The previous post "4 Major Types of Foreign Investment Set-up (1)" has introduced two types of foreign investment set-up in China. Here are the other two:
- Wholly owned foreign enterprises
Wholly owned foreign enterprises (WOFEs) are those set up in China by foreign individuals or firms where the investment is 100 percent provided and operated exclusively by foreign investors (without any Chinese partners). According to Chinese law, if several foreign partners jointly invest in a company, it will also be regarded as a WOFE.
A WOFE is a legal entity and is a limited liability company. The liability of the shareholders is limited to the assets they brought to the business. Setting up a WOFE requires currency input or equipment contribution, and the registered capital must correspond to the enterprise’s business scale.
In recent years, the Chinese government has steadily increased the scope of businesses allowed to WOFEs, such as consulting, management services and trading. However, although WOFEs can engage in an increasing range of sectors, some restrictions still exist on specific industries (see the other post about the Foreign Investment Guide).
WOFEs offer an advantage in that foreign investors have complete control over major decisions, products, and costs. They also allow strategic alignment with the parent company and greater control over (hence protection of) intellectual property.
The following is a summary of the characteristics of WOFEs:
- 100 percent foreign ownership
- 100 percent management control
Limited liability: An investor’s liability is limited to its share of the WOFE’s registered capital (equity).
Manufacturing JVs and WOFEs are subject to a Chinese value-added tax (VAT) of 13-17 percent and a corporate income tax of 25 percent (since the 2008 reforms). Business service JVs and WFOEs are subject to Chinese business tax (normally 5 percent, except for some businesses such as bars, karaoke, etc.). Business tax is, however, planned to be eliminated as part of the VAT tax reform.
- Representative offices
The representative office (RO) is an office set up in China by a foreign investor (including foreign companies and economic organizations). Compared to other foreign entities in China (JVs and WFOEs), applying for an RO business licence is quite simple and easy, except in some special industries such as banking, insurance, security and investment. Most RO applications do not need any Central government approval and are directly submitted to the local Administration of Industry and Commerce.
Please note that the Chinese government is now discouraging ROs in favour of WOFEs.
However, an RO is not a legal entity. An RO (like its Hong Kong namesake) can only carry out liaison and coordination work, market research and promotion for its parent company. An RO is not allowed to conduct other business activities such as signing contracts in its own name and invoicing, to name a few.
An RO is subject to business tax, normally approximately 10 percent to 12 percent of its total expenses (i.e. deemed profit), including office rental, staff salary, travelling and other office expenses.
The following is a summary of the characteristics of an RO:
- Not a legal entity
- Conducts research and promotion
- No invoicing
Through our China WFOE (offices in Shanghai, Beijing and Guangzhou), Primasia provides one-stop China set-up and supporting services, including payroll, tax, accounting and licence renewal. If you need further assistance, please contact US.
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