What is a WFOE in China?
A Wholly Foreign-Owned Enterprise (WFOE) is an established organization that is fully owned by a foreign investor or international shareholders. As its own autonomous financial legal entity, the organization bears all lawful obligations independently. This means the business will be responsible for understanding and following all employment, payroll, and other regulations.
As China is a popular destination for many companies to do business in, a WFOE is one of the common methods for foreign investors seeking to test the Chinese market. Originally the goal of a WFOE was to promote export-oriented manufacturing and to integrate new technologies. This changed however, when China made significant economic adjustments to join the World Trade Organization in 2001. Although WFOEs are still primarily used for export-oriented manufacturing, there are two other types of WFOEs in China. As of January 2021, companies used as a foreign investment vehicle will need to be established as a Foreign Invested Enterprise (FIE).
While this type of incorporation in China is an effective way for companies to enter the Chinese market, it’s important to remember that there are various types of WFOEs, each of which have specific purposes depending on the type of business. Here are the three primary types of WFOEs in China:
- Consulting WFOE
- Trading WFOE or Foreign-Invested Commercial Enterprise (FICE)
- Manufacturing WFOE
Setting up a WFOE in China
If you plan on establishing a WFOE in China, it’s important to understand what type of WFOE your business should be setting up, in addition to what legally constitutes a WFOE. The regulations governing WFOEs are listed in the Catalogue of Guidance to Foreign Investment which states that foreign investors can set up a WFOE in China if the business is conducive to the development of China’s economic benefits, and not prohibited by the Chinese government.
Understanding the differences between the three types of WFOEs in China is crucial. If you register a WFOE for manufacturing, for example, you cannot add consulting services within the same WFOE there. If a company ever wanted to modify the scope of their business in China, they’d have to go through a legal approval process with the government. This requires a team of in-country experts to ensure everything is set up correctly.
Costs of a WFOE in China
There are general costs involved with setting up a WFOE in China that every business needs to be aware of, but it’s important to note that these costs do vary depending on the type of WFOE a business chooses. Here are some approximate costs to anticipate as you plan to set up a WFOE in China:
- Manufacturing WFOE: CNY 1,000,000 (roughly $157,000)
- Trading WFOE: CNY 500,000 – CNY 1,000,000 (roughly $78,000-$157,000)
- Consulting WFOE: CNY 100,000 – CNY 500,000 (roughly $16,000-$78,000)
Required Documentation for a WFOE in China
Having the right documentation is critical as a business sets up their WFOE in China. Here are a few of the steps you’ll need to take to set things up correctly.
- Chinese Name and Address
Due to the language and cultural differences, China prefers companies based in their country to have a Chinese name. This may require some work to determine a name that is culturally appropriate, while still representing your company. You’ll also need your registered address or free trade zone address for the WFOE application.
There are many documents required to set up a WFOE in China, including lease agreements, environmental protections, utilities and more. Here is a general list to consider:
- Feasibility Study Report (FSR)
- Articles of Formation
- Statement of Business Purpose and estimated amount of investment
- WFOE’s operational structure and approximate number of employees
- Permission for land use and environment evaluation report
- List of products and anticipated size of production
- Business plan
- Business License
- Tax Registration
During the WFOE setup, China’s Public Security Bureau (PSB) issues something called ‘Chops’. These are used as official seals that act as signatures. There are many different kinds of Chops, such as company official chop, financial chop, legal representative chop, invoice chop, and more.
- Country Registration
Before a company can begin operations, they will need to register with the following government agencies:
- Ministry of Finance
- Technology Supervision Bureau
- The State Administration of Foreign Exchange
Establishing the WFOE in China
Setting up a WFOE in China is no simple matter. The procedure has extensive pre- and post-licensing requirements. In order to establish the WFOE, here are the necessary actions a business needs to take:
- Name approval
- Office/facility lease
- Environment impact assessment
- Ministry of Commerce approval and record-filing
- Five-in-one business license
- Carving chops
- Open foreign exchange and RMB bank account
- International trader related procedures
- VAT and tax procedures
Why should businesses set up a WFOE in China?
