In general, the main forms for foreign investors to open a business in China come in the form of the Wholly Foreign-Owned Enterprise (WFOE, sometimes spelled WOFE), a Joint Venture (JV), or a Representative Office (RO). The former two are a Limited Liability Company (LLC), whereas the latter is not a separate legal entity.
In the early days, a Wholly Foreign-Owned Enterprise was established with the aim of boosting manufacturing and export activities in China. As of recent years, the WFOE has become the preferred entry mode to set up a company in China. Establishing a WFOE is subject to various regulations, and sometimes setting up a WFOE in China in certain industries is prohibited. To provide a better understanding why setting up a WFOE in China has become so popular, this article describes the advantages associated with the Wholly Foreign-Owned Enterprise.
Although there is no registered capital requirement for opening a Representative Office, it may not be the optimal entry mode as an RO is only allowed to conduct marketing and research activities in China. Moreover, a Representative Office is still subject to Corporate Income Tax based on their expenses, which they are unable to offset like a WFOE as they are not allowed to engage in real business activities and send invoices to their clients in China.
A Joint Venture, which is a Limited Liability Company, on the other hand implies joint management. In the Chinese corporate environment, shareholders do not always have a direct influence on the activities of the company, instead the board of directors and above all the legal representative of the company have the authority to make principal decisions. Therefore, if you are expected to possess a minority stake on the board, successfully operating a Joint Venture may prove more difficult than operating a WFOE in China.
A Wholly Foreign-Owned Enterprise (WFOE) in China is a Limited Liability Company (LLC) which is established exclusively by a foreign investor's capital. Since China has entered the WTO in November 2001 and market access was granted to foreign investments in many industries, the WFOE has become the preferred entry mode to access the Chinese market.
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Advantages of a WFOE
Although the establishment of a WFOE is subject to various laws and regulations, same as for a Representative Office and a JV, there are several advantages of setting up a WFOE company compared to the other entry modes.
The advantages of a WFOE can generally be summed up as the following:
Foreign investors would have 100% control over the equity of the WFOE.
Since the WFOE does not have to partner up with local domestic enterprises, it provides the investors with control/independence related to the matters of HR, managing operations, and devising growth strategies.
WFOEs are allowed to conduct direct business activities including trading, servicing, and manufacturing activities; provided they are not illegal, prohibited or restricted by the Chinese government, and business is within the approved business scope.
A WFOE is also allowed to issue 'fapiao' official invoices in RMB and collect their sales revenues in RMB.
The WFOE can employ both foreigners and local Chinese directly without having any limitation on the number of foreigners employed.
All profits made in China (once certain thresholds are met) can be remitted by a WFOE as a dividend back to the investors of the company.
Throughout our presence in China, we have successfully helped companies enter the Chinese market and provided advice on the most suitable business structure taking into account their business requirements.
If you would like to enter the Chinese market or understand how these changes may impact your existing business in China, please do not hesitate to contact us at firstname.lastname@example.org
For more information about setting up a WFOE in China, please download our WFOE white paper