Setting Up A WFOE In China: The Pros and Cons.

 
Determining your company structure, when expanding your business into China, is a critical decision to make. Deciding whether an Representative Office, Joint Venture, or Wholly Foreign Owned Enterprise (WFOE) is the right vehicle for you business can be tricky and should be based on a clear understanding of your organisational goals.

If you decide on setting up a WFOE in China you'll need to know which type is for you, and the benefits (or drawbacks) of each...

A WFOE (pronounced “wuh-fee”), is a limited liability company and is the most favored investment vehicle as it gives full autonomy and control to the foreign parent company. 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 were gradually abolished and the WFOE is increasingly being used for service providers such as a variety of consulting and management services, software development and trading as well.

A WFOE can be broken down into three main categories: A Consulting WFOE, a Manufacturing WFOE, and a Trading WFOE or Foreign Invested Commercial Enterprise (FICE). Although all three have the same legal structure, they vary significantly is setup procedure and cost. 

Below let's explore the 3 types you'll typically be setting up, and the individual WFOE Pros and Cons:

Consulting Wholly Foreign Owned Enterprise

Consultancies or companies that provide a service fall into the Service or Consulting category. The requirements for establishing this type of WFOE in China is simple and a less complicated application process than WFOEs in other categories. Profit can only be generated from the services it registers with and is prohibited from conducting other profit generating activities. This make it important to have a clearly defined business scope from the beginning.

Pros

• Simple application process.
• No registered capital required.
• Control of Intellectual Property.
• Can purchase/build property in China.
• Hire staff directly.
• Long term licensing (15 to 30 year periods).
• Incorporation capability regardless of how long business has been established outside China.
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Cons

• Can only conduct business within licensed category or specific business scope.
• Subject to all applicable Chinese business taxes (VAT, Corporate, Dividend, and Income). 

Manufacturing Wholly Foreign Owned Enterprise

 
Companies who are starting a business in China involving activities such as the manufacture of goods can set up a Manufacturing WFOE. The process is less simple than with a Consulting WFOE. Some of the additional processes include:

• scout out a factory premises and sign a contract to lease it
• approve the location for manufacturing use by the relevant authorities
• ensure that the factory is compliant with one used for manufacturing purposes by having all of the necessary permits to operate
• to submit its manufacturing processes and equipment to a third party to assist in the issuing of the Environmental Impact Assessment Report

Pros

• No minimum registered capital.
• Control of Intellectual Property.
• Can purchase/build property in China.
• Hire staff directly.
• Long term licensing (15 to 30 year periods).
• Incorporation capability regardless of how long business has been established outside China.

Cons

• Lengthy application process.
• Can only conduct business within licensed category or specific business scope.
• Subject to all applicable Chinese business taxes (VAT, Corporate, Dividend, and Income).

Foreign-Invested Commercial Enterprise (FICE)

 
A FICE is a type of WFOE. It grants investors to access to both import and export licences in China as well as allowing the company to trade locally through retail outlets. Typically, a FICE follows stricter establishment guidelines in comparison to a WFOE due to the fact that they must be established at the provincial level, not the local level like many WFOEs are.  Below is a list of pros and cons for setting up a FICE.

Pros

• Control of Intellectual Property.
• Can purchase/build property in China.
• Hire staff directly.
• Long term licensing (15 to 30 year periods).
• Incorporation capability regardless of how long business has been established outside China.
• Can conduct import/export activities with distribution rights.
• Can conduct wholesaling activity.
• Can operate franchises.

Cons

• Application process can take several months.
• Certain industries are excluded from setting up a FICE.
• A manufacturing FICE must obtain permission from several bodies to conduct manufacturing activities.

The Wholly Foreign Owned Enterprise business structure has become an increasingly appealing vehicle through which to establish a presence in China. In 2014, regulation regarding WFOE changed and abolished the need for minimum registered capital which has further popularised it as the preferred company structure.

Each WFOE in China has its own Pros and Cons. Selecting theright Chinese company type for your business needs to be based onyour organisation goals and a clear understanding of the regulatory environmentsurrounding each format.

Setting Up A WFOE In China: The Process Explained

If you follow this blog you will have read articles on the differences between WFOEs (pronounced “wuh-fee”), ROs, and JVs, on the different types, the Pros and Cons, and a whole lot more. Today’s blog post expands on this knowledge base and sets out the application process for setting up a WFOE in China.

Before we get started let’s just fresh on the basics. A Wholly Foreign Owned Enterprise is a privately held limited liability company in China in which all the shareholders are foreign. It is the most favored investment vehicle as it gives full autonomy and control to the foreign parent company. They also come in various forms: A Consulting WFOE, which is the easiest to establish, a Manufacturing WFOE, which allows companies to manufacture in China, and a Trading WFOE or a Foreign-Invested Commercial Enterprise (FICE), which grants companies both import and export licences and allows them to trade locally.

