WFOE is an acronym for Wholly Foreign-Owned Enterprise, A company structure that allows foreigners to own 100% of the company.
An increasing number of foreign companies have set up wholly foreign-owned enterprises (WFOEs) in China in recent years. WFOEs enjoy more control over capital, human resources and profits than joint venture enterprises, another popular form of foreign investment in China . This article briefly outlines the legal issues and procedures for establishing a WFOE in China .
A WFOE is a business funded entirely with foreign capital, totally under foreign control and Without any formal Chinese ownership participation. It is set up as a limited liability entity representing separate legal persons, and has the right to remit earnings. So far, most WFOEs are subsidiaries of foreign parent companies, usually large international firms willing to risk going alone in China .
WFOEs are similar to US corporations in organization. They differ from foreign branch offices in China because they are legally independent and self-operating entities, not necessarily following the business practices of the parent company. Changes in ownership or operations are strictly controlled.
WFOEs generally govern through articles of association, subject to relevant Chinese laws. They are legally protected from seizure. Such entities are eligible for incentives, which are not granted automatically and must be justified to the granting authorities.
The Chinese authorities approve WFOEs if deemed advantageous to national economic development, especially if they bring in up-to-date technology or increase exports. They also favor WFOEs that promote export, manufacture approved new products or improve quality.
WFOEs are not allowed to participate in:
National defense
Public utilities
Banking
Insurance
Real estate
Media and communications
Shipping
Domestic service businesses
Exports-with quotas
The Chinese government reserves the right to allow limited participation in these areas or set restrictions in areas in which WFOEs can operate.
Foreign investors find WFOEs attractive because of total control of ownership. Such control comes at a cost, however, as a local partner would help in dealing with bureaucracies, suppliers, and labor, in setting up physical and service infrastructures, and in gaining local acceptance while establishing a domestic presence.
The Chinese authorities expect WFOEs to hire Chinese workers for most positions except for the limited number of management and technical slots reserved for foreign personnel. It is especially useful for a WFOE to employ a local Chinese general manager to smooth the way.
Foreign investors contribute 100% of the capital for a WFOE. The assets cannot be disposed of except by liquidation. After liquidation through established procedures, the foreign investors may repatriate all legitimate residuals, earnings and profits.
Application for establishing a WFOE must be completed at the Ministry of Foreign Trade and Economic Cooperation (MOFTEC), which entrusts the local government for examination and approval. An applicant must provide a county-level or higher government with a report on the following items:
Purposes and aims of the proposed enterprise.
Scope and scale of operations
Products to be manufactured
Technology and equipment
Domestic and overseas sales ratio
Area of land to be used and land requirements
Conditions and amounts for water use, electricity, coal,gas, other fuel and public utilities requirements
The following supporting documents are also required:
A WFOE application form
A feasibility report
Articles of association of the WFOE
A list of legal representatives (or candidates for the board of directors)
Testimony of the foreign investors’ legal certification and credit standing
A written response from the county-level or higher government
A detailed list of goods and materials to be imported
Other documents, determined case-by-case, including bank statements of the parent company or articles of incorporation
Approval should be decided within 90 days after receipt of the documents.
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