Establishment of a Wholly Foreign Owned Enterprise in the People’s Republic of China

The legal basis for the establishment of a Wholly Foreign Owned Enterprise ("WFOE") in the People’s Republic of China (PRC) are the PRC Law on Sole Foreign Investment Enterprises revised on 31 October 2000 as well as the Detailed Rules for the Implementation of the PRC Law on Sole Foreign Investment Enterprises from 12 April 2001. The Guideline Catalogue of Foreign Investment Industries, (most recent version took effect 1 December2007) is also relevant. According to the provisions of the Guideline Catalogue, WFOEs cannot be established in all industrial sectors. For example, it is still impossible to establish WFOEs in the hospital sector.

In recent years, the establishment of a WFOE when legally permitted, has become increasingly popular among foreign investors. This is mostly due to the fact that many investors prefer to be in a position of complete control over their PRC subsidiary rather than sharing their influence with Chinese joint venture partners. However, whether or not the establishment of a WFOE is to be preferred over the establishment of a joint venture company, still largely depends on the individual business requirements of the investor and will have to be carefully considered.

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