WFOE in China – Start Your Business in China

wfoe in china

In our globalized world, individuals and businesses are taking more and more advantage of international opportunities. A WFOE in China (Wholly Foreign-Owned Enterprise) is the easiest, quickest, and most popular option for foreign businesses to enter the Chinese market. Other options are a Rep Office and a Joint Venture.

In this article by Tenba Group, your Cyprus digital marketing agency, read up on the benefits of relocating your business abroad and doing business in China. Besides, we present the three options to enter the Chinese market in detail: a Wholly Foreign Owned Enterprise, a Representative Office, and a Joint Venture.

Why Relocate in the First Place?

First of all, moving abroad is a chance to acquire new markets and take advantage of more favorable economic opportunities. In the face of income tax, privacy controls, and digital regulations, businesses may choose to relocate their companies for better business conditions.

So, planning for the future is a critical step in ensuring the legacy of a business. For small-to-medium size business and digital nomads, relocating abroad can provide a favorable environment in terms of taxes, workforce, quality of life, and more. In fact, there are many possibilities in other business locations that offer more freedom and entrepreneurial safety.

In particular, for digital nomads, setting up a residence base provides many benefits. One of the major components is choosing a location that yields the best tax residency programs for international businesses. In fact, some countries even offer tax benefits and incentives for foreign business investment. Therefore, relocating abroad can help you secure your remote business.

Real Advantages of Relocating Your Business

Are you a small-to-medium business or digital nomad contemplating how to grow your business and provide legal safety measures? Relocating abroad can have serious benefits!

  1. Tax Benefits & Wealth Protection
  2. Affordable Workforce
  3. Staying Ahead of Trends
  4. Legislation & Crisis Protection

Let’s take a more detailed look at these benefits.

1. Tax Benefits & Wealth Protection

The biggest advantage of relocating abroad is the ability to choose which country best suits your business needs. Companies and digital nomads can restructure their operations to get the most out of tax and workplace benefits.

Businesses and digital nomads, starting their entrepreneurial journeys, can find opportunities in other countries with favorable tax, business, and social security regulations. At the same time, relocating abroad offers freedom in discovering new global locations and markets. Further, it grants possibilities in seeking added protection for your rights and business assets.

For example, Cyprus offers a quick and simple procedure to relocate or set up a company in the EU. Besides, the Corporate Income Tax (CIT) is 12.5% for companies – the lowest in the European Union.

2. Affordable Workforce

Starting a business overseas can provide the advantage of finding a well-educated yet affordable workforce at the new location.

Although the price of labor is steadily increasing, China’s labor costs are still about 4% cheaper compared to the US.

3. Staying Ahead of Trends

With its high level of innovation, digitalization, booming ecommerce economy, and the revival of the Silk Road, China is certainly on its way to becoming a global leader.

Moreover, the Middle Kingdom is a global investor, and driver of AI technology, including its implementation, for example, with autonomous driving.

Besides, China is preparing to launch (current stage: large-scale testing) a digital version of the Yuan (DCEP). Once implemented, it will be the first government-backed digital currency in the world and legal tender.

Finally, the Chinese government provides tax incentives for companies founded in lower-tier regions of China, in order to develop them. These lower tiers are called Xiachen in Chinese, meaning to sink to (into the lower cities). Refer to the taxation point below at WFOE in China to find out more. Xiachen also refers to the marketing/lifting of the potential of these lower-tier areas. Click here to read up on Xiachen in more detail.

To sum it up, China is well on its way to becoming the largest world economy and an or the most influential global player. As such, doing business in and with China, holds great opportunities. In particular, having a foreign-invested enterprise in China can be highly beneficial, depending on the niche and goals.

4. Legislation & Crisis Protection

Finally, regional conflicts and changing regulations affect the way of business. For some, relocating abroad is a way to find a more neutral and secure place of business and living

While for others, relocating abroad eases business restrictions and strict regulation policies that might hinder business efforts.

wholly foreign-owned enterprise

So, relocating abroad is a way of assessing the particular needs of a business and seeking the best location for that business to thrive.

