What Is a WOFE in China?
WFOE in China or a Wholly Foreign-Owned Enterprise in China is a limited liability private company in China, completely owned by foreign investors. This allows theforeign company to own complete autonomy and control over the WFOE in China.
This business model is one of the most preferred market entry vehicles among foreign investors due to the freedom it offers. A WFOE in China has full autonomy to generate revenues from business activities and directly hire local employees with usually no cap on the number of foreign employees.
A WFOE in China comes in various forms, including –
- Consulting WFOE: It is the simplest form of foreign-owned legal entity in China. A consulting WFOE is a company providing services from or in China.
- Manufacturing WFOE: These entities are given governmental and environmental clearances to carry out manufacturing activities.
- Trading WFOE: A trading WFOE in China or a Foreign-Invested Commercial Enterprise (FICE) is licensed to carry out imports, exports, both internationally and locally.
China is a premium destination for foreign investors looking to expand overseas. However, setting up a WFOE in China involves several rules and regulations, from choosing the company name to complying with tax requirements. It is best to fully understand the essential details before setting up a WFOE in China. Although the process varies with the type of WFOE, the main aspects remain the same and broadly fall under pre-license and post-license procedures.
Why Should a WFOE Be Incorporated in China?
China is one of the most powerful leaders in the global economy. With the country opening its market to international trade and business, the country has rapigly adopted industrialization .. Moreover, China’s efforts to become a part of the global business landscape make it an ideal location for establishing trade-oriented or technology-driven companies.
So, there are quite a few reasons foreign investors prefer setting up WFOE in China. Below are some key benefits.
- The foreign shareholders of a WFOE have 100% ownership and exercise complete management control over the company.
- It is a convenient investment vehicle for establishing a long-term presence.
- A WFOE can expand and create subsidiaries.
- Contrary to a representative office, a WFOE in China enjoys greater freedom to carry out profit-oriented business activities. On the other hand, a representative office is typically used for advertising or market research and is restricted from directly engaging in profit-generating activities.
- With regard to human resources, a WFOE established in China enables direct recruitment of local and foreign employees.
- The stringent capital controls in China complicates the process of taking money out of the country. However, a WFOE in China solves the problem. Since foreign investors have complete ownership of the capital, it is easier to remit money out of China.
Investment Costs of a WFOE
Understanding the minimum capital requirements to establish a WFOE in China can be challenging to navigate. The investment costs of a WFOR encompass two aspects: the registered capital and the actual starting capital.
The registered capital is the total capital contributions or equity that the shareholders pay in full to the foreign-invested enterprise registered in China. However, amendments to the PRC (People’s Republic of China) Company Law have eliminated the requirement of a minimum registered capital for setting up an enterprise in the country.
Removing a formally registered capital requirement simplifies incorporating a WFOE in China and allows greater investment flexibility. Therefore, the foreign investor has the discretion to determine the amount of registered capital based on the business type and needs.
In addition, the 15% initial capital contribution for WFOEs and the 30% minimum cash contribution are no longer required. Hence, shareholders can pay the registered capital in non-cash assets such as land use rights, IP rights, etc., unless the law prohibits using the said assets for capital contribution.
Apart from the actual registration costs, there are no minimum capital requirements in China. However, it is recommended that foreign investors declare a minimum registered capital of 1,000,000 RMB (1,57,153.63 USD), subject to location and business activity, to cover the administrative processes involved in obtaining a registration certificate. The recommended minimum registered capital differs according to the type of WFOE.
Although there is no formal minimum capital requirement, registered capital remains an essential component of the WFOE incorporation process in China. The registered capital supports day-to-day expenses of the business such as hiring, payment of salaries, rents, etc.
How Much Does it Cost to Set up a WFOE in China?
Generally, the cost of setting up a WFOE in China includes the setup cost and the registered capital.
Set up cost
The initial cost of setting up a WOFE in China depends on the type and quality of business and the company’s available capital. Now, WOFEs have four options to manage the costs related to the setup.
- Hire local consultants: Local consultants or business service providers ocan help you with the registration process of WOFEs in China. Such third-party service providers typically handle document filing, opening bank accounts, and other steps in the WOFE registration process. They usually have a small customer base, enabling them to offer personalized services to enterprises of all types and sizes. Since these service providers are locals with a sound understanding of the Chinese business, they can easily handle the setting up of WOFEs.
- Hire international firms/consultants: Third-party international firms and consultants offer similar services as the local ones. Hiring an international firm can cost you about 100,000 RMB. While big WOFEs can bear this expense, smaller companies may find hiring local consultants more affordable.
- Rely on experts: A WOFE can also take the help of experts who have experience working with business services firms. While such experts have the required knowledge and expertise, they typically lack the resources and contacts to expedite the WFOE registration process. Plus, WOFEs risk losing money and time if the so-called expert is inefficient and inexperienced.
