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Why Foreign Companies Prefer WFOE as their China Business Entity

The Wholly Foreign Owned Enterprise (WFOE or WOFE) is a Limited liability company wholly owned by the foreign investor(s). It offers a wider business scope compared to a representative office (RO), and possesses several unique features.

WFOE includes-

  • Free Trade Zone company
  • Representative Office
  • Joint Venture
  • Partnership enterprises

Although China has revamped its WFOE formation rules ( under the new rules, the investor must provide a complete organizational chart detailing ownership of the shareholder and identifying the actual controlling person), still more than 90% foreign companies prefer WFOE as their China business entity. 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.

WFOE

 

 

 

 

 

 

 

WFOE Types-

  • Consultancy Service WFOE
  • Manufacture WFOE
  • Trading WFOE – Wholesale, Retail or Franchise in China
  • FICE (Foreign-Invested Commercial Enterprise)

It can also employ local staff directly, without obligation to employ services from employment agencies. Although there is no legal restriction on the number of foreigners a WFOE can employ, in practice the number of foreign employees does depend on the amount of registered capital (discussed below) that the respective company injects.

Special advantages of WFOE-

  • An enterprise can be wholly owned by one foreign individual or joint owned by several foreign investors
  • Can engage in product sales both domestically and internationally
  • Total management control within the limitations of the laws of the PRC
  • Increased protection of trademarks and intellectual property, in accordance with international law
  • Requires only one investor, can be of any nationality and reside anywhere outside of China. Corporate investors are also permitted
  • More effective means of protecting technical information and trade secrets and allows for full authority over staffing
  • Ability to eliminate extra commission charges and other fees, since intermediaries are not legally required. This means they don’t have to liaise with agents and distributors
  • A suitable investment vehicle for establishing a long-term presence in China
  • Avoids the 11-12 percent tax on expenses that representative offices (RO) pay

A WFOE can only operate within the business scope as set forth in its business license. If it decides to pursue other activities than the ones mentioned in its Scope of Business, it will first have to gain approval from the relevant authorities. The duration of a WFOE can be up to 15 – 30 years, with possibilities of extension up to 50 years and occasionally even longer (Only for certain types of projects, and with express approval of the State Council).

WFOE is often used to produce the foreign firm’s product in mainland China for later export to a foreign country. They do not automatically have right to distribute their products in mainland China.

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