China WFOE Registration Guide (4) – Total Investment and Registered Capital of a Wholly Foreign Owned Enterprise

Under PRC law, all companies including foreign investment enterprises (FIEs), must have a minimum registered capital (registered share capital). For FIEs, in addition to the requirement for minimum registered capital the requirement for total investment is a unique legal requirement that has implications involving many aspects of such company’s business.

1. Interpretation of Registered (Share) Capital and Total Investment

According to the legal definitions, registered capital (share capital) refers to the total capital contribution of the shareholders that is registered with the relevant government agency. Total investment refers to the amount (including registered capital and funds borrowed by the company) that is required for the planned project as stipulated in the joint venture contract and the articles of association of the company.

2. Comparison Registered (Share) Capital and Total Investment

Registered capital (share capital) contribution is subject to more stringent regulation and supervision than total investment. Registered capital must be duly contributed and paid within the time limit stipulated in the company’s articles of association and/or joint venture contract and is subject to the relevant regulations of the Ministry of Foreign Trade and Economic Cooperation (MOFTEC) that provide mandatory time limits for the contribution of different levels of registered capital.

In practice, part of the registered capital could be contributed after establishment. However, schedule for this shall be expressly prescribed in the articles of association and/or the joint venture contract. Relevant government authorities will make joint annual supervisions of every FIE. One aspect of such supervision is to verify whether the registered capital has been contributed subject to the prescribed schedule. Total investment, on the other hand, is not subject to any such contribution time limits or supervision, and the absence of the contribution of the balance amount between total investment and registered capital will not affect the validity of a FIE.

The same follows for the amount of registered capital and total investment. PRC law has no mandatory requirements for the amount of total investment that shareholders may stipulate by agreement. There is, however, a regulation (Interim Provisions of the State Administration for Industry and Commerce Concerning the Proportion of Registered Capital and Total Amount of Investment of Chinese-foreign Equity Joint Ventures, promulgated in 1987) that stipulates the required proportion of registered capital to total investment. The regulation sets out the different proportions of registered capital contribution to total investment for each amount of total investment: the lower the amount of total investment, the higher the proportion of mandatory minimum registered capital contribution of the total investment.

In normal cases, it is prohibited to reduce registered capital and total investment. Especially, this applies in the following cases: (i) where the amount of registered capital after adjustment is less than the legal minimum for registered capital; (ii) while the FIE is involved in judicial or arbitration procedures; (iii) where the amount of total investment after adjustment is less than the minimum amount regarding production or operation set out in the joint venture contract or articles of association; or (iv) where the joint venture contract or articles of association provide that the foreign party may recover their investment and that the foreign party has already done so.

3. Implications of Total Investment

Total investment amount is the determining factor (as opposed to registered capital amount) for deciding which government agency has the authority to grant FIE approval. For setting up a foreign-invested manufacturing enterprise in which total investment is more than US$30 million, the applicant shall obtain approval from MOFTEC, while those with total investment less than this amount can be approved by the government authority at the provincial level. Notwithstanding the above, when such a FIE belongs to an “encouraged” industry and is self-sustainable, in respect of foreign exchange, approval can be granted by the government authority at the provincial level if its total investment is more than US$30 million.

Registered capital and total investment amounts may have an effect also on FIE term loans. The State Administration of Foreign Exchange (SAFE) has stipulated that the cumulative amount of foreign debt under term loans (loans with a term of more than one year) incurred by a FIE shall not exceed the balance between its total investment and registered capital. In the case where a FIE has set the registered capital equal to the total investment, according to this regulation the FIE would not be allowed to borrow from foreign banks because the difference between registered capital and total investment would be zero. In practice however, in such a situation, the FIE might be allowed to base their foreign debt on a projected total investment amount. In other words, based on their registered capital and according to the minimum registered capital to total investment proportion set out in the Tentative Provisions, the new projected total investment amount could be used to calculate the difference between the registered capital and total investment and thus the allowed foreign debt amount.

The total investment amount may also have tax exemption implications. According to relevant laws and regulations: (i) FIEs belonging to encouraged or restricted category B1 under the Foreign Investment Industrial Guidance Catalogue may have import duty exemption for equipment imported under its total investment for self-use, if the equipment is not listed in the Catalogue of Imported Goods Without Tax Exemption for Foreign-invested Projects; (ii) where FIEs purchase domestic equipment using funds in its total investment, and such kind of equipment belongs to the Customs department?|s tax exemption category, the full value-added tax on the purchased equipment should be reimbursed to the FIE, and furthermore, the FIE may set off their business income tax with the purchase price; and (iii) for foreign-invested research and development institutions, the equipment imported for self-use and within its total investment can enjoy exemption from import duties.

4. Minimum Amounts of Registered (Share) Capital Required

As stipulated in China’s Corporate Law, minimum registered capital for limited liability corporations is based on the nature of the industry. For manufacturing industries, it cannot be less than RMB 500 thousand. The minimum registered capital for various industries according to current laws is given below.

(1) Foreign funded banks, joint venture banks: minimum registered capital of RMB 300 million in a freely convertible currency;
(2) Foreign funded financial institutions, joint venture financial institutions: RMB 200 million in a freely convertible currency;
(3) Joint venture tour operators: not less than RMB5 million;
(4) Joint venture advertising agencies: not less than USD300 thousand;
(5) International joint venture freight forwarding enterprises: not less than USD1 million;
(6) Foreign funded investment-oriented enterprises: not less than USD30 million;
(7) Foreign Limited Liability Joint Stock Companies: not less than RMB30 million.

5. Regulations Concerning the Ratio of Registered Capital to Total Investment

In the Interim Measures Concerning the Ratio of Registered Capital to Total Investment Amount of Sino-Foreign Equity Joint Venture Enterprises, the State Administration for Industry and Commerce (SAIC) provides the following policies regulating the ratio of registered capital to total investment for foreign funded companies (including a Wholly Foreign Owned Enterprise):

(1) If total investment is equal to or less than USD3 million, registered capital must be at least 7/10 of the total investment;
(2) If total investment is above USD3 million but less than or equal to USD 10 million, registered capital must be at least 1/2 of the total investment. If total investment is less than USD4.2 million, registered capital must be at least USD 2.1 million;
(3) If total investment is above USD 10 million but less than or equal to USD 30 million, registered capital must be at least 2/5 of the total investment. If total investment is less than USD12.5 million, registered capital must be at least USD 5 million;
(4) If total investment is above USD30 million, registered capital must be at least 1/3 of the total investment. If total investment is less than USD 36 million, registered capital must be at least USD12 million;
(5) Foreign funded companies that for whatever reason cannot meet the guidelines listed above should report to the Ministry of Commerce, and any corresponding modifications must be jointly approved by the Ministry of Commerce and the State Administration of Industry and Commerce.

6. Time Limit for the Contribution and Payment of Registered (Share) Capital

The table below details the amounts of registered capital and the time limit for contribution and payment:

Note: In accordance with China Company Law, at least 20% of the registered capital should be paid within 3 months from the date of registration.

Immediately after the remittance of registered capital, the WFOE should arrange a local accounting firm (public accounting registered for practicing in China) to verify whether the registered capital has been contributed and paid in accordance with the regulations of the China Company Laws and/or the WFOE’s Articles of Association (a process known as Capital Verification). The WFOE could use the registered capital for daily operation after the issuing of Capital Verification Report.