WFOE capital requirements in newly implementing law

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Introduction

In recent years, there are more and more foreigners doing business in China. For them, the WFOE capital requirements are very important.

So, what are they? Speaking of this, I have to mention that China has introduced new laws and regulations in 2020. Meanwhile, new laws and regulations have more new information. Moreover, they are beneficial to foreign investment. Especially in terms of WFOE capital requirements.

Now, let’s take a look together.

new law implement

What is the WFOE capital?

WFOE is the Wholly Foreign Owned Enterprises. And they are Limited liability companies wholly owned by the foreign investors.

If you want to know specific information for WFOE, please visit A comprehensive guide about wholly foreign-owned enterprise/).

As for WFOE capital, here are two types.

WFOE registered capital

WFOE registered capital is the total amount of capital registered by an enterprise for its industry and commerce.

Meanwhile, they register the capital in the administrative department.

At the same time, it is also the total capital contribution subscribed by the investor.

Moreover, it is not only the amount required by the WFOE to manage the company, but also the company to achieve a balance of payments. And it also means the basis for investors to take risks and share profits for the company. Literally, the registered capital can only come from foreign shareholders. In other words, foreign businessmen still have to rely on their own cash flow to maintain the company’s operations.

Increase WFOE registered capital

When foreign businessmen want to increase capital, they need to pay additional fees for capital increase permission.

Taxation of registered capital

According to China’s new law, China does not impose taxes on WFOE registered capital.

However, China counts other payments as corporate income. Therefore, foreign businessmen need to pay taxes on this part of the money.

Total investment capital

Investment capital is the capital required by the enterprise contract and articles of association.

Meanwhile, it is used for the capital construction and production of enterprises.

Moreover, investment capital includes not only registered capital but also borrowed funds.

In accounting, the borrowing of companies is a liability,  but not its capital.

Implication

The establishment of total investment capital has three main implications:

First, it determines the registered capital based on the total investment of foreign-invested enterprises.

Second, it determines the tax exemption quota for imported equipment of foreign-invested enterprises based on the total investment.

At last, it determines the loan quota for foreign-invested enterprises based on the total investment.

registered capital

Capital requirements

Contribution methods of WFOE registered capital

First of all, Before planning the registered capital, foreign businessmen should understand the amount and regulations of it from the WFOE registered capital requirements.

Second, the registered capital can be cash. Meanwhile, it can also be a physical object. And for the physical object, it can be a device or an IP. Moreover, the investment needs to occupy 20% of the total registered capital.

Besides, there are strict procedures in China for making capital contributions in kind.

Therefore, cash contributions require less time and procedures.

teconology contribution

Precautions

When remitting registered capital, there are the following WFOE capital requirements you need to know:

  1. First of all, foreign businessmen must inject funds into WFOE registered capital account from overseas accounts.
  2. Moreover, according to the WFOE capital requirements, foreign investors need to obtain a business license first. After that, they transfer the funds to the registered capital account.
  3. Besides, when injecting funds, the State Administration of Foreign Exchange needs to approve this transaction first.

In addition to the methods mentioned above, the funds transferred in other ways are not effective capital contributions.

For example, before establishing WFOE, transfer funds through RMB accounts or Chinese partner companies. According to the WFOE capital requirements, this way is not valid.

The previously registered capital requirements

According to the previous WFOE capital requirements, we used to obey the standards below:

The amount of WFOE registered capital depends on factors such as business scope and location.

In fact, the local government will review the feasibility study report for each case.

Meanwhile, the government also checks the lease contract of the house. In this way, the government can approve the investment.

In addition, there have WFOE minimum capital requirements.

According to different industries, the registered minimum capital they need is different.

Time limit

According to the previous WFOE capital requirements, foreign investors can pay 20% of the registered capital within 90 days of registration.

Moreover, foreign business can pay the remaining part within two years.

The present registered capital requirements

In recent years, the Chinese government has been committed to simplifying the WFOE registration process. Therefore, China implemented a new foreign investment law in January 2020.

Meanwhile, China has abolished three old related laws.

In the new regulations, there are also many changes in registered capital.

Minimum

In the past, many foreigners want to start business in China. But the capital requirements for WFOE in China confuse them a lot.

For now, with the new law implementing, this restriction has now become much looser, because the new law no longer has a minimum capital requirement. However, foreign investors still need registered capital to open a company in China. So, how much-registered capital should they set now?

How to set a register capital

Regarding the registered capital, foreign businessmen set up the capital level. Moreover, they hand over it to the Ministry of Commerce and the Administration for Industry and Commerce. And then they review the level of funding, according to the expected operating costs of the company within two years of its establishment. That is to ensure the company has enough capital to accomplish its goals.

Suggestions

Besides, the registration amount is different among different cities. And it also is different among different industries. For example, the minimum registered capital of the basic consulting WFOE is 200,000-500,000 RMB. Nevertheless, the company set up is much more flexible than before.

