Foreign Direct Investment

A wholly foreign-owned enterprise is a private, limited liability company that is 100 percent-owned by a foreign entity. It is now the most popular option for foreign companies to establish a permanent presence in China.

The Chinese Government strongly favours WFOEs - the rules governing them are more flexible than those for joint ventures as you retain 100 percent control and the set-up time is shorter.

They now come in many forms, depending on needs. This needs to be addressed during the application process, which defines your scope of business licence. WFOEs are available for:

  • service companies
  • consultancies
  • trading
  • manufacturing.

WFOEs are often set up in bonded or export processing zones for production in China which can avoid import restrictions for goods being re-exported (including relatively high tariffs) and provides businesses with greater control over both intellectual property and marketing.

The key is to get a wide scope of operation when you apply for a licence. This can keep future costs down and allow you to run other operations as your business changes.

WFOEs are able to issue invoices and receive payments in RMB that can then be remitted back to New Zealand after taxes have been paid.

Under normal circumstances, the minimum capital required is 1 million RMB, 15-20 percent of which must be paid within 90 days of incorporation. The balance must be put into a designated registered capital account within two years. Capital, once registered, can be used for any normal business purpose. Registered bank accounts can also be established earlier and funds counted towards registered capital prior to receiving your official business licence for setup costs and doing due diligence.

Lower levels of capital, down to 100,000 (RMB) are possible in very limited circumstances. Some business types have a minimum registered capital of certain levels in order to qualify for VAT tax registration, without which you cannot invoice.

It is also easier to protect intellectual property rights using a WFOE rather than a joint venture.

Once your company name and application to set up a WFOE is approved, you will need to apply for a business license. Then you need to register the business with several government agencies, including tax, customs, and foreign exchange administrations.

Foreign companies in the previously off limit areas of China trading (import-export, retailing, wholesaling and distribution sectors), though classified as WFOEs, are referred to locally as foreign invested commercial enterprises (FICE). Application procedures and rules for FICEs are different from those of normal WFOEs.

When getting help to establish a WFOE, be wary of using a local agent who will often follow the standard steps without considering your particular requirements or needs.

The worst case scenario is a company finding itself unable to perform some 'assumed' functions. The business scope or articles are very difficult to change later so you need to get it right from the start.

Get help from someone who understands your particular needs and will not do a pro forma application.

Also adding certain clauses into standard articles may allow for easier repatriation of profits or other items - such as scope of business, total investment, management control, intellectual property registrations and royalty streams, currency repatriation and liquidation conditions which a company can foresee it will need in the future. If accepted by the authorities the clauses can save time and effort in the future.

For a list of consultancies and professionals that could help Kiwi companies establish WFOEs, contact New Zealand Trade and Enterprise.

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