- DIY approach: The last resort while setting up a WOFE in China is taking a do-it-yourself approach. While it is the cheapest way to get a business started, a DIY approach is not encouraged due to the complexity of the WFOE registration process. The language barrier will pose a significant hurdle because the documentation and negotiations are in Chinese. Also, visiting different offices and local authorities is part of the process and a serious hassle if a company takes the onus of completing it all by itself.
Apart from the setup cost, another significant expense is the registered capital. Although the amended PRC Company Law does not mandate any minimum registered capital amount, WFOEs must have sufficient capital to cover the daily business expenses, hire employees, pay rents, etc. In a way, the registered capital acts as a safety net if the business suffers a loss; then, companies can bank on the registered capital to pay employees, pay off debts, and cover other expenses.
Therefore, foreign companies like a WFOE in China must declare a registered capital. However, they need not pay the capital at once since the Chinese authorities provide a time frame for companies to build a certain level of registered capital.
Below is a list of the recommended minimum registered capital for different types of WFOEs in China:
|Type of WFOE in China||Minimum Registered Capital (Recommended)|
|Manufacturing||RMB 1,000,000 (1,57,153.63 USD)|
|Consulting and services||RMB 500,000 – 1,000,000 (78579.29 – 1,57,153.63 USD)|
|Trading WFOE and FICE (wholesale, retail, trading, franchise)||RMB 1,000,000 (1,57,153.63 USD)|
Advantages of Establishing a WFOE
If you are thinking of establishing a presence in the Chinese market, it is pertinent to weigh the pros and cons.
Setting up a WFOE in China has several advantages. These include:
- Foreign investors get 100% autonomy and complete control over the WFOE equity. Moreover, WFOE eliminates the need to team up with Chinese partners or local domestic enterprises. Thus, WFOEs have complete autonomy over management, operations, human resources, and growth strategies.
- WFOEs in China have the freedom to conduct profit-generating business activities, including manufacturing, servicing, and trading, provided they are within the authorized business scope and legal by the standards of Chinese law.
- WFOEs in China can get wages and issue sales to clients in RMB.
- As per Chinese law, a WFOE is a legal entity with limited liability. The legally-distinct identity has its share of perks, including better protection of IP rights.
- WFOEs in China have complete autonomy over human resources. They can hire local Chinese employees as well as foreign individuals without any upper limit on the number of foreigners employed.
- The most significant advantage of having a WFOE in China is that the company’s profits in RMB can be remitted to the parent organization outside China (after converting to USD).
Disadvantages of a WFOE
Below is a list of the limitations of setting up a WFOE in China:
- Incorporating a WFOE in China is pretty challenging and often bureaucratic. The requirement of multiple authorizations from the Ministry of Commerce, the National Development and Reform Commission, the State Administration for Industry & Commerce, and other Chinese regulatory bodies is time-consuming.
- WFOEs in China have to keep their business restricted to the activities specified during the application process. This condition limits the ability of companies to adjust their business strategies once established in China.
- Certain industries have prohibitions and restrictions on their business activities, thereby limiting foreign investors to only the approved industries.
Requirements of a WFOE in China
The mandatory China WFOE requirements are quite elaborate and include administration requirements, providing a registered address of the WFOE, and choosing a company name. Following is a detailed description of each:
A WFOE in China needs to have at least three individuals designated as the legal representative, the supervisor, and the director. Let us look at the roles of each:
Legal representative: The legal representative can enter into binding contracts on behalf of the company and execute powers of attorney on behalf of the company. In addition, the legal representative can approve litigation by and legal representation of the WFOE.
Supervisor: The supervisor is responsible for overseeing the company’s operations to ensure that legal and regulatory matters are in place. In addition, the supervisor has the authority to carry out financial inspections and take action against any director who acts against the company’s interests or violates acts/laws. Apart from senior management and board members, any shareholder or employee can be the supervisor.
Director: Finally, the director is responsible for handling the business’s day-to-day operations. The director may also act as the manager or legal representative in many WFOEs.
A registered address for the WFOE
Providing a valid and registered address to the local authorities is mandatory when establishing a WFOE in China. The said address could be of a manufacturing plant or an office. However, the WFOE cannot be located in a residential building or a residential & business-joined building. In addition, the city where the WFOE is located has a significant impact on the business. Since specific cities and areas in China have a higher density of industries, the location of the WOFE is important, particularly for accessing resources.
The business name of a WFOE in China must be in the Chinese language. In addition, the following rules apply for choosing the company name:
- The WFOE name has a fixed structure – the first word is the name of the company or the product, the second word is the concerned business activity/operation, the third word is the location of the WFOE, and the fourth word refers to the company structure, such as “Ltd.”
- The company name should be unique and not the same as another company engaged in a similar business.
- The WFOE must provide at least ten names to the State Administration of Industry and Commerce (SAIC) during registration. The SAIC has the final say regarding the name of the WFOE.
- After choosing a company name that adheres to the above rules, the next step is to collect all documents necessary for WFOE registration. The said documents include the lease contract for companies renting an office space in China, a reference letter from the concerned bank in China, and a Feasibility Study Report.
