WFOE stands for Wholly Foreign-Owned Enterprise. As the name rightly indicates, a WFOE (sometimes referred to as WOFE) is an organization set up in China, entirely owned by a foreign investor. Further, it represents a 100% autonomous, financial legal entity, bearing lawful obligations independently.
For WFOE incorporation service in China please consult our dedicated page.
Today, a WFOE, sometimes also referred to as WOFE, is the most used market entry vehicle for foreign investors searching for new markets as China has become one of the world’s most interesting investment destinations. It offers foreign investors a highly flexible market entry.
Why should a WFOE be incorporated in China?
The concept of WFOE was borne out of China’s will to encourage manufacturing activities that are either trade-oriented or presented cutting-edge technology.
The main reasons to setup a WFOE are
- profit-oriented business activities;
- address human resources independently;
- expand to create subsidiaries.
Registered Capital vs. Starting Capital – Investment costs of a WFOE
The rules on a WFOE’s registered capital as opposed to the actual starting capital in China might seem confusing to foreign investors.
The Chinese government has in fact eliminated regulations regarding the amount of starting capital and registered capital in order to ease the WFOE incorporation for foreign investors. In theory, no capital needs to be invested upfront except from the actual costs of the registration.
However, in order to facilitate the administrative process of obtaining a certificate of registration, we explicitly advise foreign investors to declare a registered capital no lower than 1,000,000 RMB when registering the WFOE (subject to the business activity and district for incorporation).
Note that this amount does NOT need to be injected into the WFOE in the beginning or at once. It is rather the amount of funds that is planned to be generated by the WFOE within a fixed period of 29 years. The registered capital can be used to support the costs of the newly established WFOE’s activities, as payment of the salaries, office or facilities rental, purchase of a product, etc.
In summary, it can be simple and straightforward to setup a WFOE even with a rather low starting capital.
New Horizons is committed to make this procedure as transparent as possible and state reliable information about the capital requirements to incorporate a WFOE in China.
Types of Wholly Foreign-Owned Enterprise
A WFOE can only operate within its specific registered business scope as put forward in its business license. If it chooses to engage in a different exercise than the ones specified in its Scope of Business, it is imperative to gain approval from the local authorities.
The different kinds of WFOE and their advised minimum registered capital guide are listed below:
- Consulting WFOE / Services WFOE: RMB 500,000 to 1 million
- Manufacturing WFOE: RMB 1 million
- Trading WFOE / FICE (trading, wholesale, retail of franchise): RMB 1 million
Advantages of a WFOE
There are several advantages to establishing a WFOE, including:
- Unrestricted operations are available through this type of company setup. A WFOE has the same legal treatment and advantages of a domestic company. There are also regulations in place that prohibit the Chinese government from preferring domestic companies over WFOEs.
- Autonomy and flexibility to execute the overall methodologies of its parent organization without considering the contribution of a Chinese partner.
- Capacity to do business as opposed to fundamentally work as Representative Office and being able to issue sales to clients in RMB and get wages in RMB.
- Profits made in RMB can be remitted to the parent company outside China, after converting to US Dollars.
- Protection of intellectual property and technology is possible through the formation of a WFOE. One of the biggest complaints that foreign investors have with joint ventures is the vulnerability of their IP to their domestic partner. WFOEs solve this problem.
- Complete autonomy over human resources. You directly control the actions of your staff and are the direct employer.
- Greater efficiency in operations, management, and future development.
- Investment does not need to be built up for over 2 years, contrasted with a Representative Office’s parent organization that is required to have been set up for more than 2 years.
Disadvantages of a WFOE
There are also several disadvantages to setting up a WFOE, such as:
- Establishment is mind-boggling and tedious, with endorsements required by multiple authorities.
- Consolidation is costly, 15% of the investment is required within the first three months
- There are restrictions and prohibitions on certain industries, hence foreign investors are streamlined to only the encouraged industries.
- Increased liability because you are the official employer of record, so you must familiarize yourself with complex laws and regulations related to employment, contracts, payroll and tax.
WFOEs are required to designate no less than 3 individuals (of any nationality and residency) as the structure of the WFOE: so that at least a legal representative, a supervisor and a financial officer are appointed. The legal representative also has to be at least the director and/or the general manager of the WFOE (or both).
Consequently, an annual audit report is prepared by the WOFE, in addition to filling the annual taxes and submitted to the local Administration for Industry and Commerce (AIC).
Registered Address of a WFOE
During the establishment of a WFOE in China, foreign companies must provide a valid registered address to the local authorities (a plant for manufacturing WFOEs, or an office for other types of WFOEs). The workplace of a WFOE can’t be in a residential or living arrangement building nor living arrangement and business (R&C) joined building.
Some cities allow a virtual address to be chosen as registered address for Consulting WFOEs. Such service can be provided by New Horizons Global Partners. The registered address during establishment must match the specified operational location.
Choosing a Company Name
The business name for a WFOE must be in the Chinese language, and the following are to be considered when choosing the name.
- The company name follows this rigid structure; the first word is the company name or product, the second word is the intended business activity or operation, the third word is the location of the establishment and the fourth word is the company structure (ex: Ltd.)
- The company name must not be the same as some other company enlisted in your same sort of business
- The State Administration of Industry and Commerce (SAIC) requires that the WFOE provide at least ten proposed names during registration, the final name of the WFOE is decided only by the SAIC.
In summary, compared to registering a business in most Western countries, registering a business in China is challenging work filled with paperwork.
A WFOE finds it difficult and tasking to submit the application documents to local authorities, hence, making it practically impossible to complete registration procedure without a consulting company service.
Additionally, a WFOE only needs to ensure that the company is capable, qualified, and has incredible affiliations; procedural knowledge and relationship with the local authorities, as this makes the application process easy and time-saving.
Further, the WFOE registration process can be confusing and discouraging for foreign investors. However, thanks to the support of New Horizons the process will be smooth, time-saving, and cost-effective.
New Horizons expert team will handle all the paperwork and bureaucracy requirements on your behalf. Thanks to our support your WOFE can be established within a short timeframe and your business will be quickly operative in China.
For more information about WFOE setting up in China, detailed requirements, and procedures, contact us today and we will provide the needed assistance.