Wholly Foreign-Owned Enterprises (WFOEs)
Manufacturing, Processing & Assembly

Wholly Foreign Owned Enterprises (known colloquially as ?woofies?) have become the investment vehicle of choice for the international investor wanting to manufacture, process or assemble in China. According to MOFCOM statistics, WFOEs accounted for 66.4% of total investment in 2004, compared to 27% in 1995.

Their popularity arises from the fact that they negate the need for a Chinese partner, with all the attendant potential problems, and do not require large amounts of registered capital. Although in essence designed to be used for facilities involving production lines, they have under certain conditions also proved suitable for service industries, albeit with some restrictions over location. Manufacturing WFOEs, with an eye on export, may also enjoy significant tax and other incentives if based in Free Trade Zones or Export Processing Zones.

WFOEs are limited liability companies established under Chinese company law. The shareholders are 100% foreign, usually a single international business that owns the company outright. Limited liability is recognised by the amount of registered capital injected into the business, and you should note that this varies from industry to industry and also on a regional basis. So, if the location can be flexible, it makes sense to shop around and compare regional differences.

But having set up a limited company does not necessarily mean you can engage in any kind of business activity, as is the case in some Western countries. WFOEs can only be operated within the scope of business approved by the authorities. Other activities are subject to further approval. So it is vital to determine what you want do right from the start.

Different types of WFOE operations require different kinds of structuring. How to go about it depends on what you want to achieve.

If you wish to conduct manufacturing, processing and assembly, 100% for export, then the authorities will reward you with many incentives and tax breaks. If you are sited in a FTZ or EPZ, you may not even have any import-export duties to worry about. Basic tax breaks are against Profits (Income) Tax, being 33% nationally and as low as 15% in many development zones. Wherever you are, the tax breaks will normally be based on the first two years of profitability being 100% free, with the next three years being 50% free, although in some north-eastern locations it may be more than this. Note this is against profitability, not the age of the business. However, certain sectors, such as agriculture and high-tech, can offer breaks at five or even eight years. If you export 100% of your production, then more incentives kick in, and various other elements, depending on your location.

On the other hand, if you are doing manufacturing, processing and assembly, with part or all going to domestic sales, this fundamentally changes the tax structure, as the WFOE is then subject to VAT and Import Duties on Imported components. Getting a decisive tax organizational structure in place if you are also exporting is vital if you are to be able at all to claim back these following re-export, so obtaining professional advice is key here or you can lose out on rebates. Under WTO rules introduced in 2003, WFOEs can now sell the majority, if not all, of their production domestically, thus tapping into the increasingly attractive local market. It is still wise, however, when structuring your WFOE to include a provision allowing you to sell product onto the domestic market ?according to China?s WTO agreements?, thus permitting you to upgrade your domestic sales quota automatically. You still get the tax breaks, but won?t qualify for rebates on FEIT or other taxes as these only apply to WFOEs exporting 100% of production.

The other key aspect of WFOE creation is the company?s Articles of Association. These must be dealt with in detail ? there are pitfalls here for the unwary. You need to cover issues such as scope of business, production scale, total investment, the board of directors and the General Manager?s authority, profits repatriation, trade unions, M&A, and liquidation. Establishing WFOEs is not just a simple application procedure ? it requires a knowledge of Chinese law and tax to end up with the optimum set of business rules for you to maximise your chances of success and your ability to make money and get as much as you can back home.

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