Registered Capital in China
If you are you looking to establish a business in China, it is important that you are aware of how registered capital in China works. Registered capital serves the important underlying purpose to ensure your business has sufficient financial resources to meet obligations to suppliers, customers and employees. Understanding the basics of registered capital and the regulations your business is subject to, can help you determine the right amount of capital your business may require during the initial setup phase.
What is the Registered Capital?
The registered capital refers to the total amount of equity or capital contributions to be paid by the shareholders of the Chinese entity. The registered capital is a tax-free contribution which can be paid as either cash (foreign currency or overseas RMB) or contributed through technology, machinery, and/or other assets – where the general practice is that registered capital is paid in foreign currency.
The registered capital of your business will be declared in the Articles of Association, which are established during business setup procedures. Your business license and an online public database will also have a record of your business’s registered capital amount.
Is Registered Capital required in China?
Yes, registered capital is required in China. Every company that is established in the country will need to specify its selected registered capital. When determining your registered capital, it is essential that the amount chosen is reasonable and attainable.
The generally recommended practice is that a company should provide 6-12 months of expenses or a reasonable amount until the company expects to generate revenues that can cover all expenses. Furthermore, companies also should not select an amount that is too high, and the shareholders are unlikely to meet, as this may cause problems with future profit repatriation, potential share transfer or liquidations.
When must the Registered Capital be contributed?
In the past, it was required for any WFOE in China to contribute a specified amount of registered capital which had to be injected by the foreign investor in the WFOE within 2 years from the start of the company’s operations; either as installments or a lump sum, as specified in the Articles of Association.
Additionally, requirements for the registered capital used to differ between cities and provinces. Generally, the rule was that 20% of the capital was required to be deposited within 90 days after establishment and the remaining balance within 2 years.
Since the latest reforms in the company law of the People’s Republic of China that took effect on 1st March 2014, this has now changed to a 30-year time frame with no annual requirements. This means that companies can contribute the registered capital to the company at any time, as long as the full amount is contributed within 30 years.
What is the minimum Registered Capital in China?
In the past, the Chinese government implemented strict minimum requirements for the registered capital for foreign invested companies in China. In 2014, Chinese Company Law was altered to remove fixed minimum capital requirements for WFOEs. Prior to this amendment, companies were expected to register for 500k to 1 million RMB of capital.
Even though no minimum requirements exist, it is essential to select an appropriate amount of capital. We usually advise our clients to ensure the registered capital can cover at least 6-12 months of expenses or until the company expects to generate revenues that can cover all expenses. Other methods to finance the entity are generally more complicated and costly, as we discuss in our article here.
Lastly, even though generally there are no minimum capital requirements, there are still certain situations in which minimum requirements apply to either operate or to obtain certain benefits, including:
- Certain industries do still have minimum standards they must follow. Finance and leasing companies must still report a minimum registered capital of $10 million USD.
- Local districts or industrial parks may request a minimum registered capital in order to register in the area. Therefore, it is important to ensure that no such requirements exist before committing to a lease agreement.
- In order to use certain words in your Chinese company name, a minimum amount of registered capital may apply. For example, in order to use the word “China” in the Chinese company name, you will need to provide a minimum registered capital of a certain amount and you will also be required to demonstrate you operate across the country and specifically apply with the government authorities in Beijing to obtain approval.
What currency should be used for the registered capital?
The registered capital can be stated in either foreign currency or Chinese currency (RMB). The most common currencies used include Chinese Renminbi, US Dollar, British Pound, Euro, and Hong Kong Dollar.
However, it is also possible to register another currency of your choosing, even though the authorities generally prefer USD or Euro and may cause difficulties during the application process with any other currencies. If a different currency is chosen, the amount will generally still be converted to USD or Euro in the government system and application system.
We generally advise our clients to select a foreign currency in which they already have an account in order to make the transfer of capital easier. As the RMB is not freely convertible, obtaining the RMB to transfer to the WFOE may prove rather complex.
What are the forms of capital contributions?
