Wholly Foreign Owned Enterprise (WFOE)
Wholly Foreign Owned Enterprise (WFOE)
The Wholly Foreign Owned Enterprise (WFOE) is a Limited Liability Company 100% 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 WTO, these conditions are gradually being abolished and the WFOE is increasingly being used by service providers such as a variety of consulting and management services, software development and trading companies as well.
Advantages of WFOE
Independence and freedom to implement the worldwide strategies of its parent company without having to consider the involvement of the Chinese partner;
Ability to formally carry on business rather than just a representative office function and capable of issuing invoices to their customers in RMB (Chinese Currency) and receive revenues in RMB
Capable of converting RMB profits to US dollars for remittance to their parent company outside China
Protection of intellectual know-how and technology
Greater efficiency in its operations, management and future development.
Business Scope
One of the most important issues covered in the project documentation is the business scope of the WFOE. The business scope is narrowly defined for all businesses in China. A WFOE can only conduct business within its approved business scope, which ultimately appears on the business license. Any amendments to the business scope require further application and approval. Inevitably, there is a negotiation with the approval authorities to approve as broad a business scope as is permitted.
General business scope usually includes investment consulting, international economic consulting, trade information consulting, marketing and promotion consulting, corporate management consulting, technology consulting, manufacturing, etc.
Registered and Paid up Capital
For the WFOE, the minimum amount of registered capital required starts from USD100, 000. Under the Company Law, the paid-up capital is equal to registered capital. Investors or shareholders must pay for the shares subscribed and deposit the money into a specified bank account. The amount of share capital so deposited should be audited by certified public accountants.
Terms and Termination
In China, terms of 15 to 30 years are typical for a manufacturing WFOE (although some may have a longer term). It is also possible to obtain extensions of the WFOE’s duration. For projects with a large amount of investment or a long construction period and low return on investment, projects producing sophisticated products using advanced or key technology provided by the foreign partner, or for projects producing internationally competitive products, the term of WFOE may be extended to 50 years. With special approval from the State Council, the term may be even longer than 50 years.
Procedure for Establishing a WFOE in China
Please note that the procedures set out below for establishing a WFOE may differ depending on the location of the WFOE. Once the location of the WFOE is finally settled, we can review this advice and highlight any differences to the procedures set out below.
1. Reservation of the WFOE Company Name
The Chinese name should be formatted as follows: first word – location/name of town; second word – company name/product; third word – activity; fourth word – company structure.
The name then has to be registered with the local office. The use of ??China?¡¥ ??Sino?¡¥ and ??International?¡¥ are not permitted in the Chinese name unless very special permission is given, although they are permitted in the non-Chinese name. Prior to any of the following applications, foreign investors should reserve a name for its prospective WFOE with the local Administrative Bureau for Industry and Commerce (”AIC”). This is called “Name Pre-registration” in China. AIC requires that a proposed name and two alternative names be provided.
2. Project Proposal and Approval
According to the PRC WFOE Law and its Implementing Rules as amended in April 2001, there should be a Project Proposal Approval stage before the final examination and approval. In practice, however, these two stages have been combined as one.
2.1 Project Proposal
The foreign investor is required to submit a Project Proposal to the local approval authority (”Approval Authority”) where it intends to establish the WFOE. Generally, the Project Proposal should cover the following points:
1. the purpose of the WFOE, production plan and market forecasting;
2. the scope and scale of the business, the products to be produced / services to be provided (a 4-5 line description should suffice);
3. financing, financial forecasts and evaluations;
4. the technology and equipment to be used;
5. land-use requirements (including the area), selection of sites;
6. personnel and wages and
7. any requirements for public facilities (water, electricity, coal, gas or other energy source).
2.2 Examination and Approval
The following documents should be also be submitted to the local Approval Authority:
1. a written application for the establishment of the WFOE;
2. a Feasibility Study Report. Based on our experience, this is generally a 20 page document;
3. the Articles of Association of the proposed WFOE;
4. a list of the proposed chairperson and the members of the WFOE board of directors, and appointment letters;
5. the incorporation document of the WFOE investor;
6. a credit certificate of the WFOE investor issued within 3 months;
7. lease agreement for the premises. Based on our experience, an actual executed lease agreement is not required and it is generally acceptable and common for the WFOE investor to merely show an intention to enter into a lease agreement by entering into a space reservation agreement with the landlord;
8. the reply of pre-registration of name approved by the relevant AIC and
9. such other documents as may be required by the Approval Authority.
As for the timing of approval, Approval Authorities are required to make their decision within 90 days from receipt of all the documentation. However, many local Approval Authorities are able to give their decision within 5 to 15 working days upon receiving all the required documentation.
3. Registration for Business License
Within 30 days after obtaining the approval certificate, the foreign investor will need to register and apply for a business licence for the WFOE from the local AIC. As part of this step, the foreign investor will need to submit similar documentation to the approval documentation for AIC filing purposes. This is purely a procedural step and the local AIC must issue the Business License within 30 days, but in our experience AIC will usually issue the Business License within 5-10 days after receiving all the required documentation.
Once the business license is issued, the WFOE is deemed to be a legal person duly organised and existing under PRC law and will have full operational rights to operate a business in China within the scope of its Business License
4. Registrations with other Government Authorities
Registration is also required with other government authorities such as Tax Bureau, Foreign Exchange Control and Customs and so on.
