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Why WFOE is an Ideal Investment Vehicle in China

China is a booming market and quickly becoming to replace the USA as the biggest economy in the world. No wonder businesses from all over the world want to enter this lucrative market. One way for overseas businesses to access the Chinese market is through setting up a wholly foreign-owned enterprise (WFOE). Since China’s entry into the World Trade Organization (WTO) in 2001, limitations on WFOE’s have been reduced to allow for their use in the service industry (Consulting WFOE’s).

WFOE can be Categorized in the Following Types

  • Manufacturing WFOE
  • Consulting WFOE
  • Trading WFOE or FICE

Compared to a joint venture, forming a WFOE has a greater freedom and independence, and for protecting intellectual properties in the mainland China, it is indispensable. A Wholly Foreign-Owned Enterprise can receive revenue in RMB, and issue RMB official invoices (Fapiaos) to customers which is crucial as invoices are the basis for obtaining tax deductions in China.

Advantages of WFOE-

  • The unique feature of a WFOE is that involvement of a mainland Chinese investor is not required, unlike most other investment vehicles
  • Provides the finest range of permitted legal activities throughout mainland China
  • WFOE is the most ideal investment tool for establishing a long-term presence in Chinese market
  • WFOE can sell China-made products directly to Chinese consumers

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A relaxation of the capital contribution requirements and a more favorable application of tax rates have seen WFOEs ascend, and a larger number of foreign firms are preferring WFOE as their China business entity. There is a minimum capital contribution required, known as registered capital, which varies according to the business. A basic consulting WFOE will typically require a minimum commitment of between RMB 200,000 to RMB 500,000. Manufacturing WFOEs, on the other hand, will require more.

However, in practice, the governing authorities will ensure that a company’s registered capital is sufficient to support its business operations for at least one year. Registered capital is typically considered “locked” in China and you would not be able to repatriate it unless the WFOE is dissolved and liquidated.

While there are certainly advantages to setting up a WFOE, the process can be quite challenging for those unfamiliar with the Chinese business environment. Consulting with the China lawyers is the best possible way to make China WFOE worry-free. Wholly Foreign-Owned Enterprise (WFOE) offers wider business scope to the foreign investors willing to enter the Chinese market. Any enterprise in China which is 100% owned by a foreign company or companies can be called as WFOE. Overseas companies could get better control and easily skip different types of problematic issues.

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