Advantages of Relocating Your Business to China

Foreign companies aspiring to enter the Chinese market have many advantages to successfully conduct business and target the largest ecommerce economy in the world. In fact, many Chinese even go abroad and then work through a foreign company in China to have a better business set-up.

Benefit from

  • favorable government policies for (international) businesses
  • an entrepreneurial environment
  • skilled and affordable workforce
  • digitalization and growth opportunities

Reach the Chinese market with

  • rising incomes, especially in the middle class
  • changing demographics with increased consumer spending
  • a large demand for Western goods and services, especially in the luxury sector (clothes, cosmetics, foods), and products for babies

While CBEC (cross-border ecommerce) is certainly a great option for businesses that sell online, having a physical presence in China may be important and beneficial for specific businesses. With the shift of China’s economy and demographics to an uprising middle-class with increased domestic spendings, there are more and more advantages of having a Chinese business. 

Conquer the Chinese Market

Besides, as China is changing from a manufacturing and export country to increased domestic spendings, the ability to sell and invoice in China becomes a larger success factor. 

Businesses which benefit from a physical presence in mainland China are:

  • CBEC brands that want to sell their products in physical stores or use the local version of China’s largest commerce platforms jd.com and tmall. com
  • Immigration agencies that want to build trust in the country
  • Companies that want to do business locally

So, to start a business in China, foreigners have three basic options

  1. Wholly Foreign-Owned Enterprise (WFOE)
  2. Representative Office (Rep Office, RO)
  3. Joint Venture (JV)

Now, WFOE and RO are the most common options, but let’s look at all business setups in detail.

1. WFOE in China

A WFOE is an investment vehicle for a mainland China-based business. It works so that foreign parties (individuals or corporate entities) can start and own an LLC. What’s unique about a WFOE is that the involvement of a mainland Chinese investor is not required.

Remember that a Wholly Foreign-Owned Enterprise is the easiest way to start a foreign business in China. Besides, a WFOE in China is also the best option to protect intellectual property in the Middle Kingdom. Licensing is possible long-term, meaning 15 to 30 years.

WFOE in China

Whereas in the past, setting up a WFOE was mostly done by manufacturing companies, today, the tendency goes towards consulting and management businesses, as well as high-tech and software.

Advantages

A WFOE in China can

  • invoice clients
  • make a profit in China
  • send funds overseas
  • hire local and foreign staff directly
  • be formed and operate without Chinese partners
  • purchase directly from suppliers
  • sell directly to customers (B2B, B2C)
  • provide a 1-year work resident permit for foreign employees with multiple exit entries

Challenges

  • inability to engage in certain restricted and prohibited business activities, such as education, health, science, and culture; click here for the full negative list for the Chinese market in English
  • limited access to government support 
  • requires the injection of foreign funds for the registered capital; normally 15% of the total investment needs to be injected within 1 month after obtaining the business license starting from 50,000 USD
  • potential liquidation consists of 4 steps and might take up to 12 months

Taxation

  • Corporate Income Tax (CIT): As an incentive for foreign-invested enterprises, until 31 December 2021, qualified SMEs with an annual taxable income of 1 million RMB (~145,000 USD) or less are applicable to an effective CIT rate of 5%. Between 1 million and 3 million RMB, the income above 1 million RMB will be taxed at 10%. Keep in mind that afterward, the CIT will depend on the region in order to promote lower-tier areas. Therefore, in Xiachen areas, the CIT will be 15% compared to the standard 25% CIT.
  • Income tax: up to 35% of personal income
  • VAT: 3% for small scale businesses instead of 13%
  • Consumption Tax:1% – 56% of sales revenue of goods. Exports are exempt.
  • Stamp Duty Tax: 1%
  • Land Appreciation Tax: 30% – 60% of gains on transfer
  • Resources Tax: 1% – 20% depending on material

Now, click here to read up on the official WFOE in China regulations by the Ministry of Commerce. But don’t confuse a WFOE with an FIE (Foreign Invested Enterprise). This refers to any type of company with at least 25% foreign investment.

