Registered capital has been one of the most frequently asked questions regarding the registration process. It is the total amount of equity contributed by shareholders to establish the foreign-invested enterprise (FIE) in China. Prior to 1st March 2014, the capital injection was required to be completed within two years from the registration date, either by installments or a lump sum. This requirement is no longer effective.
Nevertheless, allocating a reasonable and appropriate amount is still essential as it could affect the result of the registration application. The subsequent changes to the registered amount usually consume quite some time, and rarely would a downward adjustment be approved.
Cash or Asset Contribution?
The registered capital is typically tax-free and could be in the form of cash and asset. However, the cash contribution is advisable as asset contribution might add to the complexity of the transaction with tax and proper asset valuation.
For instance, the two partners of an established wine business in China are planning to bring another one on board, which has a wine production firm in Australia. Instead of injecting cash into this newly established WFOE, he would like to contribute an inventory of wine that worth RMB500,000 directly. It entails a couple of issues:
1) The first difficulty is to determine the actual market value of the wine, which needs to be performed by a third-party. The final amount will most likely deviate from what the partners agreed on – RMB 500,000.
2) Secondly, as contributed equity of the company, the revenue generated from the wine will be pure profit as there would be no cost of goods sold (COGS). And also no VAT fapiao from the vendor. Hence, the taxable amount would end up much higher than it should be.
3) Additionally, there might be some tax liability arising from importing the wines into China.
Therefore, contributing capital in the form of cash would be considerably more straightforward.
The total investment is the amount necessary for an FIE to establish its production line or entire operation, which should be specified in the Articles of Association (AoA). It is not necessarily identical to the registered capital. The differences between the two could be justified as a loan issued by the parent company overseas to the subsidiary in China.
The full capital injection of registered capital is the pre-requisite of repatriating dividends. Before the company reserve fund reaches the equivalent amount to 50% of registration capital, the WFOE must allocate 10% of its post-CIT profit to the reserve fund.
STAR Accounting & Consulting has assisted a number of large corporations, SMEs and entrepreneurs with their China market entry/entrepreneurship projects. To determine what is the most appropriate registration capital amount, or any further questions on this subject, please contact Nancy Chen at Nancy@www.star-acc.com.