This is the most common option used by foreign investors to access the Chinese market. One of its principal advantages it that its incorporation does not require the participation of a local investor.

Company Formation in China

The Wholly Foreign Owned Enterprise (WFOE), also known as WOFE, is a limited liability company with full foreign ownership. This is the optimal structure for companies that plan to have long-term business interests in China while seeking to maximize control and flexibility in business decision-making.



As the name suggests, one of the main advantages of the WFOE structure is autonomy and control. This gives room for the WFOE to quickly and flexibly implement the worldwide strategy of a parent company. The WFOE structure can help better protect intellectual property. Other advantages include efficiency in operations and development, convertibility of RMB profits and full control of human resources.

WFOE: Key points

Offers the greatest range of permitted legal activities

Best suitable investment vehicle for establishing a long-term presence in China

Ability to provide a wide variety of services within their business scope

Can sell China-made products directly to Chinese consumers

Characteristics of a WFOE in China

Is a limited liability company;

Has capital entirely owned by its foreign investors (not Chinese);

Allows investors to retain control of strategic decision making;

Offers operational and management flexibility;

Is ideal for long-term investments in China.

Why choose a WFOE?

The process of China WFOE formation offers numerous advantages compared to other types of company incorporation options:

Authorization to operate in numerous sectors of activity;

The right to carry out commercial activities and to invoice Chinese clients;

Control and autonomy are retained by the foreign investors;

Strategic decisions by the parent company are applied in a flexible and fast manner;

Better protection of intellectual property rights;

The potential to sell products made in China, and to sell them to Chinese clients;

The potential to convert RMB profits and to repatriate them to the parent company;

Exemption from the obligation to obtain a license for the import and export of products fabricated by the WFOE;

Exclusive control of human resources.

Difficulties encountered during the creation of a WFOE in China

The finance of this type of vehicle can only come from abroad;

The process of creating a WFOE is long and requires the approval of several authorities;

The risk of error is high, and the consequences can be serious;

The imperativeness of adapting to the differences in regulation between China and elsewhere is crucial.

Find out all you need to know about WFOEs and the conditions required to establish one.

The establishment of a wholly foreign-owned enterprise in China can present numerous challenges. INS Global Consulting helps you through the process, allowing you to benefit from all the advantages of this structure. You can also make use of our experience and our professional network, established in 2006.

WFOE: pre-establishment considerations

WFOE business scope

A WFOE’s business scope is a one-sentence description of the company’s activities within China. Once written and approved, it’s printed on the company’s business license. A business scope answers questions like the number of employees, the nationality of the employees, the kind of work that they will perform, activities of the business, who are the target customers of the business, where the income will go, among others.

► Function of the business scope

The one-sentence business scope affects a company’s legal operations and its ability to issue official invoices to clients.

This is a crucial aspect, since clients may be unable or unwilling to work with you if you’re unable to issue correct invoices (fapiao). Clients require the correct fapiao in order to offset value-added tax liabilities and receive reimbursements.

► Challenges of establishing the business scope

The business scope is typically passed quickly by requisite administrative government offices. However, it then goes to the state and local tax bureaus that do a thorough check.

Since further application and approval would be required to amend the business scope, it should be prepared carefully and agreed on before incorporation.

In order to prepare the business scope properly, you would need to be familiar with the Foreign Investment Industries Guidance Catalogue, which lists the industries that are encouraged, restricted and prohibited for foreign investment into China.

Here are the categories in the Foreign Investment Industries Guidance Catalogue, released by the Ministry of Commerce (“MOFCOM”) and The National Development and Reform Commission (“NDRC”): Encouraged industries: Includes planting, developing and producing woody edible oil, ingredient and industrial raw material; prospecting, exploiting, and beneficiation of scarce mineral resources in China (like sylvine and chromite); developing and producing forest food; cleaning processing leather and fur; Producing fluorine recycling from phosphorus chemical and aluminum smelting.

Prohibited industries: Includes processing and producing nuclear fuel; producing genetically modified plant seeds; processing petroleum and coking; producing sound and video recordings and electronic publications; tobacco sales; operating antique stores and auction houses selling Chinese cultural relics; Chinese legal consulting (excluding providing information relevant to Chinese legal environment); operating theater line companies.

