Registered Capital of a WFOE in China

Update time:2016-02-24  source:

Registered capital is the initial investment into a company that is required to fund its business operations until it is in a position to fund itself.


The absolute minimum capital requirements under Chinese law are RMB30,000 for multiple shareholder companies and RMB100,000 for single shareholder companies.


In practice, however, the official requirements for registered capital vary by industry and region.


With Manufacturing WFOEs, for example, the minimum registered capital is RMB1 million, subject to considerations such as factory size and equipment costs.


Meanwhile, Service WFOEs generally require above RMB100,000 and FICE require above RMB500,000 for value-added tax purposes.


Generally, locally-obtained RMB cannot be injected as registered capital – it must be offshore RMB or RMB converted from foreign currency sent in from the overseas investor.


Subject to approval from the relevant authority, a foreign investor can make capital contributions with RMB gained by other foreign-invested enterprises they have established in China.


RMB is not a freely convertible currency, so under China’s pre-existing foreign exchange administration regime, foreign investors have only been able to establish and capitalize an FIE using foreign currency, which would then be converted into RMB after the capital injection is finalized.


However, as offshore RMB holdings have continued to grow, this old rule has come under pressure.


Beginning in 2011, foreign investors were allowed for the first time to use offshore RMB holdings to capitalize or acquire a Chinese FIE, and to fund its operations by means of a cross-border RMB loan.


Using offshore RMB to establish an FIE offers a number of advantages over the use of traditional foreign currency.


For example, currently-held offshore RMB may be used without the expense of conversion, and exposure to volatility in foreign currency exchange rates may also be lessened.


For companies heavily involved in cross-border trade and investment with China, these reasons alone may be enough.


Registered capital contributions can also be made in-kind (e.g., machinery and equipment, industrial property rights, know how).


Any machinery and equipment contributed must be necessary to the production of the WFOE concerned and valuated at normal market price.


A detailed list of valuated and priced items should be submitted as part of the application.


When the machinery and equipment contributed arrive at a port in China, the WFOE should report to the commodity inspection authority in China and apply for an inspection, and an inspection report should be issued.


In should be noted, however, that any industrial property rights or know-how contributed should not exceed 20 percent of the registered capital.


It must also be owned by that foreign investor and valuated in accordance with general international principles.


The payment schedule of the registered capital should be specified in the WFOE application for establishment and its articles of association.


The foreign investor can pay the capital contribution by installments, but the final installment should be paid up within three years following the issuance of the business license.


The first installment should be no less than 15 percent of the capital contribution subscribed by the foreign investor, and paid up within 90 days of the issuance of the WFOE’s business license.


After payment of each installment of capital contribution, the WFOE should engage a certified public accountant in China to verify and issue a capital verification report.


After the registered capital has been contributed, this amount cannot be wired out again freely. If a company wishes to expand its scope of business later on, there may be a requirement to increase the registered capital.


In addition to the registered capital, a total investment figure also needs to be specified in the company’s articles of association.


The total investment quota is the total amount of funds planned to be contributed to the project over its lifespan.


The difference between registered capital and total investment represents the debt of the investment and can be made up by loans from the investor or foreign banks.

 

China is currently implementing a “zero registered capital rule” for domestic companies in the cities of Shenzhen, Zhuhai, Dongguan and Shunde.


Under the pilot rule, the AIC will not verify a company’s capital injection at the time of registration.


This allows companies to complete the business registration process without the need to actually inject any capital.


However, the method of capital injection, amount and schedule still need to be specified in the company’s articles of association. Although this policy currently applies only to Chinese enterprises, it could be expanded to cover foreign-invested enterprises in the future.


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