Over the past few years, setting up a WFOE in China
has become relatively easier. Certain restrictions have been lifted, and more flexibility has been introduced in the company registration process
. The ease of establishment has made WFOEs a smart choice for foreign investors.
Let’s look at some of the capital requirements of setting up a WFOE:
What are the pre-establishment considerations?
Before you invest your capital, you need a business license to operate in mainland China. To begin with, the first pre-establishment consideration is the scope of your business. By scope, we mean a one-sentence description of your potential business activities in China. This is important because it will eventually be printed on your business license as well.
The business scope is also an important pre-establishment consideration because it will indirectly affect your legal status and your ability to generate and issue invoices. Your clients will need the correct invoices (known as fapiao in local terms)
to claim reimbursements and offset value-added tax liabilities.
It has hence become a pre-requisite for administrative compliance. Both the state and local tax bureaus will thoroughly check the business scope section before granting you any Fapiao (invoices).
What do the current WFOE capital requirements in China say?
Prior to 2014, China required WFOEs to inject capital once the company license has been issued and the business bank account opened. This applied to all trading and consulting WFOEs. However, the same requirements with regard to manufacturing were much higher. However, things changed in 2014.
, the Chinese government relaxed these restrictions and allowed WFOEs to define their own capital injection timeframe. WFOEs no longer need to tie up costly capital for long periods of time. As per the new law, business owners, for most business fields, no need to pay up all the capital during the incorporation period. When a WFOE has to be closed down, no capital injection shall be required for most cases.
Ways to inject capital into your WFOE
To understand this, you also need to know the differences between cash injections and in-kind injections, and how the two contribute to a country’s registered capital.
If you want to inject cash capital into your WFOE, you must only use a foreign account. This capital would later be transferred to the registered capital account in your home country. This will, however, only happen after the transaction has been approved by the State Administration of Foreign Exchange.
It’s also important to understand that you can’t inject cash into your WFOE if you don’t have a legitimate business license with a business scope, as discussed above. You should ideally get the business license sorted out before the company is set up, or your injection might not be treated like a capital contribution.
The second option is through in-kind injections. These refer to capital injected in the form of intellectual property and equipment. However, in-kind injections can only make up around 20% of total registered capital.
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