Wholly Foreign Owned Company (WFOE) or WOFE
Such a company is independent legal entity registered
with only foreign capital in China and under Chinese
law. The managing director (if only one director is
appointed) or Board of directors and legal representative
are appointed by the foreign parent company. The WFOE
abides by the Chinese company law and regulations
like any other Chinese company.
2. Legal Liability
The WFOE is liable to its assets like a limited liability
company in Western legal practice. The minimum capital
to be registered is usually around USD120,000. In
some cities and for some industries, however, the
minimum capital required could be as low as USD12,000.
3. Commercial Activity
Chinese corporate law restricts companies to their
business scope, i.e. the range of business activities
it can perform. A WFOE is also restricted in such
a way. The business scope of a WFOE is usually restricted
to a manufacturing or processing or general service
activity. Certain special economic zones allow WFOE's
to have a purely distribution activity for products
of the mother company's group. Pure trading as a business
scope (with restrictions to only a single category
of products) is now allowed with much the same requirements
in terms of capital requirements.
Within its business scope, the WFOE
can have normal commercial activities of buying materials,
transforming them and reselling its products, locally
or abroad. If it approved to do so, it can just buy,
store and distribute and act as its mother company's
The WFOE can declare customs, import
and export according to its business scope.
Local currency can be exchanged against
hard ones provided it is for legal buying activities
in respect with the business scope.
Profits can be repatriated, in foreign
Local staff is hired directly under the Chinese labour
law. All its dispositions must be respected. They
do not make it difficult to hire and fire people.
Trade unions are encouraged but not obligatory. In
any case, they have proved to be no hindrance to the
Foreign managers and employees can
be appointed and receive work and residence permits
as well as the appropriate visas.
The WFOE must be located in those premises reserved
for commercial activities, i.e., commercial buildings
or commercial-cum-residential buildings.
WFOE pays income tax (and business tax if applicable)
as Chinese companies (usually 33% of the net profit).
Tax breaks can be obtained for encouraged
industries or export-oriented industries and in some
cities. generally speaking, WFOE is only liable to
income tax at a reduced rate at 15%.
In addition WFOE normally obtain the
right to import all of their production equipment
free of VAT and customs tax.
Personal income tax of the WFOE must
be deducted from the employee's monthly salaries and
paid by the employer.
7. Requirements for Registration
The WFOE must be approved to be registered. This approval
will include checking:
a) The proposed name of the WFOE
b) The articles of associations of
the company (they must abide by the Chinese WFOE law)
and its feasibility study. The business scope is a
key element of the approval. An environmental protection
study must also be made and approved.
c) The premises rental or purchase
d) The resumes and passports of the
board members and their proper appointment by the
mother company's legal representatives
e) The parent company's financial
situation, as for the RO Final registration is granted
after the registered capital is paid in.
Representative Office (RO)
It is an office of a foreign company in China. As
such it is not a Chinese company. It can be compared
to the embassy or consulate of a company in China.
It has no registered capital.
2. Legal Liability
The RO is not a separate legal entity and therefore
it does not assume liability on its own. Instead,
the foreign parent company assumes the liability of
the RO. This liability thus extends to the registered
capital and assets of the mother company.
3. Commercial Activity
a) As the RO is not a Chinese company it does not
enter into business transactions as a Chinese company,
but as a foreign company.
b) Consequently, the RO does not have
a capital, it does not buy or sell in its own name.
c) It has a bank account that is used
only to receive money from the mother company and
pay for its local expenses. (It does not have the
right to pay for goods that the parent company would
buy, for example.)
d) The RO cannot declare customs,
import or export goods, as the mother company does
not have such a right in China. It can however receive
mail, parcels of samples and send out such samples.
It can also import equipment and goods for its own
use. (Computer systems, other office equipment's.
e) The RO can act as a liaison between
its parent company and the parent company's business
partners in China. It can conduct purchase or sales
negotiations, quote prices or receive quotes from
suppliers, effect market research, market and promote
its parent company products, hold seminars, take part
in exhibitions. In general it can conduct any legal
activity that the mother company representative could
conduct in China if they would come on a business
a) As a foreign company office in China, the RO does
not fall under the labour law for Chinese companies.
As well it is not entitled to enter into own arrangements
with local staff as it cannot register for and provide
b) Local staff can be hired with the
approval of specialized Chinese human resources companies
to which fees must be paid in addition to the staff's
salary. These fees provide the necessary and legal
social welfare cover to the local staff. The formal
labour contract is signed with the Chinese HR company.
It is standard and does not allow for any important
modifications. Besides, an agreement with the hired
staff fixes the staff's salary.
This agreement may be copied to the
HR company or remain strictly between the local staff
and the RO.
c) Foreign representatives approved
by the relevant authorities receive a work and residence
permit as well as the corresponding work visa.
A local staff can be appointed as
As a foreign company in China, the RO is restricted
to use specifically approved premises for its offices,
be they bought or rented. However, a RO could be located
in those same buildings as allowed for a WFOE.
a) The RO is liable to pay taxes in China, though
it is not a Chinese company. These taxes can be calculated
in 2 ways, subject to the approval by the Chinese
- according to a percentage of the
profits generated by the RO for the foreign company
- as a percentage of the expenses of the RO.
Tax authorities have no proper way to evaluate profit
generated by the RO for the Mother company. As a result
they require at least that tax be no less than the
percentage on expenses. This is usually the way foreign
company choose to be taxed.
b) Staff (local and foreign) and liable
to pay income tax according to Chinese law. This tax
is paid by the employee or the foreign company as
per agreement with the staff.
7. Requirements for Registration
The RO must be approved before it can be established.
The approval includes checking of:
a) The financial situation of the
parent company (usually in the form of a bankers'
reference letter issued by the banker of the parent
b) Latest audited financial statements
must also be supplied (this requirement only applicable
to RO in restricted industry).
b) The personal situation of the appointed
Chief Representative, including his resume and passport.
c) The location of the RO (lease agreement
for the office premise must be produced).
Permanent Representative Office or
Wholly Foreign Owned Enterprise
1. The RO
is usually a first step for a presence in China. It
is a completely sufficient and suitable structure
for any buying activities. It also suit sales activities
when no production, assembly or after-sales services
must be provided by the foreign parent company.
It is not really satisfactory for
distribution activities as it forces the parent company
to rely legally (for ownership of the products and
collection of the money) on a third party as distributor
and import agent. (Often, these 2 functions must be
spread to 2 different companies.) In general it is
complicated, risky from the point of view of obtaining
payment and not very satisfactory from the point of
view of the services provided to the customers.
As there was previously no possibility
to register WFOE distribution companies, many foreign
companies have used their RO as a virtual distribution
company, formally going through local importers and
distribution agents. Problems stories are numerous
and I would not recommend this approach. The requirement
for establishing a WFOE for the purpose of distribution
has been lowered substantially, we now normally recommend
the trading WFOE at the first place.
2. A WFOE
is almost always recommendable for any production,
processing or distribution activity.
The alternative could be a
JV. However, in general a JV partner active
in the particular field of activity of the JV brings
no real advantages and often additional problems.
Successful JV's must be analysed
on a case by case basis to discover the reasons for
Until recently, WFOE could not be
registered with a distribution business scope. Besides,
rampant smuggling via Hong-Kong made it uncompetitive
for a WFOE to import legally and necessary to go via
an import "agent" in South-China.
With the new lower customs tariffs
and the drive against corruption becoming effective,
and with the substantially lowered capital investment
requirement, a distribution WFOE makes sense now and
it is expect that a trading WFOE to become more and
more the solution and preferred choice for foreign
investors making a presence in China.