Registered Capital in China: All You Need to Know

With the amendment to the PRC Company Law, China has introduced major adjustments to the rules on subscribed and registered capital of a limited liability company. Key changes include setting up specific deadlines for limited liability company to contribute their registered capital and providing clearer conditions for reducing registered capital. This new PRC Company Law has been effective since July 1, 2024. 

Since China no longer requires a minimum registered capital for most industries, businesses must decide this amount at their discretion. While this allows more flexibility, it can also be tricky because strict rules must be followed. 

What is Registered Capital?

The registered capital of a company corresponds to the total equity or financial investment made by the shareholders in the company. It serves as the initial investment in the company's business operations. The amount of the registered capital is filed with the State Administration for Market Regulation (SAMR) during the company incorporation process. This is also reflected in the company’s business license, articles of association, and certain sectorial licenses.

Is Contribution to the Registered Capital Compulsory? 

The registered capital of a company does not need to be paid upfront at the time of incorporation of the company. Shareholder(s) shall only commit to contributing their registered capital over a specified timeframe. 

The PRC New Company Law requires that all limited liability company shall fully contribute their registered capital within five years from its incorporation. Thus, when registering a company, it is not advisable to set up a registered capital that is too high. Companies should carefully think about their investment needs before setting up their registered capital. If additional financing is needed, companies may increase their registered capital afterward. Mandate that shareholders of Limited Liability Companies (LLCs) must fully contribute their subscribed capital within five years of incorporation.

How Can Capital Contributions Be Made?

Contributions can be made in cash or in-kind, such as equipment, intellectual property, or other tangible assets. However, in-kind contributions are limited to a maximum of 20% of the total registered capital.

Cash Contributions

This is the most common method, which involves sending money to the company's foreign capital account. After injecting funds, companies must apply for conversion to RMB for operational use.

Banks impose restrictions on usage and require supporting documentation for petty cash conversions or direct payments to suppliers.

In-Kind Contributions

This includes tangible assets like equipment or real estate and intangible assets like intellectual property. If there are in-kind contributions, these must be appraised for fair value and documented in the Articles of Association.

Is There Any Minimum Registered Capital?

There is no mandatory minimum capital requirements for most industries. However, exceptions exist, such as:

• A minimum registered capital requirement is necessary if you want to use the word “China” in your corporate name. 
• Companies engaged in financial leasing or similar activities must report a minimum registered capital of USD 10 million.
• Districts or parks may set minimum capital thresholds to qualify for registration. Before committing to a lease agreement, businesses should verify whether the location imposes specific registered capital requirements.
• Companies willing to apply for specific licenses (such as the license for labor dispatch services) or statuses (such as headquarters status) must fulfill requirements regarding registered/subscribed capital.

What Is the Timeline to Contribute? 

The amended Company Law introduces a five-year timeline for contributing.

Also, there are strict disclosure requirements for reporting specific capital registration details via the National Enterprise Credit Information Disclosure System. This includes the disclosure of:

• The subscribed and paid capital contributions made by shareholders of a limited liability company, the methods and dates of those contributions, and the shares subscribed by promoters of joint stock companies.
• Updates or changes to the equity and shareholding details of shareholders of a limited liability company and promoters of joint stock companies.

How to Determine Registered Capital Amount in China

Determining the appropriate registered capital is critical for Chinese companies. Striking a balance between operational needs, compliance, and financial flexibility is essential to avoid cash shortages or inefficient use of funds. Below are the key factors to consider:

Operational Costs

Registered capital should cover the company’s initial operations until it begins generating enough revenue to sustain itself. This period typically ranges from 6–12 months but could extend up to 1–2 years, depending on the business model. Key costs to evaluate include:

• Office and Facilities: Leasing, renovation, furnishing, or land purchase.
• Equipment and Resources: Machinery, raw materials, components, and other essentials.
• Staffing Costs: Salaries, hiring costs, and administrative fees, including visas and work permits for foreign employees.
• Utilities and Services: Utilities, third-party vendors, and administrative fees.
• Planned Expansions: Funds for scaling operations or entering new markets.
• Taxes and Miscellaneous Fees: Corporate taxes, shareholder payments, and other fees.