The process of setting one up can be broken down into 2 parts, namely: the Pre-License Procedure, and the Post-License Procedure. The process does vary depending on the type of enterprise being established but below we outline the main aspects that are common to all three types.

PRE-LICENSE PROCEDURE

Step 1: Define Your Chinese Business Name

The first step in the application process is to file for your official  Chinese business name. There are fixed guideline that need to be followed in order for you to select an acceptable name. 

Step 2: Prepare Your Legal Documentation

The second step is to prepare all the necessary legal documents for the company registration. Other documents include the lease contract for a rented office space or building, the Feasibility Study Report (FSR) and the bank reference letter.

Step 3: Apply For Your Business License

The next step is to actually submit the documentation and apply for a business license at the local authorities. These include the Ministry of Commerce (MOFCOM) and the Administration for Industry and Commerce (AIC).

POST-LICENSE PROCEDURE

Step 4: Register For Taxes

Step 4 only happens once you have been granted your business license. In this step you have to register for taxes at the State and local Tax Bureau. Multiple documents need to be provided for the registration. You will also need a company stamp. In China, official documents are only valid once they have been stamped. It performs the same function as a signature in the rest of the world. 

Step 5: Register With Other Authorities

The second to last step is to register the company with the other relevant authorities. There are 12 different authorities that a company needs to get registered with in order to get established. These authorities include the Technology Supervision Bureau which issues the enterprise code, the registration at the State Administration and Foreign Exchange, the financial registration at the Financial Bureau and the statistic registration at the Statistical Bureau.

Step 6: Open Bank Accounts

The sixth and final step is to open a bank account that operates in RMB. In addition, a foreign currency bank account must be opened for the contribution and verification of the foreign invested capital.

The process of setting up a Wholly Foreign Owned Enterprise in China can be overwhelming for people and organisations who are unfamiliar with the process. It is really important to understand how it all works before you start to avoid mistakes that could increase costs and cause delays. It is always a good idea to consult experts in the matter to ensure your application is handled quickly and efficiently.

WFOE vs Representative Office vs Joint Venture

 

Which Company Type Do You Require For Doing Business In China?

 

One of the biggest considerations is the structure of the presence the company wishes to establish in China. There are three main options: Wholly Foreign Owned Enterprise, Representative Office, or Joint Venture. Each has its own merits and drawbacks with the right choice dependent on your organisation’s goals and strategy.

This blog goes deep into the three company structures and pits WFOE vs Representative Office vs Joint Venture against each other to reveal each of their Pros and Cons. 

But before we start here are quick descriptions for each of them:

Wholly Foreign Owned Enterprise (also commonly known as WOFE) - A WFOE is a privately held limited liability company in China in which all the shareholders are foreign.

Representative Office (RO) - A representative office is a base from which to manage relationships, attend meetings, and is not a “legal person”.

Joint Venture (JV) - A joint venture means starting a company in China with at least one foreign and one Chinese shareholder.


Ok now that we are all caught up, let’s jump into the comparisons:

Ease of Setup

 

Wholly Foreign Owned Enterprise - Moderate

The process of setting up a Wholly Foreign Owned Enterprise generally takes around 40 working days. During the application process, which varies depending on the type of of this business that you require (there are 3 types: Service, Trading, and Manufacturing), you will need to specify the scope of your business.  The process can be broken down into 2 parts: Pre-registration and post-registration. Pre-registration requires the submission of a number of business related documents while post-registration requires companies to formally register with a number of Chinese government agencies.

Representative Office - Easy

Of the three structures, the easiest to setup and get off the ground is an RO. Recently, amendments have been made to curb the abuse of RO’s by foreign entities. Parent companies must have been established for a minimum of 2 years and RO’s are subject to inspection and need to keep accounting records. The application process, however, remains relatively simple. Submissions of company documents and then, once the application has been approved, registering with the various Chinese government agencies.

Joint Venture - Difficult

The process of setting up a JV is complicated by the need to, firstly, find a suitable Chinese company to partner with and then, secondly, to effectively negotiate the terms of the relationship with the prospective Chinese shareholder. Choosing partners that can make tangible business contributions, safeguarding intellectual property, ensuring operational control of the joint venture, and managing talent are some of the main points that need to be agreed upon. Others issues that need to be addressed are: aligning strategic priorities, creating a structure that permits rapid responses to change, and preparing up front for eventual restructuring. All these factors add to the complexity of setting up a JV.

Protection of Intellectual Property (IP)

 

Wholly Owned Foreign Enterprise - Easy

This company is completely owned by its foreign parent company. That means that the parent company controls all aspects of the business process and daily operations. This makes it easy for the company to protect its business processes, trademarks, and trade secrets.

