By: Steve Dickinson
Shanghai has recently loosened its minimum capital requirements for WFOEs (Wholly Foreign Owned Enterprises), making location of service businesses in Shanghai far more attractive. Chinese company law mandates all one shareholder corporations have a minimum registered capital of at least RMB100,000. The WFOE formation regulations provide for no specific amount for registered capital. Instead, the rules provide that the amount of registered capital must be sufficient for the proposed operations of the WFOE.
Most jurisdictions require the registered capital be equal to the first full year of expenses of the WFOE. As a practical matter, it is rare for a big city jurisdiction like Shanghai to require less than USD$150,000 in registered capital. What many investors do not realize is that the registered capital does not need to be contributed in a single lump sum. The rule is that 15% of the registered capital amount must be contributed within 90 days of WFOE formation, with the remainder payable over a period of two years. It is a rare WFOE that will not need to pay capital in the amount of $150,000 over its first two years of operations for rent, salaries and supplies. In accordance with these rules, if the registered capital is set at $150,000, the initial payment due in 90 days is $22,500 with the remaining amount payable within two years. This is not usually a burden for a normal WFOE operation.
In the past, Shanghai had imposed a different rule. Shanghai required minimum capital of $150,000 and required that the entire amount be paid within 90 days. Though this requirement was not usually a problem for manufacturing WFOEs, it often posed a substantial barrier to small service companies that do not have high initial capital costs. In fact, this requirement forced many service WFOEs to form their companies outside of Shanghai. I discussed this issue a number of times with local Shanghai officials over the years and they would told me that they fully understood the effect of their 90 day payment requirement and that they had no problem with forcing small service and retail businesses out of Shanghai.
Based on my recent discussions, however, it appears that all of the local districts with the exception of Jingan have modified their requirements. The minimum registered capital is still set at $150,000, however, these districts now follow the general rule whereby 15% of the total must be paid within 90 days of formation, with the remainder paid over two years. Jingan still maintains a more restrictive approach, requiring minimum capital of $150,000, 15% payment within 90 days, with the remainder payable within six months of company formation.
The result of these changes is that Shanghai is now an acceptable alternative for formation of low capitalization consulting, service and retail WFOEs. This is major change that should be welcomed by service companies considering formation of a WFOE in China.
