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
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.