The Wholly Foreign Owned Enterprise
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The Wholly Foreign Owned Enterprise (WFOE or WOFE) is a Limited liability company wholly owned by the foreign investor(s). In China, WFOEs were originally conceived for encouraged manufacturing activities that were either export orientated or introduced advanced technology. However, after China’s entried into the WTO, these conditions were gradually abolished and the WFOE is increasingly being used for service providers such as a variety of consulting and management services, software development and trading as well. With that, any enterprise in China which is 100% owned by a foreign company or companies can be called as WFOE.
WFOE has great potential in China as companies seek new markets, executives say that by 2014 China will be the world’s top investment destination.
The registered capital of a Wholly Foreign Owned Enterprise (WFOE) should be subscribed and contributed solely by 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 of “branches” should include both the branch companies engaged in operational activities and representative offices, which are generally not engaged in direct business activities. Therefore, branches and representative offices set up by foreign enterprises are not WFOE.
1. Different Types of WFOE
Following are different types of WFOE. Commonly,
- If the WFOE only be allowed to manufacture here. We can say it’s manufacturing WFOE.
- If the WFOE is allowed to do Consulting & Service, we call them Consulting WFOE.
- If the WFOE is allowed to do Trading, Wholesale, Retail or Franchise in China, we call them Trading WFOE or FICE (Foreign-Invested Commercial Enterprise)
2. Advantages of WFOE
The advantages of incorporation a WFOE, compared with other types of enterprises, include, but not limited to:
- Independence and freedom to implement the worldwide strategies of its parent company without having to consider the involvement of the Chinese partner;
- Ability 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 RMB;
- Capability of converting RMB profits to US dollars for remittance to its parent company outside of China;
- Protection of intellectual know-how and technology;
- For Manufacturing WFOE, no special requirements for Import / Export license for its own products;
- Full control of human resources
- Greater efficiency in operations, management and future development.
3. Registered and Paid up Capital
Registered Capital: USD$140,000 is a good idea for all kinds of WFOE, with USD$ 140,000 investment it’s easy to get approved. Initial Paid-up would be 20% of the registered capital, the balance should be remitted within 2 years.
Registered capital is the amount that it’s required to run the business until it can break even – the ‘registered capital’ is a guideline only. If you do looking for a minimum registered capital, for instance RMB 30,000 (which is impossible to establish a WFOE in China) this means you will run out of money pretty soon, which leads to increased costs in reapplying for permission to increase capital, additional licensing fees and renewals of business licenses and so on. The WFOE needs funding via it’s registered capital until it’s about to support itself from it’s own cash flow.
However the amount of registered capital is 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 could be negotiated in some cases.
The minimum registered capital guides for various industries according to our practice in China, for instance Beijing, Shanghai [100k RMB registered capital, Guangzhou, Shenzhen, Hangzhou, Dalian, Ningbo are given below:
Consulting WFOE RMB 100,000 ~ RMB 500,000
Service WFOE RMB 100,000 ~ RMB 500,000
Hi-Tech WFOE RMB 100,000 ~ RMB 500,000
Trading WFOE/FICE/Retail RMB 500,000 ~ RMB 1 million
Food & Beverage WFOE RMB 500,000 ~ RMB 1 million
Manufacturing WFOE RMB 1 million or USD 140,000
4. Profit Repatriation
China Government allows Foreign Invested Enterprises 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 to oversea 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.
5. Terms and Termination
In China, terms of 15 to 30 years are typical for a manufacturing WFOE (although some may have a longer term). It is also possible to obtain extensions of the WFOE’s duration. For projects in which the amount of investment is large, or the construction period is long and the return on investment low, projects producing sophisticated products using advanced or key technology provided by the foreign partner, or for projects producing internationally competitive products, the term of WFOE may be extended to 50 years. With special approval from the State Council, the term may be even longer than 50 years.
The WFOE may be terminated under certain conditions. For example, the inability of the WFOE to operate due to heavy losses, or in the occurrence of an event of force majeure, etc.