A WFOE is a Chinese limited liability company, wholly owned by one or more foreign investors. This is an investment vehicle often favored by foreign investors because it is (or is supposed to be) under their full control as there is no local partner. Furthermore, its preparation and establishment procedure does not involve all the lengthy negotiations that a sino-foreign joint venture usually takes.
The procedure for the setting up of a WFOE involves principally:
Despite a legal framework that has been in existence for more than twenty years, foreign investors still have some difficulty grasping the management control requirements of a sino-foreign joint venture in China.
The main misunderstanding is the assumption that holding the majority of the equity automatically grants control over the joint venture.
The new China Foreign Investment Catalogue (外商投资产业指导目录) was published on 29 December 2011. The new Catalogue will come into force on 30 January 2012 and will replace the 2007 Catalogue. The new Catalogue (like the previous ones) was issued by the National Development and Reform Commission (NDRC) and the Ministry of Commerce. The Catalogue classifies foreign investments in China into three categories: encouraged, restricted and prohibited investments. Investments not included in any of these three categories are to be considered permitted.
Encouraged investments are favored by, among other things, a fast track approval process. On the other hand, restricted investments are subject to additional limitations or requirements.