Registered Capital vs Total Investment
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 since the start of the company’s operations; either as installments or a lump sum, as specified in the Articles of Association. In addition, requirements for the registered capital used to differ between cities and provinces.
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?
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.
Minimum Registered Capital
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.
The cap for this 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.
Also, it is important to commit sufficient funds as China’s strict capital requirements. Adding additional capital will imply going through a time-consuming process.
Another important consideration with regard to the registered capital is profit repatriation. Before being allowed to repatriate dividends, the registered capital as stated in the Articles of Association has to be fully paid.
Also, 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.
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 email@example.com
Disclaimer: all articles and its related content are the property of Moore Stephens Consulting Company Limited and may not be reproduced either in part or in full without prior consent.