Initial Funding And Injecting Capital Into Chinese Business

Initial Funding and Injecting Capital into Chinese Business

In this post, we discuss one of the hottest topics encountered by foreign companies in China: transferring and registering a company’s initial funding. The suggestions and recommendations that follow are relevant to anyone thinking of establishing a Chinese business, be it a Foreign Investment Enterprise (FIE), a Wholly Foreign Owned Enterprise (WFOE) or a Joint Venture (JV) with a local company.

Transferring Initial Funding to a Third Party before Establishing the Company

Applying for a business license in China usually takes four to six months. Many companies cannot stand that long in order to use the funding to cover the initial costs of setting up an office, purchasing equipment, etc. They therefore prefer to transfer the initial funding to their local agent or team before they get their business license.

However, once the business license is granted and the company is approved by the government, these funds—used for establishing the company and proving that it is financially viable - are not legally considered to be a part of the company’s registered capital. According to Chinese law, any monetary transfers must be made directly between the foreign investors from a foreign bank account to a Chinese bank account set up under the company’s name for capital deposits, not by using a third party.

In a number of cases, we met investors who had transferred tens of thousands of US Dollars to local suppliers who then found it difficult to explain these transactions in the company’s balance statements, despite the fact that the money was used for rent or for purchasing equipment. It proved difficult to show the local authorities that these purchases were part of the company’s initial funding.

Solution – temporary account and relevant regulations

We therefore advise you to open a temporary bank account right after registering the company name. You should know that there are certain limitations to the amounts that may be deposited into temporary accounts and to the transactions. These limitations vary throughout China, so we suggest that you check which regulations are suitable for the location you are applying for the business license and intend to register the company. WHERE does one check?

Transferring Funds to the Company Account

If you have liquidity problems (for example, due to insufficient capital flows), there are three ways of transferring funds your company:

1. Foreign sources (subject to the limitations on total investment mentioned above).

2. Increasing the company’s registered capital – an exhausting procedure requiring a change in the company’s incorporation documents and an application for a new business license (which takes between 1 – 4 months).

3. Transferring funds against a company’s own invoice – however, in this case, the Chinese tax authority will categorize the transfer as taxable income, which leads to further expenses. Avoid this – it is an outrageous waste of money.

Therefore, you should calculate the amounts you require seriously, consulting whoever needs to be consulted, sparing yourself the aggravation and the unnecessary expenses.

We at the PTL Group have helped and are currently helping many companies to successfully register in China. However, even a successful registration is not the end of the road. It’s only the beginning of the real bureaucratic headache.

Managing a company in China is incredibly difficult. You need to manage local personnel and finances and handle the tax authorities, the Ministry of Commerce, the Ministry of Human Resources and – if you have a factory – the Ministry of Health, the Fire Department, the local governments (city/ county/ province), etc.

You can make this easier by outsourcing anything unrelated to your core business – finances, logistics, warehousing, etc. Doing this allows your local CEO to have the peace and quiet s/he requires in order to focus on the main reason for her/his relocation – whether manufacturing, sales or procurement.

Finally, we should tell you that we have seen many cases in which a company began the registration process and realized that it was too early for it to do so. We suggest that you take your time and wait for two to three years in order to see whether the requirements of your business justify the establishment of a new company. Closing a company is much more difficult than establishing it. In many cases, companies prefer to manage their Chinese operations through PTL Group’s business platform until they feel that the extent of their local operations justifies the establishment of a new company.