Companies seeking to form a China WFOE are often confused about WFOE minimum registered capital requirements. Part of the confusion stems from disreputable entity formation companies that claim to know exactly how much will be required and boast of their ability to get the Chinese government to agree to a low amount.
Under Chinese law, anyone forming a WFOE must put up a minimum of about USD $15,000 as a registered capital requirement. What exactly does this mean? This $15,000 is a minimum, but many Chinese cities have their own, much higher, minimum threshold. In fact, virtually every city in which foreign investment is common has a higher minimum capital requirement. We just did a consulting WFOE in Qingdao and the capital required was about USD $80,000. We also just did a consulting WFOE in Shanghai for which around USD $150,000 was required. Our most recent Beijing WFOE needed around USD $300,000, but that was for a software development company.
The minimum capital required will depend primarily on the city and the nature of the business. Just by way of example, we did a WFOE not that long ago in a smaller Chinese city, but because of potential food safety and transportation risks, the minimum capital required was in the millions of dollars. To a certain extent you just never know what the Chinese WFOE formation authorities will set for your WFOE’s minimum capital requirement and anyone who claims to know before engaging in serious and substantive discussions with the right Chinese governmental authorities is not being truthful.
My law firm’s China company formation attorneys have set up so many different sorts of WFOEs throughout China that they have become very good at estimating the required minimum capital for our clients, but we make clear this is an estimate and not a promise.
The most important and least understood thing about China’s minimum capital requirements is that the lowest amount possible is not necessarily what you will want. Contrary to what many believe, the minimum capital required to go into a Chinese bank to secure a China WFOE is not frozen; you can use that money to fund your operations almost right away.
And that matters because instead of seeking the lowest minimum capital required, you should be seeking the “just right” amount of minimum capital. In other words, the disreputable entity formation companies that seek to woo you with promises of securing you a low minimum capital requirement will almost certainly do you a disservice if they actually succeed — which they might as there are some cities in China where USD $15,000 will be enough. But what can be so bad about only having to put in a small amount? Surely you can put more in later if you need to do so, right? In theory, you can, but it will no doubt cost you a lot, either in legal help in getting approval for a new registered capital amount or in taxes or in delays.
The problem is that getting money over to China is not always easy and if you send that money over as anything other than registered capital, your China WFOE will get taxed on it as income, which is exactly what it will be. Alternatively, you could apply to have your registered capital increased and then send the money over as that, but that usually takes months and you might have a China payroll you need to meet.
Even worse, some of the fly-by-night entity formation companies promise foreign companies ultra-cheap WFOE formations by always setting up their clients’ WFOEs as a consulting WFOE in a corrupt rinky-dink Chinese citiy. This explains why every few months a WFOE will call us seeking to avoid massive fines for operating a manufacturing business in Guangzhou when their WFOE registration says they are a consulting WFOE in some 4th tier Chinese city.
Even if your WFOE was not formed so incorrectly as to get your WFOE fined and/or shut down, there are all sorts of things that local governments tie to a WFOE’s minimum capital, including the following:
- Temporary Residence Permits. Some local governments do not allow WFOEs with “too low” minimum capital to sponsor temporary residence permits for their local employees that have their Hukou in another city.
- Expat Employees. Some local governments link the registered capital amount to the number of foreigners the WFOE can employ.
- Future Branch Office. The potential for securing approval to open a branch office is lower if the registered capital is “too low.”
Calculating the registered capital for your WFOE at its inception is the key to avoiding costly problems with it down the road.
