Expanding into China: Choosing between a WFOE, Rep office and joint venture

 

14 May 2019   |   Guide

One of the most important things about doing business in China is to choose the correct company type. Which one you should choose among a WFOE, Rep Office and Joint Venture? What’s the framework and procedures of each?

 

Corporate establishment/registration/incorporation in China for foreign enterprises is usually possible via three main company types. These are Wholly Foreign-Owned Enterprises (WFOEs), Joint Ventures (JVs) and Representative Offices (ROs). 

Each investment form has its own merits and drawbacks and the right choice for you will be dependent on your organisation's goals and strategy for China market access.

 

Setting up a WFOE in China:

Widely accepted as the most popular entity for doing business in China, WFOEs in China are investment vehicles entirely owned by foreign (i.e. not Chinese) natural and legal persons.

WFOEs in China are Limited Liability Companies (LLC) with shareholders held liable for the company’s debts or liabilities only up to the registered capital under the PRC new Foreign Investment Law.

They (WFOE) represent the most viable way for foreign investors whenever revenues and profit-making activities have to be undertaken directly and without local partners involved at a shareholding level.

 

What is the minimum investment required to set up a WFOE?

Different industries have different registered capital requirements (equity and investment) for WFOEs but since the Company Law update back in 2014, minimum registered capital indications have been abolished, with no minimum investment to set up a WFOE provided that activities do not involve one of the regulated industries (i.e. securities, insurance, banking).

Although the recent liberalisation, it’s highly suggested to evaluate the blueprint of similar investments in the same industry and consider the registered capital as the main financing wallet of the China venture being its total amount dedicated to actual working capital.

Commonly, a trading company will opt for 300,000-500,000 RMB to secure its import/export license (in case of e-commerce operations TMALL has 1,000,000 RMB as threshold for brand stores), 100,000-200,000 RMB  for a general consulting firm, and 600,000-700,000 RMB as a minimum for a Manufacturing WFOE in China.

Especially when venturing alone in China, it’s important to understand that different municipalities and regions suit different types of industries. For example, Shanghai is known to be famous for finance, automobile, chemical, logistics investment whereas Shenzhen  is developing itself as Hi-Tech powerhouse for smartphone, IT equipment, home appliances robotics and drones.

Other factors to take into account when finding the right place can be government regulations (especially in terms of environmental impact), infrastructures and trading routes plus the customers and distributors base.

Typically, coastal provinces, large and first tier cities as Shanghai, Suzhou, Guangzhou, Beijing, Shenzhen and Hangzhou might be crucial to encounter authorities and a network of supporting services familiar with challenges for Foreign Invested Enterprises.

 

What can you do with a WFOE in China?

Different types of WFOEs in China are required for different business activities.

Trading WFOE can import its goods and products to China or export them from China to the rest of the world or simply handle domestic trading within China with the modification of those goods (packaging aside) forbidden by definition.

Consulting WFOE will mostly provide services and would face a shorter registration process given the lack of registration at the Customs and Quarantine Inspection authorities.

Manufacturing WFOE allows their shareholder to enact a full supply chain made of purchase, processing and trade/wholesale of finished products and spare parts.

Manufacturing WFOEs will have to be registered in industrial parks or manufacturing premises with reports for Environmental Impact Assessment Approval or Online Filing and Anti-Fire inspection as pre-requisite for their entrance into business.

With a WFOE in China you will be able to:

  • Employ local staff directly and ensure their contributions to Social Insurance and Housing Fund;

  • Independently decide and oversee your Group strategy for China without a Chinese partner;

  • Issue invoices with VAT available for deduction and receive payments in RMB/foreign currency;

  • Legally cover your China office premises, activities and operations with the Business License required by China’s authorities;

  • Access local grants and funds from government authorities and loans or financing in RMB from Chinese and overseas Banks.

Different Types of WFOE

Function

Duration

Manufacturing WFOE

Manufacture and Resell goods and products

More than 5 months

Trading WFOE

Trading, Wholesales, Retail or Franchise in China

Within 4 months

Consulting WFOE

Consultancy & Services

3 months

 

Different Types of WFOE

Suggested Registered Capitals (RMB)

Manufacturing WFOE

600,000+ (USD90,000+)

Trading WFOE

300,000+ (USD75,000~140,000)

Consulting WFOE

100,000~300,000 (USD15,000~50,000)

F&B / Hospitality WFOE

500,000~1 million (USD75,000~140,000)

Hi-Tech WFOE (AI, Software)

100,000~300,000 (USD15,000~50,000)


How easy is it to set up/incorporate a WFOE?

