Deciding on the appropriate level of registered capital is crucial for Foreign Invested Enterprises (FIEs) to ensure long-term viability, particularly during the initial phases of operation. This article explains the prerequisites regarding registered capital when establishing a WFOE in China, as well as the procedures for modifying the capital amount as necessary.
Definition of Registered Capital:
The registered capital of a company refers to the total equity or capital contributions that shareholders commit to paying for the set up of the Chinese entity. This capital can take various forms, including cash (in foreign currency or Chinese yuan), land use rights, intellectual property, equipment, and other assets. Serving as working capital, registered capital is considered a readily available financing resource for your Chinese company.
During the application process for a WFOE business license, the registered capital must be declared in the Articles of Association (AoA). Subsequently, this amount will be officially recorded on the company’s business license and made publicly accessible online as part of the company’s information.
Stipulations for Registered Capital:
Amount:
Since the amendment to the Chinese Company Law in 2014, the establishment of a WFOE no longer requires a mandatory minimum capital investment, unless the venture falls under regulated sectors such as securities trading, insurance, or banking, or is located in specific industrial zones with prescribed minimum capital requirements.
While many business activities no longer have a statutory minimum capital requirement, it’s strongly recommended that the initial investment be sufficient to cover operational expenses for at least a year or until the business becomes profitable. Additionally, the amount of registered capital chosen has a direct impact on the liability of shareholders, making it crucial to carefully select an appropriate sum that aligns with the company’s needs and goals.
Payment Method:
Shareholders may inject the entire capital in a single payment upon WFOE registration or disburse it in installments over a stipulated timeframe, typically within two years from business commencement.
Time Frame:
The timeframe for installment contributions is delineated in the Articles of Association (AoA). Irrespective of the contribution method, the total registered capital must be furnished within the agreed timeframe.
Determining the Registered Capital Amount:
The requisite registered capital varies depending on the nature of the business. For instance:
- A trading WFOE typically necessitates approximately CNY 300,000 – 500,000 to secure requisite licenses. However, e-commerce ventures on platforms like TMALL may require a higher sum due to platform-specific prerequisites.
- Manufacturing WFOEs commonly opt for CNY 600,000 – 700,000 in registered capital, whereas consulting WFOEs may suffice with CNY 100,000 – 200,000 to cover initial operational expenses.
Adjusting Registered Capital:
Companies may augment registered capital to align with business exigencies or regulatory mandates, subject to local governmental approval. The process entails:
- Shareholders’ Resolution:
- Conduct a board meeting to sanction the alteration in registered capital, outlining the rationale, the revised amount, and pertinent terms.
- Amendment of AoA:
- Amend the AoA to reflect the revised registered capital amount, duly signed and stamped by legal representatives and shareholders.
- Submission to AMR:
- Submit requisite documents, including the amended AoA and application forms, to the local Administration of Market Regulation (AMR) for approval and processing.
- Update Business License:
- Upon approval and processing by AMR, a new business license reflecting the augmented capital is issued. Notify relevant authorities and institutions, such as banks and tax bureaus, of the change.
Decreasing Registered Capital:
While rare, companies can decrease registered capital, subject to certain prerequisites and an elaborate process akin to increasing capital.
Registered Capital vs. Total Investment:
The total registered capital signifies the cumulative financial commitments pledged by shareholders of a Chinese entity, serving as the foundation for its operational activities. In contrast, the total investment encompasses a broader spectrum of financial resources, including not only the initial capital contributions but also funds allocated for construction projects and ongoing operational expenses. Additionally, borrowed capital sourced from external institutions, such as banks, contributes to the total investment pool, augmenting the company’s financial capabilities.
For WFOEs, determining the total investment amount is a structured process governed by regulatory requirements. The company cannot arbitrarily set its total investment figure; rather, it must adhere to prescribed ratios established in relation to the minimum registered capital. These ratios serve as benchmarks for financial planning, guiding the company’s decision-making process and ensuring compliance with legal stipulations.
The relationship between total investment and minimum registered capital ratios is shown in the table below.
| Total investment (USD) | Ratio/Amount of minimum registered capital (USD) |
|---|---|
| Less than 3 million | 70% of total investment |
| 3 million – 4.2 million | 2.1 million |
| 4.2 million – 10 million | 50% of total investment |
| 10 million – 12.5 million | 5 million |
| 12.5 million – 30 million | 40% of total investment |
| 30 million – 36 million | 12 million |
| More than 36 million | 1/3 of total investment |
Strategic and financial management are imperative for WFOEs in China. By evaluating industry-specific requirements and ensuring adequate registered capital, investors can lay a strong foundation for their business in the Chinese market. Recognizing the complexities involved in capital requirements and financing underscores the importance of being prepared to navigate the regulatory landscape and ensuring operational success.