Further Steps in Establishing China WFOE
Apart from choosing a company name and registration, setting up a WFOE in China entails additional steps such as licensing, WFOE China tax, etc. Below is an overview of the same.
Applying for a WFOE business license: After gathering the relevant documents and applying for the company registration, the next step is to apply for a business license to the Administration for Industry and Commerce (AIC) and Ministry of Commerce (MOFCOM).
Registering for taxes: The first post-license procedure while setting up a WFOE in China is to register for relevant taxes at the State and Local Tax Bureau. In addition, a company stamp on official documents is a must during the WFOE China tax registration process.
Registering with relevant authorities: While setting up a WFOE in China, companies need to register with 12 different authorities, including the Statistical Bureau, the Financial Bureau, the State Administration & Foreign Exchange, and the Technology Supervision Bureau.
Opening a bank account: The final step of setting up a WFOE in China after registering and obtaining a license is opening an account in a bank that operates in the Chinese currency (RMB).
Additionally, a foreign currency bank account is necessary for foreign-invested capital.
What You Need to Know About Maintaining a WFOE in China
The process of establishing a WFOE in China does not end with registration and licensing. Even after the company is set up, administrative and WFOE accounting matters must be managed. The pointers below highlight some essentials of maintaining a WFOE in China:
- A significant amount of administrative work is involved in the maintenance of a WFOE. These mainly include:
- Filing monthly and quarterly tax returns
- Monthly accounting
- Auditing and annual tax filing
- Annual renewals with various authorities
- License renewals
- Any local administrative filings
- Issue fa piao (an equivalent of an invoice issued by the Chinese tax authority)
- Apart from the administrative work, you need to decide your staff budgeting which includes their salary plus social benefits such as housing allowance, insurance, etc. The social benefit requirements vary with states and constitute about 30-42% of the staff’s salary.
COVID-19 Impact on WFOE in China
Like businesses in most industries and sectors, WFOEs in China have felt the repercussions of the COVID-19. In particular, travel restrictions imposed during the pandemic restricted foreign investors from opening bank accounts in China and completing the legal procedures around setting up a WFOE.
Hence, banks in China addressed the issue by providing an alternative to foreign business owners who could not visit the country. Instead of going to the bank in person, foreign business owners were permitted to complete the check confirmation process via video conference. In addition, some banks made provisions for virtual interviews provided concerned foreign investors legalized the relevant documentation at the Chinese embassy of the WFOE’s country of residence.
However, the new system was in place for only four weeks. China laid down new policies to regulate the banking procedures and comply with regulatory compliance standards. Henceforth, it is strongly recommended that the legal representative of the WFOE visits the bank in person to open an account. In addition, the legal representative must have their official passport on them when visiting the bank.
What are the Alternatives to a WFOE in China?
Setting up a WFOE in China is not the only way of establishing a business presence in China. The following section gives an overview of the three options foreign investors can avail of apart from opening a WFOE:
A distribution agreement with a manufacturer in China is perfect for business owners who wish to sell made-in-China products in the country. However, such business owners will need a separate business license if they want to distribute the products themselves. Alternately, the agreement will include provisions of sale agency fee if the manufacturer produces and distributes the products.
To undertake a joint venture, foreign business owners need to team up with a business partner in China. While setting up a joint venture in China is relatively easy, the foreign business owner will not enjoy full control over the company.
Lastly, working under an umbrella company is best for businesses dealing with imports and exports or service-based businesses. Working under an umbrella company has several advantages to foreigners. For instance, it is pretty easy to get work visas for employees. Moreover, the Chinese host company can manage the HR and administrative tasks related to taxes, recruitments, paying salaries, etc.
To sum up, registering a WFOE in China is pretty challenging, especially compared to other countries. Since foreign investors must submit applications and documentation to multiple authorities and abide by numerous rules and regulations, most business owners find the registration process extraordinarily tedious and confusing. Moreover, a company needs to have sound procedural knowledge and good relations with local authorities to speed up the registration process. Most importantly, most investors face a language barrier that can be almost impossible to navigate.
Multiplier can make the process of setting up a WFOE in China hassle-free, time-saving, and cost-effective. Multiplier is a comprehensive platform where you can manage international compliance, benefits, payroll, leaves, and a lot more without the hassle of incorporating a new entity.
Q. What is a WFOE in China?
WFOE is the acronym for Wholly Foreign-Owned Enterprise. It is also referred to as WFOE or Wholly Owned Foreign Enterprise.
Q. What are the features of a WFOE in China?
Some of the key features of a WFOE in China are:
- WFOEs are owned by foreign investors and typically have a parent organization
- WFOEs have limited liability
- WFOEs must comply with Chinese laws
- A WFOE in China is a separate legal entity
Q. What are the benefits of a WOFE in China?
Benefits of a WFOE in China include:
- Foreign investors have 100% autonomy and control over the company
- The limited liability nature of WFOEs protects foreign investors’ personal assets
- WFOE owners have the freedom to hire staff and employees (both Chinese nationals and foreigners)
- A WFOE is one of the best ways to remit profits back to the home country of the enterprise