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Minimum Capital Requirements. Good News For Small Companies Looking At Shanghai.

Posted in Legal News

By: Steve Dickinson

Shanghai has recently loosened its minimum capital requirements for WFOEs (Wholly Foreign Owned Enterprises), making location of service businesses in Shanghai far more attractive. Chinese company law mandates all one shareholder corporations have a minimum registered capital of at least RMB100,000. The WFOE formation regulations provide for no specific amount for registered capital. Instead, the rules provide that the amount of registered capital must be sufficient for the proposed operations of the WFOE.

Most jurisdictions require the registered capital be equal to the first full year of expenses of the WFOE. As a practical matter, it is rare for a big city jurisdiction like Shanghai to require less than USD$150,000 in registered capital. What many investors do not realize is that the registered capital does not need to be contributed in a single lump sum. The rule is that 15% of the registered capital amount must be contributed within 90 days of WFOE formation, with the remainder payable over a period of two years. It is a rare WFOE that will not need to pay capital in the amount of $150,000 over its first two years of operations for rent, salaries and supplies. In accordance with these rules, if the registered capital is set at $150,000, the initial payment due in 90 days is $22,500 with the remaining amount payable within two years. This is not usually a burden for a normal WFOE operation.

In the past, Shanghai had imposed a different rule. Shanghai required minimum capital of $150,000 and required that the entire amount be paid within 90 days. Though this requirement was not usually a problem for manufacturing WFOEs, it often posed a substantial barrier to small service companies that do not have high initial capital costs. In fact, this requirement forced many service WFOEs to form their companies outside of Shanghai. I discussed this issue a number of times with local Shanghai officials over the years and they would told me that they fully understood the effect of their 90 day payment requirement and that they had no problem with forcing small service and retail businesses out of Shanghai.

Based on my recent discussions, however, it appears that all of the local districts with the exception of Jingan have modified their requirements. The minimum registered capital is still set at $150,000, however, these districts now follow the general rule whereby 15% of the total must be paid within 90 days of formation, with the remainder paid over two years. Jingan still maintains a more restrictive approach, requiring minimum capital of $150,000, 15% payment within 90 days, with the remainder payable within six months of company formation.

The result of these changes is that Shanghai is now an acceptable alternative for formation of low capitalization consulting, service and retail WFOEs. This is major change that should be welcomed by service companies considering formation of a WFOE in China.

  • Jerome Cole

    “…Shanghai officials over the years and they would told me that they fully understood the effect of their 90 day payment requirement and that they had no problem with forcing small service and retail businesses out of Shanghai.”
    This does not speak well of the people in charge of Shanghai.

  • http://www.sjgrand.cn Paul from S.J.Grand Financial and Tax Advisory

    Actually this is a significant development for foreign SMEs that want to operate in the Shanghai market. I’m interested to know why they had the restriction in place and why they feel now is the time to lift it. Were they minimizing any risk-taking by smaller foreign entities so wanted to ensure the capital was there? Were they trying to protect local retail and smaller service providers? We’ll probably never know.

  • Marcus

    This is great news for small business. Kudos to Shanghai for getting this right.

  • Chung Chen

    Jeremy, this is the case with the leaders of the entire country, not just China. True, those in smaller cities may have a bit of a different attitude but in the larger cities like SH and BJ, you will find the same attitude towards smaller businesses. That being said, one has to understand, although they never seem to no matter how hard we try to explain to them, is that the registered capital is what you have to declare initially and it must last for conservatively at least two years. To apply to add more capital is a pain in the arse and is a whole new administrative red tape laden process. Trust me, think about this very carefully before you low-ball the capital requirements. You’ll kick yourself later if you do. I would imagine this capital requirement is a filter so that there will be some standard for businesses in Shanghai. You don’t want the business requirements and application process so easy like in the US where every schmuck with 200 bucks can register a company. Quality, not quantity is the goal of the Chinese leadership these days in their economic development goals. Remember that.

  • http://www.zenlaw.com Jian

    We have been involved in setting up WFOEs in Shanghai for years. Our experience is that the minimum registered capital in Shanghai for WFOEs does not need to be as high as $150,000 nowadays. But RMB100,000 is also too low to open a WFOE in Shanghai practically. It depends on the approving official’s judgment on the capital requirement for the proposed WFOE business. We would recommend our clients to put the registered capital around RMB300,000 to 500,000 if the WFOE is a consulting type or small trading type of company. The local foreign investment approving authority may tell you that the proposed registered capital is too small for the anticipated business. Do not be pushed back by the authority’s comments. Instead you can shop around different Shanghai districts to register your business. There are more than 10 districts with their own foreign investment approval authority in Shanghai. If one district is not allowed for registering small WFOEs with low capital, try the others. Or if you really want to register in a specific distric whose officials require high capital, raise the issue to a higher authority, usually the party chief who is in charge of the foreign investment solicitation in that district, telling the party chief that you got an impression that his district is not welcoming small foreign business and you would have to move to the other Shanghai districts because of their policy. No party chief would want their district be branded as small foreign business unfriendly places. He would make direct phone calls to the foreign approving official in charge under his administration. I am sure the WFOE with low capital would be granted approvals…We have tried several times and it works!

  • All Roads

    This is really a function of economics.
    Outlying districts of Shanghai have always been willing to take lower quality investments that those districts downtown, and when the economy tanked in 2008 many of the districts who previously had higher standards lowered their ceilings.
    Why didn’t JingAn? Simple, JingAn is Shanghai’s core commercial district. It is mature. It is expensive. And unless you are going to really go low rent (not what the gov’t is looking for in a new investment), the prices for being in the district for commercial space, staff, and food are going to drive your budgets well beyond 100,000 RMB a year.