Opening WOFE as an individual investment – opportunities, risks, and potential outcomes

The Foreign Investment Law《外商投资法》has have come into force on 1 January 2020. The Company Law《公司法》and other laws applicable to domestic enterprises in China will start to be fully applicable to foreign-invested enterprises, finally unifying the enterprises invested by “inside investor” and by “outside investor”.

In order to ensure a smooth transition from “foreign-invested” to “domestic”, Article 42 of the Foreign Investment Law stipulates that foreign-invested enterprises may, for a period of five years from 1 January 2020, continue to retain their original enterprise structure (the “five-year transition period”).

For the moment, the WOFE invested by a foreign individual as a natural person can benefit from obtaining the employment permit from local immigration through a special tunnel as an individual investor of a Company in China. But, due to the tendance of unifying, it is quite possible that such convenience will be redefined in the coming years.

Furthermore, the individual shareholder is always facing the transparency of personal financial information through shareholder contributions, shareholder dividends, personal income taxation with the possibility of double taxation issues under the circumstances of global taxation. It will also make the cash flow between the invested company and the individual investor quite limited on possibilities.

In comparison, if the investor of WOFE in China is a company set-up outside China, the cash flow between two entities, even cross-border, can be much easier to be organized in different ways, in the aspect of:

• Capital contribution;
• Shareholder loans through the difference between total investment and registered capital;
• Shareholder dividends*

*There will be withholding corporate income tax to be paid. As some countries or regions have preferential tax rates, it needs to be combined with the tax policies of the investor’s country of residence for comprehensive analysis.

There will be no direct impact on the individual investor’s own tax situation, and more channels are available for the transfer of funds between the investor and the invested company.

If you would like to learn more, feel free to contact us.