Pros and cons of the Wholly Foreign Owned Enterprise (WFOE) 外商独资企业

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This article is the second in a series discussing the business entities available to foreign investors in China which are collectively referred to as Foreign Invested Entities (FIEs).

Below we describe some of the key features of another commonly used for of FIE, the Wholly Foreign Owned Enterprise (WFOE).

When to use a WFOE

You should consider using a WFOE if you have a long term plan for the Chinese market and want sole control of your business.  However, you need to consider whether the advantages of sole control outweigh the advantages a local partner’s expertise would bring if using a joint venture model.

Advantages of the WFOE

  • Autonomy
    Unlike some of the models available to foreign investors, the WFOE does not require cooperation with a Chinese partner. Autonomy has advantages; it can help streamline decision making and eliminate the risks associated with choosing the wrong business partner.

  • Legal status
    Unlike the Representative Office, the WFOE is a legal person under Chinese law and has limited liability. Having a local and legally-distinct presence has many advantages, including better protection of IP rights that in China can only be enforced in local courts.
     
  • Revenue and remittance
    Unlike a Representative Office, a WFOE can earn money in China and profits can be remitted back to the investor’s home country.

Disadvantages of the WFOE

  • Incorporation and timing
    Incorporating a WFOE can take several months and the process can be bureaucratic. This may include a series of authorizations from Chinese regulatory bodies including the Ministry of Commerce, the State Administration for Industry & Commerce, and the National Development and Reform Commission.
     
  • Defining what your business will do
    The activities of a WFOE are limited to those that are specified during the application process. This may limit companies’ ability to adjust their business strategy once in China.
     
  • Remoteness from local business knowledge
    Consider the advantages of independence in the market against the advantages of entering into a joint venture with a Chinese partner with local expertise and a ready-made local network. How to establish a joint venture and work with a Chinese partner will be discussed in future posts.

Likely changes in the law

The laws governing foreign investment in China look set to change in the near future. The Chinese legislature recently decided to expedite the enactment of a new foreign investment law. This new law would revoke the laws under which FIEs (including the Representative Office and the WFOE) are regulated.

Despite these changes, the WFOE will still be relevant for the immediate future as the timeline for implementation of the new law is uncertain. Once implemented, there will be a five year period during which FIEs can convert their corporate forms to comply with the new rules. The draft foreign investment law will be covered in greater detail in a future post.

The bottom line

Limited liability, autonomy, and better protection of IP are some of the advantages of operating through a WFOE. However, these advantages come at a time cost and could mean that you are missing out on a chance for local collaboration.

Our China Desk

Whether you are in the UK seeking to set up in China or a Chinese business or individual seeking to invest in the UK we will work with you and your other professional advisers to achieve your goals in an efficient and cost effective manner. We can support clients in their relationship with China by giving access to our network of “best friend” independent Chinese law firms. We advise UK-based investors seeking to set up business in China and provide UK law advice to Chinese corporates, individuals and collectives wishing to invest in the UK.

Click here to read our earlier article - what to consider if you are investing in China - published in January 2019.

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