China’s New WFOE Minimum Capital Requirements. Waiting For The Dust To Settle.

China (nationally) recently changed its minimum capital requirements to zero. Many commentators have written on this change but none as far as I can tell have written on what it really means in concrete terms for foreign companies seeking to form a WFOE in China.

We have received a number of reader emails asking us about the significance of the change, including the following one yesterday:

I am hearing a lot recently about China’s new company laws released at the end of last year and implemented this year in March. As I am hearing, the most significant change is the elimination of registered capital requirements. What is not clear, it seams, is how the new law affects the establishment of WOFE’s. I searched your blog wondering if you had weighed in on the matter yet, and I couldn’t find anything. Perhaps you are waiting for the dust to settle, but I think this topic would make a great blog post.

Thanks!

I responded to that email as follows:

It’s important. Maybe. But we are staying silent until we know what impact, if any, this is going to have. The law until a few months ago was that the registered capital for WFOEs had to be a minimum of 100,000 RMB. But so what? Most cities set it much higher. So now that the law says there is no minimum, will cities go to zero? I doubt it. We are in the process of forming a number of China WFOEs and so we should know soon.

But also, even if it does go to zero, zero will not make sense for many (really most) companies as the last thing you want to do when you are forming your China WFOE is not have enough registered capital because then if you need more money you have to bring it in from the parent company and then China will tax you on that as income. So even if cities do cease to require any registered capital, we do not expect our clients to put in zero. So in the grand scheme of things, this all might be meaningless. Maybe this is will be our post.

This reader then responded with the following:

I think the other issue to consider for companies is that the registered capital amount provides a sense of trust in that company. Some companies will not work with suppliers with a registered capital amount below a certain level. Will other companies trust a WOFE with zero registered capital? Maybe looking at the registered capital amount is an old way of thinking but sometime habits are hard to break.

Also, I think a lot of SMEs still think the minimum is RMB1mm so they look at that as a big barrier to entry. Once the word gets out the minimum is gone we may see a big rush of activity.

I think you’ve got a good start to the post. I look forward to the official one.

This is “the official one.”

For more on WFOE formation and minimum capital requirements, check out the following: