A wholly foreign-owned enterprise is a common investment vehicle for mainland China-based business wherein foreign parties can incorporate a foreign-owned limited liability company. The unique feature of a WFOE is that involvement of a mainland Chinese investor is not required, unlike most other investment vehicles.
Description
WFOEs may be limited-liability companies, as distinct from corporations, partnerships, and proprietorships organized by foreign nationals and capitalized with foreign funds. WFOEs are mostly used by foreign companies to start a manufacturing operation in China. This can give greater control over the business venture in mainland China and avoid a multitude of problematic issues which can potentially result from dealing with a domestic joint venture partner. Such problems often include profit not being maximized, leakage of the foreign firm's intellectual property and the potential for joint venture partners to set up in competition against the foreign firm after siphoning off knowledge and expertise. WFOEs are often used to produce the foreign firm's product in mainland China for later export to a foreign country, sometimes through the use of Special Economic Zones which allow the importation of components duty-free into China, to then be added to Chinese-made components and the finished product then re-exported. An additional advantage with this model is the ability to claim back VAT on the Chinese manufactured component parts upon export. In addition, WFOEs now have the right to distribute their products in mainland China via both wholesale and retail channels. Another recent variant of the WFOE has also come into effect, and are used mainly for trading and buying and selling in China. The registered capital requirements for a FICE are lower than for a WFOE as the FICE does not need to fund plant and machinery acquisitions.
Advantages
WFOEs are among the most popular corporate models for non-PRC investors due to their versatility and structural advantages of a representative office or joint venture. Such advantages include:
the ability to uphold a company's global strategy free from interference by Chinese partners ;
A key feature of a WFOE is that it allows for any profits made in running the business to be repatriated without prior approval of the State Administration of Foreign Exchange. Dividends cannot be distributed and repatriated overseas if the losses of previous years have not been covered while dividends not distributed in previous years may be distributed together with those of the current year. Repatriation of the registered capital is possible upon dissolution of the WFOE. For most WFOE types, paid-in capital is no longer a part of business registration. When the company is registered, no capital verification report is required either.
Disadvantages
The disadvantages of establishing a WFOE include the inability to engage in certain restricted business activities, limited access to government support and a potentially steep learning curve upon entering the mainland Chinese market. As a WFOE is a type of limited liability company, it requires the injection of foreign funds to make-up the registered capital; something unnecessary with a Representative Office. Normally 15% of the total investment needs to be injected within one month after obtaining the business license starting from 50,000 USD. It is important to note that regional differences in regulations and practical differences in the application of Chinese legislation can also apply. A WFOE comes with more legal rights than a Representative Office. Consequently, its process of liquidation is more time consuming and expensive when compared to ROs. The liquidation is divided into four steps and might take up to 12 months.
Taxation
Corporate tax: 15% to 25%.
Income tax: rates up to 35% of business profits.
Consumption tax:1% to 56% of sales revenue of goods. Export are exempt.
Stamp duty tax: 1%
Land appreciation tax: 30% to 60% of gains on transfer.
