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A wholly foreign-owned enterprises (“WFOE”) is a company established in Mainland China according to Chinese laws and entirely with foreign capital. As the business environment and the attitude of the authorities towards the WFOE model have changed over the last two to three decades, the setting up of WFOE for trading and servicing businesses has become more feasible and the most chosen form of operation by foreign companies nowadays.
Prior to the enactment of new rules in 2010, setting up a Representative Office (“RO”) was an inexpensive entry strategy for foreign companies. However, the new requirements imposed on RO, and the ensuring costs of maintenance, have made RO less attractive as its role is restricted to liaison only. More and more foreign investors therefore would opt for WFOE as their corporate structure.
There have been cases where foreign investors underestimated the intricacies in doing business in Mainland China and the complex requirements in setting up a WFOE, and consequently failed to adopt an appropriate structure for their company. It is not unknown that some companies have to submit applications for altering the initial structure almost immediately after their establishment. It is therefore paramount to have a thorough understanding and analysis of the regulatory requirements and local practices beforehand to avoid wasting time and effort in having to rectify the corporate structure. Certain key aspects must be considered and decided well in advance. The following publication is a general guide on the points to note.
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