For companies planning to hire a large number of foreign staff, it’s important to take into account higher salaries, visa and permit costs, and related administrative expenses. Businesses with significant upfront investments, such as manufacturing or large-scale projects, may also require higher registered capital.

Compliance and Regulatory Risks

The registered capital amount has a direct impact on the way authorities classify a company. This can impact eligibility for incentives and project bids. Some important considerations include:

Authorities use registered capital to gauge the size and seriousness of a company. A higher amount may unlock access to tax incentives, government funding, or public project bids.

Meanwhile, shareholders’ liability is tied to their capital contributions. While higher registered capital may project credibility, it increases shareholder financial exposure in the event of losses or insolvency.

Tax Implications

Injecting funds into a company through means other than registered capital may be treated as taxable income, leading to higher tax liabilities. Therefore, estimating the capital needed upfront is crucial to avoid complications and unnecessary taxes.

Challenges of Changing Registered Capital

Underestimating registered capital can lead to cash shortages, causing operational delays. While increasing the registered capital is possible, it is a lengthy and complex process that involves updating business registration and complying with additional regulatory procedures. Conversely, overcommitting funds can result in unused capital that could have been better allocated elsewhere.

Planning for Future Growth

Registered capital should also accommodate planned expansions. Companies aiming to scale their operations or diversify into new markets should factor these ambitions into their capital projections to avoid the need for future increases.

What is the Difference Between Registered Capital and Total Investment in China?

The registered capital is the investment contributed by shareholders.

 The total investment is the total funds available for the company’s operations, including registered capital and permissible foreign loans.

The difference between the total investment and the registered capital corresponds to the  "financing gap," which represents the maximum amount of foreign debt a company can secure.

In China, the relationship between registered capital and total investment is governed by debt-to-equity ratios.

Statutory Reserve Fund Requirements

Companies must allocate 10% of their annual after-tax profits to a statutory reserve fund until it equals 50% of the registered capital. This fund acts as a financial safeguard and can be reinjected into the company as additional capital.

Increase or Reduction of Registered Capital in China

Foreign investors may find that the registered capital initially set for their company no longer aligns with their business needs.

Adjustments to registered capital may thus be necessary. This includes increasing registered capital to support growth or decreasing it to better align with current operations or financial realities.

1. Increasing Registered Capital

The process for increasing registered capital is simpler and often required for expanding operations or meeting new financial needs. The steps are as follows:

1. Step 1: The company must adopt a resolution to approve the increase in registered capital (the total investment shall be increased accordingly to maximize the company's debt capacity).
2. Step 2: preparation of a revised version of the Articles of Association (AoA) must be prepared and preparation of all administrative forms.
3. Step 3: submission of the application for the capital increase to the local Administration of Market Regulation (AMR), along with required documents such as the resolution revised AoA.
4. Step 4: Upon registration of the capital increase, the AMR issues a new business license reflecting the increased capital.
5. Step 5: The company must update its records with other authorities, including the bank, tax bureau, and any relevant regulatory bodies.
6. Step 6: Transfer the additional funds to the company’s foreign capital account and convert them for business use.

2.  Decreasing Registered Capital

Decreasing registered capital is more complicated due to the need to safeguard creditor interests and adhere to strict regulatory processes. Here are the steps:

1. Step 1: Approve the reduction through a resolution and amend the AoA accordingly.
2. Step 2: Notify creditors within 10 days of the resolution and publish an announcement in a designated newspaper or the AMR system within 30 days.
3. Step 3: Allow creditors 45 days to register claims and address these claims through repayment plans or debt guarantees, if applicable.
4. Step 4: Apply to the AMR with supporting documents, including a balance sheet, inventory of assets, and proof of creditor notifications.
5. Step 5: The AMR will issue a new business license reflecting the reduced capital
6. Step 6: Update the company’s capital records with its bank. If the reduced capital involves returning funds to shareholders, additional applications and approvals are required.
7. Step 7: Register changes with the State Administration of Foreign Exchange (SAFE).
8. Step 8: File a change report through the foreign investment reporting system, which may also integrate with name change processes in some cities.

