Setting up a Wholly Foreign-Owned Enterprise (WFOE) in China

Foreign Direct Investment (FDI) in China can take different forms. Prior to the now widely relaxed FDI regulations, foreigners were only allowed to establish a Joint Venture with a Chinese partner. Nowadays, most foreign businesses investing in or doing business in China register a Wholly Foreign-Owned Enterprise (WFOE). A WFOE is a limited liability company solely owned by foreign investors.

WFOEs in China are distinguished by their business nature or their principal business activity and different capitalisation rules as well as business licensing requirements subject to the nature of the WFOE. The broad distinction is:

The scope is further specified by a one-sentence description according to the business catalogue, setting the range of activities and operations that the WFOE is allowed to engage in. The WFOE will only be allowed to issue official invoices (fapiao) for the approved business activities. The business scope is confirmed on the WFOE business license. Any subsequent change or rectification of a mistake or omission requires a new application.

Except for a few industries, mainly concerning financial services, China abolished the minimum registered capital rules and now allows foreign investors to specify the capital and time of contribution. In practice however, the proposed capital and contribution plan will still be reviewed by the Ministry of Commerce during the application process and assessed on the basis whether the amount is likely to be sufficient to support the activities of the WFOE. Thus, the previous minimum capital requirements should serve as reference for foreign investors.

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Choosing an Investment Strategy

The choice of a suitable investment strategy may involve complex considerations of existing organisation structure, tax, credit, scalability and future expansion, repatriation or divestment plans. Besides the overseas operational entity investing directly in the WFOE in China, the use of an investment holding vehicle, such as a Hong Kong company, is an often considered option. Hong Kong based parent entities of a Chinese WFOE benefit from preferential tax rates under the Closer Economic Partnership Agreement (CEPA) between the two jurisdictions. In addition to possible tax benefits, a Hong Kong holding company also offers a simplified and proven procedure for a WFOE registration.

Intellectual Property

When establishing a brand in China, a registered trademark becomes a necessity in order to market the brand and secure distribution and retail contracts. China adopted the first-to-file system which means that whoever is first to register the mark gets trademark protection. Similarly underestimated is the processing time of 12 to 18 months for the registration.