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How To Start A Business In China — The Minimum Capital Requirements For A WFOE

Posted in Basics of China Business Law

Yesterday, in a post entitled, “How to Start a Business in China — WFOE,” we discussed the basic requirements for forming a wholly foreign owned entity (WFOE or WOFE) in China. One of the questions we are most frequently asked about how to form a WFOE in China is is how much the Chinese government requires in minimum capital.  This post follows up on yesterday’s post by addressing the minimum capital requirements issue.

Every company in China must have a stated registered capital. This amount is provided in the Articles of Association of the company and is also noted on the company register. Beginning in 2006, this company register is available to the general public. The registered capital includes all of the components of the initial investment in the company, including its start up cash, contributed property, and transferred intellectual property. Where the registered capital is small, the entire amount must be contributed immediately upon formation of the company. If the amount is large, it may be contributed in installments. There are a number of schedules for the percentage and timing of large amounts of registered capital. It is a crime to state a registered capital amount and then fail to contribute. The purpose of registered capital is to provide some notice to creditors of the capital adequacy of the company. Because of this, Chinese regulators take very seriously the rules regarding registered capital.

Registered capital is an initial investment that is intended to be immediately used in operating the company. It need not just sit in a bank and never be touched. It can be used to pay salaries and rent, to purchase product, or for any other normal start up operating expense. Registered capital may include contributed real and personal property used in operating the business. Many foreign investors think registered capital is some sort of security deposit that they can never utilize. This is not true. On the other hand, some foreign enterprises believe they can simply withdraw their registered capital after the Chinese company begins normal business operations. This also is not true. Once the capital is contributed to the Chinese company, it can never be withdrawn for anything other than paying company expenses.

The only way to get funds from the Chinese company out of China is by repatriating profits or by liquidating the Chinese company. Both of these methods will work, but they both require paying Chinese taxes and meeting other requirements under Chinese law. Investors should also note that the RMB is not a freely convertible currency. For companies that will earn RMB income, the issue of conversion to U.S. dollars or other foreign currency should be carefully considered and a failure to abide by Chinese law all the way along the process will likely lead to an inability to get money out of China at some point down the road.

Under the new Chinese Company Law, the minimum capital requirement for multiple shareholder companies has been reduced to 30,000 RMB (less than $5,000 USD). For single shareholder companies, the amount is 100,000 RMB (around $13,000 USD). However, these numbers have no real meaning for the formation of a WFOE in China.
The real question is what the Chinese authorities will consider as adequate capitalization for the specific project. Of course, that answer varies by type of business and location. For example, it is very expensive to operate a business in Shanghai. On the other hand, it can be very inexpensive to operate the same business in a rural area of China. It is expensive to operate a capital intensive business like manufacturing, but relatively inexpensive to operate a knowledge based consulting business.

The Chinese regulators usually consider all of these issues. To complicate matters, each local regulator has its own basic standards on what constitutes adequate capital for certain types of business activities. These numbers are not published, but when asked they will almost always be provided. They can only be determined through direct contact with the regulator and only after providing a clear explanation of the project. The local regulator virtually never considers the statutory minimum in making a determination regarding adequacy of capital. Rather, the local regulator will determine what it believes is an adequate amount of capital based on all the circumstances. Once the investor has a clear idea of the outlines of a project, it is usually a good idea to engage an attorney to contact the local regulator to see what their response will be to the proposed amount of investment. This initial screening can save a lot of time if the investor’s idea of the proper amount of capitalization is dramatically different from that of the local regulator.

In determining what constitutes adequate capital, one needs to consider the peculiar situation in China that building rents are virtually always paid in advance, that payment for products for sale are virtually always paid in advance, and that a reasonable advance reserve for salaries is also required. Thus, the initial start up costs are much higher than in a location like the United States, where credit and time payments are more common. In addition, the foreign investor needs to take into account the risk aversion of the Chinese regulator. The Chinese regulator will not approve a project that looks risky or under-funded. The regulator has no incentive to do this, especially for a 100% foreign owned entity.

The government sometimes permits the minimum capital to be paid in installments over up to two years, though the first installment must be at least 15% of the total amount required and it also must be at least the statutory minimum for total capital. The capital contribution can be made in money, equipment, intellectual property, or other transferable property, but the monetary contribution must be at least 30% of the total capital amount. The government will appraise the value of any non-monetary contribution and our experience has been that it will come in fairly low in its valuation.

We frequently see two big mistakes being made by foreign investors when it comes to their putting in the required minimum capital. Foreign investors hear that assets can be used as a contribution towards the minimum capital requirement, so they go ahead and ship certain assets over to China, with the expectation of then using those assets towards minimum capital. The problem with this approach is that unless the proper authorities have been notified and granted their approval in advance of the shipping, the assets you just shipped to China will not be applied towards minimum capital, and you will have a huge problem on your hands.

