Establishment of a Wholly Foreign-owned Enterprise

Establishment of a Wholly Foreign-owned Enterprise
Wholly foreign-owned enterprises (WFOEs) are entities established under the Law of the People’s
Republic of China on WFOEs (the “WFOE Law”). By definition, WFOEs are wholly owned by foreign
investors. WFOEs must necessarily be established as limited liability companies, thus separate “legal
persons” distinct from their investors, with the liability of the investors limited to the contributions made
to the Registered Capital of the WFOE. This is similar to the position of limited companies in other parts
of the world and is therefore familiar to foreign investors.
In China, WFOEs were originally conceived for and limited to manufacturing activities that were either
export orientated or introduced advanced technology. Whilst WFOEs are still encouraged in these areas,
with China's entry into the WTO these conditions have been gradually abolished, and WFOEs as a whole
have gained in legal acceptance and support from the Chinese government. WFOEs have become more
popular with foreign investors, in part due to the increasing range of business activities in which WFOEs
are allowed to participate, but also due to the full level of control that foreign investors have over WFOEs
and the widely experienced problems that foreign investors have had with JVs.
Specific
Characteristics
Legal Form
Foreign Partner’s Equity
Contracts
Articles of Association
Specific
Investment
Benefits
MOFCOM Approval
Project Proposal
Feasibility Study
SAIC
Registration/
Others
Capital Contribution
Highest Governing Body
Export Requirement
Accounting
Profit/Loss Distribution
Tax
Investment Term
Early Termination
Governing Law
Wholly Foreign Owned Enterprise
(WFOE)
Independent legal person with limited liability.
100%
None.
Yes.
For encouraged projects (VAT+ customs duty exemption on imported
capital equipment) and export oriented or high tech status projects
(income tax reduction).
Yes.
No (unless restricted project).
Yes.
Yes. Environmental and fire protection procedures may be necessary.
Cash, capital goods, industrial property rights, know-how, land use
rights.
Board of Directors (both shareholders and professional management,
appointed in accordance with Articles of Association).
No minimum export required.
Accounting as separate entity required. Accounting books must be kept
in China. Double accounting for reporting to HQ customary.
After deduction of necessary fees and tax, profit can be repatriated
overseas.
Corporate Income Tax
10 to 50 years.
Liquidation permitted. Must be in accordance with the Articles of
Association and Chinese law.
PRC Company Law, WFOE Law.
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However, it should be noted that there are still certain regulations that may impact on whether a foreign
investor can establish a WFOE or not. The “Catalogue on Guiding Foreign Investment” details certain
prohibited projects in which foreign investment is banned altogether, and certain restricted projects that
have to be in the form of a JV rather than a WFOE. These restricted projects typically involve industries
under process of liberalization. As such, the scope for WFOEs will continue to widen, eventually including
all but the most politically sensitive sectors, such as the automotive sector.
Figure 1 Manufacturing WFOE
Mother Company
Model & Goals
ٛ WFOE Assembly
ٛ 100% Production
ٛ Re exporting / China Sales
Operational issues:
China
WFOE
Location
Mainland China
Free Trade Zone
Industrial Development
Zone
ٛ Economic Zones
ٛ Western China
ٛ
ٛ
ٛ
Production
Purchasing
Raw Material
Import
Domestic
Purchase
ٛ
ٛ
ٛ
ٛ
ٛ
ٛ
ٛ
ٛ
ٛ
Centralized contracts
Invoicing in RMB/USD/Euro
Own Sales
Logistics & Ware housing
After Sales
Promotion & B. Develop.
All cash payments
Centralized finance
HR recruitment
Sales & Retail
Store
Distributors
After Sales
Wholesalers
Source: InterChina Consulting
I.
Increasing Preference for WFOEs
China modified its WFOE regulations in April 2001 in order to encourage investment in China through
this investment vehicle. As a result, WFOEs are no longer required to:


Meet export performance requirements. The law previously required WFOEs to export a certain
percentage of their products. Now, exports are encouraged through tax incentives, but are not
required.
Introduce advanced technology. The law previously required WFOEs to use advanced technology
and equipment so that goods currently imported could be substituted with domestically produced
goods. Now, the use of advance technology is encouraged through tax incentives, but is not
required.

