Business Terms for Establishing WFOE Arrangement

To have a WFOE in China, you should first and foremost possess a valid lease. Now, this, in Chinese context is easier said than done. Various business owners from outside China looking to do business in the country often ask Chinese business lawyers, “how is it possible to have a valid lease for WFOE when it does not even logically exist in the first place?” To be able to know about it, you should first know about what WFOE is.

What is WFOE?

A WFOE or Wholly Foreign-Owned Enterprise is a type of investment vehicle for mainland China-based business. Under this, a China-based business party can incorporate a foreign-owned business in the form of limited liability company. The characteristic feature of a WFOE is that it can take place without the presence of a Chinese investor unlike the majority of other investment vehicles.

WFOE companies may be funded by foreign investors and also organized by foreign nationals. This provides better control over the business venture in China which also prevents a large number of issues resulting from domestic joint venture business dealings. This includes breach in contract and leakage of information and profits not being optimized. Under WFOE, the foreign firm chooses to manufacture products in China and sell it to the world. In such a circumstance, the imported products can be duty-free inside China. There is an additional advantage of such an arrangement, that is, claiming back VAT on the China produced component parts upon export. WFOEs have the right to distribute their products in China through retail and wholesale channels.

There are some more advantages to WFOEs:

  • Such companies can work on their global business strategy without any interference from the Chinese partners.

  • Provides an independent legal entity

  • Total management administration within PRC law limitations

  • The power to receive and remit RMB to the investment organization abroad.

  • More protection of patents, trademarks

  • Exemption from obtaining an import/export license for manufactured items

  • Stakeholder liability is limited to original investment

  • Comparatively easy to dissolve Equity joint venture

  • Entire control of human resource

There are some distinct disadvantages to WFOEs. For instance, business options are restricted in WFOE setup. Support from government will be limited and so also the movement curve will be steep within the Chinese market. Also, you will need to invest at least 15% of the investment money within a month of obtaining the business license. Please note, Chinese legislation is not the same everywhere and hence the differences will be applicable.

Now, coming back to the questions client ask China lawyers to know and understand the concept. They usually ask about what the document consists of. The lease document does not include any terms and conditions for dealing with lease to an identity preparing for WFOE. In fact, lease execution depends on a large extent to you providing a business license. Now, that is impossible because you cannot do so without WFOE existence.

The landlord can be convinced to cooperate with you regarding WFOE formation purposes. He should understand that the WFOE will be in the name of the WFOE shareholder instead of the landlord. Only after the formation is complete, the name will be transferred to that of the landlord. The landlord should permit the WFOE shareholder to use the land in anyway the entity wishes to. He/she must cooperate with the shareholder. The terms and conditions should also comply with the laws and regulation of the concerned state. This includes that the landlord will pay the taxes and give them to the tenant. Without knowing the identity of the WFOE shareholder, no such arrangement can be made.

WFOE can be entered into by satisfying all the requirements mentioned above in the write up. In case, any of these remains unfulfilled, you will not be eligible for WFOE.

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