Setting up a Wholly Foreign Owned Enterprise in China

Introduction to China Wholly Foreign Owned Enterprise (WFOE)

The Wholly Foreign Owned Enterprise (WFOE) in general refers to a Limited liability company wholly owned by one of more foreign investor(s). Company limited by shares, if all shares are held by foreign nationals, then it is alos referred to as WFOE. In China, WFOEs were originally conceived for encouraged manufacturing activities that were either export orientated or introduced advanced technology. However, with China’s entry into the WTO, these conditions were gradually abolished and the WFOE is increasingly being used for service providers such as a variety of consulting and management services, software development and trading as well.

The registered capital of a Wholly Foreign Owned Enterprise (WFOE) should be subscribed and contributed solely by foreign investor(s). A WFOE does not include branches established in China by foreign enterprises and other foreign economic organizations. The Chinese Laws on WFOE do not have a clear definition of the term of "branches". The term of "branches" should include both the branch companies engaged in operational activities and representative offices, which are generally not engaged in direct business activities. Therefore, branches and representative offices set up by foreign enterprises are not WFOE.

Different types of Wholly Foreign Owned Enterprise (WFOE)

Following is a list of different types of WFOE:

1. If a WFOE is only allowed to engage in manufacturing, it is commonly referred to as a manufacturing WFOE (manufacturing company) .
2. If a WFOE is allowed to carry out Consultancy and/or General Services, it is commonly referred to as a Consultancy or Service WFOE.
3. If a WFOE is allowed to engage in Trading, Wholesale, Retail or Franchise business in China, it is commonly known as a Trading WFOE or more specifically, a FICE (Foreign-Invested Commercial Enterprise).
4. If a WFOE is registered for the principal business of software research and development, it is commonly referred to as a technology WFOE.

Advantages of WFOE

The advantages of establishing a WFOE, compared with other types of enterprises, include, but not limited to:

1. Independence and freedom to implement the worldwide strategies of its parent company without having to consider the involvement of the Chinese partner;
2. Ability to formally carry out business rather than just function as a representative office and being able to issue invoices to their customers in RMB and receive revenues in RMB;
3. Capability of converting RMB profits to US dollars for remittance to its parent company outside of China;
4. Protection of intellectual know-how and technology;
5. No requirement for Import / Export license for its own products (but still required to apply for Normal Taxpayer Qualification and perform foreign trade operator registration);
6. Full control of human resources
7. Greater efficiency in operations, management and future development.
8. A newly registered foreign company is already eligible to apply to set up a WFOE (subsidairy) in China, whereas the registartion of a Representative office in China requires that the foreign company applying to set up the Representative Office to have been in business for more than two years.

Business Scope

One of the most important issues in WFOE application is business scope. Business scope needs to be defined and the WFOE can only conduct business within its approved business scope, which ultimately appears on the business license. Any amendments to the business scope require further application and approval. Inevitably, there is a negotiation with the approval authorities to approve as broad a business scope as is permitted. Generally business scope includes investment consulting, international economic consulting, trade information consulting, marketing and promotion consulting, corporate management consulting, technology consulting, manufacturing, etc. With China’s entry intoWTO, more and more business is open to WFOE especially in Trading, Wholesale and Retail business.

Registered and Paid up Capital

Registered Capital: RMB1,000,000 (around USD150,000) is a decent investment capital for all types of WFOE, with USD150,000 investment it’s easy to get approved. Initial Paid-up would be 20% of the registered capital, the balance should be contributed and remitted within 2 years. According China company law, RMB100,000 ~ RMB500,000 is minimum investment capital for Consulting WFOE, Service WFOE, Hi-Tech WFOE registration.

It is presumed by the Chinese business registration authority that the amount of Registered Capital is the minimum amount of working capital that it’s required to run the business until it can break even - the ’registered capital?is a guideline only. The China Company Law does prescribed a minimum rehistered capital of RMB100,000 for a single shareholder company and RMB30,000 for a company with two or more shareholders. However, if you try the minimum registered capital, for instance RMB100,000,it would be difficult to get approval for registration. As this means you will run out of money pretty soon, which leads to increased costs in reapplying for permission to increase capital, additional licensing fees and renewals of business licenses and so on. The WFOE needs funding via it’s registered capital until it’s about to support itself from it’s own cash flow.

However the amount of registered capital is dependent upon factors like Scope of Business and Location. In reality local authorities will review the feasibility study report (and check the lease contract) approve the investment on a case-by-case basis; reduced registered capital could be negotiated in some cases.

The minimum registered capital guides for various industries according to our practice in China, for instance Beijing, Shanghai, Guangzhou, Shenzhen are given below: (Updated: Jun 23, 2009: Pudong Districtauthority in Shanghai announced in a meeting with PTC that they are stopping to approve the registered capital less than RMB 300,000 in Pudong District; Updated: Nov 18, 2009 Jing’an Districtauthority in Shanghai won’t approve a WFOE with registered capital less than USD140,000 since Nov. 18, 2009 Some other districts of Shanghai already refused to approve registered capital below RMB 300,000 since the begin of 2009, while there were no official announcment from those districts. In Beijing and Shenzhen, the local business registration authorities are still accepting registration applications with a RMB 100,000 registered capital):

General Tax Information

Since Jan. 2008, China’s new corporate tax rates vary from 15% to 25%, the exact rate depends on the places where the company is registered and the industry that a company engaged. Please click here to check out the latest China Corporate Income Tax information . All enterprises are required to report to the Tax Administration Department monthly, quarterly, annually. Path To China provides part time accountant service for our clients, you are welcome to contact us for more information.

Annual Audit Report

Any limited companies in China should summit annual audit report to the relevant authorities. The annual cost is about RMB 6,000. Any company will be subject be to a fine if the Annual Audit Report is not submitted in a timely manner.

Profits Repatriation by WFOE

The Chinese Government allows Foreign Invested Enterprises (FIEs) to remit their profits out of the country and such remittances do not require the prior approval of the State Administration of Foreign Exchange (SAFE). Dividends cannot be distributed and repatriated to overseas if the losses of previous years have not been covered while dividends not distributed in previous years may be distributed together with those of the current year. Repatriating the Registered Capital is forbidden during the term of business operation.

Terms and Termination

In China, terms of 15 to 30 years are typical for a manufacturing WFOE (although some may have a longer term). It is also possible to obtain extensions of the WFOE’s duration. For projects in which the amount of investment is large, or the construction period is long and the return on investment low, projects producing sophisticated products using advanced or key technology provided by the foreign partner, or for projects producing internationally competitive products, the term of WFOE may be extended to 50 years. With special approval from the State Council, the term may be even longer than 50 years.

The WFOE may be terminated under certain conditions. For example, the inability of the WFOE to operate due to heavy losses, or in the occurrence of an event of force majeure, etc.

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