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Introduction: What is Registered Capital?
In China, the registered capital of a new company is a declared figure that approximates the amount of money that is expected to be injected into the company in the coming years. The figure is used as a reference by the government to have a ballpark figure of the scale of your company and your company’s operations. The registered capital does not have to be injected into the company for 30 years.
A higher registered capital generally makes it easier to hire more foreign nationals under a foreign-owned entity in China. Some industries as we’ll discuss below also require a higher registered capital. Companies that are subject to liabilities such as financial institutions and freight forwarders in particular require a higher declared registered capital as we will go over in details below.
A company’s registered capital is declared in the Articles of Association of the company. The registered capital is also visible on the business license and online in the government public database.
Before determining a registered capital for a new company, a WFOE should be fully aware of what counts as capital and the rules regarding the injection of capital. It is possible to contribute registered capital as cash, or in kind. In-kind contributions can be either equipment or intellectual property and can contribute up to 20% of total registered capital.
It should be noted though that there are strict compliance procedures for any company wanting to use in-kind capital as opposed to cash. With less need these days to reach a minimum capital level, companies are more likely to rely on cash contribution. Cash injection must be made from an overseas account into a registered capital account for the WFOE. This cannot happen before the business license is issued, and transactions require approval from the SAFE (State Administration of Foreign Exchange).
The Registered Capital is Required
Despite no legal defined minimum, registered capital is still a requirement. It is not possible to set up a company in China with zero capital! The proposed registered capital will be reviewed by the government as part of the company application, but just as importantly there are financial benefits for a WFOE in having a certain level of registered capital.
This restriction and the fact that it is difficult to change the registered capital later, make it important to set an appropriate level at the time of initial setup.
Minimum Registered Capital
For years, the Chinese government committed to simplifying the process of incorporating wholly foreign owned enterprises (WFOE). One way they have done this is with the removal of formal registered capital levels.
Chinese Company Law was amended in 2014 to specify no fixed minimum capital for a WFOE to be established. Prior to this, it was common to see local authorities requiring a minimum of 500k to 1 million RMB capital for consulting and trading WFOEs (and more for manufacturing WFOEs).
In some specific industries, there are still minimum levels required, but these are in specialized areas usually with financial obligations. For example, a financing or leasing company would still need a minimum of US$10 million.
While there is no “minimum” registered capital on paper, the registered capital is still a mandatory part of the company incorporation process and is subjected to an arbitrary inspection. We generally recommend setting a registered capital of 500,000 RMB for a consulting WFOE and 1,000,000 RMB for a trading WFOE.
Government minimum in practice
Although the formal requirement has been removed, capitalization set too low can result in rejection. Instead of basing this decision on prescribed minimums, the level should be established in line with the future planned operations of the WFOE. As a guideline, AICs will look at the expected operating costs of the company over the first two years post-incorporation and ensure that capital is adequate for this. This is a practical consideration based on the plans and financial projections for the WFOE. In the absence of any overriding circumstances, it is common to base this on the planned expenses for the first two years.
Companies should also look at expected income or shareholder payments, as well as any planned expansion. Companies new to China are advised to use an accountant with experience in China for this. There are many differences in planning costs in China, such as an increased need for advance payment for the rental, stock, and even some salary costs.
Remember is it important to set the capital level right at the start. If it is set too low, then any additional funding required will be taxed when injected (the level could be raised but this is difficult). And if it is set too high then it is likely that at some point money will be left idle in the capital account, instead of being put to use.
Setting a practical level
Even if it was permitted to open a WFOE with no capital, this would not help the WFOE much! There are major tax advantages to using the capital for the company operating costs in the early period of operation. Any additional financing that must be injected, and cannot be taken from approved capital, will be taxed as income – not very advantageous!
This restriction and the fact that it is difficult to change agreed capital levels later, make it important to set an appropriate level at the time of initial setup.
Changes to WFOE registration procedures in recent years have made these much less of a concern than they used to be, but there are still some key things to understand.
- There is no defined minimum registered capital, but still a broad and arbitrary minimum.
- 30 years to deposit the registered capital with no info on what happens after.
- It’s important to set capital levels correctly during incorporation as it is difficult to change later and a low registered capital can disadvantage your company.
Depositing Registered Capital
Prior to the changes in 2014, there was a strict timeline for capital injection. 20% of the capital had to be deposited within 90 days and the remainder within 2 years. This requirement has been relaxed and WFOEs are free to define their own capital injection timeframe. The main requirement now is only that all capital is paid within 30 years of incorporation.
WFOEs are therefore free to define an injection timetable that is in line with their planned operation and/or expansion in China. This can be very advantageous as there is no need to have costly capital tied up in a capital account for long periods of time.
Companies should keep in mind however that before a WFOE can be closed down, when and if this is required, all capital must be fully paid up. This is a good reason not to set the level too high at the outset!
There is a requirement too for a WFOE to keep a reserve fund based on their level of capital. Whilst the intention of the capital injected is to be spent on company expenses rather than held as a reserve, there is a stipulation in Company Law for the gradual build-up of a reserve account. In particular, 10% of annual after-tax profits need to be directed to a capital reserve fund, capped at 50% of the total registered capital of the WFOE.
Changing registered capital – not easy
Companies should be aware when declaring the registered capital during incorporation that changing the registered capital at a later date, whilst possible, is a complex and time-consuming process.
This involves the following steps:
- Application to online government platform for approval to increase registered capital. The reasons for the increase must also be given
- Application to the local AIC to change the registered capital level (once approval from government is granted)
- Applying to SAFE for approval to transfer funds to China
- Making a bank transfer to the company’s Chinese bank from overseas
- Once funds have been received in China, the AIC will then need to re-issue the WFOE business license
Such applications and approvals are never quick in China, and this process could take up to two months. Given that a common reason for needing additional capital is an immediate shortage of funds for China operations, it may not be possible to rely on this. Note also, that a fee must be paid for making the change (0.04%-0.08% depending on total increase).