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What is a WFOE in China? Complete guide

While there are many ways for a company to establish a presence in China, a WFOE, or Wholly Foreign-Owned Enterprise, is one of the most popular among foreign investors seeking to enter China.

Despite the challenges of COVID and recent geopolitical changes, China remains the world’s number one destination for new foreign investment. Foreigners wanting to expand their operations into China have multiple ways to establish themselves. Still, a WFOE provides the most control possible over a company’s operations and financing.

Furthermore, as of 2020 China has sought to simplify and remove the regulatory differences between WFOEs and certain types of JVs, Joint Ventures with local Chinese partners. Currently, any company that utilizes foreign investment is classed as an FIE (Foreign Investment Enterprise). Foreign companies will now have greater protection on their investments, making it a perfect time to consider expanding into China.

 

What kinds of WFOE are there?

 

To control the potential operations of foreign enterprises in China, WFOEs are restricted to a certain number of possible forms. The scope of business they can engage in must be related to the type of WFOE established. These are:

 

Manufacturing WFOE

This is the only type of WFOE through which a company can engage in the manufacturing, production, and sale of goods inside China. It also provides certain cost benefits regarding tax and duties.

 

Trading WFOE

This type of WFOE is for those looking to import and export brand products, engage in distribution inside China, and operate through Chinese E-Commerce channels.

 

Consulting WFOE

The most easily set up of the different types, this WFOE is the most diverse in the range of fields it could cover and the most restricted in terms of operations. A consulting WFOE could be involved in management or technology consulting, technical advising, recruitment, or training services, to name a few.

 

WFOE Advantage and Disadvantages

 

Advantages

 

      Control

A WFOE is wholly owned by foreign investors and so is without any chance of involvement or interference from a local partner in its operation. You are entirely free to work in a way that suits you best.

      Independent Legal Identity

Having a separate legal entity means being able to hire and manage your employees as you see fit.

      Greater Range of Operation

Unlike if you chose to outsource your employees to a local PEO, setting up your own legal entity allows you to perform aspects of business (including issuing invoices, receiving revenue, and dealing with clients in RMB) that are restricted to other modes of business such as a Representative Office.

      Trademark/Patent Protection

WFOEs receive a higher level of intellectual property protection than other company types in China

      More Straightforward Procedures for Obtaining Supplementary Licenses

Depending on the type of WFOE initially set up, you may find it easier to apply for additional licenses, such as an import/export license for a manufacturing WFOE

      RMB/Foreign Currency Options

Deal with clients both inside and outside of China in RMB and foreign currencies.

      Simpler to Establish and Terminate (Than Some Other Business Types)

On average, a WFOE can take between 3-6 months to set up. This is a short time compared to setting up some other business types like a JV, which will require additional time to find and negotiate with a local partner.

 

Disadvantages

 

      Closing Down a WFOE

Setting up a WFOE may be relatively straightforward, but if it comes time to close it down, the process is arduous and can take up to 12-14 months. To properly do so, you must prove that all debts and obligations, including wages and tax payments, have been met. All of which will be carefully examined.

      Many Restrictions

While largely free to operate as you choose in China without a local partner, WFOEs are still highly restricted to the scope of operations corresponding to the type of WFOE.

      Little Government/Local Support

Unlike other company types in China that include local partnerships, WFOEs are mostly without support and miss out on any local knowledge or resources that a Chinese partner could bring.

      Larger Initial Investment Requirement

Without any local partnership, it is entirely up to you to provide your company’s capital. This can mean a high initial investment and ensuring you have enough to settle all outstanding debts if you need to close the business.

      High Liability

In setting up a WFOE, you agree to follow every aspect of Chinese laws and regulations regarding the operation of your business. These procedures are complex, and it’s often hard to ensure complete compliance for things like payroll or social contributions.

 

A Step-By-Step Guide to Establishing a WFOE

 

Establishing a WFOE is a complicated and highly time-consuming process. Below is a summary of the steps required to set up a WFOE. Some stages are mandatory for particular kinds of enterprise.

 

1.       Name Approval

The laws relating to a company name in China are strict. While this first step might seem simple, it can take a lot of time to find something that will encourage growth while adhering to guidelines.

 

2.       Finding a Location

When setting up a company, a legally owned or leased location is required before any further steps. Again, understanding the advantages and disadvantages of different locations can be complex.

 

3.       Environment Impact Assessment (for a Manufacturing WFOE)

With recent efforts to improve environmental levels in China, those seeking to set up a manufacturing WFOE will have to get approval from various local and national governing bodies for any aspect of their operations that may cause environmental concerns.

 

4.       MOFCOM Approval/Record Filing

At this point, a company will be able to file for approval with the Ministry of Commerce by certifying the identities of all investors involved and other details such as the name, etc.

 

5.     in-One Business License

Upon approval by the Ministry of Commerce, an application can be made for a business license. Since 2016 companies can apply for a 5-in-One that includes the Business License, Organization Code, Tax Registration Certificate, Statistical Registration Certificate, and Social Security Registration Certificate.

At this point, the company legally exists as an entity.

 

6.       Creating a Chop

Far more than in most countries, the official seal of a company in China is a powerful legal representative. It contains the highest legal authority of the company, regardless of who uses it. All seals must be obtained through the official government channel.