The other common mistake we see is the foreign investor putting a value on its assets (including its intellectual property) and assuming the Chinese regulators will put the same value on those assets in determining the contribution towards minimum capital. The Chinese regulators will require their own appraisal (at your expense) l of anything other than monetary contributions towards the minimum capital requirement, and those appraisals tend to come in low, particularly for IP.

  • Tim

    Hi Dan,
    As always, a very informative post. The only thing I would add is that investors also need to keep in mind that the liability of their newly formed WFOE is limited to the amount of registered capital.

  • Doug Sibley

    “Every company in China must have a stated registered capital. ”
    Is this true for domestic companies or just WOFEs?

  • http://www.chinataxinsights.com Matthew

    I think a critical point that many foreign investors do not always understand is the importance that registered capital plays in terms of financial credibility of a company in China.
    Doug even domestic companies are required to have registered capital, although they will usually be approved at much lower levels than foreign companies.

  • http://www.chinalawblog.com/2009/12/do_i_really_need_a_chinese_com.html China Law Blog

    Do I Really Need A Chinese Company?

    I dunno. We recently did a couple of posts on what is required to form a Wholly Foreign Owned Entity (WFOE) in China. In the first of these posts, “How To Start A Business In China — WFOE,” we we set out the four main steps in forming a WFOE. In our s…

  • http://twofish.wordpress.com/ Twofish

    All corporations in China must have registered capital. This curiously is not a Chinese invention since registered capital requirements were common for US companies in the early 20th century, but gradually these got worked down so that it became nominal and irrelevant for US corporations.
    The other reason that China has registered capital requirements is that China does not have strong and tested bankruptcy laws, so that registered capital insures that if the company blows up there will be something left. Also, registered capital makes SIV’s very, very difficult which also makes Enron style accounting tricks or off-balance sheet liabilities more difficult, which is why the Chinese government takes them seriously. Basically because of the capital requirement it’s very difficult in China to form a shell or dummy corporation.

    • Bob

       TwoFish… I am a CEO of a US corp and when I filed to start my corp, I only started a checking account and the amount in it was unimportant.  Not sure where you got your info, but I am guessing not the US. There was a large amount of honesty in the US years ago, when we bought and sold to ourselves. I can remember maybe 30 yrs ago, I could call a vendor and place an order with an automatic $500 line of credit just because I called and placed an order. The invoice would come later. People used to pay their bills and companies were stable.

  • susan

    Our HQ is in Singapore and we intend to open an office in Beijing to handle a Chinese construction company project located at South America.
    We are require to issue China local invoice and get paid in China.
    Therefore, is forming a WFOE at Beijing the best solution, so that we 100% own the Beijing office?
    We read form some article that under WFOE investment, before we repatriate the profit to Singapore HQ, our Beijing office must pay all taxes, how many types of taxes involved?
    Is there any restriction where we must open the China? e.g free zone, or any commercial district?

  • Siew hua

    is it true that a registered office in China must have RMB 5 million as investment capital, in order to allow issuing local invoice for seafreight; airfreight and inland trucking business?

  • Danny Yeung

    Is it true that foreigners cannot set up an Internet E-commerce company in China which collects RMB as payment from consumers? Thank You
    Danny

  • zeeshan arif

    i want to open a company in china to trade and the minimum capital requirements are large what should i do

  • http://mars-ventures.com Mrs Ritu Mukerjea

    I want to start a branch office of my Company Mars Ventures Ltd which is based in India Kolkata i would like to know in a simple way how to go about to begin with registering a branch office in china .I would even want to know what would be the enpenses for the the whole setup and how many visas could I avail if my branch office is openend in China.

  • http://entreper.com Jason Webb

    This is a great business advice article. It covers all the aspects, I am thinking to relocate my business soon using a professional company and seeking new challenges for better success.

  • ronald wilson

    I’ve been looking all over the net and this is the best explanation I have seen yet. Until now, I never quite understood why so many different numbers have been used for China’s minimum capital requirement. Now I do. Thanks.

  • http://www.goyalpipe.com H.Goyal

    I want to set up a WFOE in Cangzhou to buy steel products and export the same to India.Is it possible? How much capital is required as a single owner company.

  • Maxwell N. Enuesike

    I want to register a branch office of my company in Beijing with office in Gangzhou or Hangzhou.
    For the purpose of sourcing of products/goods from other parts of China and export same to Nigeria and other West African countries.
    Is it possible and what category of capital requirment did I fall into ?

  • Fenerbaci

    I heard a rumor that China is talking about tripling its minimum capital requirement. Have you heard that?

  • Emmanuel

    The capital minimum requirement depends on the classification of your business and if it is a local or a foreign company.