Restricted industries: Includes exploring and mining plumbago; producing satellite television receivers and key parts; corporate of highway passenger transport; status enquiry and grade service companies; constructing and operating large theme parks. You can read the extensive, official list here. If your particular industry isn’t listed as prohibited, restricted or encouraged, for now, it’s “deemed as allowed”. Negotiation would be required if Ministry of Commerce (MOFCOM) and Administration of Industry and Commerce (AIC) authorities find the proposed activities in your WFOE scope to be formally or informally restricted.

► How to change the business scope?

The process of changing a Chinese WFOE’s business scope is complicated and time-consuming, lasting several months.



Here are the steps involved:

Shareholders resolution for change of business scope. Application to AIC for the change of business scope, in accordance with the shareholder resolution. Obtaining and filling out the registration form to change the business scope. Obtaining a new business license. Tax registration.

Registered Capital

Registered capital refers to the amount of capital that would be sufficient to support a WFOE’s activities for a minimum period of one year after establishment. Currently, there is no fixed rule as regards the minimum Registered Capital. However, prospective investors have to understand that injecting less Registered Capital can result in severe cash flow challenges and that the transfer of funds from overseas for purposes of increasing the Registered Capital later will require re-registration of the minimum capital. Otherwise, the funds will be treated as income and taxed accordingly.

► Calculation of registered capital

The WFOE’s registered capital shouldn’t be too little, which would lead to rejection of the enterprise application and risk insolvency. It shouldn’t also be too much, leading to idle funds and missed opportunities.



The sufficient amount of capital varies based on such factors as the WFOE’s industry, the region of incorporation, among others.

This is what a typical registered capital would be for WFOEs in various industries:

This is what the typical Investment to Capital Ratios would look like for manufacturing WFOEs:

► Regulation of registered capital

Investors have the freedom to choose the period of contribution of the registered capital. Here, the Articles of Association specifies the schedule of contributions.

Based on the Company Law of the People’s Republic of China, the Articles of Association (AoAs) should be made before a WFOE company can apply to be set up. The AoAs provides detailed rules of such aspects as the company’s management structure, rights, business activities, share transfer and obligations.

Currently, there’s no formal requirement on the amount of registered capital and when it must be contributed, and no fixed rule on the amount of each contribution of capital. However, as a business standard, you need enough capital to cover the WFOE operations, including employee salaries, utilities, rent and government taxes/ charges.

Moreover, the past requirement that 30 percent of registered capital consist of cash contribution no longer applies. Note that the Ministry of Commerce (MOFCOM) closely examines the proposed registered capital contribution to assess whether it’s sufficient to support a WFOE’s activities for a minimum period of one year after establishment. Registered capital must be injected from outside China, by the overseas investor. It can be paid in cash, or through installments or as a lump sum. Once paid, it cannot be freely wired out of China.

► How to proceed if an extra injection of capital is needed

An injection of additional capital may be required to increase the WFOEs official Registered Capital. This is a tax-free transaction. However, the disadvantage would be the time-consuming process of amending the WFOE’s business license in accordance with the increased Registered Capital.

A more rapid alternative to funding the WFOE’s operations would be a related-party transaction between the WFOE and its parent shareholder. This way, the parent company receives consulting services from the WFOE and the WFOE, in return, receives payment to fund its activities.

The downside with this second option is the tax implication, since the transaction would be subject to VAT and corporate income tax.

► How does RC vary according to industries?

WFOEs operating within most industries have no minimum required registered capital. Such industries include retailing, trading, consulting, and information technology.

The typical minimum capital commitment for a basic consulting WFOE would range from RMB 200,000 to 500,000. This is low compared to what a manufacturing WFOE would require. On the other hand, such industries as banking and forwarding have a required minimum registered capital requirement.

Personnel Requirements

In any WFOE, the shareholder(s), who raise the capital, form the company’s highest authority. A WFOE should either have an executive director or a board of directors, who set the company’s agendas per the decisions of shareholders.

According to Company Law, all WFOEs should have at least one supervisor who oversees the performance of company duties by its directors as well as top management personnel. To avert any conflict of interest, all directors and the senior management personnel are not allowed to concomitantly act as supervisors. A relatively small company with a few shareholders can have one or two supervisors. However, bigger companies are required to have a board of supervisors of not less than three members.