Generally speaking, there are two methods of contributing the registered capital. This includes cash contributions or in-kind contributions:
The most common method of contributing capital in China is in the cash contribution. This does not mean depositing actual cash, but the transfer of currency into the capital account. As the method just requires the transfer of a monetary amount, there will be no value assessments required and the funds can be spent upon receipt in China. However, after the funds arrive in China, the funds will not directly arrive on the foreign capital account, as the bank will initially hold the funds. The company will need to apply for the capital injection to receive the funds on the foreign capital account.
In-Kind Capital Contribution
There are a few different ways that shareholders can contribute capital to the company outside of cash payments. A few non-monetary payment methods include:
- Fixed assets contribution
- Real estate contribution
- Equity contribution
Non-monetary contributions toward registered capital involves assessing the fair value of the fixed asset, real estate, or equity contributed. The value can’t be overstated to try and satisfy the registered capital amount.
Must the Registered Capital be contributed in full in one installment?
No, there is no requirement to contribute the entire registered capital in one payment. Companies are free to transfer the capital in several installments. This is ideal for companies that are planning to significantly invest over the years in China, but who do not want to immediately contribute the entire amount in one go. Therefore, it’s not uncommon for shareholders to make payments throughout the years, especially since the time cap is currently set at 30 years.
As the registered capital can be contributed in installments, there is a difference between the registered capital and paid up capital. The registered capital is that amount that is committed by the shareholder to be paid within the time period, whereas paid-up capital is the amount that has actually been paid.
For example, if the company has a registered capital of 1 million RMB, and the shareholders have already contributed RMB 250,000, this creates RMB 250,000 of paid-up capital and a remaining RMB 750,000 of registered capital that is yet to be committed. Having strong accounting controls ensures that you are properly recording payments to paid-up capital.
It is important to note that the amount of capital that has been paid up may affect the company’s profit repatriation. In the past, companies were not able to pay out full dividends if the entire registered capital wasn’t contributed yet, or they could only pay out dividends pro-rated according to the amount of paid-up capital. However, from our recent experience this no longer applies in most locations. Nevertheless, local authorities may still apply this rule, as the decision is up to the local in-charge officers.
How can Registered Capital be used?
As highlighted above, when the cash registered capital is transferred to the company’s (foreign) capital account, it will not immediately arrive on the bank account, Instead the funds will initially be held by the bank. In order to inject the capital into the capital account, the company will need to apply for the capital injection by supplying a number of documents to the bank.
After the funds are successfully injected into the capital account, the company cannot freely spend the funds, as the usage of the capital account is registered compared to the RMB Basic bank account or a current account. Furthermore, companies cannot freely transfer all the funds to another bank account. In order to use these funds, the company will need to do a capital conversion. There are generally two methods of capital conversion:
Petty Cash Conversion
A petty cash conversion means that a certain amount of the funds is transferred onto the RMB Basic Account. Subsequently, the funds can be used to pay rent and tax payments. Most banks typically limit the amount of petty cash conversion for one time from USD 50,000 to USD 200,000.
The bank will review what the petty cash is used for and there are certain regulations per bank about what the funds can be spent on. Generally, rent and tax payments are acceptable to the bank, but at most banks it is not allowed to use the petty cash for the payment of employee salaries.
After the petty cash is spent or before the company does another petty cash conversion, the company will normally be required to provide supporting documentation for all transactions and conversions to be verified. It is best to confirm with the company’s bank branch what the petty cash is allowed to be spent on.
Direct Payment Conversion
It is also possible for companies to make payment directly from the Foreign Capital Account to a supplier or for the payroll. However, this cannot be freely done through the company’s internet banking.
The company will need to submit the contract and invoice for supplier payments to the bank, or employment contracts and supporting documents for salary payments, in order to process the payment. Usually banks also require the documents to be submitted physically at the bank branch office, so these payments generally cause an additional administrative burden on the company.