 

7.       Opening RMB Bank Account (With Foreign Exchange

FIEs in China need to open at least two bank accounts for their operations. One must be a local RMB account, and another must be a foreign currency capital contribution account.

 

8.       Import/Export Procedures (for a trading WFOE)

Investors wishing to open a trading WFOE must seek an additional customs reference certificate and register with all regulatory bodies concerning import/export.

 

9.       VAT Taxpayer Procedures

Depending on the scale of the WFOEs operations and the capital invested into the company, different tax categories must be understood, and their processes via the local tax bureau followed to comply with Chinese tax regulations and issue fapiao (invoices).

All included, the process can take between 3-6 months.

 

What are the Costs of Setting Up a WFOE?

 

In addition to the complexity of the process itself, there are other costs to consider outside of the filing fees. These depend heavily on how much of the process you want to do yourself and how much starting capital you want to invest in the enterprise.

 

1.       SetUp Cost

The cost of setting up a WFOE will largely depend on the size and type of your business, how quickly you want the process to be done, and how secure you would feel in tackling the steps by yourself.

Having a trustworthy partner to guide and support you through the process can make a big difference, but the additional costs must be considered.

 

      Local Law Firm Specializing in Company Incorporation

The most professional option, these firms will do most of the work for you. They will be the easiest to do business with in terms of communication and compliance assurance. However, you will find your set-up costs increase rapidly with this sort of support. Price ranges can be upwards of 100,000 RMB in fees.

      Local Business/Local Services Provider

Many mid-sized businesses in China can provide guidance and support throughout the set up process. These companies specialize in providing the most step-by-step support possible. These companies are typically more open to communication than a larger firm due to the smaller number of clients, meaning you can make the most of their expertise.

Along with a Sole Trading Consultant, many options are available for companies in this sector. As such, it’s best to meet with a consultant from one of these companies first to get an idea of the cost.

      Sole Trading China Business Consultant

A smaller version of the above, many experts can offer their services to guide you through the process for a smaller fee. However, these individuals may vary greatly in terms of capabilities and quality.

      Yourself

Every step required to set up a WFOE in China is entirely possible for a single individual. You can take things at your own pace and save money on consultancy or service fees. Still, in doing so, you will open yourself up to more complications in the case of any problems. Even if you choose to avoid any service providers, it is still expected that the cost of setting up a WFOE would be around 10000 RMB.

 

2.       Required Investment Capital

      While national capital investment prerequisites were removed in 2014, each of the larger cities in China requires different initial amounts of investment depending on the kind of WFOE you might want to open. Roughly, these are:

 

Manufacturing WFOE         ~ 1,000,000 RMB

Trading WFOE                 500,000-1,000,000 RMB

Consulting WFOE            100,000-500,000 RMB

 

Resource from Shanghai Government: https://www.shanghai.gov.cn/nw49522/index.html.

 

PEO vs. WFOE

 

WFOEs and PEOs both offer many opportunities for investors looking to expand into China. Both have their advantages, and both open up potential investors to new challenges.

A WFOE will take months of work to begin in terms of set up time and cost. At the same time, a PEO relationship can be established quickly and easily, leaving the local hosting company to prepare the majority of the requirements while you work on company goals. In addition, the ability to outsource other services such as recruitment and payroll onto a PEO can save you even more time and money in the long run, while also allowing for greater legal compliance.

While many are concerned about not being able to exercise complete control over their employees in China through a PEO, this depends on the company acting as the PEO. With adequate communication at the beginning of the relationship, there should be no issues regarding control. Instead, you can enjoy the freedom that comes from less liability.

By choosing the right PEO services provider, you can avoid many of the potential problems that opening a WFOE can bring while also enjoying a greater level of flexibility in terms of regional reach, staff optimization, and safety.

 

Joint Venture (JV) vs. WFOE

 

Joint Ventures and WFOEs are both excellent ways to set up a company as a separate legal entity. Still, both come with drawbacks that will need a lot of consideration before you decide to invest.

The initial comparison is the ease of set-up and termination for each type of company. While WFOEs require some months of preparation to begin, a JV will almost always take longer due to the necessity of finding and negotiating with a local Chinese partner. Finding a partner that can be trusted and that aligns with your company goals may be the challenge that takes the longest time to overcome. All of these delays will add to your initial costs of setting up, and they can seriously extend the termination process when you are looking to end operations.

In terms of support, JVs are unparalleled. Entering into a partnership with a Chinese partner allows access to all kinds of knowledge and resources that would simply be unavailable to foreign investors looking to do things on their own. The question here is how much these resources are worth compared to the independence of action with a WFOE.

Finally, for many people looking to expand into China, the lack of real protection for any intellectual property or trademarks in a JV is a problem. This can be the major reason why companies look at forming a WFOE.

 

How INS Global Can Help to Set Up a WFOE

 

In recent years, efforts have been made to make it easier to establish a WFOE, such as greater access to national insurance benefits and a more straightforward setup process.

INS Global has over 15 years of experience dealing with companies wishing to enter the Chinese market. Their expert consultants are ready to help at any time, and at every step of the way whether you want to open a WFOE in China or make the most of their China-based PEO, recruitment, and payroll services.

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