Any board of supervisors must be made up of the shareholders’ representatives, and not less than one-third of the board members should be made up of the company staff and workers’ representatives. The precise ratio should be clearly specified in the company’s articles of association. There should be one chairman of the board of supervisors, whose election must be endorsed by more than 50% of all supervisors.

A WFOE should have a general manager whose responsibility is to run the day-to-day company operations. The general manager can be one of the members of the board of directors or the executive director.

Lastly, a WFOE can employ local staff directly without going through employment agencies. The law does not stipulate any restrictions on hiring foreign staff. However, in practice, the number of foreign workers depends on the amount of social capital (social relations with productive benefits) a WFOE invests.

Tax Planning

Income tax and VAT are key considerations for WFOEs in tax planning.

► How does the taxation on WFOEs work?

Understanding how taxation on WFOEs from Shanghai works would help you determine the deductible costs you incur during the setup process.

Take note of the pre-operation period, starting from the day of company name confirmation from the AIC or the establishment date on your business license, to the date when the company first generates revenue or issues its first invoice.

If you provide valid tax invoices, some of the costs of this pre-operation period can be deducted on your income tax. These include wages, printing fees, training fees, registration fees, transport fees, and purchases of non-fixed assets.

As much as WFOEs are allowed to repatriate funds to an overseas shareholding entity, it would be vital to take know that funds can be repatriated using loans or dividends only if the recipient company is a shareholder of the WFOE.

For instance, in the U.S., a China-based WFOE repatriating profits to a shareholding company in the United States through dividends will be subjected to a 10% Withholding tax (WHT), depending on the DTA existing between the U.S. and China. The WHT paid in China might be claimed in the U.S. as a foreign tax credit, to cut down on the income tax burden of the shareholding company.

It is important to bear in mind that not all profits can just be repatriated. Some requirements must be met before any distribution of dividends. A fraction of the profit (Not less than 10% for WFOEs) should be put in the WFOE’s reserve fund account up to a time when the reserve holding hit the 50% mark of the WFOE’s registered capital.

A WFOE can also remit undistributed profits to a U.S. based sharing company through a loan to their overseas shareholder. The interest income of the WFOE will be subjected to a 25% Corporate income Tax (CIT) as well as a 5% Business Tax. However, the CIT paid in China might later be used to offset any U.S. income tax liability sustained as per the terms of the US-China DTA.

A WFOE can also repatriate funds as a service fee by putting pen to paper in a service agreement between them and a company abroad. He service fee will then be subjected to a 6% value-added tax (VAT) as well as related surcharges, and probably CIT too (about 3.75 to 12.5%), which depends on there being a “permanent establishment (PE).”

WFOEs would be registered as general taxpayers to obtain such VAT deductions.

All investors of WFOEs in China are required to select an official investor shareholder of the companies. This shareholder could be the final beneficiary of all undertakings in China or could just be an intermediary structure, which is commonly referred to as a holding company and, in most cases, set up outside China. Further tax benefits can be derived by using a holding company as an intermediary holding structure to be the formal investor shareholder of the WFOE. Investors would then enjoy preferential tax treatment by locating the holding company in a region having favorable tax treaties with China.

Traditionally, investors might have been in a position to derive certain preferential benefits by ensuring that the location of their holding structure is in a legal jurisdiction with a considerate tax treaty with China. A good example of such a country is Hong Kong. As much as this continues to form the basis of using a holding company while establishing a WFOE in China, the analysis may no longer be straightforward as it used to be. Several countries which are home to customary foreign investors such as the Netherlands, UK, and Ireland have managed to negotiate reasonable tax treaties with China, hence doing away with the need to locate their holding companies in countries such as Hong Kong. As a matter of fact, the ability to qualify for favorable tax benefits has been made more difficult, as the Chinese government authorities have moved to seal any loopholes that are open to abuse.

The other simple and straightforward reason as to why setting up a holding company is important is that, if the investors may wish to change the WFOE’s shareholders at any later stage – mostly happens during divestiture or restructuring – it becomes much easier and quicker when done outside China. Doing this in China normally needs a tax clearance, a potential formal valuation of the WFOE, as well as official updating of the WFOE’s registration records with the concerned Chinese government agencies. This could easily drag on for months, generate considerable tax liabilities – which need to be cleared before proceeding, and any change of shareholders could be blocked by the Chinese government – in theory. However, this could be done in matter of days in certain jurisdictions.

