Since foreign currency restrictions significantly complicate cross-border transactions in China, the strategic planning of funding foreign-invested entities (FIEs) is of particular importance.
A WFOE is the only Foreign Enterprise in China that does not require a Chinese partner. It allows you to integrate your Corporate International strategy.
Registered Capital is the amount of funding that the Chinese government requires foreign investors to contribute to your projects in China (e.g. WFOE’s). The Chinese government sets requirements for the minimum amount of registered capital to start a business.
Registered Capital must be of an amount greater than the minimum requirement of the China Company Law (currently set at RMB 100,000). The Registered Capital can only come from the foreign investors. It must be actually paid into the company bank account before being verified by an independent certified accounting agency in China.
The amount of registered capital can be increased but official procedures will be required. Registered Capital must be no less than 70% of the Total Investment Quota. However, this ratio may be decreased when the amount of Registered Capital exceeds US$ 3 million.
Registered Capital can be paid by installments of up to two years. This does not conflict with the above statement, as it applies to the WFOE set-up stages only.
A cautious investor could decide to commit significant registered capital to its FIE in China, while gradually injecting the funds in increments according to the company’s cash flow needs. It becomes vital to carefully plan the capital injections so that the WFOE’s funds do not run out in between capital injection milestones.
Injecting considerable registered capital from the beginning insures the company’s expenses are covered in the long term without having to go through multiple rounds of capital injection. Meanwhile, the amount of registered capital committed to a company is publicly available information, and a large registered capital commitment can increase the credibility of the investor in the eyes of potential business partners.
However, a rational investor may feel reluctant to over-commit, as excess capital would sit idle in a bank account that brings no returns. The funds could likely be put to a more lucrative use if invested through alternative means, earning a return as a bank deposit or otherwise employed, and thus there is an opportunity cost of over-injecting registered capital into a Chinese company.
Additionally, there is the risk that the value of the money held in the capital account is subject to exchange rate fluctuations, with very limited options available to the investor to quickly respond to such a risk. Furthermore, when the time comes that the WFOE is cash-flow positive and the investor wants to repatriate profits, in most cases registered capital will have to have been fully injected into the WFOE before dividends can be issued. As such, a large registered capital commitment could delay the much anticipated process of profit repatriation.
Because of the difficulty of correctly anticipating a WFOE’s cash flow needs and the optimal amount of registered capital to inject at the start, it is likely that an investor will have to inject funds during the life of the company in response to a financial constraint. It is essential to discuss WFOE funding strategies and registered capital with a competent advisor in order to serves business objectives and mitigates risks.
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If you have further inquires, please do not hesitate to contact Tannet at anytime, anywhere by simply visiting Tannet’s website english.tannet-group.com, or calling Hong Kong hotline at 852-27826888 or China hotline at 86-755-82143422, or emailing to tannet-solution@hotmail.com. You are also welcome to visit our office situated in 16/F, Taiyangdao Bldg 2020, Dongmen Rd South, Luohu, Shenzhen, China.
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