WFOEs have become a very popular way for businesses to expand to mainland China. If you are considering expanding to China or would like to know what a WFOE is, here are a few things to be aware of:
What are the key features of a WFOE?
First things first, what is a WFOE? The term ‘WFOE’ stands for ‘Wholly Foreign-Owned Enterprise.
- Typically, WFOEs are owned by foreign investors which most of the time is a parent company.
- WFOEs have limited liability, meaning that the owners or in this case parent company, are not liable for the company’s debts or liabilities.
- WFOEs must follow Chinese governing laws (specifically for wholly foreign-owned enterprises)
- WFOEs must have a minimum of one shareholder that can be of any nationality except Chinese
What are the benefits of a WFOE?
- One of the mentioned features of a WFOE was limited liability. This is also considered advantageous to individuals who plan to own or run a wholly-foreign owned enterprise in China, as they would have protection. Let’s say the company gets into trouble; the owners of the WFOEs personal assets will not be at risk, as the enterprise would be considered a separate legal entity.
- Having a WFOE is one of the best ways of remitting money back into the originating country of the enterprise.
- A WFOE allows owners to employ staff, trade, as well as all the other actions that only a company set up by an individual in China could usually perform.
There are, however, also various drawbacks when starting a WFOE in China that must be made clear:
So what are the drawbacks of a WFOE?
If you’re planning to start up a WFOE in the span of a few weeks, it likely won’t happen. Upon the creation of said enterprises, several government departments must approve of the company, including (but not limited to):
The Ministry of Commerce, State Administration for Industry & Commerce, National Development and Reform Commission, and so on.
As a result, the approval process can take months!
Now let’s say you have successfully created a WFOE but you would like to change the focus of your business. This isn’t possible as the activities of a WFOE are limited to the ones specified in the company’s application.
Innovative companies or those focused on continuously improving products or processes may potentially suffer if attempting to make a change to their business.
The final disadvantage to be aware of is a potential lack of local knowledge. This is a major drawback for all multinational enterprises. Although, due to the fact that owners of a WFOE must be foreign to China, it is unlikely that they will have intricate knowledge of the country and its markets.
If you wanted to launch a product that was successful in Western countries, would it also be successful in China? Without the proper knowledge, expansion to a new country could be a complete gamble, and thus this is one of the most important factors to keep in mind!
Because of the importance of local knowledge, this factor will be further explored.
Where should I set up a WFOE?
Choosing the right city in China can have a major impact on the success of a WFOE. China is a huge market, and various industries tend to be specific to certain areas. Examples of this are Shenzhen, which is known as the ‘tech capital’ of China due to its innovation and new technology.
If your focus is technology then you should definitely consider Shenzhen or Guangzhou (another tech-based city) as the designated location of your WFOE. This factor alone can make or break a company. It is thus advisable to have access to local knowledge of the country, as well as the specific areas (and their focuses).
If you’re still interested in setting up a WFOE, you will have to be made aware of the application or ‘setup’ process.
What are the Steps to Opening a WFOE in China?
As mentioned, a WFOE can take several months to become approved and fully set up (generally this number is around 1-2 months). Although most of this time is waiting for various government departments to sign off on your WFOE, a lot of work must be done in order to ensure that this is a smooth process.
In order to set up a WFOE you will have to go through the following steps:
- Find out who your parent company is. This is the (foreign) company that will own the WFOE. Perhaps you already have an established business, but would like to expand to China - this would be the parent company.
- Prepare legal documents:
- The WFOE registration generally takes place online. Once the online form is filled in, a physical copy of the information provided in said document is typically sent off to China with signatures to the owners or legal representatives of the WFOE.
- After having completed the previous step, tax registration will have to be done. Said tax laws should be studied, as they are likely to be different from laws in the originating country.
- Ensure that your business also has two bank accounts:
After completing the steps above, the creation of your WFOE will entirely depend on the Chinese government departments and whether they approve or not.
Now, let’s say you have successfully established a WFOE in China. How would you approach maintaining the company and what are the requirements?
How do I maintain and run a WFOE?
Generally to run a WFOE, consists of doing administrative work - just like a traditional business.
- Doing monthly accounting
- Filing quarterly and monthly tax returns
- A renewal of documents such as the business registration certificate, which must be done every year.
- Examination or auditing of financial documents
- Tax filing
- Other potential documents that may be requested by the governing bodies of the area or China in general
Final things to note
A WFOE is just like a normal company, so owners will have to be responsible for workers and employees. Laws may be vastly different to those in your country, so it is good to get familiar with them before starting a WFOE. Finally, it is always good to do research into the Chinese markets, language and culture.
WFOEs are not suitable for all entrepreneurs or investors. Wholly-foreign owned enterprises come with many benefits, as well as drawbacks - so these must be studied and considered carefully before deciding on creating a WFOE.
Chinese markets are vast and full of various skills and expertise such as innovation in Shenzhen, thus a WFOE is a perfect way to tap into these benefits.
Further, consider the knowledge needed - it might be a good idea to partner with a local or someone who knows and understands the Chinese markets.
Finally, keep in mind that WFOEs are a relatively safe way for investors and entrepreneurs to run an overseas business as they will have limited liability.
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