Chinese Company Formation - WOFE, RO and Joint Venture

Since 1978 when China opened its door to the outside world, it has rapidly developed its economy by positioning China as one of the largest country in the world. Many investors planning to carry out cross border business into China to take advantage of the business opportunites will need to understand many issues covering political, legal, economical, social-cultural, etc., with particular with financial and taxation. Therefore, prior to your cross border business venture, it is important to consider the right mode of entry to maximise the value for your business.

In China, there are 3 types of entiities avaiable for foreign investors and they are as follows:

• Wholly-Owned Foreign Enterprise ("WOFE") - is a limited liability company wholly owned by the foreign investor. A WFOE requires registered capital and it can generate income in China, must pay tax in China and its profits can be repatriated to the investor's home country. Incorporating a WOFE allows the investor to undertake trading, consulting and manufacturing activities legally.

• Representative Office ("RO") - is perhaps an ideal way for entrepreneurs to market a foreign parent company’s services in China. A RO does not require capitalization, however, it cannot (i) directly engage in operational activities, (i) issue official invoices or sign customer contracts, or (iii) receive payments from customers. A RO is typically used for carrying out activities such as market research, promotion, and establishing or maintaining China business contacts. The Parent company, of a RO in China, must have been established for over 2 years in order to be eligible a RO in China. Clients choose a RO as their preferred China business entity because it requires no paid up share capital. A Chinese sponsor is necessary for the formation of a representative office in China.

• Joint Venture ("JV") - A JV in China is a partnership entity between a foreign company and a local partner. Joint Ventures are sometimes the only way to register a company in China as certain business activities are still controlled by the government. e.g. Restaurants, Bars, Building and Construction, Car Production, Cosmetics etc. Profit and risk sharing in a JV are proportionate to the equity of each partner in the joint venture. Equity can include cash, buildings, equipment, materials, intellectual property rights, and land-use rights but cannot include labour.