In order to establish a new business in China, complete the WFOE registration process or utilize financial services in China, companies need to prove they have enough funds to run their business. This article explores the ins and outs of registered capital.
Calculating the Registered Capital
Money makes the business go round
In China, a company’s registered capital isn’t merely needed for its day-to-day operation – it is an essential credit tool. The lower the registered capital, the hardest it is to do business (e.g., obtaining loans, entering into commercial contracts, benefitting from financial services in China), and vice versa.
The big numbers
Companies with a business license in China must understand the concept of registered capital.
Registered capital refers to the total amount of capital injected in full by the investors into the company, and registered with the Chinese authorities.
The total amount of investment includes the registered capital paid or subscribed by investors plus the loans of the foreign-invested enterprise. Therefore, the difference between the total investment and the registered capital is the amount that can be used to borrow from the parent company.
If the total investment is less than 3 million US$, the company’s registered capital should comprise at least 70% of the total investment.
No minimum threshold
Setting up a WFOE in China? There is no legal requirement for the minimal threshold of registered capital. However, in practice China still has a minimum registered capital amount requirement (which no one can truly ascertain). Having said that, the main factors that determine the amount of registered capital are the location of the business, and its scope.
Our two cents
You should not aim for the minimum because getting more money into China or increasing the capital are time and money consuming. If the registered capital is too low in the beginning, the company might experience costly problems in the long run. Therefore, it is better to set a higher bar for registered capital, which covers the company’s expected expenses for the first two years, without considering any income.
/The small print
- You DO NOT need to pay the entire registered capital up front, if your WFOE does not need the funds. Theoretically, if the company exists for 20 years, it is possible to inject the capital gradually within this timeframe. But you will have to pay the remains at some point…
- In addition to the registered capital payment, companies doing business in China are required to keep a reserve fund proportionate to 50% of the original registered capital.
- The withdrawal proportion of reserve funds shall not be less than 10% after tax profit. When the accumulated amount of withdrawal reaches 50% of the registered capital, it can no longer be withdrawn.
- The capital deposited in the bank is not frozen, so it can be used for immediate business operations.
Last updated: May 2021
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