The WFOE (Wholly Foreign Owned Enterprise) in China is rapidly becoming the dominant company type for foreign companies who’re intent on having a presence in China.
But is a WFOE the ideal company type for your business when you start a China company?
What is a WFOE?
A WFOE is a limited liability company owned by foreign individuals or corporate entities, incorporated in Mainland China.
Businesses of this type are covered by special laws and rules which regulate how they are set up, taxed, and operate on a daily basis.
Advantages of a WFOE
- No Chinese partner is needed to establish it
- Wholly Foreign Owned Enterprise can execute business formally in China, instead of through a representative office
- You have control over intellectual property and human resources, as long as you work within the laws
- Manufacturing WFOEs doesn’t require import or export licenses for their own products.
Vigilance points when you set up your WFOE
- It can take quite a long time to set up a WFOE
- WFOEs don’t have access to the Chinese government assistance
- Capital investment requirements can be particularly high
- The laws and regulations concerning WFOEs can be complicated and may come with provincial and local variants you’ll need to know
Register your China WFOE
Forming a WFOE in China is relatively expensive and time-consuming. It normally takes a couple of months and involves the following steps:
- Choosing a business name that suits Chinese business name requirements
- Gathering the required documents to register the WFOE.
- Applying for your business license with the Ministry of Commerce and the Administration for Industry and Commerce.
- Registering for business taxes (this is usually done on state and local levels)
- Registering with other relevant authorities (the requirements can vary depending on the type of business you run)
- Opening a Remnibi bank account to use with the WFOE
As stated above, setting up and operating a WFOE requires to allocate some budget for operations and maintenance.
So, it is important to carefully study your project to register a Chinese WFOE.
Main tips to check before setting up your Chinese WFOE
Most times, a WFOE isn’t required for the enactment of a business in China but because forming a China WFOE is quite expensive, entity formation companies encourage entrepreneurs and investors to start with it as they will get paid to form a WFOE.
These entity formation companies don’t necessarily help these investors figure out whether a WFOE is actually essential for what they will be doing in China.
And the result of this is that these foreign companies/investors:
- Will go through the issues and expenses of forming a WFOE they don’t require
- Also, they will spend time operating a WFOE they don’t need,
- And at the end, they will have to take the time to close down a WFOE they never should have started with, in the first place.
Even worse, these entity formation companies might also encourage investors to start with a Representative Office that the foreign company doesn’t require, and then a couple of years later, they might encourage them to shut down that Representative Office in favor of a WFOE now, simply because they’ll have to charge for shutting down the Representative Office and for forming the new WFOE.
This allows these entity formation companies to charge for the processes that were not needed initially.
Evaluate the opportunity to register your WFOE
Generally speaking, there are two major situations when a WFOE is legally needed and a third circumstance where it’s not legally needed but highly recommend:
- A WFOE is legally needed if you will have one or more employees in China.
- It is also legally required to have a WFOE in China if you are going to get paid in RMB.
- On the third circumstance: if you sell products or services to Chinese businesses with any form of government ownership it’s highly recommended to have a WFOE, even if it is not legally required.
Alternative solutions to registration of Chinese WFOE
There are some circumstances where a foreign company established a WFOE to hire employees in China and to get paid in RMB but would have been better off without having done so.
These are circumstances where the foreign company did not realize it had better options for accomplishing its China goals without the need for a China WFOE.
For instance:
- A Foreign company forms a China WFOE to sell its products since it has been convinced it requires a WFOE because it will have employees and it will also be getting paid for its products in RMB. But an easier option could have been for the company to enter into a distributorship relationship with a Chinese company or companies.
- Also a foreign company forming a China WFOE to hire employees to handle its China quality control whereas, there are many good and inexpensive quality control companies in China and sometimes that is a better way to go.
This is where your Damalion experts come in, We are very straightforward, and before helping in the formation of any company – WFOE or otherwise, we can help determine whether a WOFE is necessary or not.
In conclusion, before forming a WFOE in China it is highly recommended to do your research on whether it is necessary for your company or not.
In other words, let’s go ahead and contact your Damalion expert now for your company formation in China.
