Singapore Entrepreneurs

If you are planning to expand your business into China, what is the route for you to take? Is it a wholly foreign owned enterprise (WFOE) or a representative office (RO)? In a very detailed and long exposition, Kenneth Wong, our resident contributor will take us through the processes and analyse the ramifications of adopting either models in China.

By Kenneth Wong

Many foreign companies that are interested in the investment to mainland China and want to set up their business in China are often faced with such a question - to set a foreign representative office (Rep. office) or a wholly foreign owned enterprise (WFOE)? Which way is suitable for the status quo of the company?

• Representative office (’RO’)
• Wholly foreign owned enterprise (’WFOE’)

(In this article, we focus on the discussion of the difference between a representative office and a wholly foreign owned enterprise, particularly the difference between a representative office and a wholly foreign owned enterprise engaging in the “wholesale” and “retail” business.)

These two kinds of establishment are both organizational structures of commercial organization established by foreign companies in China, with the differences as follows:

1. Different Functions and Roles

The biggest difference of the two kinds of organizational structures lies in the functions, which lead to different liabilities and roles.

Generally speaking, a representative office as the spearhead of foreign enterprises in China exists for the liaison and market promotion, with main functions of operation natures of liaison, preparation and assistance in mainland China in assisting the parent companies.

A representative office itself has no qualification of a legal entity, with incomplete economic functions to engage in the commercial activities with common significance. A representative office cannot directly sign contracts with suppliers or customers in its own name and is not entitled to apply for the independent license of import/export, to apply for the qualification of a general taxpayer, to employ staff independently and to open an L/C account in banks. The expenditure of the representative offices must be from the remittance of the parent company overseas. It’s not possible for A Rep. Office to issue invoices (Fapiao) to its clients.

In the case of the representative offices of the commercial companies, representative offices are often established under the following circumstances:

1. In the initial stage for a foreign company to invest in China, there is not much market information available. By establishing a representative office with fewer employees (generally no more than a staff of 10 employees), initial market situations can be obtained, commercial opportunities developed, company image set up and contact with cooperation partners established.
2. In the case that initial contact has been established with domestic enterprises, but the domestic suppliers can directly contact the foreign parent companies, including the signing of contract and delivery of goods in an industry, a representative office is more preferable for the supervision and day-to-day liaison.

A Wholly Foreign Owned Enterprise (WFOE) can be described with much more simple words, that is, with complete functions of a company, entitled to perform all duties of a common company, including signing contracts, employing staff, applying for the license of import and export, issuing various invoices, opening various accountants and engaging in financing etc. independently, on which it would be unnecessary for us to go into more details.

From the perspective of the dynamic functions of a company, a wholly foreign owned enterprise (WFOE) is far more advantageous than a representative office in its applicability, flexibility and expandability and the customers are expected to choose the organizational structure based on their actual situations.

Related posts:

1. The Power and Paradox of Simplicity