WFOE (Wholly Owned Foreign Enterprise)

"Our team will assist you in negotiating with your local office, apply the appropriate reporting method for your WFOE and submit the monthly and quarterly tax reports. We can also advise on tax planning opportunities to minimize the tax burden on your company and staff."

中文

日本语

Deutsch

Integrity, Efficiency, Professionalism

More info on WFOE

The Wholly Foreign Owned Enterprise (WFOE) is a Limited Liability company wholly owned by the foreign investor(s). In China, WFOEs were originally conceived for the increasing manufacturing activities that orientated around exports and technological advancement. However, China’s accession into the WTO shifted focus to the service industry where a variety of consulting, management and software development services developed.

The registered capital of a Wholly Foreign Owned Enterprise (WFOE) should be subscribed and contributed solely by the 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 “branches”. The term “branches” should include both the branch companies engaged in operational activities and representative offices (RO), which are generally not engaged in direct business activities. Therefore, branches and ROs set up by foreign enterprises are not WFOE.

Advantages of WFOE

The advantages of establishing a WFOE, compared to other types of enterprises, include but are not limited to:
Independence and freedom to implement the worldwide strategies of its parent company without having to consider the involvement of the Chinese partnerAbility to formally carry out business rather than just function as a representative office and being able to issue invoices to their customers in RMB and receive revenues in RMBCapability of converting RMB profits to US dollars for remittance to its parent company outside of ChinaProtection of intellectual knowledge and tehnologyNo requirement for import/export licenses for its own productsFull control of human resources Greater efficiency in operations, management and future development

Business Scope

One of the most important issues in WFOE 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. The business scope of a WFOE refers to the type of business it is permitted to carry out, and it’s registration with relevant government authorities relating to those activities. Before being permitted to carry out business in any new area its business scope must be changed and approved; this can be a time-consuming process.

Any amendments to the business scope require further application and approval. Inevitably, there is a negotiation with the approval authorities to approve as broad a business scope as can be permitted. Generally business scope includes investment consulting, international economic consulting, trade formation consulting, marketing and promotion consulting, corporate management consulting, technology consulting, manufacturing etc. With China’s entry into the WTO, ever many companies are establishing as WFOE especially in Trading, Wholesale and Retail businesses.

Considerations before establishing WFOE

Changing business scope, registered capital or total investment, and other key company information registered at relevant government authorities during the establishment of WFOE can be costly and time-consuming. It is important to thoroughly assess the level of required investment and the amount of funds necessary to invest to ensure smooth operation of your WFOE. The practical level of required capital is often greater than the legal mandatory minimum requirements of registered capital. It can take several months to increase registered capital once a WFOE is established; insufficient levels of registered capital can have a serious impact on a WFOE’s operations, especially in the period shortly after being established.

Location

In China, many different cities, even districts and business zones within cities have various policies and incentives pertaining to different types of business and industry. Examples include tax incentives, differing mandatory capital requirements, or preferential zoning policies. Before establishing a local presence, local policies affecting your WFOE should be analyzed and thoroughly understood.

Analysis and Evaluation of Registered Capital Issues

Chinese law and regulations state that a WFOE is required to have its registered capital contributed by its shareholder(s) within a certain period after the WFOE’s establishment. Issues of registered capital are often a point of confusion for foreign investors.

The registered capital of a WFOE is the capital subscribed and contributed by the investors for setting up the WFOE. The amount of registered capital shall be registered with relevant Chinese local government authorities, and the registered capital shall be contributed completely by the WFOE’s investor(s) within the period stipulated in the WFOE’s articles of association (AOA).

The WFOE’s registered capital belongs to the WFOE and may be used for the WFOE’s operation, rent, purchase of equipment, payment of salaries, and other costs incurred by the WFOE. After the WFOE’s liquidation or termination, the shareholder(s) is entitled to recover the registered capital remaining after payment of all the WFOE’s outstanding debt obligations. Responsibilities are respectively allocated to the shareholder(s) based on their subscribed capital contribution to the WFOE.

