A WFOE in China (Wholly Foreign-Owned Enterprise) is the easiest, quickest, and most popular option for foreign businesses to enter the Chinese market. Other options include a Rep Office and a Joint Venture. In a globalized world, individuals and businesses are taking advantage of international opportunities found in establishing a business in a foreign jurisdiction.
In this article by China Gravy, your Cyprus digital marketing agency, read up on the benefits of setting up or relocating your business abroad and doing business using pathways such as a WFOE in China. Explore the three options to enter the Chinese market in detail: a Wholly Foreign Owned Enterprise, a Representative Office, and a Joint Venture.
Why Establish a Company in China in the First Place?
First and foremost, moving abroad is a chance to acquire new markets and take advantage of more favorable economic opportunities. In the face of income tax, privacy controls, and digital regulations, businesses may choose to relocate their companies for better business conditions.
So, planning for the future is a critical step in ensuring the legacy of a business. With its high level of innovation, digitalization, booming e-commerce economy, and the revival of the Silk Road, China is certainly on its way to becoming a global leader.
Additional Advantages for Setting Up a WFOE in China
For small-to-medium size businesses and digital nomads, establishing a WFOE in China can provide a favorable environment in terms of taxes, workforce, quality of life, and more. Although the price of labor is steadily increasing, China’s labor costs are still about 4% cheaper compared to the US.
Moreover, the Middle Kingdom is a global investor, and driver of AI technology, including its implementation, for example, with autonomous driving.
Overview of Advantages of a Business in China
Foreign companies aspiring to enter the Chinese market have many advantages in successfully conducting business and targeting the largest e-commerce economy in the world. In fact, many Chinese even go abroad and then work through a foreign company in China to have a better business set up.
Benefits of Doing Business in China
- favorable government policies for (international) businesses
- an entrepreneurial environment
- skilled and affordable workforce
- digitalization and growth opportunities
How to Reach the Chinese Market
- rising incomes, especially in the middle class
- changing demographics with increased consumer spending
- a large demand for Western goods and services, especially in the luxury sector (clothes, cosmetics, foods), and products for babies
While CBEC (cross-border e commerce) is certainly a great option for businesses that sell online, having a physical presence with a WFOE in China may be important and beneficial for specific businesses. With the shift of China’s economy and demographics to an uprising middle-class with increased domestic spending, there are more and more advantages of having a Chinese business.
To sum it up, China is well on its way to becoming the largest world economy and one of the most influential global players. As such, doing business in and with China, holds great opportunities. In particular, having a foreign-invested enterprise in China can be highly beneficial, depending on the niche and goals.
Conquer the Chinese Market
Besides, as China is changing from a manufacturing and export country to increased domestic spending, the ability to sell and invoice in China becomes a larger success factor.
Businesses that benefit from a physical presence in mainland China are:
- CBEC brands that want to sell their products in physical stores or use the local version of China’s largest commerce platforms jd.com and tmall.com
- Immigration agencies that want to build trust in the country
- Companies that want to do business locally
So, to start a business in China, foreigners have three basic options
- Wholly Foreign-Owned Enterprise (WFOE)
- Representative Office (Rep Office, RO)
- Joint Venture (JV)
Now, WFOE and RO are the most common options, but let’s look at all business setups in detail.
1. WFOE in China
A WFOE is an investment vehicle for a mainland China-based business. It works so that foreign parties (individuals or corporate entities) can start and own an LLC. What’s unique about a WFOE is that the involvement of a mainland Chinese investor is not required.
Remember that a Wholly Foreign-Owned Enterprise is the easiest way to start a foreign business in China. Besides, a WFOE in China is also the best option to protect intellectual property in the Middle Kingdom. Licensing is possible long-term, meaning 15 to 30 years.
Whereas in the past, setting up a WFOE was mostly done by manufacturing companies, today, the tendency goes towards consulting and management businesses, as well as high-tech and software.
A WFOE in China can
- invoice clients
- make a profit in China
- send funds overseas
- hire local and foreign staff directly
- be formed and operated without Chinese partners
- purchase directly from suppliers
- sell directly to customers (B2B, B2C)
- provide a 1-year work resident permit for foreign employees with multiple exit entries
- inability to engage in certain restricted and prohibited business activities, such as education, health, science, and culture; click here for the full negative list for the Chinese market in English
- limited access to government support
- potential liquidation consists of 4 steps and might take up to 12 months
- WFOEs can’t get an ICP license (mandatory when hosting a Chinese website in mainland China); you can bypass this through Cloud computing and hosting your website outside of mainland China. Alternatively, a Joint Venture with less than 49% foreign investors is entitled to an ICP license.
