Wholly Foreign Owned Enterprise and Representative Office
Compared
Wholly Foreign Owned Company (WFOE)
1. Status
Such a company is independent legal entity registered with
only foreign capital in China and under Chinese law. The managing
director (if only one director is appointed) or Board
of directors and legal representative are appointed by the
foreign parent company. The WFOE abides by the Chinese company
law and regulations like any other Chinese company.
2. Legal liability
The WFOE is liable to its assets like a limited liability
company in Western legal practice. The minimum capital to
be registered is usually around USD120,000. In some cities
and for some industries, however, the minimum capital required
could be as low as USD12,000.
3. Commercial Activity
Chinese corporate law restricts companies to their business
scope, i.e. the range of business activities it can perform.
A WFOE is also restricted in such a way. The business scope
of a WFOE is usually restricted to a manufacturing or processing
or general service activity. Certain special economic zones
allow WFOEs to have a purely distribution activity for products
of the mother company's group. Pure trading as a business
scope (with restrictions to only a single category of products)
is now allowed with much the same requirements in terms of
capital requirements.
Within its business scope, the WFOE can have normal commercial
activities of buying materials, transforming them and reselling
its products, locally or abroad. If it approved to do so,
it can just buy, store and distribute and act as its mother
company's Chinese agent.
The WFOE can declare customs, import and export according
to its business scope.
Local currency can be exchanged against hard ones provided
it is for legal buying activities in respect with the business
scope.
Profits can be repatriated, in foreign currency.
4. Personnel
Local staff is hired directly under the Chinese labor law.
All its dispositions must be respected. They do not make it
difficult to hire and fire people. Trade unions are encouraged
but not obligatory. In any case, they have proved to be no
hindrance to the management.
Foreign managers and employees can be appointed and receive
work and residence permits as well as the appropriate visas.
5. Premises
The WFOE must be located in those premises reserved for commercial
activities, i.e., commercial buildings or commercial-cum-residential
buildings.
6. Taxes
WFOE pays income tax (and business tax if applicable) as Chinese
companies (usually 33% of the net profit).
Tax breaks can be obtained for encouraged industries or export-oriented
industries and in some cities. generally speaking, WFOE is
only liable to income tax at a reduced rate at 15%.
In addition WFOE normally obtain the right to import all of
their production equipment free of VAT and customs tax.
Personal income tax of the WFOE must be deducted from the
employee's monthly salaries and paid by the employer.
7. Requirements for Registration
The WFOE must be approved to be registered. This approval
will include checking:
a) The proposed name of the WFOE
b) The articles of associations of the company (they must
abide by the Chinese WFOE law) and its feasibility study.
The business scope is a key element of the approval. An environmental
protection study must also be made and approved.
c) The premises rental or purchase contract
d) The resumes and passports of the board members and their
proper appointment by the mother company's legal representatives
e) The parent company's financial situation, as for the RO
Final registration is granted after the registered capital
is paid in.
Representative Office (RO)
1. Status
It is an office of a foreign company in China. As such it
is not a Chinese company. It can be compared to the embassy
or consulate of a company in China. It has no registered capital.
2. Legal Liability
The RO is not a separate legal entity and therefore it does
not assume liability on its own. Instead, the foreign parent
company assumes the liability of the RO. This liability thus
extends to the registered capital and assets of the mother
company.
3. Commercial Activity
a) As the RO is not a Chinese company it does not enter into
business transactions as a Chinese company, but as a foreign
company.
b) Consequently, the RO does not have a capital, it does not
buy or sell in its own name.
c) It has a bank account that is used only to receive money
from the mother company and pay for its local expenses. (It
does not have the right to pay for goods that the parent company
would buy, for example.)
d) The RO cannot declare customs, import or export goods,
as the mother company does not have such a right in China.