2. Rep Office

Generally speaking, a WFOE has more legal rights than a Representative Office (RO or Rep Office). Yet, it is still worthwhile considering an RO, when setting up a foreign business in China.

A Representative Office is an office established by a company or a legal entity to conduct marketing and other non-transactional operations in a foreign country where a branch office or subsidiary is not warranted. ROs are generally easy to establish as they are not used for actual “business” (e.g. sales).

So, foreign investors can enter the Chinese market with a Rep Office to simplify sourcing of products and quality control, as well as general liaison activities between the Head Office and the Representative Offices overseas.

Advantages

  • no registered capital is needed
  • quick to set up (6 – 8 weeks)
  • have a physical presence/office in China
  • manage the product sourcing process from within China, including quality and product checks
  • great option to test the Chinese market
  • 1-year work resident permit for foreign employees with multiple exit entries

Challenges

  • taxed around 12% on the expenses in China (office, salaries, etc.)
  • not able to invoice locally for goods and services
  • cannot make profits
  • can only deliver services to its main office, not to external entities
  • cannot have contracts with customers in China
  • can hire foreign and local staff only through an authorized agency (Labor Dispatch agency)
  • maximum of 4 foreign employees allowed
  • must be located in government-owned buildings, in specific cities
  • you must rent the office space before starting the business set up
  • the parent company must have existed for at least 2 years
  • cannot purchase directly from suppliers
  • cannot sell directly to customers (B2B, B2C)

To sum it up, a Rep Office is a useful tool and a cost-effective way for start-ups, SMEs, and larger enterprises to establish a presence in China. Especially testing the Chinese market is easy with an RO.

However, keep in mind that a Rep Office is always taxed on its expenses. In today’s world, it basically no longer has advantages over a WFOE. Although many agencies still offer the set up of an RO, a WFOE has significant benefits for foreign entrepreneurs. Especially, in order to have a real company, since a Rep Office is more like a subsidiary.

3. Joint Venture

Now, starting a Joint Venture in the Middle Kingdom refers to the foundation of a limited liability company. It requires the involvement of a mainland Chinese investor. After the JV has been formed, it becomes a new legal entity, where the shareholders’ liability is limited to the assets which they brought into the company.

In other words, a JV is a form of foreign-invested enterprise. It is created through a partnership between foreign and Chinese investors. They both share the profits, losses, and management of the Joint Venture.

Advantages

  • JVs allow foreign companies to avoid tariff and quota issues
  • gain more focus and control of product distribution and service in China → potential to reach a larger market share in China
  • shared risks and costs
  • access to new markets and distribution networks
  • working with a partner who understands the Chinese market

Challenges

  • requires the involvement of investor from mainland China
  • foreign companies are not allowed to submit the application documents directly to the relevant authority. They must retain a PRC entity that is authorized or permitted by relevant authorities to act as an agent.
  • unequal involvement of the business partners; imbalance; clash of cultures
  • requires extensive research and discussions
  • trustworthy contacts needed

All in all, a Joint Venture is a good choice for larger businesses that require the insights and network of a local partner.

Tenba Group is happy to assist you in setting up a company in China or relocating your international business to the Middle Kingdom.

Besides, we take care of kickstarting your China business with smart digital marketing strategies on the most popular social media channels and China’s search engine number one, Baidu. Our one-stop solutions are all-inclusive, so you don’t have to worry about anything. Contact us today to start your business in China!

The Takeaway

To sum it up, relocating abroad with your business can lead to favorable market and financial conditions and many other benefits, especially in the face of digitalization.

Keep in mind to meet all laws and regulations, in order to keep your business protected. Relocating abroad has become easier than ever with the help of relocation and restructuring specialists who can account for even the smallest things, such as maintaining a presence in your home country.

wfoe in china

Tenba Group, with the help of its partners, is ready to help take your SME or digital nomad business to your ideal location. Contact our experts to set up a WFOE, RO, or Joint Venture in China. We make this process easy, affordable, and competitively profitable.

Email or call us today for your FREE CONSULTATION! Discuss with our experts about your ideal relocating situation abroad. See what possibilities await your business and digital nomad success!

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