Wholly Foreign Owned Enterprise

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Wholly Foreign Owned Enterprises (WFOEs) have become the investment vehicle of choice for the international investor wishing to manufacture, process, or assemble in China. It negates the need for a Chinese partner and does not require large amounts of registered capital to fund. Although WFOEs are in essence to be used for facilities involving production lines, they have under certain conditions also proved suitable for service industries albeit with some restrictions over location. Manufacturing WFOEs, with an eye on total export of their China manufactured product, may also enjoy significant tax and other incentives if based in Free Trade or Export Processing Zones.

1 Legal Status & Limited Liability Definition
2 Reduced capital requirements
3 Previous requirements
4 References
5 Links

[edit] Legal Status & Limited Liability Definition

WFOE’s are limited liability companies established under Chinese Company Law. The shareholders are 100% foreign, usually an international business who would own the company 100%. Limited Liability is recognized by the amount of registered capital injected into the business. Although this may in fact be a combination of two assets, cash injection and equipment, the total value of these also represents the extent of the WFOE’s liability. This affects situations involving insolvency as the assets may depreciate and the cash is legally allowed to be used as operational capital. Under these quite normal circumstances then it is wise just to bear in mind that in the event of bankruptcy the parent would be expected to make up, via injection, the difference between the registered capital amount and the actual value of cash and equipment in order to satisfy creditors.

[edit] Reduced capital requirements

The lure of huge market potential coupled with the promise of tax holidays, tax incentives and financial rebates has helped China attract foreign direct investment (FDI) and to become the biggest recipient and utilizer of FDI in the world. A significant factor contributing to that is the reduced minimum paid-up registered capital requirement for the formation of WFOEs.

[edit] Previous requirements

Consulting/IT/Design/Manufacturing WFOE â€“ USD 140,000
Retailing WFOE Not Permitted
Trading WFOE- USD 200,000 permitted to be incorporated only in the Waigaoqiao Free Trade Zone (WGQ FTZ) and not eligible for Import/Export (I/X) License.

In the past, only large multinationals and medium-sized corporations were able to afford the above-mentioned registered capital requirements and were willing to take greater risks when venturing into China. However, their subsequent success then created a ripple effect on their supplier/service providers outside of China, including the smaller companies. This then initiated the next phase necessary to sustain the influx of FDI into China.

Following the amendment of the Company Law and the Administrative regulations for the Registration of companies, it is now possible to incorporate WFOEs with the following paid-up registered capital

Consulting/IT/Design WFOE RMB 100,000
Retailing WFOE RMB 300,000
Trading WFOE inside WGQ FTZ- RMB 500,000 for small-scale tax payer and RMB 1 million if 17% Value-Added tax (VAT) status is required. Import/Export License can now be issued

Domestic Trading (i.e. buying and selling of goods within China) can now be added into the business scope of a trading WFOE. To differentiate this newly-approved structure, the term Foreign-Invested Commercial Enterprise (FICE) has been introduced. Minimum paid up registered capital is RMB 500,000 for small-scale taxpayers and RMB 5 million if 17% VAT status is required but certain districts may allow application with RMB 3 million paid-up registered capital.

Manufacturing WFOE RMB 500,000 and not subjected to additional paid-up registered capital in order to apply for 17% VAT status.

As an added incentive, the regulations for the administration of the registration of companies paid-up registered capital were amended to allow a longer period of capitalization as follows:

First 3 months- 20% of paid-up capital subject to a minimum of RMB 30,000
Within 24 months - remaining 80% of paid-up capital.

As part of this significant reduction in the paid-up registered capital requirement for WFOEs, there are now several far-reaching implications for changes in regulations.

1. The Representative Office (RO) has become more or less a redundant structure due to its inherent weakness, which includes the following:

Not a legal entity licensed to conduct business in China
Cannot receive revenue in China nor issue official tax invoices (fapiao)
Cannot hire local staff directly unless through government agencies
Chief Representative (CR) full salary will be taxed according to the number of days spent in China. Monthly tax submission will still have to be filed even if the CR does not enter China during that calendar year.
All expenses incurred by the RO (including staff salary and rental) will be taxed at 9.82%.

2. A local company formed with two local PRC nationals acting as nominee shareholders is not only severely risky but also unnecessary.

A foreign beneficial owner bears a tremendous amount of risk in such arrangements because the so-called contract signed between the foreigner and the locals is not recognized by the courts in China and there is no nominee law to protect the investment of the foreigner.
Dividends are taxed at 20% as opposed to zero for a WFOE.

A local company or an RO is popularly used for carrying out market studies, as a liaison office for customers and suppliers or die to either a lack funds to risk USD 140,000-200,000 before a final investment decision is made. Nonetheless, under the new law, a foreign investor can set up a WFOE with a minimum paid-up registered capital of RMB 100,000-500,000 even for this sole purpose and yet avoid the inherent weaknesses outlined above.

The only exceptions are industries closed to foreigners where only an RO structure is permitted e.g. banks, securities companies and law firms.

3. Trading WFOEs and FICEs with Import/Export License

Need not be restricted in setting up within WGQ FTZ. Establishment in all other districts in Shanghai is now possible.
Can conduct both domestic and international trading, including importing and exporting.
Need not pay 1-5% on sales value to use the license of a local Import/Export company for importing/exporting.
Need not take receipts of payments for goods sold through a third-party local I/X company.
Customers of trading WFOEs deal directly with the company and will not know the supplier or Original Equipment
Manufacturer (OEM) through import-export document trail or through bank account details

4. Retail WFOEs can be owned 100% by foreigners