Comply with restrictive foreign exchange balancing requirements. The law previously required that
WFOEs balance their foreign exchange receipts and expenditures. This is no longer required.

Request preliminary approval prior to conducting direct domestic sales. Now, WFOEs can sell
directly to any third party or company.

Source all raw materials and fuel within China, unless unavailable domestically. Now, WFOEs can
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© 2012 InterChina Consulting. All Rights Reserved June, 2012
source raw materials and fuel from anywhere.
These modifications made WFOEs much more attractive to foreign investors, and there has been a
marked increase in the selection of WFOE as the preferred investment vehicle. In 1997, for the first time,
WFOEs out-numbered Joint Ventures in new project approvals, accounting for 45% of new projects
compared to 42% for Equity Joint Ventures.
InterChina conducted a survey of clients and other foreign investors that had selected a WFOE as their
preferred investment vehicle in China. The main reasons given were as follows:
 Total independence and freedom in implementing the global strategies of their parent companies, in
contrast to having to consult and compromise with Chinese joint venture partners.
 Ability to legally conduct business in China, including the issue of invoices and receipt of payments in
RMB and the conversion of RMB into forex for remittance to parent companies outside China, in
contrast to the limitations imposed on Representative Offices.
 Increased protection of intellectual property rights (IPR) and know-how, in contrast to joint ventures
where there was a risk of losing their IPR and know-how via their joint venture partners.
 Perceived greater efficiency in operations, management and future development


Advantages
WFOE over JV
Simpler establishment procedure than for a JV.
In contrast to JVs, WFOEs allow complete
control over the major decisions, operations
and corporate culture. Thus, strategic
alignment with parent and sister companies,
and no risk exposure to partner disputes.

Stronger position with customers who value a
purely “foreign” supplier compared to having a
JV with a Chinese partner.

Lower risk exposure to IPR infringement than
JVs, as there is no Chinese partner which may
set up in competition in the future or transfer
know how, trade secrets etc to third parties.

Easier to terminate than an EJV.

Disadvantages
WFOE over JV
More restrictions on project approval than for a
JV, thus some “restricted” industries where
WFOEs not allowed and JVs are.

Upfront investment required likely to be higher
for a WFOE as not shared with a Chinese
partner.

Absence of assistance from partner in such
areas as obtaining government approvals,
labour recruitment, sourcing raw materials,
acquiring land & production facilities, obtaining
access to marketing & distribution channels etc.

Thus exposure to upfront investment risks if
insufficient investment preparation or no
transferable customers or sales contracts.

