Determining the right amount of registered capital can help Foreign Invested Enterprises (FIEs) maintain a sustainable operation, especially in the beginning. This article explains the requirements of registered capital when setting up a Wholly Foreign-Owned Enterprise (WFOE) in China and how to change the capital amount.
What is registered capital?
A company’s registered capital is the total amount of equity or capital contributions to be paid by the shareholders of the Chinese entity. Registered capital can be in the form of cash (foreign currency or Chinese yuan), land use right, intellectual property, equipment, and/or other assets. Registered capital can be used as working capital and is regarded as a quick financing tool for your Chinese company.
Registered capital needs to be declared in the Articles of Association (AoA), which will be submitted during the application of business license. The amount will be recorded on the company’s business license and listed online as public information.
The requirements for registered capitalAmount
Since the 2014 revision of the Chinese Company Law, there is no longer a statutory requirement for a minimum capital when establishing a WFOE. That is, unless the business operates in a regulated industry, (e.g., securities trading, insurance and banking) or is registered in some industrial parks and districts where there is a specific requirement for a minimum registered capital.
Although there is no minimum capital requirement for most of the business activities in place, it is still highly recommended that the initial investment should be sufficient to cover the cost of business activities for at least one year or until it starts to generate profits. In addition, the amount of registered capital is related to the shareholders’ liability, so it’s essential to select a proper amount.Payment method
Investors can either inject the entire capital in one single payment when registering the WFOE or in several installments over a period of time, usually within two years from the commencement of the business.Time frame
The specific time frame for installment contributions is typically outlined in the AoA. Regardless of the method of capital contribution, the total amount of registered capital must be contributed within the agreed time frame.
Determining the registered capital amount
Normally, a trading WFOE will need approximately CNY 300,000 – 500,000 in registered capital to secure the application for the necessary licenses. If you plan to set up an e-commerce store on a third-party platform, the amount may be higher as the third-party platforms would request a minimum registered capital. For example, TMALL, one of the leading e-commerce platforms in China, has set an invisible threshold of CNY 1,000,000 for brands.
For a manufacturing WFOE, CNY 600,000 – 700,000 is a common amount for registered capital. However, CNY 100,000 – 200,000 may be sufficient to cover operating expenses for a consulting WFOE in its first year.
Changing the registered capital
Companies may increase the amount of registered capital to meet their business and financial needs or to comply with regulatory requirements. Approval is subject to the local government authorities.
Here are the major steps of increasing the capital level for a WFOE:
- Shareholders resolution: The company needs to hold a board meeting and pass a resolution to formally approve the change in registered capital. This resolution should clearly outline the reasons for the change, the new registered capital amount, and any related terms.
- Amend AoA: The AoA should be amended to reflect the new registered capital amount and must be signed and stamped by the legal representatives and all shareholders of the company.
- Submit documents to AMR: The company needs to submit all documents, including the amended AoA and relevant application forms to the local Administration of Market Regulation (AMR) for approval and process.
- Update records with new business license: After the increase of registered capital is approved and processed by AMR, a new business license will be issued. The company needs to inform the relevant authorities and institutions, like the banks and tax bureaus, about this change.
After that, the company can start to transfer the additional capital to the foreign capital account and proceed with capital injection and conversion to start using the funds.
Likewise, companies are allowed to decrease their registered capital though it’s rarely seen. There are some prerequisites for companies to apply for decreasing capital, for example, the company shall not be involved in any economic disputes or is not subject to judicial or arbitration proceedings.
The process of decreasing capital level has a few more steps than an increase. The company must notify its creditors of the shareholder resolution, announce the intent to decrease its capital in a newspaper or the AMR system and provide creditors 45 days to register any claims before applying for a decrease to the AMR. Documentation of the company’s debt clearance or debt guarantee is also required.
Registered capital vs total investment
The total amount of registered capital is the sum of capital contributions to be paid by shareholders of the Chinese entity whereas the total investment is the sum of construction funds and working capital for production. The total investment also includes borrowed capital from external institutions like banks. It must be invested in accordance with the scope of production specified in the company’s AoA.
A WFOE cannot randomly declare its total investment amount as it determines the ratios of minimum registered capital. The ratio between total investment and the minimum registered capital is listed 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|
It is essential for investors to carefully prepare their business plans and take the specific requirements for different industries into consideration when determining the amount of registered capital for their WFOE in China. The registered capital demonstrates the financial strength and commitment of the foreign investor to conduct business in China and shows potential to business partners.
Although you can always choose to increase capital or seek financing tools when the capital is not sufficient for covering business operation (e.g. bank loan), the process is complex and time-consuming requiring much paperwork and liaising with different departments, especially for a newly established entity.
Working with a trusted partner who understands the local market and your business needs can help you better navigate the Chinese market. Outsourcing the administrative burdens to a professional service provider can save you time, keep your business operation compliant with regulations and let you focus on the business itself.