A wholly foreign-owned enterprise (WFOE) is a limited liability company that is entirely funded by one or more foreign entities. WFOE is the most popular business structure chosen by foreign investors as it permits the most freedom in business management.
A large amount of capital is required to establish a WFOE but the benefit is that it creates an independent legal entity that can engage in profit-making business, and manage the business in its own way while also allowed to create subsidiaries. A business license is usually issued for 30 years with shorter or longer terms allowed as well as extensions.
It is critical that both the business scope and total investment are accurately defined at the initial application phase to receive government approval as, once established, the WFOE is legally obliged to remain within the parameters of its business scope and meet its financial commitments.
The process of establishing a WFOE in China generally takes between three and four months. An office space must be leased for future business before beginning the WFOE application process. It is recommended that a clause be added to the lease voiding the contract without penalty should the WFOE application be rejected.
The WFOE’s investors must pay 20 per cent of the registered capital within three months of the business licence being issued, with the balance due within two years. The minimum legal requirement is RMB30,000 if the WFOE has two or more investors, or RMB100,000 if the WFOE has only one investor. Authorities, though, will assess on a case-by-case basis the amount of registered capital taking into consideration the proposed business activities and location. The amount is then written into the company’s articles of association.
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