Since the latest reforms in the company law of the People’s Republic of China that took effect on 1st March 2014, WFOEs are no longer required to follow a set of specified registered capital limits, but it is still important to allocate an ‘appropriate’ amount as registered capital as it is a pre-requisite for businesses to operate in China.
What is the difference between registered capital and total investment?
The registered capital refers to the total amount of equity or capital contributions to be paid fully by the shareholders of a foreign invested enterprise in China. This is generally a tax-free contribution which can be paid as either cash (foreign currency or overseas RMB) or contributed in technology, machinery, and/or other assets. Where we recommend that the registered capital is paid in foreign currency.
The total investment refers to the amount of funds which a foreign invested enterprise needs to realize the company’s production or operations as set out in their Articles of Association (AoA). A WFOE company also needs to specify in the AoA what the total investment would be contributed to the company.
The difference between the registered capital and total investment can be brought into China as a loan issued by the parent company, where the overseas parent company becomes the creditor of this loan. This difference is called the “Financing Gap”. However, a company cannot freely decide the amount of total investment, as it is limited to specific ratios related to the registered capital amount. The limitation for the relationship between the registered capital and total investment (and hence the amount that can be brought in as a loan) is maintained by the following ratios (and cannot be exceeded):
Changing of Registered Capital
It is important for any foreign investor to contribute the right amount of registered capital, not too much nor too little. You must contribute the amount of registered capital in 30 years’ time upon the establishment date of the enterprise. This amount must be fully used for the purposes of the company as established in the business scope, and it is nearly impossible to lower the amount of registered capital.
However, it is possible that at a later point in time the registered capital amount is no longer aligned with the company’s business plan. Therefore, it is possible to either increase or decrease the registered capital, although the process is relatively time consuming. Below we discuss the procedures for either case:
Increase in Registered Capital
The procedures for increasing registered capital in China are relatively straightforward. The company will need to prepare an application with the Administration of Market Regulation (AMR) together with a legal resolution by the shareholders, revised articles of association and other supporting documents. Often a capital verification report will also be required to prove the amount of capital that has already been contributed.
After the increase in registered capital will be processed by the AMR, a new business license will be issued. Subsequently, the company will need to update its records and business license with other authorities as well, including the bank, tax bureau and any other authorities the company is registered at.
After the registered capital has been increased with the AMR, the company can transfer the additional capital to the foreign capital account and proceed with capital injection and conversion to start using the funds.
Decrease in Registered Capital
The procedures for decreasing registered capital in China are similar to the procedures for an increase, although there are additional steps required. For a decrease of capital, the company must provide potential creditors the right to register any claims prior to the change. Therefore, it must announce the intent to decrease the company’s capital via a newspaper announcement or the AMR system and provide creditors 45 days to register any claims before proceeding with the application at the AMR. Furthermore, a statement of debt guarantee by the shareholder may be required as well.
The complexity and time required for the procedures depend on whether the funds have already been contributed. If the funds have not yet been contributed, the procedures are usually relatively straightforward, and the company only needs to update its records with several authorities. However, if the capital was already contributed and the company aims to send the funds back to the shareholder, the company will need to apply with the bank for the transfer of the funds, which can be quite complex.
The requirements differ depending on the bank, but generally the company will need to provide the FDI Certificate, a statement about the decision to reduce the registered capital and application forms.
Another important consideration with regard to the registered capital is profit repatriation. As highlighted above, the amount of paid-up capital may affect the company’s ability to pay out dividends, even though from our experience it is currently no longer required that the registered capital as stated in the Articles of Association has to be fully paid.
Furthermore, firms are obliged to put 10% of the after-CIT profit in a company reserve fund. This process continues until the amount of reserves within the fund reaches 50% of the registered capital of the firm. Therefore, if the registered capital is set too high, it may take the company a long time to reach this amount, which cannot be sent back to the shareholders.
MS Advisory has assisted a large number of businesses enter the Chinese market and helped them in determining an appropriate amount of registered capital depending on their business requirements. If you have any questions about this subject, please do not hesitate to contact us at firstname.lastname@example.org
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