In this blog post from Hongda we're going to be taking a look at how to register a WFOE in China.
- What a 'Wholly Foreign Owned Enterprise' is
- Who might wish to open one
- The benefits and drawbacks of them
- The registration path (brief overview)
If you're a foreign business who is interested in starting a business in China, then this type of company may be the perfect solution to allow you to gain a foothold in this vast and exciting market.
Let's look at these companies in more detail here:
What Is A WFOE?
It is a type of company which allows foreign investors a gateway into China.
Commonly pronounced "Woof-y," the 'Wholly Foreign Owned Enterprise' which can also be abbreviated as WFOE, is a totally foreign owned limited company based in China.The foreign investors are limited to the investment that they put into the company when setting it up.
In more recent years following China entry into the World Trade Organization in 2001, the ability for foreigners to set up their own company within Chinese borders has been made easier, and the WFOE is just one of these vehicles. Other methods are joint venture companies, and representative offices.
Where the wholly owned foreign enterprise differs is that it is invested into and controlled by foreigners, with no Chinese influence aside from regular government requirements such as tax, and corporate registration.
Unlike other options open to foreigners, such as a representative office (which is more like a China branch office), the WFOE can operate like a normal company, making profit and invoicing customers. Importantly, the company is able to operate using Chinese Yuan (RMB), meaning that any invoices and costs could be tax-deductible.
One other notable feature is that this type of company can, in theory, hire as many foreign staff as they like as long as they fulfill China's rules on foreign workers. Commonly the larger the initial investment into the company and the more local staff that it employs, the more foreign staff will be allowed to be hired.
Who Would Open A WFOE In China?
This type of company is perfect for:
- Foreign companies who want a presence in China, but want complete autonomy
- Those who don't have, or want to enter into, a joint venture with a local company
- Companies who want to do business in China and be on the same level as Chinese companies
- Organizations who need to place a number of foreign nationals in positions in China
- Foreign manufacturers who want to produce products in China and export them
- Trading companies
- Consultancy companies
- Management companies
- Service companies
- IT companies
Basically, the original purpose of a WFOE for China was to encourage more overseas companies in specialist industries and technologies to enrich the workforce and economy by starting a business in China.
Today this is still the case, but rather than focussing on manufacturing, which used to be the case, China now welcomes all kinds of foreign business types as you can see.
Wholly Foreign Owned Enterprise Advantages
- No reliance on Chinese partners
- Ability for foreign owners to make all company driving decisions
- Can invoice in Chinese Yuan (RMB)
- Can make profits in local currency
- Easier to protect IP (Intellectual Property)
- Can hire and fire local and foreign staff
- Can send profits in USD outside of China
- Manufacturers need not apply for special import/export license
Thinking of opening a Wholly Foreign Owned Enterprise?
Download your FREE WFOE checklist which will guide you through the process here.
Wholly Foreign Owned Enterprise Disadvantages
- Difficult to set up without assistance
- Monthly accounting needs to be submitted to local taxation authorities
- Different areas in China have different rules
- A real office address is needed to set one up
- There could be a lot of capital investment needed for setup depending on your industry
How To Register A WFOE In China
A common difficulty for foreign organizations is knowing how to register a WFOE in China.
While it is a complex process, and assistance will help this run smoothly and without difficulty, we'll include a brief breakdown here for you.
Today there are very few limits on the types of companies who may set up their own local presence in China, but the regulations, investment, requirements, and set up fees for the different industries may vary.
Typically WFOEs will fall under one of three categories:
- Consulting (service)
The scope of your proposed business will determine which kind of WFOE you must open. Although each type of WFOE may be allowed to engage in business not strictly suggested by its category, it is not possible to make a change and start doing a completely different kind of unrelated business with re-application.
For instance, a manufacturing WFOE may also offer some kinds of related consultancy, but they could not cease manufacturing and become a total consultancy firm and remain the same company.
This is because the business must make the majority of its revenue from its core business type in order to function in China.
WFOE Registered Capital Needs
It's critical to budget enough capital to keep your company running for long enough to become stable, and this is where the registered capital investment comes into play.
The Chinese government has taken steps to remove the need for registered capital when setting up your company, mirroring local companies who don't have this demand.
By levelling the playing field they hope to attract more foreign companies to China.
While it may well be that you are not required to invest any money, we would suggest that a minimum investment should still be made in order to cover your starting costs.
This would be somewhere around:
It's also useful to know that the investment is not demanded all at once quite regularly, often being required to be in place months or even years after the company has been incorporated.
So the 'promise' to invest a certain amount within a time-frame specified by the local government of the city that you're setting up in may be enough to give you the green light in cases where a minimum investment is still demanded.
The WFOE Registration Path
Here is a brief overview of the steps one must take to register a WFOE.
- Register a company name - this must be in Chinese and will be of the form: COMPANY NAME, ACTIVITY, (CITY), Co., Ltd. An example would be ABC Manufacturing (Shenzhen) Co., Ltd.There is a certain set of rules that must be followed when naming a new company. Click here to read more.
- Issue approval certificate and temporary business license - there are many documents and pieces of information needed in order to gain approval, this is the area where foreign companies are likely to need professional assistance
- Formal government registration with relevant offices
- Create 'chop' (company seal) for use with official company documentation
- Open local RMB business bank account
The benefits of having your own independent Chinese company are huge.
You'll be legal, be able to make money in China, send profits abroad, and employ your own local and foreign staff.
The old way of doing business in China was to open a joint venture, and that's still fine for some companies; but this can lead to issues down the line as you are not fully in control. What happens if you fall out with your local partner?
Therefore running a WFOE and answering to no one is far more preferable for most foreign companies who're looking at starting a company in China today, and China has made it easier for companies to register them and we generally recommend them to around 90% of our clients who are interested in setting up a company in China.
That said, the paperwork can still be daunting as you can see from the registration information given earlier.
Making sure you have all the necessary documents ready when registering a WFOE will help you to plan in advance and keep track of everything!
Alternatively working with a local partner, like Hongda, to open your company will save you a lot of time and money, not to mention stress.
Are you starting a business in China?
Is a Wholly Foreign Owned Enterprise the right company for you?
What are your questions or concerns over starting this business?
Let us know by leaving a comment below, and we will be happy to reply.