China WFOE (Wholly Foreign Owned Enterprise)

A WFOE (Wholly Foreign Owned Enterprise) or company of 100% foreign capital, is generally recognized as the structure of most interest to foreign investors in China because it offers many advantages:

Autonomy – Unlike a representative office, the WFOE can conduct itself in normal business operations, issuing and recording of invoices. It is also not necessary to have a parent company for at least two years to open a WOFE.

Control – The WOFE provides full control over the capital, management and operations of the company, easy repatriation of dividends and the safest way to avoid the perils of joint venture (Chinese partner’s withdrawal, etc.).

Flexibility of HR policy – There is usually no restriction on the number of foreign employees.

China is not open to all types of business for Foreign Owned Enterprises and there are restrictions in areas of activity making implantation of a WFOE harder to manage.

The authorities have indeed published a catalog defining areas where foreigners can and cannot invest. It distinguishes three different categories which are: “forbidden”, “restricted” and “encouraged”. It is therefore essential for a potential investor to focus its business very well because only fields allow encouraged to set up a WFOE and the difference can sometimes be quite low between two categories do not have the same classification.

This is why how you define your business scope can be decisive in the acceptance of your application by the authorities. The business scope is a one-sentence description covering all present and future activities of the company. In other words it means your business goals. A small change in the terms used to define your business can sometimes mean the difference between a positive or negative response. It may therefore be useful to review its business scope to meet the criteria of the authorities if it does not change your plans starting too.

However, it must remain very vigilant with the business scope. Once it has been defined, it must be followed to the letter because the authorities are very careful about its application. If you changed your goals just to be consistent with the law and then you do not follow your plans, you will find yourself in a very complicated situation with a high risk of outright closure of the company. Similarly, it is important that the business scope contains all your future goals as an extension of the activities can be blocked even years later if it was not mentioned at the outset.

As a foreign investor, you should always keep in mind that the approval is only the first step in your journey to success of your company in China. You do not only need to be consistent with the regulation but also of planning your business accurately and considered all possible developments.