Registered Capital in China: A Comprehensive Guide for Foreign Businesses
The significance of registered capital for foreign companies seeking to establish a presence in China cannot be overstated. Registered capital represents not only the financial commitment of foreign investors to the Chinese market but is also a key regulatory requirement for corporate establishment.
Since China removed registered capital minimums except for a few industries, companies have been left to determine the figure by themselves. This can be a daunting and difficult task, as the amount is simultaneously rigid and crucial to a company’s early success.
In this article, we explain the basic requirements for registered capital within China’s corporate establishment procedures and discuss key considerations for companies in determining the registered capital amount.
What is registered capital?
Registered capital is the initial investment dedicated by shareholders to a company—either a joint venture or a wholly foreign-owned enterprise (WFOE) in the foreign investment regime. This amount must be registered with the local branch of the State Administration of Market Regulation (SAMR), when a company is incorporated. It is included in the company’s business license, Articles of Association (AoA), and the investment certificate issued to shareholders after incorporation.
There is no minimum registered capital amount to establish a company (including foreign-invested enterprises (FIE)) in China, except for those operating in certain industries, such as securities, banking, and insurance. The registered capital amount is therefore an approximate amount of capital that the company expects to inject over a certain number of years.
China follows a subscribed capital model, which means that the capital contributions do not need to be paid upfront and can be injected under a schedule determined by the company itself (over a period of up to 30 years). The government will check whether the investors follow the capital injection plan.
Registered capital can be in the form of cash or in-kind contributions, such as the provision of equipment, intellectual property, or even labor. However, in-kind contributions can only account for up to 20 percent of the total registered capital amount.
Considerations for determining the registered capital amount
Determining the registered capital amount can be a difficult process, and it is crucial for FIEs to carefully consider many different factors when choosing a number.
First, the registered capital should be sufficient to fund the FIE’s operations at the early investment stage, which is usually until it begins to generate enough income to cover the expenses. This takes at least one to two years and could be longer.
Meanwhile, changing the registered capital amount is a lengthy process in China as it needs to go through required procedures and involves changing the business registration. For this reason, if a company has underestimated the capital needed to keep its business running, or income has been slower to generate than expected, it could quickly run out of cash with few avenues for injecting liquidity, leading to significant operational delays. Moreover, an additional injection of liquidity (that does not involve raising the registered capital amount) might be considered income and therefore subject to tax.
However, determining the amount needed to cover costs will require a range of considerations. An under-commitment of registered capital can leave a business short of crucial funds, while an over-commitment can lead to unused capital that could otherwise be devoted to better purposes. Calculating the optimal amount of registered capital allows a new FIE to run smoothly and avoid costly and time-consuming headaches.
Secondly, while there is no required minimum for most companies, the registered capital amount will be used by authorities to assess the size of your company. This means that the registered capital amount can have implications for the kinds of preferential treatment (such as tax and funding) or bidding projects that your company is eligible for.
That said, it is important to note that the capital contribution provided by a shareholder is also directly related to their liabilities, and a higher registered capital amount therefore bears higher risks.
Because the registered capital is needed to fund the company’s operations until it can turn a profit, companies need to carefully consider their upfront operational costs.
The forecasted costs can be based on the costs of previous years for companies with operations in other countries. However, special considerations should be made specifically for operations in the China market, as they could be higher or lower depending on the company’s plans.
Costs that should be evaluated in the process include, but are not limited to:
- Leasing or purchase of land, office space, and facilities;
- Leasing or purchase of machinery and equipment;
- Purchase of raw materials, components, and other resources;
- Hiring of staff, including overall size of the workforce, seniority, and nationality;
- Hiring of vendors and third-party services;
- Shareholder payments;
- Planned expansion; and
- Taxes and administrative fees; etc..
Note that a company that plans on hiring a large number of foreign staff in China may consider increasing their projected expenditure, as hiring foreigners can be more costly due to higher salary expectations, visa and work permit fees, and other administrative costs.
If a company eventually plans to expand beyond its initial investment in China, it should also consider whether capital is needed to fund this expansion.
Due to the complex nature of calculating the costs of operating in China, companies are advised to consult an accountant that is familiar with your industry in China, as they will be aware of unforeseen costs and potential setbacks that could require added liquidity.
Registered capital versus total investment
The registered capital is not the same as the total investment amount in a company.
