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 Annual audits have been replaced by a system that lets the company send in its own financial reports.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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Trusted Counsel Required for Drafting WFOE & JV

Among other transitions, one of the notable developments observed in China is the country’s approach for getting more legalistic with the overseas companies operating over here. Often it is noted that, foreign companies pay very little attention to China’s growing legalization protocols. The consequence is they end up tangling in the legal battle that not only cost them money but also hampers their productivity and peace of mind.

In the view of the veteran China business lawyers, it is the negligence, sloppiness and the too trusting mindset of the foreign agencies are responsible for their bad luck. Take a look at the incidents that lead to it.

  • Foreign Companies Trusted Persons in China on their Face Value

A maximum number of overseas companies think by forming a WFOE is enough for gaining the legal status for continuing operations in China. Then comes a situation where the company wants to terminate one of its employees and come to the China lawyer for assistance. When the China lawyers look at the official Chinese government corporate records for the WFO so as to get a better handle on the employee’s authority at the company, they discover there is no WFOE.

Now the question is how does a company think it has a China WFOE but in actuality it has nothing. Most of the time the mistake foreign companies make is trusting the person the company now wishes to terminate. That person claimed to have formed a WFOE for the foreign company but never did or maybe this person never formed any Chinese entity at all. The money foreign corporates give to this person for forming WFOE, goes straight to his pocket and now the company cannot sack the employee from a company that does not exist.

  • Complications Regarding Joint Ventures in China
  • The complexity regarding Joint Ventures is to a some extent similar to the WFOE with the only difference is it is more complicated in nature. The putative JV partner is put in charge of forming a China Joint Venture and it either does never forms any company at all or it forms a company in Hong Kong that the foreign company believes to be a China Joint Venture. It is a case of a complete Joint Venture scam with the only exception that it makes you lose even a greater amount of money that you may lose in WFOE.

    Bottom Line

    It is advised not to trust your Joint Venture or WFOE employee without verifying the documents. Drafting WFOE and JV in China is a complicated task. In order to get everything in excellent working order, foreign companies need to seek assistance from the experienced and trusted counsel.

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