Establishing a foreign-invested enterprise (“FIE”) in China requires you to take into account a number of strategic considerations. One important consideration is setting the right amount of registered capital from the very outset. The concept of registered capital is central to the incorporation and effective functioning of FIEs in China. It also plays an indispensable role in your company’s financing, day-to-day operations, and subsequent growth. Determining the correct amount is, therefore, a delicate balancing act. Injecting too little or too much could have far-reaching consequences for your business.
While registered capital arrangements for FIEs have been liberalised over the years, there are specific conditions that deserve careful attention. This article helps you navigate the various complexities of registered capital requirements. In addition, it will provide useful pointers on determining your registered capital needs and the forms of capital contribution to commit.
Table of Contents
What is registered capital?
Registered capital is defined as the total amount of capital contribution to be injected by the shareholders of the FIE. It can be denominated in either renminbi or a foreign currency. The amount of registered capital serves as a reference point for the authorities to gauge the scale of your operations. Registered capital should be distinguished from paid-in capital. Instead, it is better thought of as subscribed capital, which refers to the amount of capital that investors pledge to contribute to the FIE.
Prior to the revision of its Company Law in March 2014, China operated a compulsory paid-up capital system. Under this system, restrictions were imposed on the minimum registered capital, the ratio of minimum cash to capital contribution, and the time frame for capital injection. Entities operating in specific industries still follow the paid-up capital system, including finance providers, asset management companies, and insurance brokers.
As your initial investment in the FIE, registered capital serves a very practical purpose. It is not intended to be merely deposited in your corporate bank account, lying dormant and earmarked for later use. Your registered capital provides the necessary funds to keep your FIE running smoothly on a day-to-day basis, e.g., to cover rental costs, salaries, and other start-up expenses, until it can accrue its own cash reserves and become financially self-sustaining. Â
What is the minimum registered capital?
In 2014, the requirement stipulating a minimum registered capital was abolished. Exceptions, however, apply to those engaged in the provision of financial services or insurance, for example. Unless you operate in certain regulated industries, you are generally free to decide when and how to make the capital contributions as well as the value thereof. These can be paid in the form of a lump sum or instalments. Such details should be delineated in the articles of association and registered with the local Administration for Market Regulation (“AMR”).
It should also be noted that this information is publicly accessible via China’s National Enterprise Credit Information Publicity System. Members of the public can conduct a check on the capital contribution and shareholding structure of locally incorporated companies.
Despite the absence of a statutory minimum amount on paper, there exist certain rules in practice. The AMR will assess the adequacy of the registered capital, considering whether the amount stated is sufficient to cover working capital required until the company reaches the break-even point. In its assessment, the AMR will also refer to internally set benchmarks based on the relevant sector and locality. Hence, the amount of registered capital to be subscribed must not be an arbitrary or nominal figure. Rather, it should be based on the scale and scope of your business, which should closely correspond to your business plan’s financial analysis and cashflow projections. This is discussed in further detail below.
What is the time limit on paying in the registered capital?
Before the new subscribed capital system came into force, the first instalment of registered capital had to be paid within 90 days and the rest within two years from the date of establishment. While a time limit is no longer imposed on the completion of capital injection, the registered capital should in practice be paid wholly within 30 years upon incorporation. In addition, the contribution term, as agreed by the shareholders, should be set out in the articles of association. Proper adherence to the self-prescribed payment deadline will be monitored by the authorities.
Why is setting the right amount of registered capital so important?
Although China no longer mandates a minimum registered capital, the general rule of thumb is that the amount should allow you to execute the intended scope of your operations, as stated in the articles of association. In other words, the amount should be commensurate with the operational scale of your enterprise. Â
Establishing as accurate a figure as possible requires meticulous and farsighted planning. A fine balance needs to be struck. On the one hand, setting an unnecessarily high figure can expose shareholders to heightened liability risks. As a rule of thumb, you should aim for a reasonable amount to accurately reflect your operating expenses for the initial 6 – 12 months. Too low a figure would inhibit your business activities and stunt development, leaving you with little room for manoeuvre. Although changing your registered capital is possible later, it is time consuming and administratively complicated to do so.