- injection of foreign funds for the registered capital recommended, but not mandatory anymore
- Corporate Income Tax (CIT): As an incentive for foreign-invested enterprises, until 31 December 2021, qualified SMEs with an annual taxable income of 1 million RMB (~145,000 USD) or less are applicable to an effective CIT rate of 5%. Between 1 million and 3 million RMB, the income will be taxed at 10%. Keep in mind that afterward, the CIT will depend on the region in order to promote lower-tier areas.
- Income tax: up to 35% of personal income
- VAT: 3% for small scale businesses instead of 13%
- Consumption Tax:1% – 56% of sales revenue of goods. Exports are exempt.
- Stamp Duty Tax: 1%
- Land Appreciation Tax: 30% – 60% of gains on transfer
- Resources Tax: 1% – 20% depending on material
Now, click here to read up on the official WFOE in China regulations by the Ministry of Commerce. But don’t confuse a WFOE with an FIE (Foreign Invested Enterprise). This refers to any type of company with at least 25% foreign investment.
2. Rep Office
Generally speaking, a WFOE has more legal rights than a Representative Office (RO or Rep Office). Yet, it is still worthwhile considering an RO, when setting up a foreign business in China.
A Representative Office is an office established by a company or a legal entity to conduct marketing and other non-transactional operations in a foreign country where a branch office or subsidiary is not warranted. ROs are generally easy to establish as they are not used for actual “business” (e.g. sales).
So, foreign investors can enter the Chinese market with a Rep Office to simplify sourcing of products and quality control, as well as general liaison activities between the Head Office and the Representative Offices overseas.
- no registered capital is needed
- quick to set up (6 – 8 weeks)
- have a physical presence/office in China
- manage the product sourcing process from within China, including quality and product checks
- great option to test the Chinese market
- 1-year work resident permit for foreign employees with multiple exit entries
- taxed around 12% on the expenses in China (office, salaries, etc.)
- not able to invoice locally for goods and services
- cannot make profits
- can only deliver services to its main office, not to external entities
- cannot have contracts with customers in China
- can hire foreign and local staff only through an authorized agency (Labor Dispatch agency)
- maximum of 4 foreign employees allowed
- must be located in government-owned buildings, in specific cities
- you must rent the office space before starting the business set up
- the parent company must have existed for at least 2 years
- cannot purchase directly from suppliers
- cannot sell directly to customers (B2B, B2C)
- Rep Offices can’t get an ICP license; some RO may bypass this regulation by applying for a personal ICP license through one of their employyes. However, this is a grey area. Again, a Joint Venture with less than 49% foreign investors is entitled to an ICP license.
To sum it up, a Rep Office is a useful tool and a cost-effective way for start-ups, SMEs, and larger enterprises to establish a presence in China. Testing the Chinese market is especially easy with a RO.
However, keep in mind that a Rep Office is always taxed on its expenses. In today’s world, it basically no longer has advantages over a WFOE. Although many agencies still offer the set up of a RO, a WFOE has significant benefits for foreign entrepreneurs. Especially, in order to have a real company, since a Rep Office is more like a subsidiary.
3. Joint Venture
Now, starting a Joint Venture in the Middle Kingdom refers to the foundation of a limited liability company. It requires the involvement of a mainland Chinese investor. After the JV has been formed, it becomes a new legal entity, where the shareholders’ liability is limited to the assets which they brought into the company.
In other words, a JV is a form of foreign-invested enterprise. It is created through a partnership between foreign and Chinese investors. They both share the profits, losses, and management of the Joint Venture.
- JVs allow foreign companies to avoid tariff and quota issues
- gain more focus and control of product distribution and service in China → potential to reach a larger market share in China
- shared risks and costs
- access to new markets and distribution networks
- working with a partner who understands the Chinese market
- requires the involvement of investor from mainland China
- foreign companies are not allowed to submit the application documents directly to the relevant authority. They must retain a PRC entity that is authorized or permitted by relevant authorities to act as an agent.
- unequal involvement of the business partners; imbalance; clash of cultures
- requires extensive research and discussions
- trustworthy contacts needed
All in all, a Joint Venture is a good choice for larger businesses that require the insights and network of a local partner.
Why Focus on Setting up a WFOE
Of course, a foreign investor or entrepreneur can decide not to set up a business in China and instead use the CBEC model or lead generation strategy via a website in order to reach Chinese clients and consumers.
