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Foreign Business Structures that Are Optimal for Working in China

Whether a foreign business is operating solo or establishing a partnership with a Chinese business, here are two common types of business structures for breaking into the global market and expanding a business to China.

Wholly Foreign-owned Enterprise (WFOE)

When deciding on a Chinese business structure, a wholly foreign-owned enterprise (WFOE) "makes the most sense nearly all the time, if it is possible for a foreign company," says Dan Harris, co-author of the China Law Blog and a founding attorney of Harris & Moure, a Seattle-based law firm focused on international law.

Also known as a foreign-invested commercial enterprise (FICE), the WFOE business structure creates a limited-liability organization that has a shareholder, or an investing entity, and allows foreign business owners to manufacture, trade, distribute, and deliver products and services in China without having to partner with a Chinese business. When registering for a WFOE, there are generally three options available to foreign enterprises, according to Robin Tabbers, special counsel at Shanghai-based R&P China Lawyers, a PRC law firm under foreign management that supports exclusively international businesses in China.

“Deciding which entity one should form should really be made on a case-by-case basis.”

— Dan Harris, co-author of the China Law Blog and attorney at Harris & Moure

·      Consulting & service WFOE: This entity allows a business owner to provide services and consultancy activities to customers in China on behalf of the foreign investor. With a consulting & service WFOE, a foreign business owner cannot engage in trading.

·      Trading WFOE: With a trading WFOE, a foreign business can "engage in wholesale and retail trading, it can import and export, it can buy goods in China, and it can sell and distribute," Tabbers says.

·      Manufacturing WFOE: This structure makes it possible for a foreign business to assemble and process equipment or products in China.

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While a WFOE is generally a viable structure for most businesses, Tabbers notes that businesses in certain industries may be restricted from setting up a WFOE. "There's some guidelines by the Chinese government that say which areas are limited to being included under a WFOE," he says. These industries include mining, telecommunication and media, among others.

Joint Venture (JV)

If a business owner can't set up a WFOE due to industry-related restrictions instituted by the Chinese government, then he or she has the option of going into a joint venture (JV) with a Chinese business.

To ensure that the roles and responsibilities of both the foreign business and the Chinese partner are clarified, Harris stresses that it's important for business owners to hire legal counsel who can speak, read and write in Chinese so important details aren't lost in translation.

Business owners can use a trusted online foreign exchange service to minimize the costs of paying for legal counsel - or any other related expenses while expanding their business to China. By singing up for email market-rate alerts, international business owners will be notified of favorable exchange rates on Chinese currency so they can go to their online FX accounts and secure the latest rates to initiate a money transfer to China.

By obtaining expert legal advice and practicing due diligence while conducting one's own research, business owners can ensure that they've chosen the most optimal commercial entity before deciding to move their livelihood overseas.

"Deciding which entity one should form should really be made on a case-by-case basis," Harris says. "You really do not want the Chinese government to reject your Chinese company registration because if they reject it initially, your chances of ever getting it approved … go way down."



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