WFOE in China: An Introduction to the Chinese LLC
China is the world’s second-largest economy and has welcomed a large amount of foreign investment in recent decades.
To maintain its commitment to further open up its markets, boost inbound foreign investment and enhance regulatory transparency, the new PRC Foreign Investment Law (FIL) took effect on 1 January 2020.
The FIL replaced the three previous laws governing foreign investment and foreign-invested enterprises (FIEs) in China: Chinese-Foreign Equity Joint Venture Law, Chinese-Foreign Cooperative Joint Venture Law and the Wholly Foreign Owned Enterprise (WFOE or sometimes called WOFE) Law.
Under the FIL, the terms of the WFOE Law and Joint Venture (JV) Laws are no longer binding. All FIEs in China will take the legal form of either a Limited Liability Company, a Company Limited by Shares or a Partnership.
Nevertheless, the words ‘WFOE’ and ‘JV’ are often still used to refer to relevant investment forms for easier communication.
What is a WFOE?
WFOE stands for Wholly Foreign-Owned Enterprise, which is a limited liability Chinese company. It is invested into with 100% foreign capital and owned solely by foreigners (including Hong Kong), either individual(s) or a corporate body.
A WFOE can do the same actions as any other Chinese company, such as:
- Trade freely in China
- Make revenue in CNY
- Invoice (produce fapiao) in CNY
- Employ staff
- Transfer profits back abroad
- Export goods
Often, a WFOE is set up as a subsidiary of a foreign company based abroad, though it operates as a standalone entity within China.
WFOEs are often sub-classified into 3 key categories:
- Manufacturing WFOE: manufacturing sector
- Trading WFOE: trading, wholesale, retail or franchise sector
- Consulting WFOE: consulting and service sector
Pros and cons of a WFOE
|A separate legal entity and the liabilities of the shareholders are limited.||Sometimes take more than two months to set up a WFOE, usually depending on the nature of business/industry|
|No requirement to have a Chinese partner to set up business.||No access to Chinese government support.|
|Operational independence; no need to answer to a local business partner.||Minimum registered capital investments can be high for certain business, such as the financial related business|
|Ability to protect intellectual property.|
|Invoice and get paid in CNY.|
|Can convert currencies and remit profits abroad.|
Where to set up your WFOE?
China is a large country with a considerable market. Various industries tend to be located in specific areas.
For example, Shenzhen is known for its high-tech and innovation industries, Guangzhou for advanced manufacturing, while the toy industry is mostly located in Chenghai.
Choosing the right location for your Chinese company can have a major impact on the success of a WFOE.
It is therefore advisable to have access to local knowledge of the country, as well as the specific areas and their industry focus.
Minimum registered capital
In the past, WFOEs were required to have a minimum registered capital to operate. However, there is not a specific amount set out in the law.
In recent amendments to the foreign investment laws, the requirement of minimum amount of registered capital has been removed for most of the businesses, except certain financial-related business – likely to lower the barrier to entry for foreign firms.
There are some rough guidelines, but it is a highly individual topic. It is best to consult with a corporate services provider to receive more accurate information.
If you’re flexible on the WFOE’s location, it may be worth comparing the requirements in different areas.
Having said the above, it can be burdensome to apply for an increase of the registered share capital in China. Therefore, it is suggested to prepare a budget plan and ensure that the intended amount of registered capital is enough to operate the business for a period of time.
Steps to register a WFOE
There are several steps to take when registering a WFOE, but the laws and rules concerning WFOEs may come with regional and local variants.
So while the general steps will be similar for all WFOE businesses, there could be additional requirements to consider depending on the business type and location.
Consulting a professional for individual advice is essential for a successful WFOE application.
The general WFOE registration steps are:
- Choosing a business name which fits Chinese business name requirements
- Gather the incorporation documents, such as Articles of Association, rental contract and Feasibility Study Report (based on type and location of your business)
- Apply for the business license with the Ministry of Commerce (MOFCOM) and the Administration for Industry and Commerce (AIC)
- Register for business taxes, which may need to be done on state and local levels.
- Register with other authorities, depending on the business type (for example Customs or e-Port registrations)
- Apply for the company chop, financial chop and legal representative chop with the local Public Security Bureau
- Register with the Foreign Exchange Bureau
- Open a CNY bank account
Gathering the required documentation for a WFOE application is often challenging and time-consuming. As business owner, you’d typically need to provide the following documents:
- Company director(s) passport copies
- Legal representative’s passport copy and details
- Company supervisor’s passport copy and details
- Company office lease rental contract
- Chinese name of company
- Business scope
- Copies of overseas company registration documents (required if the foreign investor is a corporate body)
How long does it take to set up a WFOE in China?
The length of the WFOE registration process generally depends on the type of WFOE.
A Consulting WFOE is the simplest to set up; they are not allowed to sell anything besides services. Compared to a Manufacturing or Trading WFOE, no special certificates are necessary, such as Import/Export Licenses or environmental impact assessment reports.
On average, it takes 1.5 – 2 months to set up a WFOE, but it may be longer.
How HKWJ can help
We can assist and guide you through the complete WFOE application process, to ensure your WFOE is set up correctly and successfully.
To help you enter the Chinese market, we analyse and advise on the possible forms of investments, and the different legal and tax implications.
When engaging us for opening a WFOE, we help you with:
- Supplying all required government forms and assisting in filling them correctly
- Name registration with the AIC
- Assisting with finding business premises within your budget
- Applying for business license and necessary certificates
- Assisting in creating the necessary company chops
- Registering with the tax authorities
- Opening a Chinese bank account (CNY and foreign currency)
- Purchasing or printing financial invoices (fapiao)
- And more
Besides the company set-up, we provide all necessary support to keep your China business compliant. Services include, but are not limited to, accounting, tax filing and advice, HR including visa application, and payroll.
Contact us via the form below for more information and to start setting up your WFOE in China.