The Wholly Foreign Owned Enterprise (WFOE or WOFE) is a Limited liability company wholly owned by the foreign investor(s). In China, WFOEs were originally conceived for encouraged manufacturing activities that were either export orientated or introduced advanced technology. However, with China’s entry into the World Trade Organization (WTO), these conditions were gradually changed. WFOE business entities in China are increasingly shifting more to consulting and management services, software development, and trading.
The Concept of WFOE in China
Primarily, the WFOE concept was developed in order to enhance manufacturing activities that are either trade-oriented or presented cutting-edge technology. The unique feature of a WFOE is that involvement of a mainland Chinese investor is not required, unlike some other investment vehicles in China. However, creating the best WFOE structure is complicated, and requires the consideration of many factors.
The main reasons to set up a WFOE are–
- Profit-oriented business activities
- Address human resources independently
- Expand to create subsidiaries
WFOE Business Scope–
You cannot engage in all kinds of business activities. You must operate under the business scope that has been approved by the Chinese authorities. A WFOE does not include branches established in China by foreign enterprises and other foreign economic organizations. To engage in distribution, an existing manufacturing wholly foreign-owned enterprise (WFOE) will need to expand its business scope. Adding distribution into its business scope means that the WFOE will be able to import goods to China to sell directly, either in wholesale or retail; as well as establish a fully operational China sales and after sales platform.
Key Component of China WFOE–
A crucial component of setting up a WFOE is the registered capital. It is the amount of money you promise to invest in your organization. The registered capital of a Wholly Foreign Owned Enterprise (WFOE) should be subscribed and contributed solely by the foreign investor(s). WFOE is an independent company which develops its own strategy and makes profits in the Chinese market.
It is critical that both the business scope and total investment are accurately defined at the initial application phase to receive government approval as, once established, the WFOE is legally obliged to remain within the parameters of its business scope and meet its financial commitments.