The Growing Importance of WFOE Amidst US-China Trade War

With the growing US-China trade war and continuous slowdown in Chinese economy, US companies having business interest in China cannot afford to maintain a quasi-legal status in China. The value of forming a China specific WFOE has been stressed by the China lawyers time and again. And with the growing tension between the two countries, forming WFOE will take a greater significance.

The US has imposed three rounds of tariffs on Chinese products this year, totaling $250bn worth of goods. President Trump has warned even more could be on the way. Beijing announced it would retaliate against new US tariffs, with the commerce ministry saying that it would “immediately introduce countermeasures of the same scale and strength”.

China purchased roughly $130 billion in American goods last year — less than a third of what the United States ordered from Chinese enterprises. Now Beijing is poised to impose higher border taxes on a total of $110 billion in U.S. products. China’s $3 billion dollar counter punch to the US tariffs is just the first move from the world’s second largest economy, according to a Bloomberg report. One of the major retaliatory actions might be the cancellation of a $38 billion order to American aircraft maker Boeing, which China placed back in the year 2015. Agriculture and technology are other major sectors where the Asian superpower may plan to hit back US trade imposition.

China’s Foreign Ministry said it will respond to Trump’s latest round of tariffs with duties on more than 5,200 types of American imports and unleash a crackdown on the US companies operating in China without proper legal documents.

Beijing imposed a 25 percent additional tariff on imported American cars in response to U.S. tariffs on $34 billion in Chinese goods, including the automotive, solar panel. Electronics goods, furniture sector. US companies need to understand that the independent contractors are almost never legal in China and if US firm has Chinese employees, it must have a WFOE as a possible weapon for defending themselves from the wrath of the Chinese government.

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Increased Importance of WFOE in China

Overseas firms set up wholly foreign owned enterprises or WFOE in China with the help of China lawyers. As the largest market in the world by the size of its population, it is an attractive place for setting up business. The good news is, the Chinese authorities have made the entire process easier for startups to set up a company by eliminating the complexities and streamlining the process.

The requirement for a minimum amount of registered capital has been eliminated, as have capital verification reports. Annual audits have been replaced by a system that lets the company send in its own financial reports.

To set-up a WFOE in China, foreign entrepreneurs must comply with the following requirements:

  • A local registered address (only commercial and not residential)
  • At least 1 director, unless the company forms a Board of Directors, in which case a minimum of 3 and maximum of 13 directors are required (directors need not be Chinese citizens or residents)
  • A minimum of 1 and maximum of 50 foreign shareholders (natural persons or corporates)
  • A legal representative (need not be a Chinese citizen or local resident)
  • A General Manager (need not be a Chinese citizen or local resident)
  • A supervisor; and a minimum registered capital that ranges from CNY 100,000 – CNY 1 million (depending on the nature of business and local authorities requirements)

Why foreign companies should go for WFOE in China

China is the land renowned for lower labor cost, lower rental costs, businesses-friendly corporate taxes for businesses and many other many financial incentives for businesses and individuals. In addition to it, if an overseas company forms a WFOE, it will prove immensely helpful as a WOFE in China enjoys the same rights as a Chinese-owned business. Most WOFE’s are LLCs, or Limited Liability Companies, in which partners only have responsibility for their own invested capital. Plus, with China now part of the World Trade Organization, WOFE’s can operate as trading companies or retail stores. A Chinese WFOE can conduct manufacturing operations in China, invest in other companies and it is also allowed to get involved in wholesale and retail trade with Chinese customers.

According to the China business lawyers, foreign entities interested in opening up a company in China need to make sure they have conducted a proper research and look at the five year plan of the Chinese government about what types of businesses they are encouraging more and more, and how you can get the maximum out of the facilities they are offering.

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