The WFOE definition for opening your companies in China

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Introduction

What’s the WFOE definition? It is the short name of a wholly foreign owned enterprise in China.

And many foreign investors choose to set up a WFOE rather than the other forms of companies. Why?

The reason is easy because it brings a bunch of benefits. Keep reading and find out more below.

WFOE definition #1: Benefits of WFOEs

Full control of your business in China

The control of the business is one of the factors that make the WFOE stand out among the many choices.

Because there is no local capital to invest in your business.

Many companies eventually go bankrupt, not because of low sales and no bad reputation of customers or customers. It’s because investors are not familiar with the business. Conflicts between shareholders are often the main reason. Generally, it is the difference between opinion and knowledge background.

Cultural differences sometimes lead to great cultural conflicts.

And foreign-owned enterprises can almost ease this concern. Because you can own a WFOE.

You can take full control of your company without interfering too much with important decisions.

Better protection for your intellectual property

The more shares of the company, the higher the asset risk. For example, local partners leak trade secrets. Especially when you have an inadequate contract or agreement with the other party.

But it is not easy to find a reliable local partner in China.

A WFOE can help you in this case.

From the date of registration of your WFOE in China. Your business is protected by Chinese law. And your intellectual property.

Capable and flexible with money

A WFOE is an independent legal entity in China. This means that a WFOE has the right to collect funds from its own account. And other rights such as issuing invoices and signing contracts.

Besides, WFOEs can transfer funds to companies outside China. It’s usually an overseas parent company.

As a wholly foreign-owned company, it has the right to convert RMB into other currencies. Like the Dollar and Euro.

Lower cost for operation

Preferable Taxes.

China’s corporate income tax is much lower than that of many developed countries. Especially compared with North America and European countries.

In most cases, WFOEs enjoy the same tax policies as other local enterprises in China.

Moreover, if your WFOE is involved in the export business, you are likely to get a refund. As we discussed earlier, the maximum refund of VAT is 13% of the product amount.

Lower wages to hire Chinese local staff.

China’s workers are famous for their hard work and affordable wages. For the same quality of work, compared with the wages demanded by many developed countries. You may save 50% on the cost of hiring a local Chinese.

Less cost for the land and space.

Also, due to the preferential price of CNY / RMB. You pay less rent and enjoy more space for your factory or office. It is easier for you to expand your business in China.

Find more Advantages and benefits of wholly foreign owned enterprises (WFOEs) in China.

There are other options for opening an enterprise in China besides a WFOE. For example, a representative office (RO) or a joint venture (JV).

WFOE definition_01

WFOE definition #2: The benefits of changing from a RO to a WFOE

ROs in China always face high restriction. They cannot engage in profit-making activities or issue invoices.

As a result, the actual tax expense rate of ROs is about 12%.

However, there is no way to change that. Is the tax cost of reverse osmosis outside China reasonable? So, what are the options for the company?

For companies that have registered RO, one of the most feasible options is to convert them to WFOE.

Tax-saving

One of the core differences between the two is that under Chinese law, a WFOE is an independent legal entity, while a foreign-funded company is not.

This process is not entirely a “conversion”, because a RO must be completely deregistered and a WFOE must be established. However, completing these steps in any order can offset the delay.

It may be more expensive to use reverse osmosis funds to pay for China’s operating costs than financing through a WFOE. This is because the effective tax rate of reverse osmosis is about 12% of the cost. A WFOE may deduct expenses from the income generated by the business activities specified in its business scope.

Tax savings achieved through the use of a service agreement between the WFOE and the head office are considered to be differences in profit margins. The RO has a relatively inflexible rate of 15% as profit, while WFOE is taxed at 10% of their actual profits.

Of course, there will be some costs in establishing such a service agreement mechanism.

But you can offset that with tax savings. An actively traded WFOE/FICE will provide greater flexibility to manage revenue and expenses.

This is to minimize corporate income tax (CIT), and RO lacks flexibility in this respect.

In the long run, ROs cannot improve tax efficiency and save money through development and expansion. However, owning a WFOE will give enterprises more business opportunities. Besides, if the company wants to expand into the trade field, the WFOE can expand its business scope to include it.

Flexibility

Also, if the services provided by a WFOE to an overseas company fall within the scope of “logistics support services” and “general offshore outsourcing services”. Then the company can apply for VAT exemption. Combined with a low-profit tax, this is a considerable saving for a company. Accordingly, a company that pays a high annual fee through a RO is prepared to save at least 12% of its annual tax revenue, assuming that various factors hold up.

WFOE definition #3: WFOEs vs ROs

There are many reasons why setting up a Representative Office (RO) in China is beneficial to the company. The simple and low-cost registration process is the most attractive. If a company starts investing in China or just wants to get a research/support position, then a RO is a good way to start.

Of course, RO has its use, but it is not a long-term solution. People have to remember how the reverse osmosis tax works. If a company considers rents, salaries, and other variable costs, the ROS may tax its expenses quite substantially.

WFOE definition #4: WFOEs vs JVs

What is a JV in China?

A JV represents joint ventures in China. This requires at least two shareholders.

Individuals or businesses can participate. But at least one of them is from other countries outside the Chinese mainland.

WFOE vs. JV in China: which is better?

The answer depends largely on what you want to do. And your budget.

If you want to do some small and medium-sized business in China.

