A Wholly Foreign-Owned Enterprise (WFOE) is one among five foreign invested enterprises (FIE) for foreign investors entering the Chinese market. Compared to the representative office (RO), it provides a business scope that is far more wider. It also has so many compared to joint ventures. The real intention behind conceiving it was to promote and encourage manufacturing activities that are mainly export orientated or introduced advanced technology throughout Chinese manufacturing industry. But changes have been noticed in WFOE when China became WTO member. Since 2016, no paid up capital is required for the foreign investor to establish a Consulting, Trading or Information Technology business etc in China. This contract is mainly started to use for service providers regarding the following field:
- Consulting Services
- Management Services
- Software Development and Trading
WFOE are limited-liability corporations organized by foreign nationals and capitalized with foreign funds. This leads to greater control over the business venture in Mainland China, and avoid a multitude of problematic issues that can potentially result from dealing with a domestic joint venture partner. It does not include branches established in China by foreign enterprises and other foreign economic organizations. The Chinese Laws on WFOE do not have a clear definition of the term of “branches”.
WFOE Aspects that Foreign Clients need to Understand Deeply-
Most of the US and European clients should spend extra time with their China lawyers to fully understand forming WFOE as it is entirely different over here in China.
- The section of WFOE where a full disclosure of foreign investors is required is totally opposite to the investor secrecy systems standard in Europe and North America.
- The dividends of a given year, such as 2016, can be paid only if the company is profitable (ie. earnings are bigger than expenses) for that year.
- It is also essential to have a proper WFOE business scope, and not to act outside of your registered business scope.
- Bear in mind that a WOFE in one city can be used to trade and operate in other cities, and subsidiaries can always be registered for future expansion.
- The key point is to identify the place of business – where the office will be located – and start there.
Because of its independent feature where the founder can be 100% in control and they can structure and develop their company according to their goal, the WFOE has gained a reputation as one of the finest tools for doing business in China. As a business owner you simply need to be aware of the many glitches while forming a WFOE in order to make it more effective and profitable.