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Legal-Ease
Business> Legal-Ease
UPDATED: August 13, 2007 NO.33 AUG.16, 2007
Upgrading Your China Entity
This is the second in a series of articles on this topic, the first of which appeared in Issue No. 31
By ZOE ZHOU
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The government usually requires an increase in capital when a foreign-invested enterprise (FIE) is intending to expand its business scope in China. Increasing registered capital is also an important way to finance FIEs.

Registered capital, total investment, foreign debt & FIE financing

Below is a simple formula that may influence the financing of an FIE:

maximum amount of foreign debt ≤ total investment-registered capital

The ratio between the registered capital and the total amount of investment shall conform to the relevant statutory ratio between the registered capital and total investment as showed in the form below.

If an FIE needs to borrow money from overseas (from the mother company or bank for example), the total amount of foreign debts should not exceed the gap between the total investment and the registered capital allowed by law.

In practice, when it is not possible for an FIE to get a bank loan from a Chinese bank, the increase of registered capital is the most straightforward way to gain financing from the mother company. If an FIE will need to seek a loan from abroad, either from the mother company or from a bank abroad, it may be limited by the gap between the registered capital and total investment. If the registered capital is increased, the FIE will be able to enjoy a larger margin to borrow in future.

Increasing capital: the process

Increasing capital is not solely decided by the FIE itself, since it will involve revising the articles of association as well as drafting a feasibility report should there be an enlargement of the business scope. Therefore, a capital increase needs to be first approved by the Bureau of Foreign Trade and Economic Cooperation (BOFTEC) and then registered with the local administration of industry and commerce (AIC).

One thing worthy of attention is the time needed to inject the increased capital. The increased capital should be paid up after the approval of BOFTEC and before AIC registration. Having obtained approval from BOFTEC, the FIE will need to apply to the State Administration of Foreign Exchange for approval to change the capital account, then inject at least 20 percent of the increased capital and perform capital verification. Only after obtaining the capital verification report, which shows that at least 20 percent of the increased capital has been paid up, can the FIE proceed with AIC registration and post-registration procedures.

The whole process of increasing capital will take around three months to complete depending on availability of the FIE’s documentation. However, the funds can be deposited after BOFTEC approval and before AIC registration. From our past experience, the increased capital will be available for use after about one month. Considering the time involved in increasing capital, we suggest FIEs accurately plan their finances before setting up to avoid the trouble of increasing registered capital.

Opening branch offices

Once your established wholly foreign-owned enterprise (WFOE) is up and running, you may be in the position to open a branch office. To do this, several steps need to be completed. The WFOE first has to complete 100 percent injection of the registered capital already committed. Once that is done, the company can begin the process of establishing a branch office.

The WFOE must first apply in the city where they are established to the local BOFTEC for authorization and approval to set a branch office in another location. Once this has been done, the WFOE then must apply to the local BOFTEC in the city where they want to establish their branch office for an approval certificate and business license. Once this has been done, the branch office can handle the post-establishment registrations (making chops, enterprise code registration, tax registration, statistics registration, opening bank accounts).

During the application process, the following documents are normally requested:

. Board resolution of the WFOE;

. Appointment letter for the branch office manager or person in-charge;

. Resume and photo of the branch office manager or person in-charge;

. Lease agreement of the branch office;

. Latest capital verification report;

. Latest audit report;

. Copy of various legal certificates of the WFOE containing the WFOE chop.

The procedure is fairly straightforward and should take a company about two to three months to complete. Once all registrations have been completed, and the branch office has received its certificate from the tax authority, the branch office must file its monthly tax form by the 10th of the following month.

As tax incomes go to two different pools in China-the state tax bureau, which funds the Central Government, and local tax bureau, which funds the local government-when the branch office registers, it will be given two certificates, one for the state tax bureau and one for the local bureau.

Conclusion

Upgrading your China operations is a process that requires a fair amount of planning, understanding and local expertise. However, it’s not the difficult and complex endeavor that many assume it to be.

The author is with Dezan Shira & Associate www.dezshira.com

 



 
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