This article aims to introduce the WFOE business scope to help investors understand the business market in China. First, we are going to introduce three different types of WFOE, including Services (or consulting), Trade (or foreign-invested commercial enterprises) and Manufacturing. Then we will go into more details about your WFOE business scope.
The Wholly Foreign Owned Enterprise (WFOE) also known as WOFE is a limited liability company with full foreign ownership. Since the reform and opening up, with the continuous growth of China’s economy and the deepening of the market economy system, more and more foreign companies of different industries and sizes have been pouring into the Chinese market in order to share in the growing market earnings.
According to the 2019 World Investment Report, China attracted the second-largest amount of foreign direct investment after the United States. According to the statistics of the Ministry of Commerce, by the end of 2019, the number of WFOE approved Enterprises in China had exceeded 850,000, and the total amount of foreign investment used in China had reached nearly 5 trillion US dollars.
The wholly foreign-owned enterprise in China
A “wholly foreign-owned enterprise” is a limited liability company wholly owned by one or more foreign investors. These companies are able to make money and issue local invoices to suppliers in the official Chinese currency, Renminbi (RMB). Shareholders bear limited liability for WFOE liabilities with their capital contributions. They can also directly hire local employees.
There are three different types of WFOE:
Although all three structures have the same legal status, they are very different in terms of the establishment process, cost, and scope of allowed commercial activities. The majority of the income of trading wholly foreign-owned enterprises and manufacturing wholly foreign-owned enterprises must be derived from their main business, but they must also provide related services. At the same time, some wholly-owned foreign-funded enterprises can also carry out transaction activities related to their services.
Related Service: Open a WFOE in China
Services (or consulting)
If WFOE is allowed to provide consulting and services, it is called a consulting or Service-oriented WFOE.
A Service-oriented WFOE is a company whose core activity is to provide services to third parties. This is the easiest way to establish a WFOE limited liability company because it requires a shorter period of time to approve and a lower capital investment than a wholly foreign-owned trading enterprise or a wholly foreign-owned manufacturing enterprise. The following is an example of the business scope of a service-oriented WFOE that provides technical services:
“Provide technical services and consulting services for XXX; technology transfer, technical consulting and technology development; provide commission agency services related to the above technical consulting services (not including auctions); wholesale and import and export services of related products.”
Trade (or foreign-invested commercial enterprises)
If a wholly foreign-owned enterprise is allowed to trade, wholesale, retail or franchise in China, we call it a foreign-invested commercial enterprise.
In order to engage in import and export activities and domestic distribution (ie retail, wholesale and franchise activities) in China, a trading company (also known as FICE) can be established. Trading foreign-owned enterprises can combine different business activities, such as assembly and provision of services. The following is an example of FICE’s business scope:
“Wholesale, agency (not including auction), import and export of products; after-sales service; technology transfer; technology consulting; technology development and other business consulting services.”
Manufacturing
If the WFOE is only allowed to engage in manufacturing activities. It can be said that this is a manufacturing WFOE.
A wholly foreign-owned enterprise in manufacturing refers to a company engaged in machinery manufacturing, electronics, and other industries; a wholly foreign-owned enterprise in manufacturing needs to rent a factory as its registered address. Before registering for WFOE, the local Administration for Industry and Commerce (AIC) will actually inspect the factory. In addition, manufacturing foreign-owned enterprises must obtain approval from the Environmental Protection Agency.
In some cases, it is necessary to provide a complete report on the estimated environmental impact of the factory, issued by the designated agent, to ensure that the manufacturing process meets the specified environmental specifications. The Radiocommunication Bureau will request information on the raw materials used, the consumption of machinery and equipment, and the safe disposal of toxic products. Examples of the business scope of manufacturing WFOE are as follows:
“Design, develop and manufacture products and related parts, sell self-made products; wholesale, import and export similar products and agencies (excluding auctions); provide after-sales service and other related services for products; technical consultation, technology development and technology transfer. “
All three structures have the same legal status, but there are significant differences in the following areas:
Different types of wfoe registered capital level (RMB)
WFOEs operating within most industries have no minimum required registered capital. Such industries include retailing, trading, consulting, and information technology.
The typical minimum capital commitment for a basic consulting WFOE would range from RMB 100,000 to 500,000. This is low compared to what a manufacturing WFOE would require. On the other hand, such industries as banking and forwarding have a required minimum registered capital requirement.
