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If you are expanding your company into China, one of your main worries may be creating a Wholly Foreign Owned Enterprise (WFOE or WOFE). Setting up a WFOE has become one of the most common ways in which international companies enter the Chinese market.
To decide whether a WFOE is the right step for your company, you need to understand all of your available options and the details involved.
What is a WFOE?
According to the WFOE Organization, the Wholly Foreign Owned Enterprise is a limited liability company fully owned by an international investor or international shareholders.
The initial purpose of a WFOE was to encourage manufacturing that was export-oriented and to introduce new technologies. This has changed since China joined the World Trade Organization.
Today, a WFOE works for companies looking to enter the Chinese market. There are different types of WFOE, and they are all suited for different purposes.
What are the types of WFOE?
There are three different types of WFOE:
1. Consulting WFOE: Meant for consulting services, it is the easiest WFOE to set up.
2. Trading WFOE or Foreign-Invested Commercial Enterprise (FICE): For trading, wholesale, retail, and franchise purposes.
3. Manufacturing WFOE: As its name states, this is for manufacturing activities.
How do you set up a WFOE in China?
The first and most vital step to set up a WFOE is to understand the legalities of what constitutes a WFOE.
According to WFOE regulations in the Catalogue of Guidance to Foreign Investment, “Foreign investors are permitted to set up a 100% foreign-owned enterprise in industries that are conducive to the development of China’s economic benefits, and not prohibited or restricted by the Chinese government.”
A WFOE can only conduct business that falls within its business scope. This means that if you registered a WFOE for manufacturing, you could not add consulting services within the same WFOE. To change the scope of your business, you need to submit further applications and receive approval.
What’s the cost of setting up a WFOE?
The cost of setting up a WFOE will vary depending on the industry. Here are the estimated required, registered capital levels in Chinese yuan (CNY):
- A manufacturing WFOE requires approximately CNY1,000,000.
- For a trading WFOE, capital required may vary from CNY500,000 to CNY1,000,000.
- A consulting WFOE requires less capital, in the range of CNY100,000 to CNY500,000.
What documentation is required?
Once you understand the legal parameters of WFOE, the most important steps you need to follow to set up a WFOE include:
1. Chinese name
Chinese authorities prefer that companies based in China have a Chinese name. Therefore, you must choose an appropriate name that is respectful and represents your company.
According to YK Law, the documents required include:
- Feasibility Study Report (FSR)
- Articles of Formation
- Statement of Business Purpose and estimated amount of investment
- WFOE’s operational structure and estimated number of employees
- Permission for land use and an environment evaluation report
- List of products and anticipated size of production
- Business plan
Other required documents include lease agreements, environmental protections, and requirements for utilities, among others.
3. Business license
4. Tax registration
In China, the Public Security Bureau (PSB) issues “chops,” which are official seals that substitute signatures. To issue invoices and tax receipts, you will need to obtain your invoice chop.
To begin operations, you need to register with the following government agencies:
- Ministry of Finance
- Technology Supervision Bureau
- The State Administration of Foreign Exchange
What is the procedure for establishing a WFOE?
1. Name approval 6. Carving chops
2. Office/facility lease 7. Open foreign exchange and RMB bank account
3. Environment impact assessment 8. International trader related procedures
4. MOFCOM approval or record-filing 9. VAT and tax procedures
5. Five-in-one business license
After the pre-licensing stage, the WFOE has been legally established
Advantages of setting up a WFOE
Now that you have a general sense of the process involved in setting up a WFOE, you might be wondering whether this is the right path for your company.
According to the international law firm of Mills and Reeve, establishing a WFOE offers the following advantages:
- Autonomy: A WFOE has the same status as a domestic company. The main advantage of this is that the law prohibits the Chinese government from giving preference to Chinese companies.
- Legal: A WFOE serves as a legal presence under Chinese law and has limited liability. Since local courts are the only ones that can handle important subjects like Intellectual Property, it is good to have a legal presence in the country.
- Revenue: A WFOE can generate money in China and send that money back to its home office.
Disadvantages of setting up a WFOE
- Time: As mentioned above, to incorporate a WFOE you must register with multiple offices and undergo an extensive bureaucratic process that requires a significant amount of time and resources.
- Activity: Since you apply for a specific type of WFOE, it can be challenging to shift your business activities or explore new sectors.
- Isolation: Even if you manage to set up a WFOE, you are still in a very unique and remote market without the expertise required to fully understand how things work.
- Risk: The guidelines for setting up and running a WFOE can be tricky, and there is a lot of government oversight. Any mistakes could ultimately cost you the opportunity to do business in China.
Can you do business in China without setting up a WFOE?
Previously, setting up a WFOE in China was only possible for companies willing to spend the time and money and take on the risk of navigating local challenges. However, today, any company can grow globally while avoiding risk.
Global hiring partners can help you carry the load of your international ventures and manage risks. An Employer of Record (EOR) allows companies to skip entity or WFOE setup and hire international employees through its local, compliant entities.
The EOR handles:
- HR functions
In addition, an EOR shines when it comes to helping you manage global risks by taking on 100 percent of the compliance responsibility and liability. By partnering with an EOR, you can rest assured that your company is following local laws.
An EOR’s local, in-country experts can also help you protect your Intellectual Property and guide you through the local legal complexities.
Creating a WFOE in China is a major, long-term commitment. But what if your company only wants to test the Chinese market?
With an EOR, you can hire a few employees to test the market, and if the venture is successful, you’ll benefit from sustainable growth. Once you have achieved success, an EOR can help you transition your employees to your local entity.
And what if the venture fails?
Then you can exit the market without losing all the resources associated with setting up a WFOE.