However, in the long term stronger foreign investment potential should aim to establish a WFOE in China to maximize the benefits the jurisdiction offers for foreign companies rather than simply trying to attract the right audience.
If you decide that setting up a WFOE in China is the most advantageous path for expanding your international business scope, the next steps would be establishing and maintaining your WFOE.
How to Set Up a Business in China as a WFOE
The great news is that establishing a company in China is straightforward using the WFOE process and usually takes only 1 to 2 months.
- Establish 3 key roles: a legal representative, a director, and supervisor, and a parent company, if necessary. The legal representative is the legal authority of the company with the signing power to enter into binding contracts, execute powers of attorney, and authorize legal initiatives of the company. This is also the name that will appear on documents such as the business registration certificate. The supervisor observes the operations of the company and takes an active role over directors. All employees or shareholders are eligible for this role with the exception of board members and senior management. Finally, a director handles day-to-day operations or as the acting manager in the case of small WFOEs.
- Develop your business scope: In one sentence for the business registration certificate, outline the business activities in China carefully as changing this requires lengthy administrative procedures and may affecting the business license.
- Select the appropriate location: Determine the workforce, regulations, and industry aspects that will affect your WFOE in China.
- Obtain a company chop: Company chops, or official stamps of the business, act as a signature of the business and legally bind documents. The police department will record and register the chop and will be required for opening a bank account.
- Gain approval for the Chinese company name through the local Administration for Industry and Commerce (AIC)
- Prepare documentation such as notarizing the parent company documents and structure chart of the roles
- Complete the WFOE in China registration application, typically online first and then original signed documents submission in person, completing approval processes of Chinese regulatory authorities
- File WFOE China tax-related registration after business registration paperwork is issued
- Open at least two bank accounts – a foreign currency account and an RMB account: A legal representative must be present to complete this process using your company chop and will only take a few hours to finalize.
- Finally, apply for any business licenses that may be required.
Beyond Establishing a WFOE in China
Once you have set up a WFOE in China, you will need to put in the work to maintain the company and the business licenses. This includes administrative work such as monthly accounting, timely tax returns, renewals of paperwork and licenses, and auditing and filing procedures to name a few.
On top of that, there are the employment aspects of a WFOE to keep in mind. For instance, social benefits for employees are a crucial budgeting aspect of a business in China where 30-40% of a salary may be required to cover social insurance or allowances for housing. These requirements vary by locale and make the decision of where to ultimately establish a WFOE in China a significant component of a business’s success.
Our professionals at China Gravy and our extended network can help you not only set up the business using informed decisions but also complete important administrative and maintenance tasks to continue efficient and smooth operations.
A Look at WFOE in China Cost for Foreign Investment
It is also important to recognize the costs associated with WFOEs in China. The federal government has no standing minimum capital requirements. Foreign investors should be aware that local cities may impose their own standards as well as certain types of business licenses.
In general, the officials covering your application will have the discretion to determine if the invested capital is sufficient to cover the cost of operations until a WFOE might achieve positive cash flow, normally anticipated no sooner than two years. This capital investment also affects the ability to sponsor certain amounts of local employees’ residence permits, foreign employee maximums, amendments to company structure, and tax status or rebate applications.
The best course of action for foreign investors interested in establishing a WFOE in China is to begin to narrow down the best cities for business setup. From there, prospective business owners can begin to research the requirements or standards for capital investment for those particular locales and compare the advantages to the costs of establishment.
China Gravy is happy to assist you in setting up a WFOE in China or relocating your international business to the Middle Kingdom.
Besides, we take care of kickstarting your China business with smart digital marketing strategies on the most popular social media channels and China’s search engine number one, Baidu. Our one-stop solutions are all-inclusive, so you don’t have to worry about anything. Contact us today to start your business in China!
The Takeaway: WFOE in China
To sum it up, establishing your business abroad with a WFOE in China can lead to favorable market and financial conditions and many other benefits, especially in the face of digitalization.
Further options to set up a business in China are through a Rep Office or a Joint Venture.
China Gravy, with the help of its partners, is ready to help take your SME or digital nomad business to your ideal location. Contact our experts to set up a WFOE in China or explore other options such as a RO or JV. We make this process easy, affordable, and competitively profitable.
Email or call us today for your FREE CONSULTATION! Discuss with our experts about your ideal relocating situation abroad. See what possibilities await your business and digital nomad success!