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.
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.
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 capital contributions 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?
In 2014, China had revised its Company Law, lifting the restrictions on the maximum time limit for capital injection. In practice, companies had been expected to pay in the registered capital in its entirety within 30 years from the date of incorporation.
Under the amended Company Law, set to take effect on 1 July 2024, there is a reversal of some of the legislative changes in respect of registered capital enacted in 2014. Originally, the aim of the 2014 amendments was to provide shareholders with increased flexibility in the timing of their contributions. However, there have been some concerns that certain shareholders are exploiting this flexibility. They do so by setting an inordinately high amount of registered capital and deferring contributions through a prolonged contribution period.
To rectify this, the Company Law has been amended to mandate shareholders to pay in their entire subscribed capital within five years from the date of incorporation. The “contribution date”, as agreed by the shareholders, should be set out in the articles of association. The authorities will monitor the proper adherence to the self-prescribed payment deadline.
In the event that a company faces insolvency prior to the scheduled due date of contributions, the company or its creditors hold the right to demand the shareholders to expedite their payment.
For companies established prior to the implementation of the amended Company Law and have capital contribution payment terms that exceed the specified five-year time limit, a transitional period will be allowed. During this period, these companies will be required to modify the contribution period to align with the new requirement over a reasonable timeframe.
What are the consequences of not making timely capital contributions?
According to the revised Company Law, if a shareholder fails to make timely payments of the subscribed capital, they shall forfeit their equity equivalent to the unpaid amount. However, this action can only be taken after the shareholder has been notified and provided with a grace period of no less than 60 days. Additionally, the non-compliant shareholder will be held responsible for any losses incurred due to the incomplete capital injection. Furthermore, in cases where there are shortfalls in capital contribution during incorporation, the other shareholders will share joint and several liability alongside the non-compliant shareholder.
The board of directors will now shoulder responsibility for verifying the status of capital contributions. Where a shareholder fails to make their contribution within the specified timeframe, the board will issue a notice to the concerned shareholder, demanding payment. This measure is to better ensure that all shareholders properly fulfil their contribution obligations and pay in their subscribed capital in a timely manner.
If the board neglects its duty to monitor and enforce the timely payment of contributions, resulting in financial losses for the company, the director(s) responsible for such oversight will be held personally accountable for those losses. This provision emphasises the importance of diligent supervision by the board to keep track of capital contributions.
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.
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.
– Creditor’s rights
In the revised Company Law scheduled to take effect on 1 July 2024, creditor’s rights are formally recognised as a legal form of capital contribution. This is a significant development that expands the options available for shareholders to contribute capital.
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?
Capital increase
It is important to bear in mind that increasing your registered capital could be a time-consuming process. Therefore, it is vital that you closely monitor your cash flow and have sound control mechanisms in place. If you are facing a liquidity squeeze, waiting for more funds by way of an increase in registered capital is far from being an ideal scenario. The whole process can take several months to complete, from registering the increase with the authorities, injecting the additional capital, depositing it in the bank account to utilising it.
Capital reduction
Once the registered capital is injected, it is difficult to retrieve it unless you comply with the capital reduction formalities. Withdrawing the registered capital without obtaining approval may lead to the corporate veil being pierced, with shareholders being held liable. There are only a limited number of scenarios where you can reduce the registered capital, which are usually related to the downsizing of operations. It has, however, become procedurally easier, since the requirement to obtain pre-approval from the Ministry of Commerce was dropped.
Under the revised Company Law, shareholders must decrease their capital contributions proportionately to their shareholding ratios in the company, unless stated otherwise in other relevant legislation.
Additionally, FIEs holding an industry licence may be subject to a minimum registered capital requirement. Such FIEs must seek the approval of the regulatory body that granted the industry licence in the first place. Similarly, FIEs which have concluded an investment agreement with a local authority or are recipients of government subsidies should check that they have met the prescribed registered capital or investment requirements.
Nowadays, banks assume specific functions traditionally undertaken by the State Administration of Foreign Exchange. It is, therefore, not unusual for banks to exercise particular caution when dealing with an application for the repatriation of funds arising from a capital reduction. You are well advised to check with your bank regarding the relevant requirements for repatriating funds.
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.
With our profound expertise and years of experience and established presence in Shenzhen, Guangzhou, and Shanghai, we can also guide you through the entire process of forming a foreign-invested enterprise – ensuring a smooth and efficient setup – as well as handling any related procedures, such as changing your legal representative.
Contact us to find out more.
Updated on 11 January 2024
