Wholly Foreign-Owned Enterprises

It is an independent legal entity in China with limited liability, wholly owned by one or more foreign investors and established entirely with foreign capital. “WFOEs” can carry business within its registered business scope. This kind of company is increasingly being used for service providers such as a variety of consulting and management services, software development and trading.

Advantage of “WFOEs”

• Freedom for implementing policy matches with its parent
• Ability to carry out business in China while “RO” prohibited
• Capability to convert RMB to US dollars and remit out of China
• Freedom for import and export own product
• Greater efficiency of management
• Full controls of its resources
• Technology and technical know-how no need to transfer or share

Capital requirement for “WFOEs”

Nature of business	Minimum capital requirement (RMB)
Consulting	0.1 – 0.5 million
Service	0.1 – 0.5 million
High Technology	0.1 – 0.5 million
Wholesales	0.5 – 1 million
Retails	0.5 – 1 million
Food and Beverage	0.5 – 1 million
Manufacturing	0.5 – 1 million

The above table has listed the minimum capital requirements for the establishment of “WFOEs”. However, by our experience we will advice our customer to increase the capital up to a level which can cover the initial costs, says the office rent, decoration, salary, etc. As additional cost will be incurred, if reapply for permission to increase capital, additional licensing fees, renewals of business license and so on. Moreover, the setting up time may be difference from city to city.

Joint Ventures (“JVs”)

• Equity Joint Ventures (“EJVs”)

It is a legal entity with limited liabilities and is usually set up for specific purposes such as the establishment of a new manufacturing concern. Normally, it will limited to a fixed period of time from 30 to 50 years. In some circumstances, unlimited period of operation can be approved, says involved the transfer of advanced technology. Also, it requires foreign partner(s) to contribute a minimum of 25% of the capital. In general, the foreign partners provide the capital investment, technical knowledge and management skills and arrange for technology transfer. The Chinese partner normally makes land and buildings available and facilitates the smooth operation of the joint venture. The partners share the profits and losses of the joint venture in proportion to their capital contributions. The paid up capital of an equity joint venture may not be withdrawn during the term of its operation other than in exceptional circumstances and is subject to approval.

Capital requirement for “EJVs”

 

Size of EJVs	Capital contribution required
Debt and equity	≧ US$3 million    70%
Debt and equity	US$3 million ≧ US$10 million    50%
Debt and equity	US$10 million ≧ US$30 million    40%
Debt and equity	≦ US$30 million    33.3%

 

• Cooperative Joint Ventures (“CJVs”)

The “CJV” are sometimes referred to as Contractual Joint Venture and similar to “EJV”. However, it allows either to form as a single entity with limited liability or bears liabilities independently. The partners of “CJV” may share their profits and losses in accordance with the provisions in the “JV” contract which do not necessarily correspond with the ratio of their investment. In addition, the foreign partner may recoup its capital during the term of the “JV” as specified in the contract, provided that the ownership of all the fixed assets of the joint venture may revert to the Chinese partner on the expiry of the term.

Difference Between “EJVs” and “CJVs”

	“EJVs”	“CJVs”
Minimum Capital requirement	25%	N/A
Capital nature	Approval must obtain for contribution other than cash	Cash or Non-cash contribution are acceptable
Profit/Loss distribution	Linked to shareholding	Linked to the contract
Dissolution/Expiry	Net asset will distribute according to shareholding	Net asset may be transferred to Chinese party

Representation Office (“RO”)

In general, “RO” is established for engaging business liaisons, quality control, product promotion, market research, exchange of technology and other permitted activities in China. Also, it is an effective and relative cheap way to expand your business in China begins with an “RO”. However, “RO” is not an independent legal entity. It is not allowed to directly engage in operational activities, cannot issue official invoices or receiving payments from its clients.

“RO” Functions

• Conduct research and survey for its parent
• Liaise with clients in China on behalf of its parent
• Provide data and promotional material to potential client and trading partners
• Act as coordinator for its parent’s activities in China
• Make travel arrangements for parent’s representatives and client