| What is a Wholly Foreign-Owned Entreprise | | | | months, depending on the nature of its operations |
| (WFOE)? | | | | and the license-requirements that it is subjected |
| A Wholly Foreign-Owned Entreprise (WFOE) | | | | to. |
| refers to businesses in China which are 100% | | | | Incorporating a WFOE might not be an |
| foreign-owned, as opposed to joint ventures | | | | economically viable option for smaller operations |
| which involve at least one domestic (mainland | | | | with limited resources, as the setting-up process |
| Chinese) partner. | | | | can be expensive. A WFOE must pay a minimum |
| WFOEs were previously subjected to strict | | | | 20% of the registered capital into a corporate |
| restrictions, such as the capital requirements | | | | bank account within the first three months of |
| which were set at levels within the resources of | | | | corporation, and the remaining 80% within two |
| only large multinational and medium-sized firms. | | | | years. The pledged sum of capital has to be |
| However, the positive effects of Foreign Direct | | | | invested into the firms operations in China, and it |
| Investments in China have prompted the | | | | has to be shown that the return on this capital |
| government to ease the requirements on WFOEs | | | | contributes to the Chinese economy (eg. by |
| to encourage the inflow of foreign capital. For | | | | creating employment or contributing to the |
| instance, the capital requirement for firms seeking | | | | development of regional infrastructure). |
| to start a consulting business was previously USD | | | | While a WFOE is able to expand in terms of the |
| 140,000 but has now been reduced to RMB | | | | size of its operations, it is limited where its |
| 100,000 (approximately US$15,000). In addition, | | | | business scope is concerned. When registering a |
| foreigners can now be issued an Import/Export | | | | WFOE, the entrepreneur is required to provide a |
| License, while they were ineligible to do so before. | | | | detailed scope of their enterprise and the nature |
| Advantages of a WFOE | | | | of their operations; the business scope is subject |
| The first advantage of setting up a WFOE in | | | | to approval from the authorities, and thereafter |
| China is the independence of operations that the | | | | delineates the breadth in enterprise that the firm |
| firm is entitled to. As the involvement of a | | | | is entitled. |
| domestic Chinese investor is not required, the | | | | Procedures for setting up a WFOE |
| WFOE model allows the firm to operate in | | | | The following provides an outline of the core |
| consistency with the interests of the | | | | steps to be taken in establishing a WFOE: |
| parent-company, without the lengthy negotiation | | | | 1. Name pre-registration: this reserves the |
| processes which would otherwise take place | | | | company name with the local Administrative |
| under a joint venture. | | | | Bureau for Industry and Commerce. |
| The WFOE possesses the additional business | | | | 2. Project Proposal Approval: A detailed proposal |
| advantage of existing in China as an autonomous | | | | has to be submitted to the authorities, providing |
| legal entity with the operational functions of a | | | | elaboration on |
| registered company. It has the operational | | | | (a) The purpose and objectives of the WFOE |
| flexibility to implement sales and marketing plans, | | | | (b) Production and sales plan and forecasting |
| recruit staff, issue invoices, receive revenues in | | | | (c) Source of financing, financial risks and |
| RMB, and apply for trading licenses- all of which | | | | forecasts |
| are not allowed under the purely administrative | | | | (d) Land area and locality of the business |
| functions of a representative office. | | | | operation |
| The recognized legal identity of the WFOE also | | | | (e) Personnel required, wage calculation and |
| accords it a greater level of Intellectual Property | | | | distribution |
| protection, as its legal rights are enforceable within | | | | (f) Planned usage of public utilities and facilities (eg. |
| the national jurisdiction of China. A WFOE is also | | | | water, gas, and electricity) |
| eligible for tax exemptions if it operates within a | | | | 3. Submission of documents to the authorities: |
| Free-Trade Zone, Export-Processing Zone, or | | | | these include the Articles of Association of the |
| provinces designated for the set-up of | | | | proposed WFOE, a list of proposed directors, and |
| foreign-investment enterprises. | | | | a Feasibility Study Report addressing the viability |
| Disadvantages of a WFOE | | | | of the new business. The authorities would |
| Foreign firms lacking adequate knowledge and | | | | typically give a decision within 5-15 working days |
| expertise of business customs in China would find | | | | upon receiving all the required documentation, |
| it hard to establish a business rapport (guanxi) | | | | thereafter issuing an approval certificate to the |
| with clients or suppliers. This might have negative | | | | firm. |
| implications for the long-term operations of the | | | | 4. Business License Registration. After obtaining |
| WFOE, especially if it is unable to create a | | | | the approval certificate, the firm must register |
| supply-chain that is more cost-effective and | | | | and apply for a business license for the WFOE |
| efficient than those of its competitors. | | | | within 30 days. The business license is typically |
| Setting-up a WFOE can also be a long and tedious | | | | issued within 5-10 days after all required |
| process, especially if language barriers further | | | | documentation has been received. |
| complicate the complex licensing procedures and | | | | 5. Registration with Government bodies and |
| government bureaucracy. The establishment of | | | | authorities, such as the State and Local Tax |
| the WFOE could take between four to six | | | | Bureaus. |