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How To Start A Business In China. The Minimum Capital Requirements For A WFOE, Part II — The Goldilocks Rule

Posted in Basics of China Business Law, Legal News

Companies seeking to form a WFOE in China are often confused about Chinese law regarding the minimum registered capital requirements for forming a WFOE.  Part of the confusion stems from disreputable entity formation companies that encourage their hiring by claiming they know exactly how much will be required and that they have the ability to get the Chinese government to agree to a really low amount.

Under Chinese law, anyone forming a WFOE typically must put up a minimum of about USD $15,000 as a registered capital requirement.  What exactly does this mean?  Well, first off, the $15,000 is a minimum, but many Chinese cities have their own, much higher, minimum threshold.  In fact, virtually every city in which foreign investment is common has a much higher minimum capital requirement.  We just did a consulting WFOE in Qingdao and the capital required was about USD $80,000.  We also just did a consulting WFOE in Shanghai for which around USD $150,000 was required.  Our most recent Beijing WFOE needed around USD $300,000, but that was for a software development company.  The amount of minimum capital required is going to depend primarily on the city and the nature of the business.  Just by way of example, we did a WFOE not that long ago in not all that big a city but because of potential food safety and transportation risks, the minimum capital required was in the millions of dollars.  To a certain extent you just never know and anyone who claims to know before engaging in serious and substantive discussions with the right governmental authorities is just guessing.

But here’s the most important and least understood thing you need to know about China’s minimum capital requirements: the lowest amount possible is not necessarily what you will want.  Contrary to what many believe, the minimum capital required to go into a Chinese bank to secure a China WFOE is not frozen; you can use that money to fund your operations almost right away.

And that really matters. It matters because instead of seeking the lowest minimum capital required, you should be seeking the “just right” amount of minimum capital. In other words, the disreputable entity formation companies that seek to woo you with promises of securing you an ultra-low minimum capital requirement will almost certainly do you a disservice if they actually succeed — which they might as there are some cities in China where USD $15,000 will be enough.  But what can be so bad about only having to put in a small amount?  Surely you can put more in later if you need to do so, right?  In theory, you can, but it will no doubt cost you a lot, either in legal help in getting approval for a new registered capital amount or in taxes.

If you do not have sufficient capital to operate, you mind find yourself having to shut down. For good.  I have heard of that happening. The problem is that getting money over to China is not always easy and if you send that money over as anything other than registered capital, your China WFOE will get taxed on it as income, which is exactly what it will be. Alternatively, you could apply to have your registered capital increased and then send the money over as that, but we hear that takes at least two months, usually considerably more.  My firm has actually never been involved in such a transaction (knock on wood), in large part because we make sure that our clients understand registered capital ramifications when we first register their WFOE for them.

In fact, there are all sorts of things that some local governments tie to a WFOE’s minimum capital, including the following:

  • Temporary Residence Permits. Some local governments do not allow WFOEs with “too low” minimum capital to sponsor temporary residence permits for their local employees that have their Hukou in another city.
  • Expat Employees. Some local governments link the registered capital amount to the number of foreigners allowed to be employed by the WFOE.
  • Future Branch Office. The potential for securing approval to open a branch office is oftentimes lower if the registered capital is “too low.”

Calculating the registered capital for your WFOE at its inception is the key to avoiding costly problems with it down the road. For more on the minimum capital requirements for a WFOE, check out How To Start A Business In China — The Minimum Capital Requirements For A WFOE.

 

  • Chip

    I’m trying to track down the article, but I believe CCTV gave a special a few days ago in regards to Shenzhen no longer requiring capital for a company to be registered. I can only assume this applies only to locally owned companies, NOT WFOE’s, correct?

  • Tim

    You forgot:

    Tax Bureau relations – they may encounter problems with the tax bureau official in charge of their company. General Taxpayer Status and EVR applications may be stymied by low capital investments.

    • http://www.chinalawblog.com/ Dan Harris

      Tim,

      You are absolutely right.

  • Mike

    Besides bureaucratic, tax and operational reasons, the paramount importance of having a ‘big’ registered capital is ‘face’, for lack of a better word. It is a pissing contest, pure and simple.
    The first (and sometimes only) thing Chinese companies will ask for and/or tell you is how big is yours and/or how big is theirs, not whether you have technology, products, reputation, customers, etc etc.
    Many times, if you don’t have that extra sock in your shorts, you will be ignored or at least not taken seriously, no matter how much baijiu you can handle.
    Note also that (unsurprisingly) your Chinese counterpart’s sock may not be what it appears to be. Fact is that while registered capital for your WFOE will be scrutinized in great detail and while you can use it bit by bit, it is actually required to be in the bank, for real. At the same time, it is extremely easy for a Chinese company to ‘fake’ a ‘real’ capital registration. For example, to get an official one million registration, just pay 7000 to an accountant (part of that is taxes), and that’s it. The actual money does not exist (for more than a couple of days), only the piece of paper.

    • http://www.chinalawblog.com/ Dan Harris

      Good point about “face.” Didn’t know that about how Chinese companies are able to “fake” their minimum capital, but it comes as no surprise. We have had local people with our clients try to get us to “fake” the minimum capital for our foreign clients, insisting that they have the guanxi to pull it off. Fortunately, no client has ever tried this because the risk (at least for foreigners) for not paying the full minimum required capital is pretty severe.

      • Zhang Jerome

        Faking registered capital is regarded as criminal behavior in mainland China. It will push you into big troubles. I have such cases at hand.

  • Ken

    Hi, Can the registered capital use to pay for renovation of restaurant if we are starting a restaurant business?