WFOEs are limited liability corporations organized by foreign nationals and capitalized with foreign funds. WFOEs are often used to produce the foreign firm’s product in mainland China for later export to a foreign country. The WFOE must go through the entire registration and incorporation process, and is the most costly business structure to setup.
A Wholly Foreign-Owned Enterprise (WFOE, sometimes incorrectly written as WOFE) is a common investment vehicle for mainland China-based business wherein foreign parties (individuals or corporate entities) can incorporate a foreign-owned limited liability company.
WFOEs are limited-liability corporations organized by foreign nationals and capitalized with foreign funds. This can give greater control over the business venture in mainland China, and avoid a multitude of problematic issues which can potentially result from dealing with a domestic joint venture partner.
Such problems often include profit not being maximized, leakage of the foreign firm’s intellectual property and the potential for joint venture partners to set up in competition against the foreign firm after siphoning off knowledge and expertise.
WFOEs are often used to produce the foreign firm’s product in mainland China for later export to a foreign country, sometimes through the use of Special Economic Zones which allow the importation of components duty-free into China, to then be added to Chinese-made components and the finished product then re-exported. An additional advantage with this model is the ability to claim back VAT on the Chinese manufactured component parts upon export. In addition, WFOEs now have the right to distribute their products in mainland China via both wholesale and retail channels.
The FICE Option: Another recent variant (the Foreign Invested Commercial Enterprise / FICE) of the WFOE has also come into effect, and are used mainly for trading and buying and selling in China. The registered capital requirements for a FICE are lower than for a WFOE as the FICE does not need to fund plant and machinery acquisitions.
The unique feature of a WFOE is that involvement of a mainland Chinese investor is not required, unlike most other investment vehicles (most notably, a sino-foreign joint venture)
There are three distinct WFOE setups:
1. Service (or Consulting) WFOE;
2. Trading WFOE (or Foreign-invested Commercial Enterprise, “FICE”); and
3. Manufacturing WFOE.
Advantages of Establishing an WFOE
WFOEs are among the most popular corporate models for non-PRC investors due to their versatility and structural advantages over a Representative Office or Joint Venture:
- The ability to uphold a company’s global strategy free from interference by Chinese partners (as may occur in the case of joint ventures);
- A new, independent legal personality;
- Total management control within the limitations of the laws of the PRC;
- The ability to both receive and remit RMB to the investor company overseas;
- Increased protection of trademarks, patents and other intellectual property, in accordance with international law;
- Shareholder liability is limited to original investment;
- Easier to terminate than an Equity Joint Venture
- Simpler establishment than a Joint Venture.
Disadvantages of Establishing a WFOE
The disadvantages of establishing a WFOE include the inability to engage in certain restricted business activities, limited access to government support and a potentially steep learning curve upon entering the mainland Chinese market.
Since a WFOE is a type of limited liability company, it requires the injection of foreign funds to make-up the registered capital; something unnecessary with a Representative Office. It is important to note that regional differences in regulations and practical differences in the application of Chinese legislation can also apply.
Important Factors when Choosing a WFOE
1. 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. 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 is permitted. Generally business scope includes:
- Investment and international economic consulting
- Trade information, marketing and promotion consulting
- Corporate management consulting
- Technology and consulting
With China’s entry into WTO, more and more business is open to WFOE especially in Trading, Wholesale and Retail business.
2. Minimum Capital Requirements
Since March 1, 2014, no minimum registered capital is required for WFOEs with scope of business in consulting, trading, retailing or information technology in China. However there is still a minimum registered capital required for some industries such as Banking and Forwarding.
Below is a short list of cities that have detailed information about registered capital, required documents and procedures to establish a WFOE:
First tier cities:
SHANGHAI BEIJING SHENZHEN GUANGZHOU
2nd tier cities
: HANGZHOU CHENGDU CHONGQING TIANJIN WUHAN
3rd tier cities
: NINGBO SUZHOU XI’AN
Side note: Since China still maintains foreign currency control policy, it’s still advisable to choose registered capital within RMB 100,000 ~ RMB 500,000 as the minimum registered capital for a Consulting WFOE, Service WFOE, or Hi-Tech WFOE registration in Shanghai, Beijing, Shenzhen, Tianjin, Guangzhou, Hangzhou, Ningbo, Suzhou, Chengdu, Chongqing, Wuhan, Xi’an and many other cities of China. (Investors can inject the capital within 2-10 years)
3. Registered and Paid up Capital
Registered capital is the amount that is required to run the business until it can break even – the ‘minimum registered capital’ is a guideline only. If you do looking for a minimum registered capital, for instance RMB 30,000 (which is impossible to run a WFOE in China) this means you will run out of money fairly soon, which leads to increased costs in applying for permission to increase capital, additional licensing fees and renewals of business licenses and so on. The WFOE needs funding via its registered capital until it’s able to support itself from its own cash flow.
However the amount of registered capital needed is also dependent upon factors like scope of business and location. In reality, local authorities will review the feasibility study report (and check the lease contract) approve the investment on a case-by-case basis; reduced registered capital can be negotiated in some cases.
