Wholly Foreign-Owned Enterprise (WFOE): How To Start an LLC in China
Starting a wholly foreign-owned enterprise (WFOE) is a strategic choice for foreign companies looking to establish a presence in China. This article will explain everything you need to know about incorporating a WFOE in Mainland China and why it’s favourable to create a Hong Kong-based company to be the parent of the WFOE.
What Is a WFOE? Essential Traits and Key Characteristics
"WFOE" stands for "wholly foreign-owned enterprise," a type of limited liability company in mainland China. A WFOE must have complete ownership outside the People's Republic of China (PRC). A WFOE is an attractive option for investors, as it provides a high degree of independence and flexibility.
WFOEs are divided into three distinct categories based on business type:
Manufacturing WFOEs for product manufacture.
Trading WFOEs for wholesale, retail, and franchise trading.
Consulting WFOEs for consulting and services.
Although the three types share the same general rules, there are some industry-specific processes and requirements. Depending on the location-specific regulations of where a WFOE is incorporated, it can have different capital requirements and approval processes.
Since the enactment of the new Foreign Investment Law (FIL) on 1 January 2020, a WFOE is considered equal to Chinese-owned companies in most regards. A WFOE can:
Provide foreign investors full ownership and control over the enterprise.
Operate independently from its parent company and Chinese partners.
Represent the parent company and open branches outside China.
Repatriate money to the foreign investor's home country.
Protect its intellectual property.
Trade on the Chinese market.
Hire employees directly.
Negotiate and enter contracts.
Access preferential policies (if applicable).
Import and export own products without a special license.
Open multi-currency bank accounts, convert money, and invoice in Chinese Yuan (CNY).
While a WFOE offers distinct advantages, it also comes with notable drawbacks:
No support from the Chinese government.
High capital investment requirements in certain industries.
Considerable variance among local jurisdictions.
Taxes
Since WFOE is a legal entity in China, it is required to pay taxes. The WFOE has to pay:
Corporate income tax (standard is 25%; certain industries have preferential tax rates)
VAT (6% to 17%, depending on the type of business activity)
Business tax (5%, if applicable)
Dividend tax (10% to 20%, if applicable)
The Location of Your WFOE Matters
China has several special economic zones (SEZs), each with considerable autonomy over its economic policies. SEZs often favour a specific industry and may offer favourable regulations and incentives for WFOEs.
For instance, Shenzhen is often called the "Silicon Valley of China" because of its advanced tech industry. If your WFOE is tech-oriented, cities like Shenzhen, Guangzhou, and Tianjin would be good locations to incorporate your business.
Conversely, incorporating a WFOE in a poorly chosen location could hinder your business. We recommend contacting us with any industry-specific questions before founding your first WFOE.
Requirements for Starting a WFOE
Here is a list of required documents and steps that you need to take before registering a WFOE:
Application forms and papers
Business name in Chinese in addition to the existing foreign name
Business license application
Detailed business plan, articles of association, and terms of operation
Shareholder's office or residential address
WFOE's address
Minimum registered capital, along with sources of funds, method, and time limit of contribution
Identity and passport documents of the shareholder(s); for corporate shareholders, articles of incorporation and related documents
Registration for business taxes
Registration with official authorities, depending on business type and scope
CNY bank account and arrangement for foreign exchange
The exact requirements vary depending on where the WFOE is registered.
Minimum Capital
The Chinese government does not have a nationwide minimum registered capital for WFOEs; it depends on the location and industry of your WFOE.
The highest minimum registered capital has traditionally been for manufacturing and trading WFOEs, although consulting WFOEs in the financial sector also have high minimums. Your WFOE's minimum capital requirement could be as low as USD 10,000 or over USD 150,000.
Since many different factors are at play, you will have to perform some research to find exact investment capital figures for your business.
Starting a WFOE Through Hong Kong
Although you can start a WFOE from any jurisdiction, a smart strategy would be to incorporate a subsidiary in Hong Kong to hold the Chinese WFOE. Chinese authorities are familiar with paperwork from Hong Kong, which will streamline the whole process and accelerate your WFOE application.
Similarly, Hong Kong is an international hub, and the local authorities are versed in working with foreign nationals and documents from most Western countries.
Are you ready to do business in China?