WFOE’s costs are likely to be greater than its revenues for the period immediately after its establishment; the shortfall is funded by the WFOE’s registered capital. If the WFOE’s registered capital is not sufficient to cover its cost before it starts to record a profit, the WFOE shall choose either to borrow a foreign loan or to apply to the relevant government authorities to increase its registered capital. Increasing registered capital is costly in terms money and time. We strongly recommend investors to carefully plan and calculate the likely level of capital required until profitable operation.

According to relevant Chinese laws and regulations, the amount of total investment shall be equal to or higher than the WFOE’s registered capital, and shall not exceed the proportion stipulated in relevant regulations; the minimum statutory proportions of registered capital to total investment are:

1. Total investment < 3 million USD: the registered capital shall not be less than 7/10 of the total investment.

2. 3 million USD ≤ total investment < 10 million USD: the registered capital shall not be less than 1/2 of the total investment
  and shall not be less than 2.1 million USD.

3. 10 million USD ≤ total investment < 30 million USD: the registered capital shall not be less than 2/5 of the total investment
  and shall not be less than 5 million USD.

4. 30 million ≤ total investment: the registered capital shall not be less than 2/5 of the total investment. If the total investment is
  less than 36 million, the registered capital shall not be less than 12 million.

Minimum Registered Capital

The minimum permitted registered capital of a WFOE is 30,000 RMB. If a WFOE is invested by only one investor (either a foreign individual or a foreign enterprise), the minimum registered capital of a WFOE is such that it shall be not less than 100,000 RMB.

The procedure of applying for increasing the registered capital levels is complicated and time consuming. An outline of this procedure:

(1) Apply for registered capital increase with the original approving authority (usually the local bureau of commerce);

(2) Apply for changing the WFOE’s Business License with the local administration of industry and commerce;

(3) Apply for the modification of registered capital information with the local branch of State Administration of Foreign Exchange,
  for approval of the additional investment;

(4) Engage a Chinese public registered accounting firm to issue a Registered Capital Verification Report;

(5) Modify relevant information in local tax bureaus; and

(6) Other procedure required by local government authorities. In our experience, the completion of the whole procedure to
  increase registered capital takes 2 to 3 months.

Registered Capital Injection

The shareholder(s) of a WFOE may make capital contributions in currency, in kind (such as equipment), in intellectual property rights, or by other non-currency means that may be assessed on the basis of currency value and transferred according to Chinese law.

The value of non-currency contributions shall be assessed and verified by a China-qualified appraisal organization and are not permitted to be either under or over-valued. The amount of the capital contributions in currency paid by all the shareholders shall be not less than 30% of the registered capital of the WFOE.

The shareholder(s) may choose to inject capital contributions in the form of a lump sum or by installments. If the registered capital is chosen by the shareholder(s) to be injected in a lump sum, the shareholder(s) must contribute the whole registered capital within 6 months after the WFOE has obtained its Business License.

If the shareholder(s) intend to inject the capital contribution in installments, the first installment should not be less than 15% of the capital contribution subscribed by the shareholder(s) and must be injected within 3 months after the WFOE has obtained its Business License, the rest of the registered capital must be completely injected within 2 years after the WFOE has obtained its Business License.

Profit Repatriation

The Chinese government allows Foreign Invested Enterprises (FIE) 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 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. Repatriating the registered capital to home countries is forbidden during the term of business operation.

Our services

Accounting and Payroll Services 
 Our Pathfinder serviceIndependent internal audit

Tax Services
Tax compliance serviceTax planning and consultingExport tax refund application

Consulting Services
Law inspection servicesHR consulting serviceM&A

Labor Services
 Work permit serviceLabor contract serviceLabor insurance service

Business Services
Business registration and establishment
  - WFOE
  - RO
  - JVBusiness changesBusiness cancellationCapital verificationChanges in registered capitalAnnual business inspection