If you are expanding your company into China, one of your primary concerns may be creating a Wholly Foreign Owned Enterprise (WFOE) as it is one of the most popular ways in which global companies enter the Chinese market.
To determine whether a WFOE is the right step for your company, you need to comprehend all of your available options and the details involved.
What is a WFOE?
Wholly Foreign-Owned Enterprise is a China-based business entity specified for non-Chinese industries to establish their limited liability company in China. Most importantly, it is the most popular investment vehicle for non-Chinese enterprises expanding their business to China. Although there are numerous company structures available to non-Chinese enterprises, setting up a WFOE is the most privileged investment vehicle.
The Advantages of a WFOE
The benefits of establishing a WFOE include, but are not limited to the following:
- A WFOE has the same significance as a domestic company. The main benefit of this is that the law forbids the Chinese government from giving priority to Chinese companies.
- A WFOE has sole control over human resources so long as they acknowledge the Chinese law.
- A WFOE serves as a lawful presence under Chinese law and has limited liability.
- A WFOE have the capacity to carry out business formally.
- A WFOE can make money in China and send that money back to its home office.
- When it comes to creation and business efficiency, WOFEs can boost operations, management, and future development so long as they stay within the parameters of business operations depicted in the paperwork that was filed to get approval to operate.
There are three different types of WFOE:
- Consulting WFOE: It is meant for consulting services, and it is the easiest WFOE to set up.
- Trading WFOE or Foreign-Invested Commercial Enterprise (FICE): majorly for trading, wholesale, retail, and franchise purposes.
- Manufacturing WFOE: as the name affirms, this is for manufacturing activities.
What are the Alternatives to a WFOE?
If you are interested in starting a business in China, you have three alternatives to setting up a WFOE:
- Joint venture: a joint venture is Ideal for foreign companies wanting to enter China and begin operating instantly with a local partner. There are less difficulties than to establish a WFOE, and in general, it is simpler to set up. But, you share control with your partner in China.
- Distribution agreement: if your objective is to sell products in China that are made there, you might contemplate entering into a distribution agreement with your manufacturer in China. If you intend to distribute the products yourself, you will need a different business license. However, if you want the manufacturer to produce and distribute the products, your arrangement will provide for their sale agency fee.
- Umbrella company: Umbrella Company is a legal entity that functions like your host in China. It looks after your operations, usually your marketing, import-export, or any kind of consultant, in China. Establishing an umbrella company is less expensive and thus a reasonable way to start a service sector business in China.
Steps to set up a WFOE in China
Company Name Approval
The first step of your WFOE registration is to agree on a proper name. Above all, China maintains legislation that dictates certain requirements for a company name to be put into consideration.
Chinese legislation establishes certain limitations regarding what is not allowed in a company name or what may need special authorization from government authorities.
The rules do not permit special characters and explicit words that imply business operations in certain industries.
Company names must include the administrative region name of the company’s incorporation, Brand name, business the company is operating in, and the company name must include Company Limited.
Prepare Documents for Registering Your WFOE
In addition to registration forms you will have to compile any lease agreements, your Feasibility Study Report, bank references, your Articles of Formation, copies of investors’ passports, resume of your legal representative in China, a recent annual audit by the parent company’s CPA, and the customs codes for goods to be imported or exported, if relevant.
In addition to the above, a manufacturing WFOE must submit:
- Statement of Business Purpose and amount of investment,
- WFOE’s operational structure and number of employees,
- permission for land use and an environment evaluation report,
- list of products and anticipated size of production,
- detailed list of equipment,
- business plan,
- environmental protection measures you will take, and
- requirements for utilities such as power and water supply.
Apply for Business License for your WFOE
You have to apply for a license with the Ministry of Commerce (MOFCOM) and the State Administration for Industry and Commerce (SAIC or AIC).
Tax registration
Once you have your business license, you have to register for taxes at the state and local tax bureaus. In China, the Public Security Bureau issues “chops”, which are official seals that replace signatures. To give invoices and tax receipts, you will need to acquire your invoice chop.
Register With Other Authorities
Lastly, in order for your WFOE to start business operations in China, you must register with the applicable authorities. These authorities include the Technology Supervision Bureau, the Financial Bureau, the State Administration and Foreign Exchange, and the Statistical Bureau.
Open Bank Accounts
The final step of the registration process is to open a foreign currency bank account in China in which you put the capital backing your WFOE. Many global banking institutions have branches in China and some will enable you to open a Chinese account and transfer funds that way. Also, you have to open a foreign currency bank account for the contribution and confirmation of the foreign-invested capital.
There are no rules about the minimum amount of registered capital for a WFOE. However, it is highly recommended that the initial investment is adequate to support the WFOE’s business activities proposal. Accordingly, a sufficient initial investment should allow the WFOE to operate in China for at least one year, without the risk of bankruptcy for its operations.
Whether you are interested in creating a WFOE or want to establish another type of Chinese companies, please contact your Damalion expert now.
