The WFOE is an effective business solution for most foreign companies operating in China. Therefore, it is important to understand what a WFOE is and understand the risks that come with WFOE ownership and management.
PTL Group specializes in company registration in China. We make sure that China company registration is done right, because doing so will help us focus on the real goal: long-term WFOE management. To help our clients, we provide extensive operational support for registered entities. This is where our knowledge and expertise really make a difference.
We hope you find the following information useful.
WFOE in a Nutshell
WFOE – Wholly Foreign-Owned Enterprise
WFOE is the most common and oftentimes preferred business entity for international companies in China. Any company that is fully owned by a foreign investor or investors in China is in fact a limited liability company – or WFOE in short. Since the entire registered capital is foreign-sourced, it grants the WFOE’s investors the greatest level of independence and flexibility in matters of running the business.
It is important to note that branches and representative offices set up by foreign enterprises are not WFOEs. This point is important because unlike other business structures, WFOEs can hire both foreign and local employees.
The three main WFOE types
Generally speaking, WFOEs can operate in any industry that is not included in the Negative List, and their business scope is determined by their type:
- Manufacturing WFOE: Expected to set up manufacturing in China, and allowed also to trade and provide consultation services.
- Service/consulting WFOE: Allowed only to provide consulting services within specific industries in China.
- Trading WFOE or FICE (Foreign-Invested Commercial Enterprise): Allowed to trade, wholesale, retail or franchise in China. This type of WFOE is eligible to apply for a customs license which allows engaging in import-export processes independently.
The WFOE – Main Advantages
- Managers do not need to rely on partners when formulating their WFOE’s business strategy in China.
- WFOEs can hire both local and foreign employees, with no limitations regarding the number of foreigners employed.
- The overseas HQ can inject money into the WFOE tax-free, through the registered capital.
- WFOEs can transfer China-sourced income as dividends.
- WFOEs can deduct their own import VAT and do not need to rely on import agents or distributors.
- WFOEs can enjoy tax benefits, grants and tax deductions in specific designated areas.
- When operating a WFOE in China, you are signaling to both clients and the local government that your company and its products and services are in the midst of establishing a long-term relationship with China and the Chinese market.
Risk and liabilities
Setting up a WFOE in China can come with certain risks and liabilities:
- HR: Direct liability for any dispute with the WFOE’s employees. Direct liability for paying all social benefits and income tax for the WFOE’s employees, under the Chinese labor law.
- Finance: Direct risk and liability for paying any WFOE tax liability, including: VAT, profit tax, dividend tax, import VAT, etc.
- Trade: Direct liability for any business activity performed by the WFOE’s employees with or without acknowledgment of the parent company.
- Operations: Broad exposure for the company’s reputation, assets and business activity, which can be compromised by employees, business partners and competitors.
Last updated: July 2021
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