOE
Economy and Information Committee Registration No, except for Food Distribution
Feasibility Study Yes
Business Case Analysis Yes
Capital Contribution Cash, capital goods, property rights, know-how, land use rights
Highest Governing Body Board of Directors
Export Requirements None
Profit/Loss Distribution Net profits can be repatriated
Taxation Corporate Income Tax
Early Termination Liquidation permitted in accordance with Articles of Association and relevant Chinese law


WFOE versus a Rep. Office

WFOEs are entities established under Chinese law giving rise to a new “legal person” completely distinct from that of their investors. A Representative Office (RO), on the other
hand, has no distinct legal personality (it shares that of the parent company) and due to this fundamental distinction it is not functionally equivalent to a WFOE. For instance, an RO
cannot directly engage employees, issue an invoice or partake in profit-making activates of any kind (a WFOE can do all three). 

The following chart sets out the principle differentiating characteristics of the two entities. Particular attention should be paid to the many practical limitations of an RO compared to a
WFOE

Characreristic
WFOE
RO
Legal personality Limited liability company having an independent
legal personality
No independent legal personality – inextricably linked to the parent company
Foreign Equity 100% 100%
Articles of Association Yes No
Capital Contribution Yes No
Highest Governing Body Board of Directors Parent Company
Ability to conduct independent business activity Yes No
Ability to accept payments Yes No
Ability to issue an invoice Yes No
Banking ability Full range of activities Can only receive funds from Parent Company and pay
its own expenses
Ability to conclude a valid Chinese labor contract Yes No
Working Permit / Residence Permit Yes (One year, multiple entry) Yes (One year, multiple entry)
Office Standard office building Grade "A" office building
Taxation Income Tax, Turnover Tax Personal Income Tax, Expenses
Profit/Loss Distribution Net profits can be repatriated Cannot turn a profit
Scope of Permissible Business Activity Same as listed on the Business License
("Business Scope")
Restricted to non-profitmaking activities
(marketing, quality control, market research, liaison)
It is essential to recall that a Representative Office is not a new legal person, which is to say it is not a new company. While it most certainly has some superficial adorning’s of a company (an office, a logo, letterhead, staff), it cannot fulfill the businessman’s most basic requirement: to engage in commercial activity. As such, it should never be seen as a lower cost alternative to a WFOE.

It is also worth noting that an RO cannot be converted or re-registered as a WFOE at a later stage– they are completely separate legal entities with distinct requirements and procedures for establishment. The move from an RO to a WFOE can only be accomplished through a new, separate registration.

Repitration of profits
A key feature of a WFOE is that it allows for any profits made in running the business to be repatriated without prior approval of the State Administration of Foreign Exchange (SAFE). Dividends cannot be distributed and repatriated overseas 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. Repatriation of the Registered Capital is possible upon dissolution of the WFOE.
Taxation
WFOEs are subject to corporate tax rates of between 15% and 25%. The rate varies depending on where the WFOE is registered, the business scope and the business sector.
Annotated List of Registration Steps
  1. Register the proposed name with the State Administration of Industry and Commerce
    • The first step for all companies is to officially reserve the WFOEs name.
  2. Register with the Ministry of Commerce for a Certificate of Approval
    • Because investors in a WFOE are always non-Chinese citizens, we need to get special permission from the Ministry of Commerce. When we register for a Business Registration License, we must show the State Administration of Industry and Commerce this approval certificate.
  3. Register with the Economy and Information Committee for a Certificate of Approval
    • (Special Case: Food and Food Distribution)
      For WFOEs dealing with food prodcuts, this additional step must be completed. It is required in order to apply for the Business Registration License.
  4. Register with the State Administration of Industry and Commerce for a Food Distribution License
    • (Special Case: Food and Food Distribution)
      The first step for all companies is to officially reserve the WFOEs name.
  5. Register with the State Administration of Industry and Commerce for a Business Registration License
    • The WFOE can only start doing business once it receives this final approval. The WFOEs approved business scope will be written on the license.
  6. Manufacture of seals and registration thereof with the Public Security Bureau
    • After we get the Business Registration License, we need make company seal. When doing business, the stamp will stand for the WFOE
      (like a signature) and thus must be registered with the police.
  7. Register with the Technical Supervision Bureau for an Organization Code Certificate
    • This certificate is used to prove that the company is currently operating.
  8. Register with the Local Taxation Bureau for a Taxation Registration Certificate
    • Required in order to pay tax.
  9. Register with the PRC State Administration for a Foreign Exchange Registration Certificate
    • Because the money will come from outside China, special approval is needed in order to transfer money in and out of China on behalf of the WFOE.
  10. Open Foreign Currency and RMB bank accounts
    • Practical requirements in order for the WFOE to function.
  11. Obtain a Capital Verification Report
    • Report from a Chinese accountant to prove that the capital has been paid.
  12. Register with the Local Finance Bureau for a Financial Registration Certificate
    • A type of record unique to WFOE’s which is verified each year by the State Administration of Industry and Commerce.
  13. Register with the Local Statistical Bureau for a Statistical Registration Certificate
    • Part of statistical recordkeeping by the government.
Feasibility Study
A feasibility study and business case analysis are required by the Chinese government as part of the application process. This vital document will be drafted by our team but in order to prepare it we will require the following information:
  1. Date of Establishment of the Investor Company
  2. Address of the Investor Company
  3. Name and CV of the Legal Representative
  4. Detailed WFOE Business Scope
  5. Detailed Investor Company Business Scope
  6. Historical background of the investment project
  7. Draft Business Case Analysis relating to the WFOE Business Scope
  8. Expected Revenue during the firsCt three (3) to five (5) years of WFOE operation
What is a feasibility study?
The feasibility study aims to rationally uncover the strengths and weaknesses of the proposed WFOE, opportunities and threats as presented by the environment, the resources required to carry through, and ultimately the prospects for success. Simply put, the two criteria to judge feasibility are cost required and value to be attained. The Study we will prepare will aim to put your project in the best light possible given the facts at hand.