The following are Different types of wfoe registered capital level, which can be used as a reference：
Wholly foreign-owned enterprise in manufacturing industry 1,000,000 RMB
Trading foreign-owned enterprises 500,000 to 1,000,000 RMB
Consult a wholly foreign-owned enterprise 100,000 to 500,000 RMB
WFOE structure
Although all three structures have the same legal status, they are very different in terms of the establishment process, cost, and scope of allowed commercial activities. The majority of the income of trading wholly foreign-owned enterprises and manufacturing wholly foreign-owned enterprises must be derived from their main business, but they must also provide related services. At the same time, some wholly-owned foreign-funded enterprises can also carry out transaction activities related to their services.
WFOE business scope
WFOE business scope refers to the activities of foreign companies in China. Once written and approved, it is printed on the company’s business license. The WFOE business scope mainly answers the number of employees and the nationality of employees. It even shows the type of work and business activities they will be engaged in. It will also answer questions such as who is the target customer of the business and the source of income.
WFOE business scope functions
The one-stop business scope will affect the company’s legal operations and its ability to issue formal invoices to customers.
This is a crucial aspect, because if you cannot issue the correct invoice (fapiao), the customer may be unable or unwilling to work with you. Customers need the correct invoice to offset VAT debt and get reimbursed.
Challenges to establish WFOE business scope
The WFOE business scope is usually quickly established by the necessary administrative department. Then go for a thorough inspection and report to the local tax bureau.
Since the modification of the business scope requires further application and approval, it should be carefully prepared and agreed before the merger.
In order to properly prepare the business scope, you need to be familiar with the “Guidance Catalog for Foreign Investment Industries”, which lists the industries that encourage, restrict and prohibit foreign investment into China.
The following are the categories in the “Guidance Catalogue for Foreign Investment Industries” issued by the Ministry of Commerce (MOFCOM) and the National Development and Reform Commission (NDRC):
Encourage industry
- 1. Including planting, development and production of wood edible oil. Or processing raw materials and industrial raw materials;
- 2. Help China to develop and mine rare mineral resources (such as forests and chromite);
- 3. Development and production of forest food, such as cleaning and processing of leather and fur;
- 4. Fluorine recycling through phosphorus chemical industry and aluminum smelting.
Prohibited industries
- 1.including processing and production of nuclear fuel;
- 2.Production of genetically modified plant seeds;
- 3. Processing petroleum and coking.
- 4. Make audio recordings, videos and electronic publications;
- 5. Tobacco sales;
- 6. Operate antique shops and auction houses to sell Chinese cultural relics;
- 7. Chinese legal consultation (not providing information related to the Chinese legal environment);
- Online operating room company.
Restricted industries
- 1. Including lead mine exploration and mining;
- 2. Production of satellite TV receivers and key components.
- 3. Highway passenger transportation company;
- 4. Identity inquiry and rank service company;
- 5. Construction and operation of large theme parks.
You can read the extensive official list here.
If your specific industry is not currently listed as prohibited, restricted or encouraged, it is “considered allowed”. If the Ministry of Commerce (MOFCOM) and the Administration of Industry and Commerce (AIC) authorities find that the proposed activities within your WFOE are subject to formal or informal restrictions, they will need to be negotiated.
How to change the scope of WFOE business?
The process of changing the scope of WFOE’s business is complex and time-consuming and lasts for several months. The steps involved are as follows:
- 1. The shareholders initiate a resolution to change the business scope.
- 2. Apply to AIC to change the business scope according to the shareholders’ resolution
- 3. Obtain and fill in the registration form to change the WFOE business scope.
- 4. You will get a new business license.
- 5. Tax registration.
Conclusion
Through the analysis of this article, it can be concluded that China is supporting the development of WFOE. The limitation of the business scope of WFOE is to better promote the development of the world. Nowadays, the influence of foreign-funded enterprises on China’s foreign trade is more obvious, which increases the total volume of China’s foreign trade and expands the scale of China’s foreign trade.
At the same time, the introduction of foreign capital and technology has gradually changed my country’s unilateral processing trade’s foreign trade mode and improved China’s production technology and commodity structure. And enhance the competitiveness of foreign trade.
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