WFOE is a more affordable option, especially if you have a small team. The flexibility of registered capital enables you to save more money for business operation.

At the same time, you need to develop business relationships and build your team from scratch. For enterprises with a small budget but energetic team members, a WFOE is a wise choice.

On the other hand, joint ventures need more capital first.

However, thanks to your local partners, you can make the most of these resources, experiences and relationships.

In this way, you can save more time to prepare for the whole project.

With the help of the local market, it may promote your existing business. If you have enough cash flow and expect more return on investment, choose a joint venture/JV in China.

Also read WFOE vs JV in China: Differences between WFOE and Joint Venture.

WFOE definition #5: WFOE formation: the requirements for setup

Before you start up a new WFOE in mainland China, you have to know the key information and prepare the required documents.

Documents for Special Foreign Exchange Account

First, submit a written application form.

Moreover, register the identity certificate of an overseas natural person at the Local Industry and Commerce Bureau.

And then, submit the company name pre-approval notice or relevant certificates.

Besides, foreign investor entrusts domestic natural persons to handle account opening procedures. Provide power of attorney, identity certificate or business license.

Finally, provide the supplementary documents explanation for the aforementioned documents.

Requirements for the accounts of WFOE

There are some requirements for the establishment of WFOE in China.

First of all, you can transfer the funds in your account to its capital account.

If no foreign-invested enterprise has been established, the foreign investor shall apply to the bank for account cancellation. We will return the remaining funds in the account to your country.

Secondly, when the verification period of the account expires, the foreign investor should apply to the bank for account cancellation and return the funds.

Moreover, you should also migrate and close accounts according to the capital account.

Precautions

For China WFOE formation, you should pay attention to:

When foreign investors entrust others to submit written applications, they need to provide foreign notarization.

If the investment amount is less than 100000 US dollars, the limit can only be that the investor actually contributes in cash.

In this case, you need to provide the original and a copy of the above materials. Please seal the copy.

At the same time, the safe must approve the settlement and transfer of account funds one by one.

In the end, you don’t have to mortgage the funds in your account.

Naming requirements

For the name of a WFOE in China, you need to know the following information:

Name of the alternative company name

Basic information of shareholders

Registered capital and registered currency

Name of the registration area

The main business of your company.

Requirements for Registrants:

The purpose of foreign-invested enterprises is to attract foreign private investment.

Foreign invested enterprises generally implement a two-level management system. One is the board of directors. Second, the highest decision-making body of foreign-invested enterprises.

In this case, the general manager is responsible for the daily work. The chairman shall preside over the board meeting at least once a year.

About the capital of registration

For the establishment of a WFOE in China, the foreign investor must separately contribute and subscribe to the registered capital.

There is no clear provision in Chinese law on the adjustment of branches of WFOE.

However, branches shall include institutions and representative offices participating in business activities.

Foreign investors can invest in foreign currency. It can also invest in mechanical equipment, industrial property rights and proprietary technology.

Read more about China WFOE formation & its process and registration.

WFOE definition #6: The WFOEs in China

Be part of the list of WFOE in China: a choice by the big companies

And a WFOE can be a mix of the above 2 or 3 types.

Typically, an option of the companies with large scales. Particularly the groups with their global household names.

These globally famous companies thrive for their wise insights. And they can seize the opportunity in the global market more quickly than the others.

China, the country with a population making up nearly 20% of the world. It’s definitely the place they can’t miss.

As a result, China has become one of the places with hyped investment. In other words, investing in China has been a trend throughout the world.

Now, let’s see who the big players are in the Chinese market.

The list of WFOE in China

The Daimler Group

You may not have heard of Daimler. But you must have heard of the famous brand Mercedes Benz.

And Mercedes-Benz belongs to the Daimler Group.

Daimler, as a WFOE, has developed its business in China for nearly 20 years.

Recently, a Reuters report showed that Daimler’s business in China has picked up after the popularity of COVID-19 in China. Daimler again sold about 50000 cars in March.

According to reports, Chinese consumers bought 694200 Mercedes Benz cars in 2019. 29% of total sales.

Also, Daimler group is likely to increase investment in China in the next few years.

Daimler’s website says the group has extended Hubertus troska’s contract until December 31, 2025. Hubertus is responsible for Greater China management.

And he has created a remarkable success for the Mercedes Benz brand in the Chinese market.

GE (General Electric)

GE started its business in China from 1906.

At that time, GE was one of the most active foreign companies in China.

Although GE’s business in China was stopped for war and political reasons. The group continued to trade with China in 1979. In the same year, an office was set up in Beijing.

Despite the fierce trade war between the United States and China. GE has been trying to find its way into the huge Chinese market.

For example, wind energy business.

According to Ge, the group’s news centre. GE has signed a contract to build 715 megawatts in northern China’s Henan Province.

It will be GE’s largest wind power order ever in Asia. Of course, it is the largest single onshore wind power deal ever awarded to non-Chinese wind turbine OEMs in China.

Find the other WFOEs in China.

Conclusion

In this article, we discuss the following aspects of WFOE:

  • Four advantages of wholly foreign owned enterprises.
  • The benefits of changing from a RO to a WFOE.
  • Compared with ROS, WFOEs has advantages and disadvantages.
  • Compared with JVs, WFOEs has advantages and disadvantages.
  • Six steps to set up WOFE.
  • Two cases of the development of wholly foreign owned enterprises in China.

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