One popular entry mode for foreign companies is the establishment of a wholly foreign-owned enterprise (WFOE) in China, representing a limited liability company entirely owned by one or more foreign investors.

This article delves into the step-by-step process of setting up a WFOE in China, covering legal requirements, registration procedures, and key considerations for foreign investors embarking on this venture.

What is a China WFOE?

A Wholly Foreign-Owned Enterprise in China is a limited liability company held exclusively by foreign investors, making it an ideal business structure for foreign companies engaging in Quality Control (QC), Research and Development (R&D), trade, services, and production.

Compared to other structures, a WFOE is the only business entity that allows foreign owners to retain 100% control. It is commonly used for producing a foreign company's products in Mainland China for subsequent export.

There are three types of WFOEs:

1. Consulting/Services WFOE: Licensed for consulting or services businesses, including cost-plus WFOEs serving as the back office of the foreign investor.

2. Trading WFOE: Licensed for trading, wholesaling, retailing, and franchising activities, requiring additional registration at customs for importing/exporting goods.

3. Manufacturing WFOE: Licensed for manufacturing and selling products, with a more complex registration process involving an environmental impact assessment.

Numbers About China WFOE

Taxes:

• Corporate income tax: 25% (lower rates may apply based on size and qualifications)

• Value-added tax: 3% – 13% of sales revenue (exports are exempted)

• Consumption tax: 1% – 45% of sales revenue (exports are exempted)

• Land appreciation tax: 30% – 60% of total transfer gains from state-owned land use rights, buildings, and attached facilities

• Stamp duty tax: 0.005% – 0.1%

• Resources tax: 1% – 20%, depending on the specific materials required

Amount of Owners:

Foreign investors can wholly own a WFOE, with no limit on the number of shareholders, allowing both individuals and companies to be shareholders.

Laws:

WFOEs in China are governed by the Company Law of the People’s Republic of China and other relevant laws and regulations.

Amount of Capital:

The minimum registered capital required for a WFOE varies depending on the industry and location, ranging from CNY 100,000 to several million CNY. Most industries do not require registered capital injection unless necessary for business operations.

Days Required to Register:

It takes approximately one to three months to complete all necessary procedures for registering a business in China, including obtaining business licenses, tax registration, opening a bank account, and registering with the State Administration of Foreign Exchange.

Advantages of Setting Up a WFOE

The advantages of a WFOE include:

1. Foreign investors retain 100% control.

2. Independence in HR matters, operations management, and growth strategy without partnering with a local domestic enterprise.

3. Direct business activities, including trading, servicing, and manufacturing within the approved business scope.

4. Issuing official VAT invoices (fapiao) and collecting sales revenues in CNY.

5. Employing both foreigners and local Chinese without limitations in most cities.

6. Remitting all profits made in China as dividends back to the company's investors.

Disadvantages of Setting Up a WFOE

Drawbacks include:

1. Complex setup process with endorsements required by multiple authorities.

2. Limitations to encouraged industries due to prohibitions and restrictions.

3. Greater liability as the official employer of record, requiring familiarity with complex laws and regulations related to tax, employment, contracts, and payroll.

Things to Consider Before Registering a WFOE

Before registering a WFOE in China, companies should consider:

1. Investment Structure: Tax efficiency, complexity, lead time, co-investors, internal interests, flexibility, and future exit.

2. Registered Capital: Decision-making based on factors like covering the first one to two years of operational costs.

3. Location: District considerations, tax benefits, access to talent, proximity to the city center, and accessibility to suppliers or clients.

4. Licences: Requirements for specific licences in certain industries.

Requirements for Registering a WFOE in China

WFOE Compliance:

Compliance with various regulatory bodies, including the Administration for Market Regulation, Ministry of Commerce, Seals Office/Public Security Bureau, Tax Bureau, and State Administration of Foreign Exchange.

Guidelines on Registered Capital:

Sufficient registered capital to sustain the business initially, depending on the business scope, sector, and business plan.

Administration Requirements:

Designation of a legal representative, financial officer, and supervisor, with at least three individuals in the structure.

Steps to Setting Up a WFOE

To set up a WFOE in China, the following steps are involved:

1. Choosing a Chinese Business Name: Adhering to strict regulations and considering cultural and language differences.

2. Preparing Documentation: Gathering necessary documents for WFOE registration, including passport copies, lease agreements, Articles of Formation, and more.

3. Applying for a Business Licence: Submitting the application to the local offices of the Administration for Market Regulation (AMR).

4. Registering for Taxes: Registering for applicable taxes at the tax bureau and activating the CA key.

5. Registering with Other Authorities: Registering with seals office, the State Administration of Foreign Exchange, social welfare bureau, housing fund bureau, customs, and E-port for trading business.

6. Opening a Corporate Bank Account: Opening foreign currency and Chinese CNY bank accounts.