  • http://www.TheChinaBusinessGuide.com Steve

    Besides the minimum capital requirement, what are the other costs to setup the WFOE, especially the agency fees?
    Steve

  • nabil jaber

    how about the capital for trading company in yiwu how much RMB? some agency say 500000 and other say 100000 rmb so what is the right

  • http://mary.ni@richin.hk Mary

    The standard registered captial for Trading WFOE is USD140,000, consulting WFOE is USD100,000, However, the Initial Paid-up would be 20% of the registered capital, the balance should be remitted within 2 years.
    Generally, the agency fees is around RMB15,000, the government fee is around RMB6,000.
    Hope above information will be helpful for u…

  • KOSWATTE A SOMADASA

    I am interested in open an small scale business in China. Please let me know the entire procedure. I intend to invest around RMB 100,000.00. Appreciate your early reply.
    Thanks
    Somadasa

  • Martin

    Can anyone tell me what the procedure is for opening your own school in China?
    I have many Chinese students who come to me for English tuition. i want to go legitimate. I have a Chinese friend who wants to be a business partner. We have limited capital.

  • Jane

    I have set up a trading WFOE in Shanghai. In my company business license, we are allow to do import and export sales. My question is can my company bill or issued USD currency invoices to our customers if we want to trade in USD currency? Can any one help to advise? Thanks

  • Marko

    I would like to import used cars from EU to China. Open a company, rent a place in one of the biggest cities. I will need a legal help to start up business:
    -opening company
    -getting all regulations regarding import and sale of used car in china
    -finding workers
    -renting office
    -having right accountancy/outsourced

    Can you advice some office or person in china?
    thank you
    Marko

  • Natalia

    We are considering between Consulting WOFE and CJV now. Is there any difference in taxation between the entities. Which tax policy is better?

  • Jade

    I tried to help my boyfriend to setup a company before in China. Based on my experience, it is necessary to ask help form agency because you need a lot of red tape. I am a chinese and studied in Uk.

  • http://peenacarpet.com Nadeem Sajid

    I am from Pakistan and doing business of Hand Knotted Woolen and Silk Carpets, I am exporting my product to US, Europe and Far East. I visited China 4 / 5 times to attend some carpet related exhibition and come to know that chiness market is very good for Pakistani carpets, So I would like to open shop/ wharehouse in chengu or beijing or shenghae, so please help me out to know the requirments so I may makeup my mind to go on….Regards, Nadeem

  • http://n/a lee

    Martin -
    I am in the same boat. The opportunities to tutor in China are nigh on endless, but I’m finding it nearly impossible to do so legally. I have also managed to find some Chinese friends who would like to launch a business together. Unfortunately my research so far shows it would be easier for them to start a school and be approved to issue FEI (foreign expert invitations), and simply recruit me as a foreign expert.
    If anyone knows the process/requirements of launching a teaching business that is part-owned by a non-national, I would be interested to hear it.
    Thanks

  • Srinivas

    i want to open an regional office in china, what all documents and what is the process.

  • sulaiman

    I wnat to open a sea cargo office in china. i want to know the procedures.

  • camil

    Dear All ,
    I would like to get some information regarding consulting wofe with economic , managment and financial consulting as business scoope.
    We are a trading company based abroad and recently we had a rep office in china but we just decided to close it since it is not conveniant for us anymore .
    We only do follow up for the orders from china , sourcing , inspection , and our company in china will be making profits throught the services mentioned above and we’ll leave the purchasing issues to be handled by our office abroad with chinese factrories directly and supervised by our office in china.
    So i have been advised to open an economic consulting wofe to be handling the business in china as mentioned above.
    could you please confirm to me if it is 100% legal with a consulting wofe ( business scoope : economic consulting ) to handle all the follow up mentioned above and invoice customers accordingly .
    thank you

  • Dan

    I hate to intrude here, but I think you are making a huge mistake thinking that your providing a few lines of explanation of what you will be doing as a WFOE is sufficient for anyone to be able to discern whether your WFOE is appropriate. Your explanation only raises a whole slew of additional questions that need answering before anyone can determine whether your proposed WFOE would be appropriate. Also, the fact that you had a Rep Office and then shut it down might (or might not) make your getting a WFOE more difficult.

  • Rayhan

    Thanks a lot for the valued information here about opening of foreign owned export company in China.
    I just understand that I have to bring at least 30% of the registered capital as paid up capital and rest 70% might bring within next 2 years. I have two questions :
    - If i can use this 30% as pay to factories for my order deposit ?
    - if i can do export business within 2 years (before show rest 70% capital) ?
    - if i can bring rest 70% capital by different installment and if can use those money for my business running, i mean pay to factories like this ?
    Thank you so much…
    Regards
    Rayhan

  • bismillah

    Hi, i just want to open an export co, in china.and just want to know how i can open and what are the requirements ? Waiting for replay Thank you.

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  • Jennifergaimaguire

    April 17, 2012:  Can this article be updated to ensure the information is currently correct?
    Jenny

  • Pingback: China Joint Ventures and WFOEs -- Minimum Capital

  • Bipul Kumar

    Can you pls advise your contact detail in Singapore.

    Thanks / Bipul

  • Ashram

    What happens if company does not fulfill it’s minimum capital requirements before the deadline? Are they dead in the water or is there an extension process?

  • Hasan

    I am interested in open an Small business (trading company) in China. i also keep search a rent office. Please let me know the entire procedure. I intend to invest around US$ 8000-13000. Appreciate your early reply.