WFOE in China
A. WFOE in China: introduction
A Wholly Foreign Owned Enterprise, popularly known as WFOE in China, is a company based in the People’s Republic of China and is entirely owned by foreign investors. The entity has the structure of a limited liability company and finds its stride in foreign funds. WFOE is the most preferred structure which allows full ownership and control by the foreign investors, making it possible to develop internal structure as well as the privilege to convert the local currency for profit repartition use.
The main purpose of a WFOE in China is to target a vast majority of manufacturing businesses for sales as well as exports and business services.
B. WFOE incorporation
Registration process of starting a WFOE in China:
C. General categories of WFOE
- Manufacturing WFOE, allowing WFOEs to only manufacture.
- Consulting WFOE, allowing WFOEs to provide Consulting and Services.
- Trading WFOE (also known as Foreign-Invested Commercial Enterprise “FICE”) allowing WFOEs to do trading activities as well as assembly
D. Registered and paid-up capital
Recently, there have been some amendments in the PRC company law making the business set up process even easier for foreign investors. According to the amendment, the restrictions on the ratio of initial capital contribution have been removed and also, the time limit for capital contribution will no longer exist, unless the law, regulations or decisions of the State Council otherwise specifies for certain companies. Despite this flexibility, the companies are encouraged to have sufficient registered capital to start with, the money input that covers the costs so that business can reach the breakeven point.
E. Business scope
The business scope is one of the most crucial factors when applying for a WFOE in China because this has to be defined and approved before investors can proceed in conducting business. The approval is to be found in the business license. When the business scope is modified, then it will need to be specified and approved again. Besides, negotiations with approval authorities are not excluded and can be done as long as it is an acceptable agreement. Certain sectors, such as tourism, accounting (bookkeeping, CPA), food, cosmetic, etc., requires pre approval from certain authorities.
F. Tax applicable to WFOE
Note: Surcharge tax is paid based on the VAT, BT or CT which may vary by cities.
G. Social security issues
A new rule has taken force on October 15, 2011 concerning the social security of foreign employees which obliged companies to register its employees within 30 days after receiving their work permit. In some of the cities, the social contribution is compulsory whereas in others is optional, such as Shanghai.
H. Annual audit and compliance for WFOE
Every company with limited liability in China should file an audit report with the authorized bodies. If this formality is not met by companies, taken into account the time given, then they may be fined.
I. Term and termination
The average termination term for WFOEs is from 15 to 30 years or even longer, not excluding extensions. The term can be extended from up to 50 years when a project takes a long time; return on investment is low on construction period, large investments, projects regarding sophisticated products, use of advance key technologies provided by foreign partners or activities producing competitive products internationally. Lastly, the termination of a WFOE term can be extended from over 50 years as long as State Council approves of it.
To set up a company does not take as much time as it does to close it. The processing time to complete the de-registration process may take from 6 months to 1 year for a WFOE in China. Cancellation of certificate of approval and business license and de-registration of tax are the most crucial and time consuming steps in the whole de-registration process.
By S.J. Grand