In addition, may be a significant time lag and
taxation on existing resources before initiation
of operations.
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II.
Approval & Registration for Incorporation of a WFOE
Separate Process:
Trademark
Registration
Reservation of Company
Name with SAIC
Preparation of Project
Proposal
WFOE抯in
Restricted
Industries
Decision on Project
Proposal from
MOFCOM
Possible consultation
with MOFCOM on
Investment Application
Conduct of Feasibility
Study
Submission of Project
Proposal to MOFCOM
Approval & Registration
of Lease Contracts on
Factory/Building/Land
Conduct & approval
of Environmental
Impact Assessment
Formal Investment Application of JV Contract,
Feasibility Study, Articles of Association and relevant
documents to MOFCOM
EJV has Legal
Person Status in
China
Decision on Investment
Application from
MOFCOM
Issue of Approval Certificate by
MOFCOM
Application to SAIC for
Business License
Issue of Business
License by SAIC
Registration with relevant
government bodies (SAFE,
Customs Office, Tax Bureau, etc.)
Possible application fro
Advanced Technology
Status etc
Capital Contribution
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4
The process should commence with the reservation of the company name with the State Administration
for Industry and Commerce (SAIC). Trademark registration is an independent process, undertaken over
6 to 12 month period (at least), and thus should actually be initiated as soon as a foreign investor has
business interests in China.
For WFOEs in restricted industries, it is first necessary to prepare a project proposal and have that
approved by MOFCOM or the relevant approval authority.
Prior to making the investment application, foreign investors need to first search and locate suitable land
and buildings for the WFOE. The foreign investor can sign the purchase or rental contract.
At this point, the foreign investor can make the investment application to MOFCOM or the relevant
approval authority. This includes submitting the Articles of Association, Feasibility Study and other
documents. The Environmental Impact Assessment should be submitted to the Environmental
Protection Bureau.
Once MOFCOM or the relevant approval authority has made their decision and issued an approval
certificate, foreign investors should apply for the business license from the SAIC. Upon receipt of the
business license, the WFOE becomes a legal person in China.
At this point, the foreign investor can then make the company seals for the WFOE (allowing the WFOE to
sign contracts), apply for an organization code certificate, open bank accounts (in USD and RMB), and
register with the relevant authorities (State Administration for Foreign Exchange, State Administration
for Taxation, Customs Office, Statistics Bureau etc).
The total application and registration process will take one to three months once the relevant
documents/information have been prepared. Normally, the bigger the city, the longer the application
process.
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© 2012 InterChina Consulting. All Rights Reserved June, 2012 III.
Documentation Required for Incorporation of a WFOE
Table 1 Documents to be Provided by Investor.
Document
Business license
Credit certificate
Appointment letter
Mandate letter
Machinery/
equipment list
Production technology
Labor
protection
methods
Cleaning
and
disinfection methods
Environmental
protection
Comments
(To be provided in original language with an English translation, or
directly in English)
Copy of the investor’s business license in their “country of origin”.
Original of the investor’s credit certificate issued by the relevant bank in their
“country of origin”.
Original appointment letters, issued by the investor in their “country of
origin” and signed by the investor’s legal representative, for the legal
representative, members of the board, General Manager and Vice General
Manager (if any) of the WFOE in China. In addition, copies of their passports,
brief CVs and 3 passport photos each.
Original mandate letter, issued by the investor in their “country of origin” and
signed by the investor’s legal representative, for the legal representative of
the WFOE in China (the legal representative of a WFOE is normally the
Chairman of the Board). If there are to be additional people with authority to
sign on behalf of the WFOE, then additional mandate letters are required.
A list of the machinery and equipment to be deployed by the WFOE. The list
should include names, models, specifications, production origins,
manufacturers, dates of production, prices, quantities etc. There should be
two lists, one for imported equipment and one for domestically purchased
equipment.
A description of the production technology to be deployed in the WFOE. This
description should include know-how, production process and production
flow chart, quality standards etc.
A description of the pollution (waste gases, wastewater, solid waste) that will
arise as a result of the production conducted by the WFOE. This should
include the composition and treatment of the pollution.
Organization chart
Raw materials
Type, quantity, source (imported or locally purchased) and price of raw
materials required for the production conducted by the WFOE.
Utility consumption
Quantity of water, electricity, gas or other energy sources required for the
production conducted by the WFOE.
Production output
Estimated production output of the WFOE for the first 3 year period.
Apart from the above, the relevant authorities may require some new information/documents
wherever they think necessary.
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© 2012 InterChina Consulting. All Rights Reserved June, 2012 Table 2 Documents to be Prepared in China.
Document
Project
proposal
Land purchase contract or rental contract
Articles of Association (AofA)
Feasibility study
Environmental Impact Assessment
Comments
None (unless restricted project).
For the WFOE.
For the WFOE.
For the WFOE. Based on the materials / information
prepared by the investor.
For the WFOE. Based on the materials / information
prepared by the investor. Should be conducted by a
qualified environmental evaluation company.
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© 2012 InterChina Consulting. All Rights Reserved June, 2012