Setting up a Wholly Foreign-Owned Enterprise in China can be difficult when handled alone by a foreign company. Finalizing the business plan, recruiting employees, and deciding how to enter the market can also pose hurdles. You may find multiple sources citing contrasting information regarding the WFOE capital requirement in China on the web!
Leaping into the Chinese laws and studying the market may further confuse you regarding the capital requirements. To clear this confusion, we have prepared a thorough guide on the China WFOE minimum capital investment requirements, related laws, and how to make the right capital decision.
Concept of WFOE in China
A foreign company can set up a business in China in three possible business models – as a Representative Office (RO), a Wholly Foreign-Owned Enterprise (WFOE), or Joint Ventures (JV). However, business experts recommend setting up a WFOE since it is the business model that comes with the most benefits.
A Wholly Foreign-Owned Enterprise (WFOE) is a form of a Limited Liability Company in China with 100% ownership by a foreign company. WFOE is the most preferred business model by foreign investors since it gives them the complete freedom to operate their business. The foreign-owned business also enjoys the same rights and status as a Chinese-owned enterprise. The Foreign Investment Industries Guidance Catalogue lays down the list of restricted and prohibited industries for WFOE registration in China.
The idea behind the concept of a WFOE in China was to invite more foreign businesses in the fields of technology and manufacturing. WFOEs are considered as a great source of economic development in China since it promotes foreign investment in the company.
The primary step in the registration of a WFOE in China is to define the business scope. The WFOE can carry out only those activities which it specifies in its business scope as a part of the registration application. The registration process involves filing an application with the Ministry of Commerce (MOFCOM) and the Administration for Industry and Commerce (AIC). However, when it comes to the WFOE capital requirements in China, there have been specific changes in the Chinese Company Law.
China Capital Requirement for WFOE Registration
The Chinese government has made numerous efforts to invite more businesses across the world and simplify setting up a business in China. The Company Law was amended in 2014 to do away with the fixed minimum capital requirement for WFOE registration. Before the 2014 amendment, the general capital requirement was at least RMB 500,000 and up to RMB 1 million.
This requirement applied to consulting WFOEs and trading WFOEs, and in the case of manufacturing WFOEs, the need was higher. Though the capital requirement for WFOE registration is not applicable anymore, specific industries may require minimal capital infusion.
With no legal obligation for a minimum capital requirement, a WFOE only needs to infuse sufficient capital. The foreign company can initiate its WFOE registration process with a basic capital injection that can help it sustain initially.
Meaning of Registered Capital
The company’s registered capital is any amount of cash, kind, or other asset contributed to operating the business. It can be in the form of land, plant and equipment, intellectual property, or any such asset up to 20%. It is important to note that the company does not need to infuse its registered capital in a single transaction.
This amount is based on the funds a WFOE actually needs before it starts generating any income in China. The amount of registered capital is unique for every WFOE, and a WFOE must select as per its operational requirements.
The registered capital can be infused into the business from an overseas account at any time during the first 29 years of the company. It is a step ahead of the previous law. Earlier, the company had to deposit 20% of its registered capital within 90 days and the rest within 20 years. Now, a WFOE has the freedom to inject its capital anytime it wants as per its requirements.
Another critical point to note here is that all the capital must be fully paid up before a WFOE is closed down. The WFOE must also add 10% of the annual after-tax profits to its capital reserve fund with a limit of 50% of the total registered capital.
Selecting the Capital Level for WFOE Registration in China
The MOFCOM and the AIC review the proposed capital level of a WFOE. The best practice to choose the right level of capital investment in a WFOE is to define a business plan.
Financial projections can help in calculating how much capital the business may need for its operations in China. The AIC also makes its decisions based on the company’s financial forecast and the expenses the business will incur after its incorporation.
How to Change WFOE’s Capital
The process to change a WFOE’s capital level includes the following steps:
- File an application with the MOFCOM along with the reason to increase the capital.
- File an application with the local AIC after receiving approval from MOFCOM.
- Apply for the approval from SAFE for capital transfer from an overseas account.
- File the application for the WFOE business license reissue with the AIC.
What Should WFOEs Do?
Infusing a sufficient amount of capital is the key to running a successful business in China. Thanks to the 2014 amendment, a company does not need to infuse all its capital right at the beginning. However, it must still inject enough money to carry out its registration and setting up process.
Selecting the capital should also be based on the expected profits and the expansion plans of the company. The company must also consider the likely salaries, rent, purchase of raw material, etc.
In summary
- Chinese law does not have a minimum capital requirement anymore.
- The WFOE can enter the Chinese market with the necessary capital for its registration and setting up.
- The WFOE can deposit capital in the future as per its expansion plans.
- If the company is new to the Chinese market, it is advised to consult local experts who know the Chinese corporate laws and tax norms.
How Horizons Assists With Your WFOE Registration
Horizons acts as your local advisors for your China market entry. We have a team of accountants experienced in Chinese law, who can assist you with your WFOE incorporation and capital level selection. Our business experts can also help you with your market research, competitor analysis, and study of customer preferences.
Our HR experts can also act as your employment partner and help you with your talent search, recruitment, and employee management. You can also find best-in-class solutions for your contract management, payroll processing, and legal compliance with the Chinese laws. Contact us today to know more about the WFOE capital requirements in China and kickstart your China expansion plan hassle-free.