Moreover, locating an alternative source of funding from elsewhere could present a challenge. Other cash injections, such as additional payments from shareholders, that fall outside the scope of the registered capital may be regarded as taxable income and are, as such, subject to corporate income tax, while your capital contributions are not.
In addition, the lack of flexibility in the movement of funds is another compelling reason why precise planning is indispensable. Once the capital is injected, it is effectively locked up and cannot easily be transferred out. Even if you were to liquidate and dissolve your FIE, the entirety of the registered capital must first be paid in.
There are no hard and fast rules when it comes to setting the correct amount of registered capital. All the circumstances of the case must be considered. Enlisting professional assistance can help you accurately ascertain the level of capitalisation required.
What forms of capital contribution are allowed?
Permissible forms of capital contribution
Capital contributions can be paid in cash or in kind. The following in-kind contributions are recognised: capital equipment, buildings, technology, land-use rights, intellectual property rights, and debt and share rights.
– Movable property
Shareholders are allowed to put forth moveable property as capital contribution, including equipment as well as plant and machinery. Chinese law provides that the legal right to the asset is transferred from the time of delivery of the asset by the shareholder unless the law states otherwise. The date of delivery is generally deemed the date when the asset is committed as capital contribution.
– Immovable property
Shareholders can also put forth immovable property in the form of real estate as capital contribution. According to Chinese law, the legal right to real estate can only be established, altered, transferred, or terminated after registration of ownership transfer is completed in accordance with the law. The date of such registration shall be deemed the date when the real estate is committed as capital contribution.
– Intellectual property rights
Legislation governing patent rights stipulates that a contract be signed, and the transfer be registered with the patent administration department. The transfer of the patent right shall become effective from the date of registration.
– Equity
Equity held in another entity can be committed as capital contribution in the new FIE, except in the following circumstances:
- The equity has been pledged.
- The law or the articles of association prohibit the transfer of the equity.
- The transfer of the equity has not been approved by the relevant authorities.
Non-permissible forms of capital contribution
Licences, goodwill and so-called “sweat equity”, i.e., the value of one’s efforts and hard work, are not permissible forms of capital contribution. The suitability of your chosen forms of capital contribution should be ascertained by a certified accounting professional. The valuation of non-monetary contributions must be verified by a licensed appraiser. If it is found that the actual value of a non-monetary asset has been underestimated, the difference must be paid.
What is the procedure for changing the registered capital?
Registered capital is defined as the total amount of capital contribution to be injected by the shareholders of the FIE. It can be denominated in either renminbi or a foreign currency. The amount of registered capital serves as a reference point for the authorities to gauge the scale of your operations. Registered capital should be distinguished from paid-in capital. Instead, it is better thought of as subscribed capital, which refers to the amount of capital that investors pledge to contribute to the FIE.
Prior to the revision of its Company Law in March 2014, China operated a compulsory paid-up capital system. Under this system, restrictions were imposed on the minimum registered capital, the ratio of minimum cash to capital contribution, and the time frame for capital injection. Entities operating in specific industries still follow the paid-up capital system, including finance providers, asset management companies, and insurance brokers.
As your initial investment in the FIE, registered capital serves a very practical purpose. It is not intended to be merely deposited in your corporate bank account, lying dormant and earmarked for later use. Your registered capital provides the necessary funds to keep your FIE running smoothly on a day-to-day basis, e.g., to cover rental costs, salaries, and other start-up expenses, until it can accrue its own cash reserves and become financially self-sustaining. Â
What can CW do for you?
The significance of registered capital should not be underestimated. It can have far-reaching implications not only for the establishment but the subsequent success of your company in China. It is, therefore, crucial to precisely determine the amount of registered capital that is most suited to your operational scope. With over 30 years’ experience in helping foreign investors from all over the world establish corporate presence in China, our China Consulting seasoned professionals can assist in setting and adjusting the amount of registered capital in full compliance with the law and all procedural requirements. In addition, we can devise a tailored capital contribution strategy to enable you to achieve your business goals in China.
Contact us to find out more.
