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The Foreign-Owned Factory in China
The Foreign-Owned Factory in China
Wholly foreign-owned enterprises (WFOEs) refer to companies, enterprises, other economic organizations, or individuals from foreign countries that establish enterprises in China (such as Shanghai, Shenzhen, Xiamen) in accordance with Chinese laws, and whose entire capital is invested by foreign investors in mainland China.
According to the Foreign Investment Enterprise Law, the establishment of foreign-funded enterprises must be beneficial to the development of our national economy and should meet at least one of the following conditions: adoption of international advanced technology and equipment; or production of products that are entirely or mostly for export.
The organizational form of a foreign-invested enterprise is generally a limited liability company, also known as a single-member limited liability company. However, this does not include branches of foreign companies, enterprises, or other economic organizations established in China (Shanghai, Shenzhen, Xiamen), such as branches, offices, or representative offices.
The functions of wholly foreign-owned enterprises are mainly reflected in the freedom to engage in activities within the scope of business in China and having import and export rights. Secondly, it can be listed and issue stocks in China, promoting the development of the securities market.
If you plan to register an investment company, set up an import and export trading company, or establish a factory in Shanghai, Beijing, Shenzhen, Xiamen, Kunshan, it is advisable to consult with a professional consulting firm in advance.
I.Foreign-owned sole proprietorship factory in China
Foreign-invested enterprises are classified according to different investment methods, distribution methods, risk methods, investment recovery methods, responsibility methods, and liquidation methods, and are divided into Sino-foreign joint ventures, Sino-foreign cooperative ventures, foreign-owned enterprises (also known as wholly foreign-owned enterprises), and foreign-invested joint-stock companies. Wholly foreign-owned enterprises are a type of foreign-owned enterprise, which is an enterprise established in China’s territory according to Chinese law, and whose capital is invested by a foreign investor.
- All of the investment in the enterprise, except for land, is solely owned by foreign investors without any Chinese investors participating. An enterprise can be solely owned by a foreign investor or jointly owned by several foreign investors.
- Operating independently in mainland China, the investment company has no Chinese involvement in its management. The company conducts its operational and management activities in accordance with its approved articles of association and is not subject to interference.
- After paying taxes according to the relevant Chinese tax regulations, all operating income belongs to and is under the control of the investor. When the enterprise terminates, it shall announce it in a timely manner and conduct liquidation in accordance with legal procedures.
II.Regulations for Wholly Foreign-Owned Enterprises in China
According to the “Foreign Investment Enterprise Law of the People’s Republic of China” published on April 12, 1986, the basic policies and principles for establishing wholly foreign-owned enterprises in China are:
- In order to expand foreign economic cooperation and technological exchange, promote the development of China’s national economy, China allows foreign enterprises, other economic organizations or individuals to establish foreign-funded enterprises within China’s territory and protect their legitimate rights and interests.
- The establishment of foreign-invested enterprises must be conducive to the development of China’s national economy, and adopt advanced technology and equipment, or export all or most of their products. China prohibits or restricts the establishment of foreign-invested enterprises in certain industries. The industries prohibited or restricted for foreign-invested enterprises include military industry, postal and telecommunications enterprises, cultural enterprises, etc.
- Foreign investors’ investments in companies and their legitimate interests and profits obtained within China are protected by Chinese law. Foreign-funded enterprises must abide by Chinese laws and regulations and shall not harm China’s public interests. The Foreign Investment Law also stipulates that China will not nationalize or expropriate foreign-funded enterprises. In special circumstances, in accordance with the needs of public interest, if expropriation of foreign-funded enterprises is necessary, appropriate compensation will be given in accordance with legal procedures.
- The application for establishing a foreign-funded enterprise shall be reviewed and approved by the competent department of the State Council in charge of foreign economic and trade affairs or by an authorized agency of the State Council. The foreign-funded enterprise must invest in China within the time limit approved by the examination and approval authority. If it fails to invest within the prescribed time limit, the administrative authority for industry and commerce has the right to revoke its business license. The investment of foreign-funded enterprises shall be inspected and supervised by the administrative authority for industry and commerce.
- The production and operation plan of foreign-funded enterprises shall be filed with their competent authorities for the record.
- Foreign-invested enterprises must establish accounting books within China, conduct independent accounting, submit accounting statements in accordance with regulations, and be subject to supervision by financial and tax authorities. Those who refuse to set up accounting books within China may be fined by the financial and tax authorities, ordered to cease operations by the industrial and commercial administrative authorities, or have their business license revoked.
- Foreign companies operating in China are required to pay taxes in accordance with the “Enterprise Income Tax Law of the People’s Republic of China” and other relevant tax regulations in China. Chinese investment companies can apply for preferential tax treatment such as tax reductions or exemptions. If the profits after paying income tax are reinvested in China, companies can apply for a refund of the part of the income tax already paid on the reinvested portion.