Wholly Foreign Owned Enterprises
By Gregory Sy
Wholly Foreign Owned Enterprises (WFOEs) or limited liability companies whose investors are purely foreign are quickly becoming the most popular method of foreign investment in China. While foreign companies once thought (and were often compelled by laws) that a local partner was necessary to operate business in China, this is increasingly no longer the case in a wide range of industries.
Characteristics of WFOEs:
- Between one to fifty shareholders
- Restricts the right to transfer shares
- Prohibits public offering of shares
- Equity is divided based on contribution to registered capital and not allocation of shares
- Liability is limited to the amount of registered capital contributed
WFOEs are governed by the Law of the PRC on Enterprises Operated Exclusively with Foreign Capital, and relevant implementing regulations.
Advantages of WFOEs:
- Management control
- Simpler establishment procedures
- Easier to terminate
- Easier to increase investment
- Protection of intellectual property
Disadvantages of WFOEs:
- Lack of experience and local connections
- May not be listed on stock exchange
There are a number of steps required to establish a WFOE:
- Filing of articles of company introduction letter, articles of association, feasibility study, and other corporate documents with the local foreign commerce bureau for approval and issuance of Foreign Investment Approval Certificate.
- Collateral filings with other government authorities such as:
* Local and national tax bureaus
* Foreign exchange bureau
* Customs bureau
* Statistics bureau
* Public security bureau
- Within 30 days of obtaining Foreign Investment Approval Certificate, obtain temporary Business License from the Administration for Industry and Commerce
- Make Registered Capital Contributions and Audit by Domestic Accounting Firm
- Submit investment report to Administration for Industry and Commerce to obtain Permanent Business License
A company name must be in both English and Chinese, though, for practical purposes, only the Chinese name is important. It cannot be identical or similar to a previously registered company name. The name can be pre-reserved for a period of up to six months, which will expire if not used for establishment purposes during this time.
Unlike companies in many western nations where they are permitted to do any range of business activities unless otherwise stated in laws and regulations, foreign investors in China are required to define their company’s business scope at the outset of operations and must conduct business within this scope, subject to modification through re-application.
As per the business scope defined, a foreign investor will be required to invest a certain minimum amount of capital which must be registered or recorded with the appropriate authorities as having been made to the WFOE. Generally, this amount will range from RMB 30,000 to several million RMB for larger projects. Capital must simply be invested into the company and recorded as having been made with the local administration for industry and commerce.
Shareholders must all be foreign and there must be between one to fifty who hold an interest in the WFOE.
The WFOE must designate a board of directors (or single director) who shall act for the initial term of office (as set out in the articles of association).
Only one individual may bind the WFOE through simple signature (without use of company chop), and they must be designated as the Legal Representative in the formation documents.
At a minimum, the WFOE must designate its first general manager.
From a purely legal perspective, the directors, senior managers, supervisor and other senior personnel do not have to be a resident in China, though it may be more practical to do so.
At least one individual who is not a Director or Senior Manager must act as the WFOE’s supervisor.
Each company must have a unique physical address at which the company is registered. Unlike other nations in which virtual offices are permitted, China requires that a company have a physical office space.
Within three months of the end of each calendar year, the WFOE must undergo an annual inspection. Prior to the annual inspection, the firm must hire a domestic accounting firm to conduct an audit of the books.
This is the second part of the Grandall Legal Group article Business Vehicles, next week we will publish the third part. Here you can find part I.
Gregory M. Sy is a partner / foreign counsel with Grandall Legal Group. His practice includes general business advisory for SME’s in China, particularly in the areas of international corporate structuring and transactions. Representative clients include the Consulate of the United States of America in China (Shenyang), Embassy of Brazil, various publicly listed companies (NYSE, LSE, DAX, and BSE), along with numerous other SME’s operating in a wide range of industries. Mr. Sy obtained an LL.B. from the University of Victoria, and is admitted to the New York bar. Gregory publishes extensively on a variety of China legal issues for international and local publications, and has recently acted as chief editor for Martindale’s China Law Digest. You can contact Gregory at firstname.lastname@example.org or learn more about the firm at www.grandall-profile.com.