Global Registration

What are the WFOE capital requirements in China?

A foreign company can set up a business entity in China in the form of a representative officer (RO), Joint Venture (JV) or a Wholly Owned Foreign Enterprise (WFOE). The most commonly adopted business vehicle by various foreign-owned companies is the structure of WFOE^[1] which is similar to an LLC in China. This article discusses the concept and capital requirements of a WFOE in China.

What is a WFOE in China?   

The term WFOE/ WOEF in china stands for Wholly Foreign Owned Enterprise. A WFOE is essentially a Limited Liability Company (LLC) in China, where 100 per cent ownership of the company rests with the foreign subsidiary. Maximum investors across the world select the model of WFOE because it gives them complete freedom to run the business operations without any interference from any local player and, at the same time, able to keep tight control over their respective Intellectual Property.

Additionally, a WFOE enjoys the same rights and status as a locally registered company in China except in the areas/sectors mentioned in the Foreign Investment Industries Guidance Catalogue where registration of WFOE is restricted or prohibited in the country.

The concept of WFOE was envisioned to attract foreign investment in China, especially in technology and manufacturing. WFOEs have also turned out to be a significant source of foreign investment in China, so much that China has surpassed the USA to become the country attracting maximum foreign investment.

The first step in registering a WFOE in China is defining the scope of the business activities. A WFOE can carry out only those business activities that fall within the scope of the “Specified Business Activities” mentioned in the registration application. The filing for a WFOE registration takes place with the Ministry of Commerce (MOFCOM) and the Administration for Industry and Commerce (AIC). The Chinese government has introduced some amendments to the capital requirements of WFOE.

WFOE capital requirements in China  

In their effort to attract more foreign capital investment in China, the Chinese government has introduced changes in their company law. The amendments came in 2014 and removed the minimum capital requirements for a WFOE to open a business in China. Before the amendment, the minimum capital requirements ranged from RMB 500,000 to RMB 1 million.

After the amendment, no minimum capital requirements are prescribed for any WFOE to register their business entity in China. However, the capital requirement should be sufficient to start the business smoothly. Therefore, industry-specific capital requirements persist whilst registering WFOE in China.   

What is meant by Registered Capital?

The registered capital refers to the amount of cash, assets in the form of Intellectual Property, etc., invested in running the business. The registered capital can be in the form of cash, intellectual property, land, building, equipment etc. or any other asset. Before starting operations, 20% of the total registered capital must be submitted, which makes up for the minimum amount of capital a WFOE needs to sustainably run its operations in China. Therefore, this amount should be accordingly decided before generating any income.

As per the new amendment requirements, the registered capital can be infused at any time during the first 29 years of the business of WFOE. It must be noted that before a WFOE closes its operations, it must ensure that all the capital is fully paid up.

Ideal WFOE Capital requirements in China 

As mentioned above, there are no prescribed minimum level requirements for setting up a WFOE in China. However, MOFCOM and AIC do review the proposed capital amount of a WFOE. The practice prevalent in the industry is choosing the appropriate level of capital investment and mentioning it in a business plan which is submitted to the relevant authority.

The business plan should comprise the future projections, operational structure and the amount of capital required to run the business operations in China. These financial forecasts and the expected expense will be taken into consideration by the AIC to make the decision on the amount of WFOE capital requirements for your business.

Procedure to change WFOE capital requirements in China

The following procedure must be followed to change WFOE capital requirements in China:

1. An application is filed, along with the appropriate reason, with the MOFCOM to increase the share capital.
2. Once the approval has been obtained from the MOFCOM, another application is filed with the local AIC.
3. Approval is sought from the State Administration of Foreign Exchange (SAFE) to transfer the capital from an overseas account.
4. An application is filed with the AIC to reissue the WFOE business license. 

Conclusion 

It can be concluded from the above-mentioned discourse that injecting a sufficient amount of capital is crucial to successfully registering and subsequently running the business in China. Post-2014 amendments, the Chinese government eliminated the requirement to infuse all the capital at the beginning of the company’s registration in china. However, the promoters should infuse sufficient capital for the successful registration and setting up of a WFOE in China. For gaining more insights into WFOE capital requirements in China, please follow Enterslice.

Read our Article: Company Registration Process in China: A Step by Step Guide