How’s the development of WFOE in China

With the rapid economic development, China is playing an important role on the world stage, and the business market in China has also attracted more and more foreign companies and foreign investors who come to China to set up companies to expand the market. Next, we explain the WFOE in China from the following five aspects: first, introduce the specific characteristics and development status of WFOE in China, then introduce the rights and obligations of WFOE, and finally explain the advantages of WFOE in China.

The Wholly Foreign-Owned Enterprise (WFOE) is a Limited liability company wholly owned by the foreign investor(s). When foreign-funded PE/VC enters China, it first establishes WFOE, then settles the registered capital into RMB, and then invests in China. WFOEs were conceived for encouraged manufacturing activities that were either export orientated or introduced advanced technology.

But with China’s entry into the WTO, these conditions were abolished and the WFOE is being used for service providers such as a variety of consulting and management services, software development, and trading as well. The registered capital of a Wholly Foreign-Owned Enterprise (WFOE) should be subscribed and contributed by foreign investor(s). A WFOE does not include branches established in China by foreign enterprises and other foreign economic organizations.

On the one hand, this will constitute fierce competition for local private equity; on the other hand, the introduction of these mature asset management models, investment concepts, and investment strategies will help promote the development of China’s asset management industry and achieve a common win. In the past two years, the establishment of WFOE by foreign-funded institutions has entered a peak period. According to statistics, more than half of the top 50 institutions in the global asset management scale set up WFOE in Shanghai.

1. 1. WFOE is an enterprise organized by foreign direct investment. Direct investment refers to an investment method in which investors invest funds in the enterprise and take part in the business decision-making of the enterprise to varying degrees. The investment income is obtained through enterprise profit distribution. Compared with indirect investment, it has greater stability.

1. 2.  WFOE is an enterprise that attracts foreign private investment. Private investment refers to investments made in the name of companies, enterprises, and other economic organizations or individuals. It is different from the government’s foreign aid and has the color of non-governmental technical cooperation.

1. 3.  WFOE was established in China by Chinese laws and administrative regulations. According to Chinese laws and administrative regulations, the establishment of a wholly foreign-owned enterprise in China must be approved by the Chinese government before it can be established. After WFOE is established in China, it must abide by Chinese laws; at the same time, it is also protected by Chinese laws.

One of the most important issues in the WFOE application is the business scope. The business scope needs to be defined and the WFOE can only conduct business within its approved business scope, which appears on the business license.

Any amendments to the business scope must further application and approval. There is a negotiation with the approval authorities to approve as broad a business scope as is permitted. WFOE’s business scope includes investment consulting, international economic consulting, trade information consulting, marketing and promotional consulting, business management consulting, technical consulting, manufacturing industry, etc. As China joins the WTO, more and more companies are opening up to the WFOE, especially in the trade field.

Production and operation planning rights. WFOE has the right to plan its production and operation plan within the scope of the approved contract in China.

The right to use funds. WFOE in China can borrow from financial institutions within China or outside China and has the right to control and use its funds by regulations.

The right to buy materials. In China, WFOE can buy the required raw materials, fuels in the Chinese market, or buy in the international market.

The right to manage labour and employment. WFOE enjoys autonomy in the management of labour and employment under the premise of abiding by Chinese laws and administrative regulations. But the employment and dismissal of employees, the form of wages, wage standards, welfare, labour insurance, rewards and punishment measures, etc., shall be stipulated through the conclusion of contracts according to law.

Institutional establishment and staffing rights. WFOE can determine the establishment, adjustment, and cancellation of internal organizations of the enterprise according to the production and operation needs of the enterprise. They can decide the staffing of the enterprise.

WFOE in China, while enjoying the above rights, must also undertake the following obligations:

(1) It must abide by Chinese laws and administrative regulations, and must not damage China’s social public interests;

(2) The agreements, contracts, and articles of association signed by the law must be fulfilled;

(3) Taxes must be paid by Chinese tax laws;

(4) It should accept the management and supervision of the relevant departments of the Chinese government;

(5) Should assume other obligations as prescribed by Chinese laws and administrative regulations.

From the perspective of foreign investment, the advantages of establishing WFOE in China are:

1. 1.Wfoe uses an independent control and management model. In terms of operations, their future development has higher efficiency.
2. 2. Enjoy preferential policies of three reductions and two exemptions.
3. 3. Ability to conduct business without having many restrictions like the office.
4. 4. Issue RMB invoices to users and use RMB as income.
5. 5. Use RMB profits to convert into US dollars and transfer to overseas parent companies.
6. 6. Hire employees in China.
7. 7. Protect intellectual property and proprietary technology.

Breakthrough mode limits

If traditional foreign-funded institutions want to take part in the Chinese capital market model, they usually use QFII to invest overseas funds in the domestic asset market. However, the obvious disadvantage of this model is that it is subject to quota restrictions. If you seize the opportunity of WFOE, you can adopt the model of local fundraising and investment in the local market, thereby breaking the quota limit. So, WFOE has become the only choice for foreign institutions to join in China’s capital market.

Some foreign-funded institutions hope that WFOE’s business scope can be further expanded. For example, it can provide A-share investment advisory services to foreign investors, develop public offerings, and even apply for QDII quota for overseas investment. In this process, it is crucial to seize the opportunity.

From the perspective of the WFOE model itself, the following unique advantages have made foreign institutions more favored:

1、Compared with joint ventures with Chinese companies, which are more free and independent, foreign parent companies can view their investments as a complement to their global strategy.

5、There are no special requirements for the import and export licenses of its products;

6、 It can set and enjoy all personnel management rights;

7、It can be more efficient in management and development operations.

To sum up, WFOE in China is one of the most popular corporate models for non-Chinese investors due to its versatility and structural advantages of representative offices or joint ventures. The main role of WFOE in China business market is a connector, liked a bridge linked the two edges of a river, binding China with other economies around the world and accelerating global commodity and capital circulation.

WFOE is used in China to produce foreign companies’ products in mainland China for future export to foreign countries. WFOE is a popular enterprise form for foreign investors in China. It has irreplaceable advantages and characteristics. At the same time, the article also describes the rights and obligations of WFOE in China because they operate in a complex environment, such as Chinese specific law and policy. As China’s economy develops along the way, investing in China is the right choice.