Summary of Recommended Registered Capital Amounts:
USD$140,000 is a decent investment capital for many types of WFOE. (With USD$ 140,000 investment it’s easy to get approved).
RMB 100,000 ~ RMB 500,000 (Approx. USD$15,000- 75,000) is the advisable as minimum investment capital to be approved for Consulting WFOE, Service WFOE, Hi-Tech WFOE registration in China. After the approval, initial paid-up capital should be injected within 3 months, which could be 20% of the registered capital, and the balance should be remitted within 2 years.
The minimum registered capital guides for various industries in China, for instance Beijing, Shanghai, Guangzhou, Shenzhen, Ningbo & Hangzhou are given below:
Consulting WFOE |
RMB 100,000 ~ RMB 300,000 (Approx. USD$ 15,000- 50,000) |
Service WFOE |
RMB 100,000 ~ RMB 300,000 (Approx. USD$ 15,000- 50,000) |
Hi-Tech WFOE |
RMB 100,000 ~ RMB 300,000 (Approx. USD$ 15,000- 50,000) |
Trading WFOE / FICE |
RMB 300,000 ~ RMB 1 million (Approx. USD$ 75,000- 140,000) |
Food & Beverage WFOE |
RMB 500,000 ~ RMB 1 million (Approx. USD$ 75,000- 140,000) |
Manufacturing WFOE |
RMB 500,000+ (Approx. USD$ 75,000+) |
Note: FIEs may benefit from china’s new registered capital regime as stated above in the Executive Summary
Registration Steps
A. Gather and prepare appropriate documents
The following documents will be required before creating a WFOE:
- 2x Certificate of Incorporation, Articles of Formation or equivalent, certified by Chinese embassy or Chinese consulate overseas
- For individual investor : 2x Passport copies of Investor need be certified by Chinese embassy or consulate. If individual investor is currently in China some cities will allow individual investor to submit with their original passport.
- 2x Bank Reference Lettersfrom investor’s bank (declare a good standing)
- Passport copies of: (i) Parent company’s director (ii) China company’s Legal Representative and (iii) China company’s supervisor
- China Legal Representative provides: 6 photos (2 inches size), brief resume
- Registered capital; Business Scope; 8 proposed Chinese names of China company
- Office address in China, 2x leasing contracts, 2x certificate of real estate ownership and 2x landlord identification
- 4x Letter of Authorization
- For Trading WFOEs only: The latest annual audit report copy from the parent company: provided by a Certified Public Accountant (CPA) and Customs HS Code of proposed Import/Export products in China
The above documents are enough to register a Trading WFO, a Service WFOE & Consulting WFOE.
Manufacturing WFOE’s will also need:
- Purpose and estimated investment
- WFOE’s operational structure and number of employees
- Permission for land use, environment evaluation report
- Products, size of production, detailed list of equipment, and business plan
- Environmental protection measures
- Requirement for utilities such as power and water supply
Time: n/a
Cost: n/a
B. Register through a PRC sponsor
Foreign investors are not permitted to directly submit the application documents of incorporation of a WFOE to the relevant authority in China (e.g. local Ministry of Commerce / MOFCOM). They must instead retain a PRC entity that is authorized or permitted by relevant authorities to act as a sponsor, such as a local designated Foreign Enterprise Service Company (FESCO) who will be in charge of your representative office application process. The sponsor will submit all the documents prepared in the first step to the examination and approval authorities on behalf of the foreign investor.
Agency: MOFCOM (via a FESCO)
Time: Procedures and time frames for setting up a WFOE in China are covered in the following table.
Note: Anecdotal sources recommend that one should expect 2-3 months to have all documents organised and prepared, about 1 month to submit all documents. Furthermore, it has been advised to be prepared for different cities on a case-by-case basis to expect more than the official requirement.
Step |
Time |
1. Name registration with State Administration of Industry and Commerce (SAIC). |
Completed on the same day |
2. Certificate of Approval by Ministry of Commerce or Foreign Economical Cooperation Bureau |
5 business days |
3. Apply for Business License with SAIC |
5 business days |
4. Chops (Seal/Stamp) made by Public Security Bureau (PSB) |
1 business day |
5. Organization Code License by Technical Supervision Bureau (TSB) |
5 business days |
6. Tax Certificate by Taxation Bureau |
7 days |
7. Registration and Approval with State Administration of Foreign Exchange (SAFE) |
5 Business Days |
8. Open foreign currency and RMB bank account |
1 day |
9. Inject capital from investor/s’ overseas bank account |
n/a |
10. Capital Verification Report by Certified Public Accountant (CPA) |
2 business days |
11. Apply for Permanent Business License with SAIC |
5 business days |
12. Financial certificate registration |
10 business days |
13. Statistics license registration |
1 business day |
14. Import/Export license (applicable for Trading & Manufacturing WFOE) |
1 business day |
Table of Costs:
WFOE type: |
Approx. government fees |
Consulting company |
1,000 USD |
Service WFOE, Software company |
1,000 USD |
Trading Company with Import/Export license |
1,000 USD |
Freight Forwarding company |
2,000 USD |
Food & Beverage WFOE |
2,500 USD |
Manufacturing WFOE |
4,000 USD |