We hear so many half-truths and misconceptions about registered capital that it’s hard to keep track of them all, let alone dispel them. Not for lack of trying, though: see e.g. China Company Law Myths: Registered Capital and Personal Liability and China WFOE Minimum Capital Requirements: The Goldilocks Rule.
Without further ado, following please find 7 rules (both formal and informal) about the registered capital requirement for WFOEs.
1. China has no statutory minimum registered capital amount for WFOEs. This statement has been widely promulgated but is only mostly true. China used to have a statutory minimum applicable to all WFOEs, but when the Company Law and associated regulations were revised as of March 1, 2014, the statutory minimum was waived for almost all types of WFOEs. Certain high-profile business scopes still have statutory minimum registered capital amounts for WFOEs. For instance, a financing and lease company must have at least US$10M in registered capital, and an international forwarding company must have at least US$1M in registered capital.
2. China still has a de facto minimum registered capital amount for all WFOEs. When the Implementing Rules on WFOE Law were amended in 2014, the new rules eliminated the following requirement: “the amount of registered capital of an FIE shall match the company’s operational scale.” Observers hailed this change as allowing foreign investors much greater latitude in determining the proper amount of registered capital for their Chinese subsidiaries, because the Administration of Industry and Commerce could no longer claim statutory authority. The acclaim was short-lived, because the AIC still approves all WFOE applications and the formal requirement has simply been replaced with an informal one.
3. You don’t have to deposit the full amount of registered capital right away. Before the Company Law was amended, the default rule was that foreign investors needed to deposit 15-20% of the full amount of registered capital within 90 days of the business license being issued, and the remainder within 2 years of the business license being issued. And to confirm that the registered capital was in fact paid, the deposit needed to be verified by an accountant and the government. The new default is that the registered capital simply needs to be paid within 30 years of the business license being issued.
4. You do have to deposit the full amount of registered capital at some point. 30 years seems like a long time, and it is, but it’s not forever. And if you ever seek to wind down your WFOE – for any reason – you need to have deposited the full amount of registered capital first. So don’t think you can set the amount of registered capital artificially high just so you can have tax-free operating funds.
5. You don’t have to keep the full amount of registered capital as a reserve. We have covered this extensively in previous posts. The basic rule of thumb is that your registered capital should cover the first year or two of your WFOE’s projected expenses. And not only do you not need to keep the registered capital amount in a bank account, you are expected to spend it. On your WFOE’s expenses for the first year or two.
6. You will have to keep a reserve fund of 50% of the registered capital amount. The corollary to the above rule is that though you are expected to spend your entire registered capital amount on the China WFOE’s expenses, you are simultaneously required by statute to build up a reserve fund equal to 50% of the registered capital amount. This is straight out of Article 166 of China’s Company Law: “When companies distribute their after-tax profits for a given year, they shall allocate 10% of profits to their statutory common reserve. Companies shall no longer be required to make allocations to their statutory common reserve once the aggregate amount of such reserve exceeds 50% of their registered capital.” Note the use of the imperative “shall”: paying 10% of your WFOE’s profits into this fund is not discretionary.
7. The minimum allowable registered capital amount may not be the minimum necessary. Just because the AIC approves a certain registered capital amount for your WFOE does not mean the amount is appropriate. The most common error here is for foreign investors to set their registered capital amount too low in light of what they plan to do with their WFOE. Maybe they want to start with a two-person office, but in two years they expect to open a second office, hire 30 more people and bring several people over from their “home office.” Unfortunately, if a WFOE’s registered capital amount is too low, the WFOE may have limitations on everything from hukous to foreign work permits to its ability to open branch offices. It is possible to increase the amount of registered capital after a WFOE has been formed, but it takes time, and that is often the most precious commodity of all.