When a sourcing project gets to a certain size, it often makes sense to set up a permanent presence on-the-ground in China to help manage the supply chain. This series of blog posts covers some of the key areas of consideration when it comes to setting up in China.
Wholly Foreign Owned Enterprises
WFOEs usually take the form of limited liability companies and the liability of the foreign investor in respect of the WFOE is limited to the amount of capital it agrees to contribute. The risk of proceeding with a WFOE structure is that a foreign investor will not have the assistance of a domestic partner when obtaining government approvals, premises, land and cannot benefit from the existing sales and distribution channels of a domestic partner.
However, many foreign investors using the WFOE structure have found that doing business in the PRC is becoming less difficult over time and is less dependent on local connections. Furthermore, the WFOE structure enables a foreign investor (or multiple foreign investors) to have complete freedom to implement the operational, investment and management strategies of the foreign parent company, without having to take into consideration the interests, needs and agenda of a domestic partner.
This makes WFOE easier to manage. In addition it is easier for a foreign investor to protect its know-how and technology as the WFOE structure makes it easier to limit access. Which is why WFOE have become more common compared to EJV. Actually many originally EJV have now become WOFE with the domestic party’s withdrawal.
*Note: WFOEs are prohibited from being established in industries where there is an express requirement for a joint venture, or where a domestic party is required to hold a controlling interest under the Catalogue.
Next Post: Represetative Offices
Written for CSIC by Sophie Mao
China based lawyer at www.AsiaBridgeLaw.com