Setting up a Wholly Foreign-Owned Enterprise (WFOE) in China: Everything you need to know

Wholly foreign-owned enterprises are one option for businesses and entrepreneurs looking to expand to or trade in China. Often shortened to simply WFOE, this business structure can be used across a range of enterprises in manufacturing, consulting, services, wholesale, retail and trading.

If you want to grow your business in China this guide is for you. We’ll run through the full WFOE meaning and definition, WFOE in China requirements by enterprise type, and the importance of preparing an accurate WFOE business scope. We’ll also cover how you can save when you send USD and EUR payments to businesses in China, with Wise. Let’s dive right in.

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What is a WFOE in China?

A WFOE is a wholly foreign-owned enterprise in China. Businesses of this type are covered by specific laws and rules which govern how they are set up, taxed and operate on a day to day basis. As well as national laws, there can be regional and local variations on how rules are interpreted and implemented, which means you’ll need to be clear about the specific requirements in the location you’re setting up business.

As with all legal and operational aspects of running a business, it’s crucial you fully understand the WFOE requirements before you start your journey to expand in China. Take professional advice to make sure you understand your options - the information in this guide is intended as an introduction only, and can’t replace individual support from specialist advisors.

WFOEs aren’t your only option if you want to trade in China. Other business structures such as opening a representative office, launching a joint venture or partnership enterprise are also available. However, the WFOE structure is one of the most popular ways to do business in China, thanks to the control and independence owners have - and the fact that profits may be converted to foreign currencies and remitted to the parent company overseas.

WFOE advantages and disadvantages

Let’s start with an overview of some of the key pros and cons of a WFOE business in China, to help you build a picture of how it may work for you.

Types of Wholly Foreign-Owned Enterprises

WFOEs are roughly split into 3 different types, according to the business area they work in. These include:

• Manufacturing WFOEs
• Consulting WFOEs - these businesses could be in consulting or other related services
• Trading WFOEs - covering businesses in the trading, wholesale, retail or franchise sector

The rules which apply to all types of WFOE are similar, but some requirements, such as capital investments do vary according to the specific business area you’ll work in. We’ll look at this in a little more detail later.

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WFOE requirements

If you’re a foreigner looking to do business in China, setting up a WFOE may be a good option, depending on your long term vision for the company, and the type of business you intend to run. Let’s take a look at a few important requirements before you get started, including the documents and capital needed to register your WFOE.

Documents needed to set up a WFOE in China

Before you get started applying for your business registration, make sure you have all the documents required according to your business type. You’ll also need a company chop before you can start to trade. While the documents needed to register your WFOE will vary, you can expect to need:

• WFOE application and feasibility study
• Business documents relating to the parent business - Certificate of Incorporation, Articles of Association or any relevant registration documents for example
• Structure chart showing the business ownership structure as well as people holding key positions such as directors and legal representatives
• Business scope document - more on this below
• Personal information and identity documents for business owners and those in controlling positions, including proof of creditworthiness
• Proof of minimum capital needed according to business scope

WFOE business scope

One of the first things you’ll need to do before entering the world of the WFOE is to come up with your WFOE business scope. This is important as it defines the business areas you’re legally allowed to operate in. Your approved WFOE business scope will be a short description, which is printed on your business license. It summarises the type of work you do, how large your company is, where employees come from and so on.

Business types are split out according to the Foreign Investment Catalogue, and can fall into different categories:

• Encouraged
• Restricted
• Prohibited
• Permitted

As you may expect, setting up a WFOE in an encouraged business area will be far easier than trying to get the paperwork in order to work in a restricted industry type.

Once you have defined your WFOE business scope you can only work within this definition - if you decide to pivot your business you’ll need to amend your registered business scope to trade legally. There’s a relatively complex formal process to define and approve your business scope with the authorities both nationally and locally - take advice with this step to make sure you get it right first time.

WFOE minimum capital requirements

WFOEs are limited liability companies, and are required to have a minimum registered capital to operate. There is not a specific minimum registered capital requirement set out in law. Instead, the amount of capital needed will vary according to the business type and operating location, as set out in the WFOE business scope.

Figuring out the minimum capital requirement for your own business will take a little research - consultancies which support foreign businesses setting up WFOEs in China do provide a rough guideline, but this is a highly individual topic. It’s good to know that the amount of registered capital you need will also vary according to the city you choose to set up in - if you’re looking for a range of options and are flexible on the ultimate location of your business office, it may be worth building a picture of the requirements in some different areas.

Here are some rough estimates of WFOE minimum registered capital to start your thinking.

WFOE registration

Registering your WFOE takes several steps, which can vary depending on the type of business and where in China you’re basing yourself. The broad steps required will be similar for all WFOE businesses, but there could be additional requirements to consider which you’ll want to know about in advance. Taking professional, individual advice is essential.

Here’s an overview of the key WFOE registration steps to get you started:

• Choose a business name which fits Chinese business name requirements
• Gather the documents required to register your WFOE, which can vary based on the type and location of your business
• Apply for your business licence with the Ministry of Commerce (MOFCOM) and the Administration for Industry and Commerce (AIC)
• Register for business taxes - this may need to be done on state and local levels
• Register with other authorities - requirements can vary according to the type of business you run
• Open a CNY bank account to use with your new WFOE

How much does it cost to set up a WFOE in China?

Although the set up steps laid out above may look straightforward, getting your WFOE in China up and running is likely to be a complex and time consuming affair. The exact process will vary depending on the type and size of business you’re proposing, and where in the country you will be based. It’s most common, therefore, to get professional support from one of a range of sources, when setting up a Chinese WFOE. Naturally this will mean you need to pay a fee - which is in addition to your minimum capital requirements. Here are a few of the options, and a rough amount you may anticipate paying.

Taxation of WFOE

WFOE businesses will pay tax in China, with a range of different taxes applied according to the business type, structure and turnover. Taxes which may apply include:

• China corporate income tax at the prevailing rate - at the time of writing this is 25%
• Personal income tax on any salaries earned in China - variable based on income level
• VAT according to the type of business - expect around 6% - 17%
• Business tax if applicable
• Dividend tax if applicable

Tax is always complex, and when you’re running a business in a different country it’s compounded by unfamiliar rules and the potential impact of double taxation treaties. Take professional advice to make sure you stay on the right side of the law.

While opening a WFOE in China is not a straightforward process, it can still be an excellent opportunity for entrepreneurs and business owners looking to expand. If you’re thinking about setting up your own WFOE, use this guide as a starting point, and don’t forget that you could keep more of your profits with Wise business payments.

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