With so much work and money involved with setting up a WFOE in China, some businesses may wonder if it’s even worth the hassle. Despite the legal complexities, a WFOE has many advantages when set up correctly.
It’s important for your business to receive the same treatment as any other company in China. By setting up a WFOE in China, a company is granted unrestricted operations. This means the business will get the same legal treatment and advantages as a domestic company. Chinese legislation prevents preferential treatment of a domestic company over a Wholly Owned Foreign Enterprise. It also allows the flexibility to execute the overall methodologies of its parent organization without considering the contribution of a Chinese partner.
A WFOE in China acts as the legal presence under Chinese law and has limited liability. Having a legal presence is especially important when it comes to Intellectual Property, considering local courts are the only ones that can handle such claims. Foreign investors may have concerns with joint ventures if there is any vulnerability of their IP to their domestic partner.
A WFOE is designed to generate money in China and allow a business to send the revenue back to its home office. This means that any profits generated in Chinese CNY can be remitted to the parent company outside China, after converting to US dollars. This creates a pathway for greater efficiency with operations, management and future business development. Additionally, the investment doesn’t have to be established for more than two years, which is required by a Representative Office’s parent organization. This means businesses can expect to see immediate revenue opportunities, instead of waiting.
Challenges of Establishing a WFOE in China
Although establishing a WFOE offers many benefits to global companies, it’s also important to consider the risks and challenges associated with Wholly Foreign-Owned Enterprises in China.
Speed to Market
For companies looking to quickly test new markets, a WFOE in China will be a roadblock. The setup process to incorporate a WFOE requires registration with many different offices and is subject to intense bureaucratic regulation. Ensuring this process is done correctly can take a significant amount of time and resources from a company. If speed is the goal, it might be worth considering an EOR solution instead.
Lack of Flexibility
Because there are three different types of WFOEs in China, your operational flexibility is limited because the business you register as must operate within that function. This means it can be difficult for businesses to adjust to or experiment with new sectors.
Compliance around WFOEs in China is both a pro and a con. Although a WFOE in China protects companies from certain legal obstacles, it also requires extensive knowledge and maintenance. If there are any mistakes during the setup process, it could cost you the opportunity of doing business in China. Even if done correctly, the laws and regulations governing WFOEs are constantly changing. You’ll need to stay up-to-date on all the latest regulations regarding employment contracts, HR, payroll, taxes and more.
A WFOE in China is a great solution for companies willing to spend the time and money to operate in that country. However, with many companies wanting to test new markets and avoid risk, an Employer of Record (EOR) can be a feasible solution. An EOR acts as the employer, therefore eliminating the need to establish your own legal entity in each jurisdiction of operation. This means the company can manage the daily tasks of its employees, while the EOR handles the related administrative burdens of the HR function. Typically, an EOR will help manage:
- Hiring in China
- Employment Contracts
- Payroll Administration
- Compensation and Benefits
Many companies choose this route as a way to eliminate the stress of compliance risk completely, as the EOR is held liable for any mistakes. As experts in specific country laws and regulations, EORs provide peace of mind for rapidly expanding companies.
Working with WFOE Experts
Successful growth in Chinese markets requires businesses to make lasting partnerships with expansion experts. Global Upside provides peace of mind and helps companies find hidden opportunities in the global marketplace, all while supporting your revenue goals.
Global Upside also specializes in setting up WFOEs in China, and can get your business off to the right start. Address your HR needs from the point of hire to retirement (H2R) with solutions for employee onboarding, employment documentation, compensation and benefits, employment law compliance, global mobility, and HR software.
Our services are backed by round-the-clock support from experienced legal, HR, and payroll experts located across the globe. We track and manage all local requirements and keep you up to date on the latest legal changes to ensure your business remains compliant wherever you operate.