What is a WOFE (WFOE)?
A Wholly Owned Foreign Enterprise (WOFE/WFOE) is a limited liability company with 100% foreign capital. The set up of a WFOE in China was originally designed to encourage industry, both export-oriented and technologically advanced. However, since China joined the World Trade Organization, these conditions have been abandoned and the WFOE has been democratized. The WFOE model is now primarily used for service providers such as various consulting and management services, while also still being used in its original trading function.
INS provides management of and assistance with all administrative and legal procedures involved in a WFOE set up. We can take you through the complex, lengthy and challenging paperwork required for a successful establishment. We have been helping foreign companies establish WFOEs for over 10 years, leading our service to be recognized internationally.
The share capital of a WFOE must be contributed solely by foreign investors. This gives greater control over the business venture and also avoids problems typically faced in joint-ventures.
The following are the most common types of WFOE often chosen by investors:
- Manufacturing WFOE: dedicated to business
- Consultancy WFOE: (Gold Service): allowed to provide a service
- Trading WFOE or Foreign Invested Capital Commercial Enterprise (FICE): this denotes a WFOE engaged in “Trading”, wholesale, retail and franchise operations in China.
Establishment Conditions and Procedures
Establishing a WOFE usually takes from 6 to 18 months from the time of the proposal of the name of the company until the delivery of the final audit report. The time varies depending on what type of WOFE is being set-up. Foreign investors may find it particularly difficult and time-consuming to have to submit their applications in Chinese and directly to the authorities. You may therefore prefer engaging with a consulting company, which can allow the person to take advantage of the consultancies’ long-standing relationships with local authorities and procedural knowledge.
This is an overview of the most important steps, for more detailed information please contact our consultants.
Choose and file your official Chinese business name ensuring that it follows the fixed guidelines. Furthermore a lease contract of the rented office space or building should be provided.
Ensure that all the necessary documents are drafted in Chinese for the company registration at the proper premises. The Articles of Association which are mandatory in this step are often overlooked as a formality, but they are critical for the success of the company. Other important documents include the rental contract, the Feasibility Study Report (FSR) and the bank reference letter.
Apply for a business license with the local authorities; these include the Ministry of Commerce and the Administration for Industry.
Once you have your business license the next step is to register for taxes at the State and local Tax Bureau. Please bring the official company stamp as well as all the appropriate documents and the business license.
Register the company at all other relevant authorities including the Technology Supervision Bureau, the State Administration and Foreign Exchange, the Financial Bureau and the Statistical Bureau. In total the company has to be registered at 12 different authorities.
The final step of the process is opening an RMB bank account and a foreign currency bank account.
A WFOE gives freedom in establishing an international strategy without being dependent on a Chinese partner.
2. Control Ability
It is a separate legal entity that allows investors to formally manage all business operations of the company including invoicing in RMB. In this setup you are in complete control of administrative and fiscal planning, legal procedures, recruitment strategies and human resources.
Intellectual property of strategy and technology is kept safe.
4. Ease of International Trade
There is no need for an Import / Export license for a company’s own products.
5. Allowed to Buy Real Estate in China
1. High Establishment Difficulty
The application process is very complex and each step may have a profound impact on the future development of the company including in the areas of: business scope, financing, tax rates, director board management, etc. The process is long, involves many authorities and it is easy to make mistakes.
2. Capital Requirements
There is a minimum capital requirement to set up a WFOE. It varies among industries but normally 15% of the total investment should be injected within 1 month after obtaining the business license starting from 50,000 USD.
A WFOE faces limited access to government support and a potentially steep learning curve.
4. Subject to All Applicable Chinese Taxes
- Corporate tax: 15% to 25% (depending on the WOFE’s location and industry)
- Income tax:rates up to 35% of business profits
- Personal taxes:(wages/salaries) 3% to 45%
- Consumption tax:1% to 56% on sales revenue of goods. Export are exempt.
- Stamp duty tax:1%
- Land appreciation tax:30% to 60% of gains on transfer
- Resources tax:1% to 20% depending on material
- VAT:17% / 13% for certain food, goods, books and utilities.
- Dividend tax:20%
- Interest tax:20%
- Royalties tax:20%
- Deed tax:3% to 5%
- Socialsecurity tax: 37%
- Real Estate tax:12% on rental value
Ever since China entered into the WTO it has also become possible to form a WOFE that exclusively handles acquisitions and sales in China (or a so-called “trading company” or “retail store”). Such companies still fall under the category of the WOFE and are called Foreign Invested Commercial Enterprises (FICE).
Minimum Registered Capital
NOTE: Depending on the nature of the activity (manufacturing, consulting, language school, services, commerce, etc.) and the province in which you register your company, a different registered capital (or the initial capital that you need to deposit in the company’s bank account after obtaining a commercial license but before the company begins to operate) is required.
Even if these days the minimum registered capital can be very low, it is still recommended to make an estimate of the company’s expenses until it’s able to be self-sufficient – thanks to the profits it generates – and choose a registered capital that doesn’t stray too far from the estimated sums.
The reason is, if the expenses should come close to the amount in the company bank account before the company begins to generate a profit, to avoid bankruptcy you’ll be forced to send an injection of money from abroad. That requires a new procedure to re-register the registered capital (which will take up to 8 weeks and needs the approval of the local government) or the payment of profit taxes on the amount paid so as to avoid imminent bankruptcy. Both problems can be avoided, in fact, by setting up a registered capital sufficient enough to support the expenses until the point at which the company will be capable of sustaining itself.
If in the future you think about selling your Chinese company, then it is possible that it would be to your benefit to own a foreign “controlling” company, or a company outside of China that controls, in your place, the shares of your Chinese company. In this case, at the time of sale you can simply cede the foreign controlling company without having to deal with the long procedure necessary to transfer the property of a company in China.
Even if a WOFE can pay dividends to shareholders, there is a restriction: the dividends of a given year, such as 2016, can be paid only if the company is profitable (i.e. earnings are bigger than expenses) for that year. Another way to “withdraw” the gains of a Chinese company is to pay consultancy fees to a foreign company of whom you’re a shareholder.
A new rule was established on October 15th, 2011 concerning the social security of foreign employees and it required companies to identify them within 30 days after the issuance of their working permits. In some cities, the social contribution is mandatory while in others it may be optional, as in Shanghai for example.
The average lifetime of a WOFE varies between 15 to 30 years or longer in some cases. This period may be extended to 50 years when a project takes time to materialize, or due to a low return investment, or if the project has heavy fixed investment.
Radiation and Liquidation
The deadlines to permanently close a WFOE are much more important than its creation. It takes up to 6 months or 1 year to close a WFOE in China. The cancellation of trade licenses and radiation with government authorities regardingtax are the most time-consuming steps.