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Solutions for a Foreign-Invested Enterprise to Increase Capital

Background

A multinational group headquartered in the US (“US Co.”) owns a subsidiary in Hong Kong. The Hong Kong subsidiary (“HK Co.”) is the shareholding company of a Foreign-Invested Enterprise (“FIE”) in Mainland China. The FIE’s primary business involves sourcing telecommunication products from China and locally selling to their corporate clients.

 

Challenge

Initially, when the FIE was established, the registered capital was set at USD 200,000, which would be contributed by the HK Co. with funds sourced from the US Co. This amount of the registered capital was estimated to cover the first year’s expenses. However, the capital was spent sooner than expected due to unforeseen and unfavorable market situations. As a result, the initial funds were not enough to cover the costs.

Under normal circumstances, when an FIE has insufficient registered capital, it may apply for a capital increase. However, in this specific case, it was estimated that the time to complete the capital increase would take at least two months, while the remaining capital was considerably low. And the FIE was at the risk of not being able to pay salaries to the employees, the rent, and its suppliers. An alternative solution is needed for the FIE to obtain working capital in such a time-sensitive situation.

 

Solution

Through an in-depth investigation of the group’s global operation, CW helped the group restructure its China operation so that the revenue stream of the FIE can be further sourced from performing certain activities to support the group’s other entities overseas. Accordingly, financial transactions were structured to provide the FIE with additional funds more efficiently. Our consultants in various fields (accounting, tax, and compliance) work seamlessly together to help the client alleviate the capital shortage in less than one month.

 

Conclusion

When setting up a company in China, the registered capital should be set at the appropriate level to provide enough funds before the China entity becomes self-sustainable. Therefore, investors are highly recommended to consult experienced financial advisors on forecasting the working capital amount. In this way, the company can minimize the potential risk of cashflow bottleneck and avoid going through unnecessary bureaucracies that might disrupt daily operations.

For more information, feel free to contact our China Consulting Team.

Contact:

Phenix Zheng

Email: phenix.zheng@cwhkcpa.com

 

Important Disclaimer

This case study is for illustrative purposes and meant to provide an example of the Firm’s process and methodology. An individual case may vary based on the specific circumstances encountered. There can be no assurance that similar results can be achieved in comparable situations.

Your use of this case study, including implementing any solutions set out in the above article, does not create a professional-client relationship between you and our Firm or any of its related companies. We cannot accept you as a client unless and until we determine that there is a fit and until various requirements, such as fee arrangements, are resolved.

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