China has liberalized its minimum capital requirements for WFOEa and the amounts required have been reduced in many Chinese cities. But even if the Chinese government is going to let you get away with very little registered capital, you may want to pay more.
You should think about the registered capital you should be paying by considering how much money you will need to sustain your China WFOE until it can generate enough revenues from its own cash flow in China to sustain itself. If you inject less than you need in registered capital to sustain your WFOE until it generates enough in revenues to sustain itself, your WFOE will need a cash injection from somewhere. If you transfer money to your WFOE from overseas but you do not go through the correct process of re-registering your registered capital (which typically takes at least six weeks and involves having to get a new business license) the funds you (or anyone else) send to your WFOE will count as income to your WFOE and will be taxed accordingly.
Chinese law on minimum registered capital is clear, but the amount of capital that will be required does vary, depending mostly on the nature of the business of the company to be formed and on the city in which it is going to be registered.
Every company in China must have a stated registered capital. The registered capital includes all the components of the initial investment in the company, including its start up cash, contributed property, and transferred intellectual property.
Where the registered capital is small, the entire amount must be contributed immediately upon formation of the company. If the amount is large, it may be contributed in installments. There are a number of schedules for the percentage and timing of large amounts of registered capital.
It is a crime to state a registered capital amount and then fail to contribute that amount within the time required. It is also a crime to withdraw registered capital after it has been contributed.
The purpose of registered capital is to provide some notice to creditors of the capital adequacy of the company. Because of this, Chinese regulators take seriously the rules regarding registered capital.
Registered capital is an initial investment intended to be immediately used in the operation of the company. It is not a deposit that must just sit in a bank and never be touched. It can be used to pay salaries and rent, to purchase product, or for any other normal start up operating expense. Registered capital may include contributed real and personal property used in operating the business. Many foreign investors think registered capital is some sort of security deposit they can never utilize. This is not true.
On the other hand, some foreign enterprises believe they can simply withdraw their registered capital to their home country after the Chinese company begins normal business operations. This also is not true. The only way to get funds from the Chinese company out of China is by repatriating profits or by liquidating the Chinese company. Both these methods work, but both require paying Chinese taxes and meeting other requirements under Chinese law.
Investors should also note that the RMB is not a freely convertible currency. For companies that will earn RMB income, the issue of conversion to U.S. dollars or other foreign currency should be carefully considered.
Chinese law is quite clear regarding minimum capital requirements for a WFOE but the statute’s prescriptions on this are essentially meaningless in actual practice. Under Chinese Company Law, the minimum capital requirement is either 30,000 RMB (less than $4,000 US) or 100,000 RMB (a bit over $12,000 US) depending on whether it is a multiple or single shareholder company. However, these numbers have no real meaning for forming a WFOE in China.
The real question is what the Chinese authorities will consider as adequate capitalization for the specific project and that always depends on the type of business and its location. For example, it is very expensive to operate a business in Shanghai. On the other hand, it can be very inexpensive to operate the same sort of business in a rural part of China. It is expensive to operate a capital intensive business like manufacturing, but relatively inexpensive to operate a knowledge based consulting business. Finally, some Chinese cities just seem to want WFOEs more than others.
The Chinese regulators usually consider all these issues in determining the amount of registered capital they will require of a WFOE. To complicate matters, each local regulator has its own basic standards on what constitutes adequate capital for certain types of business activities. These numbers are not published, but when asked they will almost always be provided. They can only be determined through direct contact with the regulator but only after providing a clear explanation of the project.
The local regulator virtually never considers the statutory minimum in determining the adequacy of capital. They make this decision based on all the circumstances. Once the investor has a clear idea of the outlines of a project, it is usually a good idea to engage a China attorney to contact the local regulator to see what their response will be to the proposed amount of investment. This initial screening can save a lot of time if the investor’s idea of the proper amount of capitalization is dramatically different from that of the local regulator.
My law firm’s China company formation attorneys go to the local regulators to get this amount before we get very far along in the application process. Almost without exception, our experience has been that after we explain the nature of our client’s business to the regulator, the regulator’s decision on the minimum capital required has been a very workable one for our clients.
In determining what constitutes adequate capital, one needs to consider the peculiar situation in China that all rents are paid in advance, that payment for products for sale are usually paid in advance, and that a reasonable advance reserve for salaries is also required. Thus, the initial start up cost is going to be higher than for a comparable company in the United States or in Europe, where credit and time payments are much more common. Chinese regulators will not approve a project that looks risky or under-funded.
What are you seeing out there?