The first question that comes to mind when one hears the term “WFOE” is, “What is WFOE?” The WFOE is a term used to describe a business owned by a non-Chinese entity. The term has been used to describe a business in China that is neither entirely Chinese-owned or wholly foreign-owned. When a business is listed on a stock exchange and is operated by non-Chinese individuals or firms, it is called a wholly foreign-owned enterprise.
If a Chinese company does not operate a business within China and instead is not wholly owned by a Chinese individual or firm, then it is classified as an entirely foreign-owned enterprise. Either of these two classifications, although similar, are different in their own way from the WFOE.
Most people do not understand the difference between a Chinese-owned and a Chinese-operated business in China. They often think that all Chinese-owned businesses are foreign owned. In fact, some Chinese-owned businesses are wholly foreign-owned, but the majority of the business activities conducted in China are conducted by a wholly foreign-owned enterprise. Therefore, most people may have a misunderstanding of what is WFOE.
Many of the organizations, especially the US corporations, that operate in China either have a subsidiary in China or are located there. They tend to think that because they operate in China, the Chinese-owned entities are also the only ones that are engaging in business in China. Some companies prefer to use the WFOE concept, since it suggests that they are operating in China only part of the time. For these companies, it helps to avoid confusion between them and the wholly foreign-owned enterprises that actually do operate in China.
It should be noted that a WFOE is sometimes said to be an entirely foreign-owned enterprise in China. One thing that happens with this terminology is that when a business is operated in China, the business tends to be thought of as an entirely foreign-owned enterprise in China. It should be pointed out, however, that when the business is operated by a totally foreign-owned enterprise in China, this also is not an altogether foreign-owned enterprise in China.
There are different types of WFOEs in China as said by Adrian Cheng. One type is called a B-WFOE, which is a business in China that is wholly owned by a Japanese firm, such as Mitsubishi Corporation, Mitsui Sumitomo Insurance, etc. Another type is the C-WFOE, which is a business in China that is wholly owned by a Chinese firm, such as China Merchants Bank, China Life Insurance, etc.
A B-WFOE has not necessarily been described as a B-WFOE because it is owned wholly by a foreign-owned firm. The term simply refers to a business in China that is owned by a foreign firm and thus is said to be wholly foreign-owned. One might say that a wholly foreign-owned enterprise in China is a business in China that is wholly owned by a foreign firm. In other words, it would be more accurate to say that the term wholly foreign-owned enterprise refers to a business in China that is owned by a foreign firm.
So, why are most businesses in China a C-WFOE? The term is commonly used for various reasons. Some examples of businesses that are C-WFOE’s include:
The term business in China is very broad. As the practice of doing business outside of China continues to grow, it will become increasingly difficult to figure out who is really operating the business in China. As such, business owners who use the term business in China may be able to maximize their profit and minimize their risk by listing their business under a different set of business in China classifications.
It should be mentioned that both foreign-owned enterprises and Chinese-owned enterprises must comply with regulations as regards the ownership and control of the business. It is also important to remember that foreign and Chinese businesses cannot engage in the same activities. or utilize the same resources. For example, if a Chinese firm wants to use a certain resource such as a particular machinery, it has to acquire that resource from another foreign firm.