Be careful, a properly registered capital is important, and the reasons are below:

First, if the registered fund is too low, the government will refuse company registration. Therefore, the registered capital should be enough to run the company for two years.

Second, foreign businessmen can use the registered capital for company operations. In this way, foreign businessmen have many tax advantages.

Third, Sometimes, investment capital does not conform to the situation of the company. So, foreign businessmen need to modify it later. In this situation, they will have to pay an additional fee to apply for permission for the additional capital.

Fourth, it must also have enough capital to pay salaries, rent, utilities, taxes, and other expenses. And if foreign businessmen are unable to pay for these expenses, the business is owned by foreigners in China is illegal.

So, we suggest that set up the registered capital carefully according to the expected operations.

Time limit

Fortunately, there is no strict time limit for paying off the registered capital.  The WFOE need to pay off the registered capital within 20 years.

That is the news for WFOE minimum capital requirements. Let’s have a look at a time limit of WFOE capital requirements.

Comparing previous situation and the present one.

Comparing the requirements of the new law and the old law, we can know:

  1. There are no specific WFOE capital requirements.
  2. The time limit is also much longer. And it means you don’t have to spend a lot of money on the capital registering in the beginning.
  3. But, changing funds is a time-consuming hassle. Moreover, it requires additional costs.

Based on these changes, a WFOE can freely formulate its planned operations and expansion plans in China. Moreover, it can invest the registered capital at the right time.

This is very profitable because they can make use of the money instead of putting a lot into the capital account for a long time.

By the way, do you know specific steps for changing capital level? Anyway, it’s not an easy case.

Change the capital level

If you are not clear about this, take a look at the steps for changing the capital level:

  1. First, apply for approval to increase the registered capital. Among them, WFOE should give the reasons for increasing capital. (Ministry of Commerce)
  2. Then, apply to change the level of registered capital. (Local Administration for Industry and Commerce)
  3. Third, apply for approval to transfer funds to China. (State Administration of Foreign Exchange)
  4. Then, transfer money from overseas to the company bank account in China.
  5. Finally, after receiving the funds, AIC will reissue the WFOE business license.

This process generally takes two months.

In addition, WFOE needs to pay 0.04%-0.08% of the total increase as the cost of the change.

In general, changing the capital level is a complex process. Meanwhile, it does take some time to finish.

investement capital

Suggestions

Although the regulations no longer set a specific registered capital minimum. But under normal circumstances, local governments recommend the registered capital be at least equal to the cost of the first two years of WFOE.

We also give some sincere advice.

Do not set it too low or too high.

  1. If the registered capital is too low and is not enough, WFOE needs to pay additional costs to increase it. When foreign investors need to close the WFOE, they must pay off all their capital within the specified time and conditions. That is no good for closing it. So, do not set it too low.
  2. Moreover, if the registered capital is too high, the capital will be idle in the capital account instead of using. In addition, it is more complicated to return the unused registered capital from the Chinese account to foreign investors. Therefore, foreign businessmen should not set the registered fund too high. Set it properly can avoid effects on operations.
  3. The “Company Law” has provisions on the gradual establishment of reserve accounts.
  4. In particular, 10% of the annual after-tax profit needs to be directed to the capital reserve fund. And the upper limit is 50% of the registered capital of the wholly foreign-owned enterprise.

So, WFOE also needs to keep reserves based on its capital level. And WFOE should count these changes in.

Although WFOE can use the registered capital, it will influence the company operates with an improper amount.

When setting up registered capital, foreign investors can refer to the following information:

  1. The estimated source of income of the company in the first two years
  2. Payments from shareholders
  3. Payments from shareholders related companies

In summary, we suggest that WFOE follow the suggestions of local governments and set the registered capital as the company operating expenses for the first two years. Or, we suggest hiring an experienced accountant to set the registered capital.

caculate capital

The ratio of total investment capital to registered capital.

  1. The latest law does not stipulate the concept of total investment.
  2. In addition, the registration authority no longer reviews the ratio.
  3. But, it is still within the scope of information collection.
  4. Moreover, for the issue of WFOE external debt, the total investment amount still has commonly used standards. In addition, the difference between the total investment and the registered capital shall be the upper limit of foreign debt.

So, WFOE needs to count the ratio when setting the registered capital.

Conclusion

There are two concepts of investment. One is the registered capital. And another one is a total investment.

WFOE registered capital is the total amount of need for registration. While the total investment is the total amount to invest the WFOE.

Although the new law in China doesn’t have a specific requirement for their amount, the WFOE also need to make them proper for themselves.

They are not only the number needed to set up, but also they have a great influence on the WFOE running.

If there is a registered capital set up improperly, it will be additional money for increasing it.

And if there is total investment set up improperly, it will have a bad effect on taxation later on. And the registered capital setup will become troublesome.

So, we suggest that hire a professional accountant to fix them out.

If the article helps you out with the WFOE capital requirement, please share it with your friends. Thanks for reading.

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