WFOE is the short form of “wholly foreign-owned enterprise”.
A wholly foreign-owned enterprise (WFOE, sometimes WOFE) is a common investment vehicle for mainland China-based businesses wherein foreign parties can incorporate a foreign-owned limited liability company.
As “WFOE” is rather difficult to pronounce, practitioners then chosen to use “WOFE” instead, which is pronounced as “woo-fee”. If a foreigner would like to conduct business in China, then a WOFE has to be established to take on the ownership and responsibilities of such a business.
The extraordinary feature of a WFOE is that the involvement of a mainland Chinese investor is not obliged, unlike most other investment vehicles.
Advantages of wholly foreign-owned enterprises (WFOEs)
WFOEs are among the most prominent corporate model investors due to their versatility and structural benefits.
Such benefits include:
- the ability to uphold a company’s global strategy free from interference by Chinese partners
- the ability to both receive and remit Remnibi to the investor company overseas
- upgraded protection of trademarks, patents, and other intellectual property, in accordance with global law
- free from having to procure an import/export license for products manufactured
- shareholder liability is restricted to the original investment
- maximum control of human resources.
What you need to know before opening your Chinese WOFE
The problems of establishing a WFOE include the inability to engage in specific restricted business activities, restricted access to government support, and a potentially steep learning curve upon entering the Chinese market. As a WFOE is a type of limited liability company, it imposes the injection of foreign funds to make up the registered capital.
Therefore, the planning stage in the establishment of a WOFE is significant and the following points must be addressed:
- where the WOFE should be established,
- how many employees should be hired,
- the amount of capital investment needed and
- the scope of the business to be performed.
Transferring the ownership of the WOFE
Sometimes clients would want to transfer the ownership of their WOFEs to other investors, but their previous agent or advisor might have helped them set it up with an individual owner as the sole investor of the WOFE. And under this agreement, it will be hard for other investors to become equity owners of the WOFE.
So, under situations where new investment is to be raised, the formal practice is to have the WOFE held by a company. And the civil way to handle it is: for the foreign investment money for a WOFE to go through a Hong Kong holding company.
The benefits of using a Hong Kong company as a holding company for a WOFE primarily include preferential dividend tax treatment, potential capital gains tax benefit, the potential exemption in inter-company transactions’ VAT, and the ability to accept new capital at the Hong Kong company level.
If you would like to know more about a company formation (the WOFE or others) in china, let’s go ahead and contact your Damalion expert now.
