When you plan to expand your business in China, the first step you need to take is to determine the right business structure. Choosing between a Representative Office, Joint Venture, or Wholly Foreign-Owned Enterprise (WFOE) depends upon your expansion goals and purpose. However, when it comes to the most preferred form of business structure in China, WFOEs lead the list. Let’s examine the concept of WFOE, the registration process, and the pros and cons of WFOE in China.
What is a Wholly Foreign-Owned Enterprise (WFOE)?
A Wholly Foreign-Owned Enterprise (WFOE) in China is a form of business structure registered as a limited liability company. It is the most preferred form of investment tool for foreign companies since it gives full control and rights to the parent company.
A WFOE eliminates the need to associate with a local Chinese partner and allows the foreign parent company to have 100% ownership. Earlier, businesses that were involved in manufacturing activities favored WFOE registration in China. However, the Chinese government has eased several registration conditions, and WFOEs are becoming a common channel to enter the Chinese market.
The recent changes have also removed the requirement for having a minimum capital requirement for WFOE registration. Now, a foreign company does not need to set up its WFOE in China by investing its capital in a lump sum at the beginning. A foreign company can also set up a WFOE with basic capital for its incorporation, hiring, and starting its operations.
WFOE Registration Process in China
The foreign company that wishes to register a WFOE in China must ensure that all the legal regulations and formalities pre-registration are fulfilled. There may be industry-specific registration requirements that the company must also fulfill. The general registration process to start a WFOE in China includes:
Approval of Name: The first step in the WFOE registration process is to obtain the approval for the company’s name.
Office Premises: A WFOE must purchase or rent its business premises to operate legally in China. The WFOE registration application requires the company to submit the details of its office space.
Application with MOFCOM: The company needs to first apply to the Ministry of Commerce. Other documents such as the commitment letter from investors, name approval, business licenses, power of attorneys are also submitted.
Business Licenses: The next step is to obtain the WFOE business license, organization code, social security registration, tax registration, and statistical registration.
Company Seal: The company needs to have an official seal that is round in shape and has the company’s name in Chinese and English.
Bank Account: The parent company needs to open a foreign exchange account for their business transactions in China.
Advantages of WFOE Registration in China
Setting up a WFOE in China comes with the following benefits:
Unlike other business forms such as a Joint Venture, a WFOE does not require a foreign company to associate with a local partner. This way, the company has complete control over its business decisions and profits. By working solo, the company can also eliminate the risks associated with a wrong partner or partnership disputes.
By registering a WFOE, the foreign company can set up its legal presence in China. A WFOE gets the same legal recognition under the Chinese laws as a locally owned company. By having a legal existence, the company can also own real estate and intellectual property in its name in China.
A WFOE’s profits ultimately belong to its parent company. The foreign company does not need to share its profits with a local partner and can remit the revenue to its own country.
No Minimum Capital Requirement
The changes in Chinese corporate laws have removed the WFOE minimum capital requirement. A WFOE can be registered without investing all of its capital at the time of its registration. The company gets 29 years to infuse its capital into the business entirely.
Disadvantages of a WFOE
While WFOE registration is generally considered a beneficial expansion option, there are a few cons of WFOE as well:
The process of WFOE can be time-consuming and complicated. Thus, the foreign company would require local assistance to fulfill many registration formalities.
Scope of Business
The company needs to have a defined scope of business and its activities at the time of its incorporation. It may prevent the company from expanding its operations in China down the line.
Lack of Local Expertise
A foreign company may not have the needed local expertise and legal knowledge to set up a WFOE in China. It may still need to rely on a local partner for its compliance and HR management.
When to Choose a WFOE in China?
A WFOE may not be a suitable market entry channel for all kinds of businesses.
A business can consider WFOE registration for its expansion in China if it has long-term operational plans and sufficient funds. A WFOE is also suitable for a business that wants to operate alone and does not need a local partner. However, small companies with limited budgets may choose alternatives to WFOE, such as a PEO, to expand into China. This way, they can avoid the need to register a legal entity in the country and still operate their business with full control.
As your business and employment guide, New Horizons Global Partners can help you with your WFOE registration and provide you complete support for your post-compliance HR management and local law compliance. We also provide PEO solutions for all your employment, payroll, and compliance needs and act as your alternative to setting up a legal entity. For customized PEO solutions for your market expansion in China, contact us today!