It can however receive mail, parcels of samples and send out
such samples. It can also import equipment and goods for its
own use. (Computer systems, other office equipment's.
e) The RO can act as a liaison between its parent company
and the parent company's business partners in China. It can
conduct purchase or sales negotiations, quote prices or receive
quotes from suppliers, effect market research, market and
promote its parent company products, hold seminars, take part
in exhibitions. In general it can conduct any legal activity
that the mother company representative could conduct in China
if they would come on a business trip.
4. Personnel
a) As a foreign company office in China, the RO does not fall
under the labor law for Chinese companies. As well it is not
entitled to enter into own arrangements with local staff as
it cannot register for and provide social welfare.
b) Local staff can be hired with the approval of specialized
Chinese human resources companies to which fees must be paid
in addition to the staff's salary. These fees provide the
necessary and legal social welfare cover to the local staff.
The formal labor contract is signed with the Chinese HR company.
It is standard and does not allow for any important modifications.
Besides, an agreement with the hired staff fixes the staff's
salary.
This agreement may be copied to the HR company or remain strictly
between the local staff and the RO.
c) Foreign representatives approved by the relevant authorities
receive a work and residence permit as well as the corresponding
work visa.
A local staff can be appointed as Chief Representative.
5. Premises
As a foreign company in China, the RO is restricted to use
specifically approved premises for its offices, be they bought
or rented. However, a RO could be located in those same buildings
as allowed for a WFOE.
6. Taxes
a) The RO is liable to pay taxes in China, though it is not
a Chinese company. These taxes can be calculated in 2 ways,
subject to the approval by the Chinese Government:
- according to a percentage of the profits generated by the
RO for the foreign company
- as a percentage of the expenses of the RO.
Tax authorities have no proper way to evaluate profit generated
by the RO for the Mother company. As a result they require
at least that tax be no less than the percentage on expenses.
This is usually the way foreign company choose to be taxed.
b) Staff (local and foreign) and liable to pay income tax
according to Chinese law. This tax is paid by the employee
or the foreign company as per agreement with the staff.
7. Requirements for Registration
The RO must be approved before it can be established. The
approval includes checking of:
a) The financial situation of the parent company (usually
in the form of a bankers' reference letter issued by the banker
of the parent company).
b) Latest audited financial statements must also be supplied
(this requirement only applicable to RO in restricted industry).
b) The personal situation of the appointed Chief Representative,
including his résumé and passport.
c) The location of the RO (lease agreement for the office
premise must be produced).
Permanent Representative Office or Whooly Foreign Owned Enterprise
1. The RO is usually a first step for a presence in China.
It is a completely sufficient and suitable structure for any
buying activities. It also suit sales activities when no production,
assembly or after-sales services must be provided by the foreign
parent company.
It is not really satisfactory for distribution activities
as it forces the parent company to rely legally (for ownership
of the products and collection of the money) on a third party
as distributor and import agent. (Often, these 2 functions
must be spread to 2 different companies.) In general it is
complicated, risky from the point of view of obtaining payment
and not very satisfactory from the point of view of the services
provided to the customers.
As there was previously no possibility to register WFOE distribution
companies, many foreign companies have used their RO as a
virtual distribution company, formally going through local
importers and distribution agents. Problems stories are numerous
and I would not recommend this approach. The requirement for
establishing a WFOE for the purpose of distribution has been
lowered substantially, we now normally recommend the trading
WFOE at the first place.
2. A WFOE is almost always recommendable for any production,
processing or distribution activity.
The alternative could be a JV. However, in general a JV partner
active in the particular field of activity of the JV brings
no real advantages and often additional problems.
Successful JVs must be analyzed on a case by case basis to
discover the reasons for their success.
Until recently, WFOE could not be registered with a distribution
business scope. Besides, rampant smuggling via Hong-Kong made
it uncompetitive for a WFOE to import legally and necessary
to go via an import "agent" in South-China.
With the new lower customs tariffs and the drive against corruption
becoming effective, and with the substantially lowered capital
investment requirement, a distribution WFOE makes sense now
and it is expect that a trading WFOE to become more and more
the solution and preferred choice for foreign investors making
a presence in China.
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