What is a WFOE and How Easy Is It to Set One Up?
There are many ways to do business overseas. You can open a virtual branch office, an actual office, or just hire locals and work with them remotely. Choosing the most appropriate vehicle for your business will probably depend on a number of different factors.
In many countries, it’s not possible to start a business without at least one of the directors being local. This can make life difficult, as it means ceding a percentage of control to someone you might not have a close relationship with. Unsurprisingly, a lot of people choose not to go down that route.
For anyone looking to do business in China, a Wholly Foreign-Owned Enterprise (WFOE) is the answer. This is a limited liability company 100% owned by a foreign investor, so you are in control. The WFOE came into fruition to aid manufacturing and technology companies to do business in China, but today, the WFOE is being used more and more by service companies and consulting firms.
A WFOE is a company set up in China. It doesn’t refer to foreign branches of a company located elsewhere. As the name suggests, a WFOE is owned solely by a foreign investor, with no capital contributed by a Chinese investor.
There are three main types of WFOE:
The Pros of a WFOE
There are some unique advantages of setting up a WFOE. These include:
- The application process is relatively simple for consulting WFOEs, but less so for a manufacturing WFOE.
- You have complete control of what the company does, as well as hiring and firing, and you don’t need to consult any Chinese partners before making operational decisions. This enables much greater efficiencies in everyday business processes, as well as in the future development of the company.
- All intellectual and technology property is protected when you incorporate a WFOE in China, which is useful when you consider that China is infamous for its abuse of intellectual property rights and technology expertise.
- If your business is in manufacturing, you won’t need a special import/export license for any products you manufacture.
- Long-term licenses are available – up to 30 years.
- You can purchase and build property in China.
The Cons of a WFOE
There are very few disadvantages to setting up a WFOE in China, but the two that are worth noting are:
- You are limited to specific business categories with WFOEs, so it might not suit your business model.
- A WFOE is subject to Chinese business taxes.
- Manufacturing WFOEs need permission from several trade bodies before they can operate.
Setting Up a WFOE
It can be tricky to set up a WFOE, as each district is free to interpret the Ministry of Commerce rules to their own advantage. GlobalizationPedia has more information on setting up a WFOE in China. Their guide tells you how to register a WFOE, as well as the main issues to expect.
A WFOE is the most popular business structure for foreign investors hoping to enter lucrative Chinese markets, but it’s important to seek expert advice before you do anything concrete.