3. WHOLLY FOREIGN-OWNED ENTERPRISES
(a) Legal Status
Wholly foreign-owned enterprises (“WFOE”) are governed by the Law of the PRC Concerning Enterprises with Sole Foreign Investments and relevant implementing rules. The foreign investors provide all the investment. Such entities are usually set up as limited liability companies with separate legal person status. Only upon general approval may a WFOE be established with other forms of liability. Its status as a limited liability company is confirmed in its articles of association.
The liability of the foreign investor is limited to the amount of capital contributed. However, the limited liability of the company should be distinguished from the unlimited potential liability of directors and managers, advisors or suppliers of the company under product liability, worker safety or environmental protection regulations.
(b) Parties Involved
The most striking difference between an EJV and a WFOE is the absence of a Chinese party. This has both advantages and disadvantages. It clearly simplifies the process for the establishment of the enterprise, as lengthy negotiations with a Chinese party are not required. As long as the relevant regulations are complied with, foreign investors are free to determine the scope of operation, the number of workers, the percentage of exports etc.
Another advantage is the better control over the confidentiality of know-how, technology and trade secrets. With access to the technology and know how necessary for the operation of a joint venture, the Chinese partner or the department in charge may be tempted to make use of the technology without authorisation to another Chinese entity under its control and set up competing operations.
On the other hand, the knowledge of how China operates and the social skills of a Chinese partner may prove useful in dealings with officials and maintaining good relations with relevant local offices. WFOEs often circumvent the disadvantages of not having a Chinese partner by hiring PRC nationals to assist with interactions with the various authorities. Although one foreign investor establishes most WFOEs, there are no legal restrictions on the number of foreign investors in such enterprises.
(c) Encouraged and Restricted Business
The underlying principle of law is that a WFOE must be conducive to the development of China’s national economy. China encourages the establishment of foreign-funded enterprises that export their products or have advanced technologies.
There are also limitations in the type of business in which a WFOE may engage in, and some of the prohibited industries include:
- News agencies
- Publication, distribution and import of books, newspapers and magazines
- Publication, manufacturing and import of audio and video products and electronic publications
- Broadcasting stations (networks), television stations (networks), broadcasting and television channels (frequencies), broadcasting and television transmitting and covering networks (launching stations, relay stations, broadcasting and television satellites, satellite uplink stations, satellite receiving and transmitting stations, micro-wave stations, monitoring platforms, and cable broadcasting and television transmitting and covering networks)
- Companies making and operating broadcast and TV programs
- Film making companies, issuing companies and cinema line companies
- News websites, internet audio and video programs, business grounds for surfing the internet, and operation of internet culture
- Construction and operation of golf courses
- Any other industries prohibited from time to time by the relevant authorities
Restrictions on the establishment of a WFOE are placed on the following industries:
- Public utilities;
- Real estate;
- Leasing; and
- Any other industries restricted from time to time by the relevant authorities
In general, the establishment of a WFOE in the above-restricted sectors requires special approval from MOFCOM23.
Documents required for the establishment of a WFOE vary slightly from those required for a joint venture, and include a feasibility study report, articles of association, appointment of a legal representative, evidence of the legal status of the foreign investor and a certificate of creditworthiness. Written consent of the People’s Government at or above the county level of the intended places of establishment of the WFOE is also needed.
A WFOE is a Chinese legal entity and must abide by all Chinese laws. As such, it is allowed to enter into contracts with the appropriate government authorities in order to acquire land use rights, rent buildings, and receive utility services. Staff must be employed in accordance with applicable labour laws, and the establishment of trade unions is positively encouraged.
(e) Capital Contributions
If the capital contributions are to be made by installments, the amount of the initial capital contribution shall not be less than 15% of the registered capital and shall be paid in full within 3 months as of the date of establishment of the WFOE. The remaining registered capital shall be contributed within 2 years after the establishment of the WFOE.
23 Please see Directory of Industries for Foreign Investment