The total investment includes the registered capital and the possible foreign loan amount that an FIE can borrow.
Since 2018, how much foreign debt an FIE can take on can also be decided by a new method called “macroprudential management of foreign debt”. However, the pre-existing ratio requirement between registered capital and total investment is still being applied in practice.
For FIEs that choose to follow the ratio between registered capital and total investment mode, the registered capital amount can affect the amount of offshore debt that an FIE can take on from other investors or foreign banks.
The ratio of total investments to the minimum registered capital is outlined in the table below.
Investment to Capital Ratios
|Total investment (US$)||Minimum registered capital|
|3 million or less||7/10 of total investment|
|3 million – 4.2 million||US$2.1 million|
|4.2 million – 10 million||1/2 of total investment|
|10 million – 12.5 million||US$5 million|
|12.5 million – 30 million||2/5 of total investment|
|30 million – 36 million||US$12 million|
|36 million or greater||1/3 of total investment|
Use our calculator to work out the ratio of registered capital to total investment.
Requirements for capital reserves
FIEs in China are required to maintain a capital reserve fund and must pay a proportion of their annual dividends into this fund. Specifically, a company must pay 10 percent of the annual after-tax profits into the capital reserve fund, up to 50 percent of the total registered capital.
Increasing or decreasing the registered capital
If companies plan to adjust their registered capital based on financial, strategic, or regulatory considerations, it is a time-consuming process that involves working with multiple government authorities. Generally, increasing registered capital is easier than decreasing registered capital, the latter of which involves additional procedures.
- Step 1: The company should reach a board resolution (for JVs that haven’t changed their organizational structure in accordance with the Company Law) or shareholder resolution on the matter and revise the AoA accordingly.
- Step 2: To decrease registered capital, a balance sheet and an inventory of assets must be prepared. The company needs to inform the creditor within 10 days of the company resolution and announce the decrease in a designated newspaper within 30 days of the company resolution.
- Step 3: The company should apply to the local branch of SAMR for a business license update within 30 days of the company resolution.
- Step 4: The company should make relevant updates in the bank regarding capital increase/decrease.
- Step 5: The company should apply to the State Administration of Foreign Exchange (SAFE) to make relevant foreign exchange registration.
- Step 6: FIEs are also required to submit a change report through the foreign investment reporting system, which might be integrated with the company name change registration in cities offering one-stop services.
The bank will facilitate the capital increase afterward. And other business certificates may need to be amended correspondingly.
Considerations for transfer of cash registered capital
Since China no longer requires a minimum registered capital amount, it is becoming more common for companies to choose to provide all or most of the funds in cash. However, these cash contributions must be provided from abroad, which can only be done after the business license is issued and creates an additional administrative hurdle.
The transfer of foreign funds into China can be a lengthy process, as the country currently does not allow the free exchange of foreign capital, except in certain limited areas, such as the Shanghai Free Trade Zone. Foreign exchange is subject to certain restrictions and must be approved by the SAFE.
Companies and their shareholders must take into account the possible delays of cash transfers from abroad when planning to inject capital into the Chinese entity, in particular when there is a potential liquidity crunch or an approaching deadline for the subscribed capital contributions.
Liabilities for violations of registered capital requirements
Under the Company Law, companies that falsely report registered capital will be fined between 5 percent and 15 percent of the amount of the (falsely reported) registered capital amount. The company will also be ordered to make the relevant corrections, and in serious circumstances may have its business license revoked.
In addition, if a company fails to notify its creditors that it has reduced its registered capital amount, then it is liable to a fine of between RMB 10,000 and RMB 100,000.
China Briefing is written and produced by Dezan Shira & Associates. The practice assists foreign investors into China and has done so since 1992 through offices in Beijing, Tianjin, Dalian, Qingdao, Shanghai, Hangzhou, Ningbo, Suzhou, Guangzhou, Dongguan, Zhongshan, Shenzhen, and Hong Kong. Please contact the firm for assistance in China at email@example.com.
Dezan Shira & Associates has offices in Vietnam, Indonesia, Singapore, United States, Germany, Italy, India, Dubai (UAE), and Russia, in addition to our trade research facilities along the Belt & Road Initiative. We also have partner firms assisting foreign investors in The Philippines, Malaysia, Thailand, Bangladesh.
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