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WHOLLY FOREIGN OWNED ENTERPRISE (WFOE) – A limited liability company with 100% foreign ownership, most often set up by a single foreign investor.

The liberalization of foreign investment increased the popularity of WFOEs among foreign investors, and currently, the WFOE is the most frequently used foreign investment vehicle in China.

WFOEs are established solely by non-Chinese investors, most often by a single investor who wishes to develop PRC activities independently.

CHARACTERISTICS

  • 100% foreign ownership: multiple foreign investors are permitted, though it would typically create more flexibility to consolidate foreign shareholdings in an offshore company. Foreign Invested Enterprises (FIEs) can be incorporated partially or fully with foreign capital. Capital coming from Hong Kong, Macau and Taiwan is considered as foreign capital.
  • 100% management control: this helps to avoid corporate culture conflicts that can affect EJVs and CJVs. The foreign investor(s) have complete control to implement the operational, investment and management strategies.
  • Limited liability: usually, a WFOE is set up as a limited liability company, and an investor’s liability is limited to its share of the registered capital of the WFOE. However, a WFOE can take other limited liability forms recognized by PRC law, subject to approval, but this situation is quite rare.
  • Limited investors: WFOEs are limited to a maximum of 50 investors.

Foreign investors can make capital contributions in the form of foreign currency, machinery, equipment, industrial property, technology. The contribution of Renminbi profits from other investments in China remains subject to approval.

OPERATION

The daily operation of a WFOE is controlled by its management. The highest authority in a WFOE is the meeting of the investors. All decisions regarding termination, sale or restructuring of the WFOE must be taken by the WFOE’s investors, with approval/registration from the competent government authorities.

While a WFOE typically has a board of directors which appoints officers, most often including a general manager, a WFOE with comparatively few investors or small in scale may have one executive director and no board of directors. Indeed, having a board of directors is not compulsory in a WFOE.

The corporate documentation is limited to the Articles of Association which define the organization and functioning terms of the WFOE.

Regarding financing administration, all the accounting books and statements must be written in Chinese and subject to Chinese GAAP.

Pros & Cons of a WFOE

ADVANTAGES

  • There is no need for long negotiations with a domestic partner.
  • The establishment process of a WFOE is formal, simple and streamlined, and takes around 30 days, from the date of filing all the necessary documentation.
  • Complete management control of the foreign investor(s). There is no need to take into consideration the interests, needs, and schedule of a domestic partner. Therefore, this structure is particularly recommended for foreign investors who are already familiar with doing business in China.
  • It is easier to protect intellectual property, technology and know-how.

DISADVANTAGES

  • The foreign investor(s) will not benefit from the assistance of a domestic partner for obtaining government approvals, premises and land.
  • The time to market may take some more time for inexperienced foreign investor(s) in China. Indeed, there will be no domestic partner to provide for existing sales and distribution channels, and local connections.

To know more, download our legal handbook related to foreign investment in China…

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