The standard process of setting up a Wholly Foreign-Owned Enterprise takes 60 days with 2 main sections of activities: pre-registration and post-registration.

Pre-registration requires the submission of a number of business-related documents including passport copies of individual investors or notarized documents of the controlling entity.

Post-registration requires companies to formally register with a number of Chinese government agencies using the Business License issued by the local Administration for Industry & Commerce.

There are two main types of Joint Ventures available in China:

  • Equity Joint Venture (EJV): an independent legal entity with limited liability. Profit and risk sharing in an EJV are proportionate to the equity of each partner in the EJV.

  • Co-operative Joint Venture (CJV): a CJV’s profits are allocated according to the terms of the co-operative venture contract rather than the proportion of their input in the registered capital, which offers greater structural flexibility over an EJV.

 

What is the minimum investment required to set up a Joint Venture?

There is no minimum investment requirement for Chinese partners in a JV project, however China’s EJV Law still requires that the foreign party contributes no less than 25% of the registered capital.

Additionally, just like for WFOEs, JVs are still subject to borrowing gap limitations as showed in the below table:

 Size of investment (US Dollar)

Share of registered capital

 Less than 3 million

70%

 Between 3 million and 10 million

50% 

 Between 10 million and 30 million

40% 

 More than 30 million

30%


What can you do with a Joint Venture?

Fewer and fewer sectors now require a Joint Venture in exchange for market entry as China has moved from an investment catalogue of industries open to foreign investors to a Negative List showcasing fewer and fewer closed-door exceptions every year.

JVs are often a favourable option for innovative endeavours facing potential resistance where a Chinese counterpart might imply getting a stake in the local market and a partner that shares strategic goals and on the ground knowledge.

 

How easy is it to set up/incorporate a Joint Venture?

Joint Venture agreements and Corporate Governance structures to be completed and signed off before pre-registration steps usually delay the typical time frame described for WFOEs.

Intellectual property, management blueprints and operational control in areas such as expected revenues and ROI, people and finance are all topics to be discussed and solved beforehand in order to ensure a smooth process in terms of documental licensing.

Find out more details about Setting up a Joint Venture in China.

A Representative Office is a local window established by a foreign company in need to represent its activities like market research, PR and suppliers visits.

Since it is not an independent legal entity, it cannot participate in any direct commercial activity generating revenues or profits and it can only be set up by foreign entities with minimum 2 years of existence in the relevant jurisdiction.

 

What is the minimum investment required to set up a Representative Office?

There are no registered capital requirements for a representative office but local expenses need to be handled via overseas remittance from the foreign company.

Set-up costs and timeframe are usually lower than the ones for a WFOE however de-registration processes are as complex and time-consuming as the ones reserved for the latter.

A physical address in a commercial building is still required just like for consulting and trading WFOEs.

 

What can you do with a Representative Office?

Permitted activities include:

  • Business development

  • Establishing partners

  • Rendering advice

  • Preparation of market studies and general collection of information

  • Liaising with authorities and business partners

Foreign employees can be hired as Chief Representative and General Representatives of the local office whereas Chinese employees cannot hold a direct labour relationship with the RO, in this case, a registered HR dispatching agency is needed to undertake contractual duties.

In essence, a RO holds the status of a physical office and enables the activities of foreign/Chinese staff deadlines with distributors, agents, and suppliers of the parent company.

 

How easy is it to set up/incorporate a Representative Office?

While this is perhaps the simplest to set up because registration can often be completed within a few weeks; de-registration can be a very lengthy process, particularly where there are more complex structures involved. 

Attitude 

Industries

Prohibited

Railway, Shipping, Freight, and Oil & Gas field ownership. In such industries, it is common for foreign investors to establish entities that can provide services to Chinese owners

Restricted

(This applies to Joint Ventures only) Mining, Pharmaceuticals, Oil & Gas, and Tobacco. In a joint venture within China, the Chinese party must hold the majority

Encouraged

Consulting, Manufacturing, and FICE (Foreign-Invested Commercial Enterprises) i.e. trading. This applied to Wholly Foreign-Owned Enterprises (WFOEs) and some Joint Ventures.

*Including but not limited to

Company Types

Complexity  

Setup Time Frame

Structure

WFOE

 Medium

 2-5 months (depending on the business scope)

 100% Foreign investment

Joint Venture

 High

 5+ months

 Partnership

Representative Office

 Low

 Few weeks

 No actual & direct “business”

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