► Annual compliance procedures

The annual compliance procedures include: annual audit, corporate income tax (CIT) reconciliation, foreign currency reconciliation, annual tax filing and annual inspection, plus other region-specific requirements.

Here is an illustration of the annual compliance timeline (subject to regional variance):

Annual audit

Annual audits ensure that WFOEs meet official Chinese financial and accounting standards.

Audit procedures take approximately 4 months. Certified Public Accounting CPA firms start preparing the reports in January, immediately after closing the previous year’s account, and complete it before the end of April to meet the tax filing deadline on May 31.

Annual inspection

This is mandatory for all enterprises registered in China. Failing inspection would affect the company’s qualification for a business license.

It starts from January to the end of June

Annual inspection involves completing the relevant information and submitting forms to: The Tax Bureau, the Foreign Investment Administration Department, the Economic Committee, the State Administration for Industry and Commerce, the State Administration of Foreign Exchange, the Finance Ministry and the Customs Bureau.

► Which taxes is your WFOE subject to?

The turn overtax involves such taxes as:

Business tax for consulting and service enterprises. This is based on the business turnover.

VAT tax is applicable to manufacturing and trading businesses. Such a tax is based on the value added part of products. It’s 17 or 13 percent of certain utilities, foods, books and other goods.

Income tax covers such taxes as:

Corporate income tax – applies if the enterprise partners are companies. This is based on the company’s profits and has been leveled to 25 percent.

Individual income tax – This is personal taxes on wages/salaries. Ranging from 3 to 45 percent.

Dividend tax is 20 percent of the registered capital, while public companies pay a 10 percent dividend tax.

Other taxes include:

Corporate tax – this depends on the company’s industry and location. It ranges from 15 to 25 percent.

Consumption tax – Export goods are exempt from this tax. It’s typically 1 to 56 percent of the revenue derived from sales of goods.

Stamp duty tax – Charged at 1 percent.

Land appreciation tax – 30 to 60 percent of gains on transfer.

Resources tax –The tax rate depends on the material, ranging from 1 to 20 percent.

Dividend tax – 20 percent.

Interest tax – 20 percent.

Royalties tax – 20 percent.

Deed tax – 3 to 5 percent (This is a transfer tax when buying or selling an asset such as land or premises and the percentage tax is 3 to 5% of the deed’s total worth).

Social Security tax – 37 percent.

Real Estate tax – 12 percent of rental value.

Intellectual Property

China follows a ‘first-to-file’ policy regarding intellectual property rights (IPR). This means the first to file for IPR obtains those rights.

Such a policy would pose problems for foreign companies seeking to expand into China, since an opportunistic investor may have already filed the IPR. Hence, the first step to entering the Chinese market would involve checking your trademark and filing the correct paperwork with the appropriate authorities.

► How does IP work in China?

The options you have for protecting your IPR include:

Copyrights – Registration of works with the National Copyright Administration ensures evidence of ownership.

– Registration of works with the National Copyright Administration ensures evidence of ownership. Patents – Filed with the State Intellectual Property Office in Beijing, following the ‘first-to-file’ system. If you don’t have a commercial office in China, you must file patent applications through authorized patent agents.

– Filed with the State Intellectual Property Office in Beijing, following the ‘first-to-file’ system. If you don’t have a commercial office in China, you must file patent applications through authorized patent agents. Trademark – Filed with the Trademark Office of the State Administration for Industry and Commerce (SAIC), located in Beijing and having 13 local offices. A trademark is protected only within the category under which it’s filed. Foreign companies require an authorized trademark agency to file an application. It is also important for foreign companies to establish their trademarks in Chinese. This helps in averting any future situations where other companies might try to copy their names. Setting up foreign companies with only English names has become a very common phenomenon in China lately.

After securing the IPR, you must also be proactive and vigilant in protecting it against prevailing troublesome IPR violations. This can be done through regular online research, attending trade shows and other strategies to check for possible violations. You can also request for the Chinese customs’ free-of-charge monitoring of trademark infringement.

Transfer Pricing

Transfer pricing refers to the price charged when associated enterprises in different jurisdictions engage in intercompany transactions.

► What are the rules for transfer pricing in China for WFOEs?

China follows the ‘arm’s length principle’’ with regard to transfer pricing rules. This means related party transactions must be treated in a similar manner to transactions between unrelated parties.

Especially with transactions with parent companies, WFOEs should: