Choose the right China legal structure for foreign enterprises - WFOE vs Rep Office

For foreign companies doing business in China, the setting up permanent representative office (Rep Office) or wholly foreign owned enterprise (WFOE) has remarkable differences in business model, tax implications, business operations and legal compliance. There are many considerations in determining the appropriate China legal structure, to name a few:

• What is your business model? Are you looking at the domestic market in China or just source products export to other countries to sell?
• Is your business still in the product development stage, just to look for low cost research and development centre in China?
• Do you have any RMB receipt in product or services sales? Do you just have cost centre expenses in China?
• Do you need a separate legal entity to shelter your holding company outside China?
• Do you want to have your own compensation scheme and sign employment contract directly with employees?
• Which China location is a better place to operate your business? Does the location have any preferential tax treatment or quality human resource available?

This list is no way comprehensive. Hence you need quality advice to answer these important China legal structure questions.

Below is just to give some kinds heads up on the difference between permanent representative office (Rep Office) and wholly foreign owned enterprise (WFOE) in China. The Rep Office is just an initial step to establish a presence in China. It may be a right legal structure for companies with cost centre activities. This includes procurement activities, marketing liaison, product research and development… The Rep Office cannot conduct sales and receive RMB in China.

Rep office is not suitable for conducting distribution function. In the past, the setting up of WFOE distribution companies was difficult. This made many foreign enterprises to rely on third party distributors to act as importing agent, owning products and collecting payment. The arrangement created many issues on the supply chain, accounts receivable, VAT payment/receipt, after sales service…

China has recently changed to lower the requirement substantially for establishing a WFOE for distribution purpose. Therefore we highly recommend the setting up of trading WFOE selling domestically in China.

If you are interested in setting up a Rep Office or WFOE in China, we should be grateful to help out on the overall process to ensure its legality and compliance.

If you want to share your precious experience, good or bad, in selecting or operating a China WFOE / Rep office, simply click here to share with us your China legal structure experience.

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