Establishing a WFOE in China

A week ago we returned to our country after a short but intense experience in China. In addition to enjoying cultural and leisure visits, we learned about how to do business in China and other cultural aspects.

It is common to establish a Wholly Owned Foreign Enterprises (WFOE) in China. A WFOE is a wholly foreign company which is established in China in accordance with the laws and wholly owned by one or more foreign investors.

 A WFOE is a limited liability company, that is to say, the liability of shareholders is limited in terms of the assets they contributed to the company. A WFOE can make profits and issue local RMB invoices to its customers, which is crucial, as invoices are the basis for obtaining tax deductions in China. You can hire local staff directly, without the obligation to hire employment agency services. Although there is no legal restriction on the number of foreigners who can hire a WFOE, in practice the number of foreign workers depends on the amount of social capital that company invests.

There are three different WFOE configurations:

• Service WFOE

• Trading WFOE

• Manufacturing WFOE

While the three structures share the same legal identity, they differ significantly in terms of configuration procedures, costs and the range of business activities in which they are allowed to participate. Trading WFOEs and manufacturing WFOEs must obtain the majority of their revenues from that core business, but may also offer associated services. However, some service WFOEs may also carry out the business activities related to their services.

The steps for forming a WFOE in China typically consist of the following:

1. Determine if the proposed WFOE will conduct a business approved for foreign investment by the Chinese government.
2. Determine if the foreign investor is an approved investor. Basically, any legally formed foreign business entity is authorized to invest in a WFOE in China. China especially welcomes investment that promotes the export of Chinese manufactured products.
3. Chinese government approval for the project. In China approval of the project by the relevant government authority is an integral part of the incorporation process.
4. It usually takes two to five months for governmental approval, depending on the location of the project and its size and scope. The investor must pay various incorporation fees, which fees vary depending on the location, the amount of registered capital and any special licenses required for the specific project.

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