China company incorporation can be achieved in several forms, namely, wholly foreign invested enterprise (WFOE), joint venture (JV), representative office (RO), etc, each of which has its advantages and disadvantages. The foremost consideration when setting up a business in China is the type of structure. In this exposition, Tannet mainly explains the difference between WFOE and JV.
Brief Introduction to WFOE and JV
As the name suggests, a WFOE is solely established and owned by foreign entities. It doesn’t require the direct involvement of a Chinese investor or partner. Foreign investors can hold the complete control of all the business operations. Setting up a WFOE requires a registered foreign capital which is agreed upon and registered with the authorities.
Joint Venture is a unique type of company registration in China since it requires the involvement of a foreign entity as well as a local Chinese party. The history of JV goes back to when China first opened itself up to foreign investment. Basically, if a foreign company wanted to do business in China, they needed to partner up with a local Chinese company or person.
Which One Should You Choose: WFOE or JV?
Now that you know exactly what is a JV and WFOE in China, let's find out which one is a better option for setting up a business in China.
1. Complexity in Forming a Business
The process of forming a JV is complicated by the fact that you need to locate a suitable local company to partner with and then negotiate the terms of the agreement. A lot of time is taken in aligning strategic priorities with the partner.
Setting up a WFOE, on the other hand, does not involve a lot of complexities. It generally takes about 30 days to set up a WFOE in China. You can select different types of business such as manufacturing, trading, and service. As compared to setting up a JV, setting up WFOE is relatively easier.
2. Required Investment
Investment amount is another critical consideration when selecting a business structure. The minimum capital for setting a JV in China is RMB 100,000 if there is one foreign investor and RMB 30,000 if there are two or more foreign investors.
Previously the minimum investment amount for setting up a WFOE was RMB 100,000. However, the requirement for minimum capital was abolished in 2014. Although now a foreign company can establish a WFOE in China by investing any amount of capital, we do not recommend you to start a WFOE in China just with one Yuan. Bear in mind that no capital injection will require at the moment, you will have 30 years to do the capital verification.
3. Scope of Business
Keep in mind that a WFOE is not allowed to sell products or services in the domestic market. While foreign companies can use creative methods such as export and re-import to get around the problem, but this tends to incur high costs due to sizable duty rates. There are no such restrictions for a JV.
4. Protection of Intellectual Property (IP)
You need to partner with a local company to set up a JV in China. The benefits of joining forces with a local company include sharing of internal contacts, networks, and processes. However, the risk of entering into a partnership with a local company is theft of the intellectual property rights.
There is no risk of intellectual property theft in the case of forming a WFOE. You can keep complete control over the daily process and operations. This makes it easy to protect trade secrets and intellectual property rights.
Setting up a JV and WFOE each has its pros and cons. If you want to retain maximum control and profit, you should select a WFOE. On the other hand, if you think that you can benefit from expertise, contacts, human resource, and market information of a local company in setting up a business in China, you should go for a JV. After all, the most important thing is that you must select a structure depending on your business goals, scope, and budget. You should figure out what's the best structure for setting a business in China.
Contact Us
If you have further queries, don’t hesitate to contact Tannet anytime, anywhere by simply visiting Tannet’s website english.tannet-group.com, or calling Hong Kong hotline at 852-27826888 or China hotline at 86-755-82143422 or 86-755-82143181 or emailing to tannet-solution@hotmail.com. You are also welcome to visit our office situated in 16/F, Taiyangdao Bldg 2020, Dongmen South Rd, Luohu, Shenzhen, China.
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