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 or more foreign investor(s). Company limited by shares, if all shares are held by foreign nationals or foreign enterprises, then it is also 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, restrictions on WFOE have been gradually lifted 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 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 Branch. The term of Branch 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:

• If a WFOE is only allowed to engage in manufacturing, it is commonly referred to as a manufacturing WFOE (manufacturing company).
• If a WFOE is allowed to carry out Consultancy or General Services, it is commonly referred to as a Consultancy or Service WFOE.
• 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).
• 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:

• Independence and freedom to implement the worldwide strategies of its parent company without having to consider the opinions of the Chinese partner;
• Allowed to formally carry out business, receive operating income and issue Value Added Tax Fapiao to customers;
• Capability of converting RMB profits to US dollars for remittance to its parent company outside of China;
• Protection of intellectual know-how and technology;
• Allowed to apply for General Taxpayer Qualification and enjoy the Value Added Tax input tax and output tax deduction;
• Full control of human resources;
• More efficient in operation, management and future development;
• A newly registered foreign company is eligible to apply to set up a WFOE (subsidiary) in China at any time, whereas the registration 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 registration 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. Where permitted by laws and regulations, it is advisable to obtain as broad business scope as is permitted. Take Consulting WFOE as an example, the general description of business scope includes business consulting, economic and trade consulting, marketing planning consulting, corporate management consulting, technology consulting, etc. With China’s entry into WTO, more and more business activities are open to WFOE especially in Trading, Wholesale and Retail business.

Registered and Paid up Capital

In accordance with the Company Law of The People’s Republic of China amended and implemented in October 2018 and the Foreign Investment Law of The People’s Republic of China effective from January 1, 2020, the restrictions on the proportion of initial contribution, the proportion of capital contribution in currency and the time limit for contribution by foreign-invested enterprises have been abolished. The amount, method and time limit of the capital contribution shall be determined by the investors of the company independently and shall be clearly specified in the Articles of Association. Unless otherwise stipulated by laws, administrative regulations and the State Council on the minimum amount of registered capital in specific industries, the restriction on the minimum registered capital of a company has been removed.
 
The business environment has been optimized by reforming the registered capital of enterprises and the time limit of capital contribution, further opening up the control of market entity access, reducing the entry threshold of foreign invested enterprises. However, the amount of registered capital cannot be set in a casual way, and it needs to consider the actual situation and business development needs of the company. In the initial stage of a company’s start-up, the registered capital can be appropriately less. Capital increase can be arranged when the scale of the company expands in the later stage and the company is able to assume greater responsibilities to meet its business needs. In addition, company in different industries may have different requirements for registered capital. It is suggested to refer to the registered capital of companies in the same industry.

Based on our experience of companies formation in China, the minimum registered capital for different industries is suggested as follows:

Type of WFOE	Registered Capital
Consulting WFOE	RMB 100,000 ~ RMB 500,000
Service WFOE	RMB 100,000 ~ RMB 500,000
Hi-Tech WFOE	RMB 100,000 ~ RMB 500,000
Trading WFOE/ FICE	RMB 500,000 ~ RMB 1 million
Food & Beverage WFOE	RMB 500,000 ~ RMB 1 million
Manufacturing WFOE	RMB 1 million or USD 140,000

Tax

At present, there are a series of preferential tax policies for newly established companies in China. If tax planning could be made in advance, tax burden could be dramatically reduced or even avoid. 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 declare to the tax authorities on schedule (monthly/quarterly/annually). We provide Chinese accounting and tax services to our clients, you are welcome to contact us for more information.

Annual Audit Report

Companies registered in China shall prepare Financial Statements at the end of each accounting year and shall be audited by the Accounting Firms in accordance with the law.

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.
 
Term and Termination

There is no clear regulation on the business term of a WFOE. In China, terms of 15 to 30 years are typical for a common manufacturing WFOE. It is also possible to obtain extensions of the WFOE’s duration.

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

See also:
Guide to Establishing a Subsidiary in China