A China WFOE or WOFE is a Chinese limited liability company that is exclusively owned and overseen by foreign investors. A WOFE is established by foreign individuals or entities who wish to conduct business in China.
WOFEs can enhance operational efficiency, facilitate market expansion, and provide opportunities for foreign investors looking to tap into the Chinese market. By establishing a WOFE, foreign investors can navigate the Chinese business landscape independently while complying with the regulations and laws set forth by the Chinese government.
The advantages of a WFOE include:
- A WFOE is treated equally to a domestic company, without priority given to Chinese companies.
- It has full control over human resources, as long as it complies with Chinese law.
- It is a legally recognized entity in China, with limited liability.
- It can engage in formal business operations.
- It can generate profits in China and repatriate them to its home office.
- It has the potential to improve operations, management, and future growth within the authorized scope of business activities.
There are three types of WFOE:
- Consulting WFOE: this type is mainly for consulting services, and it is the easiest type of WFOE to establish.
- Trading WFOE: a trading WFOE is specifically designed to engage in trading, wholesale, retail, and franchise operations.
- Manufacturing WFOE: this type is specifically designed for manufacturing activities.
What should we know before using a WOFE to carry out business activities in China
Ownership
Foreign investors have 100% ownership and control over a WFOE. It allows them to conduct business autonomously in China, eliminating the requirement for a local partner.
WFOE/WOFE is exclusively owned by foreign investors, and Chinese citizens cannot hold shares in such companies, but Chinese citizens can hold director or supervisor positions in a WFOE/WOFE, provided that the company is owned by foreign investors.
Liability
The liability of the WFOE is limited to its registered capital, and the personal assets of foreign investors are generally protected.
Business scope
WFOEs can engage in a wide range of business activities permitted by the Chinese government.
Among these options, a WFOE can own and run a store on various e-commerce platforms in China, as well as many international e-commerce platforms. Also, it can operate brick-and-mortar stores in China and other jurisdictions, subject to local laws and regulations.
However, the scope of the business activities to be conducted by the WOFE must be clearly defined in the business license.
Registered capital
China used to require a minimum registered capital for WFOEs, but the requirement has been largely abolished, except for certain regulated industries.
Incorporation process
The registration process of a WFOE is quite straightforward and it involves:
- name registration,
- obtaining approval from various government authorities,
- preparing legal documents,
- registering with relevant authorities.
- obtaining a license,
- opening business bank accounts, and
- finalizing tax registration.
Also, when registering a WFOE, there is no legal requirement to register it in a specific city, region, or province. A WFOE/WOFE registered in one location can operate in other cities without any restrictions.
Costs associated with forming a WFOE/WOFE
The formation cost typically includes services such as company name checking and registration, company registration, corporate bank account opening, work visa for the director, and company tax registration. The specific costs vary depending on the location and services required.
Taxation
WFOEs are subject to various taxes, including:
- Value Added Tax (VAT): it it paid monthly on the sales of goods/services, and is applicable to general taxpayers.
- Corporate tax: it is paid annually based on net profit.
- Personal income tax for employees: it is also paid monthly, with the rate dependent on the employee’s salary.
- Social Security: it’s paid monthly, with the amount varying across different cities.
Employment
WFOEs can hire both Chinese and foreign employees, but they must comply with Chinese labor laws, such as employment contracts, social insurance, and work permit requirements for foreign staff.
Repatriation of profits
WFOEs can repatriate profits outside of China, subject to foreign exchange controls and relevant regulations. Proper documentation and procedures are necessary for repatriation.
Compliance
WFOEs must comply with Chinese laws and regulations, including annual audits, financial reporting, and periodic inspections by authorities. It’s essential to engage legal and accounting professionals to ensure compliance.
In addition, protecting intellectual property rights is crucial when operating in China. So WFOEs should register trademarks, patents, and copyrights to safeguard their IP assets.
Note that China’s regulations and business environment are subject to change, so consulting with professionala who are familiar with Chinese laws and practices is recommended when establishing and operating a WFOE. Contact Damalion now to setup your WFOE in China.