 

RO - Moderate

RO’s have limited capabilities. They cannot issue invoices, receive payment, or engage in for profit activities. The result is that they still have to outsource the production of their business activities to local suppliers although they are able to monitor progress and thereby limit any IP violations.

 

JV - Difficult

A JV requires a foreign company to join forces with a local Chinese business. The benefits of sharing internal business networks, contacts, and processes is apparent as it reduces the time it takes for the company to establish itself. The danger, however, is that it makes the company vulnerable to theft and abuse of its intellectual property if the relationship between the shareholders deteriorates or if adequate protection isn’t built into the initial company setup.

 

Cost of setup

WOFE - Low

Setting up a WOFE used to require a company to invest Registered Capital. For a limited liability company with one single shareholder was required amount of registered capital accumulates to RMB 100,000. That however has changed. In 2014, the regulation regarding minimum registered capital for WFOEs were abolished in many cases to further promote it as an investment vehicle for foreign companies.

RO - Low

RO’s are relatively affordable to setup. The regulatory changes in 2010 have however made operating an RO more expensive. Additional compliance requirements means a greater financial burden on the RO or facing heavy fine for not complying as well as having their registration certificate revoked. The tax burden is also higher, going up by more than 2% from 9.5% to 11.69%.

JV - Moderate

The costs associated with setting up a JV are dependent on the type of JV setup (Equity Joint Ventures and Cooperative Joint Ventures) and how it is decided among the shareholders to capitalize the JV. Generally the absolute minimum of registered capital is RMB 30 000 for each investor in a company with multiple shareholders and RMB 100 000 for a company with one shareholder.

Deciding on how to structure an expansion into China is a critical decision. Each option has its own benefits depending on your organisational goals. An RO is best suited for companies that wish to test the waters in China. It allows you to develop relationships, create a presence, and gain more insight into how business is done in China. A WOFE on the other hand allows a company to set up a more tangible presence that allows them to trade and conduct for-profit activities and benefits from lower tax rate as well as giving them full control of the operation. A JV is a good solution for companies that have well established relationships with Chinese companies and for situations where  a WOFE might not be an option due to government regulation.

Whichever structure you decide to go with, make sure you do through research and that you understand the regulatory environment regarding your specific sector or industry.

How To Set Up A Representative Office In China

 
Do you need staff on the ground to look after current business interests here, but don't need a complex new company set up or to be able to sell in China as a local company? If so, a representative office in China is a very popular foothold for foreign businesses like you.
In this post we'll answer: "What makes an RO special, and what kind of company might benefit from setting up a rep office in China?"

Why And How To Set Up A Rep Office In China

Let's first look at what a rep office in China is.
A representative office in China is a legal Chinese company which exists as a physical 'branch office' of an overseas company in Mainland China, hiring both foreign and local staff to help undertake business activities here.
The business activities that you're allowed to undertake through your RO are meant to be supportive of your foreign company's goals in China. You offer a local office which:

• Meet local Chinese clients or suppliers
• Manage your brand in China
• Undertake marketing here
• Manage your local supply chain
• Offer a local office and physical address in China, adding credibility to your company
• Share information, experience, and knowledge with suppliers and clients
• Reduce company costs by having a 'man-on-the-ground' in China who doesn't need to travel at great expense for the company
• Hire local staff to assist with any of the above activities
• Has fairly simple tax, as RO running costs are taxed as business expenses (which won't be too much if the RO is kept small and with few staff -if it started to grow, switching from a rep office to a WFOE would be preferential in terms of tax)

Setting up your RO is simple compared to other Chinese companies.
It requires NO investment, and simple proof that your overseas parent company is real and in good financial standing. Working with Hongda, you can expect your rep office to be open in just around 2 weeks!

It's important to note that an RO can't perform any business activities related to making profit however, such as selling products, and issuing invoices. For this you would need a WFOE or Joint Venture.

 

 

Who Needs A Representative Office In China?

If you're a foreign company who already deals with Chinese companies an RO may be beneficial for you.
Traditionally in order to have a presence and staff in China, a foreign company would need to set up a WFOE or joint venture, but these are full companies which take longer to set up, attract more tax, and need monthly accounting work.
If your foreign company is already dealing with local suppliers or clients, there may be no need to have another Chinese company which can trade with them. However, if you do enough business in China, having staff placed here in order to handle the business interests of your overseas parent company and make sure that product quality is fine, shipments go out on time, marketing is done correctly, etc, may well be a great idea.
So if you need a 'man-on-the-ground' here in China to improve your current situation, an RO could be a quick and low-cost company type that will help you take care of business.