Special Rules for Decreasing Capital

Companies can reduce capital to make up for losses after utilizing statutory and discretionary public reserve funds.

In this case, creditor notifications are not required, but the reduction must be publicly announced within 30 days through designated platforms.

Shareholders cannot receive distributions or be exempted from unpaid contributions when reducing capital to offset losses.

Proportional Reduction

Reductions must align with shareholders’ contributions or holdings unless:

• Laws stipulate otherwise.
• All shareholders of an LLC agree to specific terms.
• The AoA of a joint-stock company specifies different arrangements.

Profit Distribution Restriction

After decreasing registered capital, companies are prohibited from distributing profits until the combined statutory and discretionary reserves equal at least 50% of the reduced capital.

Penalties for Non-Compliance

Under Company Law, companies that falsely declare their registered capital may face fines ranging from 5% to 15% of the falsely reported amount. They will also be required to make corrections, and in severe cases, their business license could be revoked.

If a company reduces its registered capital without notifying creditors, it can be fined between RMB 10,000 and RMB 100,000.

Article 251 of the amended Company Law also outlines penalties for failing to truthfully disclose registered capital information through the National Enterprise Credit Information Disclosure System. Fines range from RMB 10,000 to RMB 50,000 for standard violations and RMB 50,000 to RMB 200,000 for serious cases. Individuals directly responsible for such violations may also be fined between RMB 10,000 and RMB 100,000.

How Registered Capital Can Be Utilized in China

When a company's registered capital is transferred into its foreign capital account, the funds are not immediately available for use in the company's regular bank account. Initially, these funds are held by the bank, and the company must apply for capital injection by providing the necessary documentation to the bank to access them.

Once the funds are successfully injected into the capital account, their usage is restricted compared to a standard RMB basic bank account or current account. Companies cannot freely spend or transfer all the funds to another account without undergoing specific procedures. 

To utilize these funds, a company must perform a capital conversion, which can be done through two primary methods:

Petty Cash Conversion

This method involves transferring a portion of the funds from the capital account to the RMB basic account. The transferred amount can then be used to pay for expenses such as rent and tax payments. Banks typically limit the amount for each petty cash conversion, usually ranging from RMB 50,000 to RMB 200,000.

• Usage Regulations: Banks monitor how petty cash is spent and have specific regulations on allowable expenses. Generally, payments for rent and taxes are permitted. However, most banks do not allow petty cash to be used for employee salary payments.
• Documentation Requirements: After the petty cash is spent or before initiating another conversion, companies are usually required to provide supporting documents for all transactions and conversions for verification purposes.
• Bank Confirmation: It is advisable to confirm with the company's bank branch regarding the permissible uses of petty cash to ensure compliance with the bank's policies.

Direct Payment Conversion

Alternatively, companies can make payments directly from the foreign capital account to suppliers or for payroll expenses. However, this process can only be carried out with internet banking services.

• Submission of Documents: The company must submit relevant contracts and invoices for supplier payments or employment contracts and supporting documents for salary payments to the bank.
• Physical Submission: Banks often require these documents to be submitted in person at the bank branch, adding an administrative step to the process.
• Administrative Considerations: Due to the need for physical documentation and bank approval, this method may introduce additional administrative burdens on the company.

Following the reforms to China's Company Law that took effect on March 1, 2014, Wholly Foreign-Owned Enterprises (WFOEs) are no longer mandated to adhere to specific registered capital limits. Nevertheless, allocating an appropriate amount of registered capital remains important, as it is a prerequisite for operating a business in China.