Background

Interpretation of Total Investments (TI) and Registered Capital (RC)

Definition of TI

Definition of RC

Steps in deciding the TI & RC

1. Before setting up an FIE, the investor should calculate the TI and the return for the intended project. This is normally done through the discounted cash flow method.
   The investor can estimate the internal rate of return (IRR) for the intended project. The discounted cash flow would later form part of the submission documents for project approval.
2. The RC is regulated according to the rules set by the Chinese authority. Please refer to the table below:

Table 1: TI & RC ratio

• There is a difference between the TI and RC. The FIE can apply for bank loans or investor loans if required according to its operational needs.
  If there is no operational need, the FIE is not compelled to apply for a loan.
• The difference between the TI and RC is the amount that limits the FIE in its loan application, ie. the FIE will be allowed up to this differential amount if it wishes to apply for a loan.
• The RC should follow the timeline for RC contributions strictly which is either:
  1. By one time contribution: RC must be injected within 6 months after the business licence is issued; or
  2. By installments: the first contribution of at least 15% of its subscribed RC must be injected within 3 months after the business licence is issued, the balance by the end of the year.

Under the new Company Law, for Limited Liability Companies, the minimum RC requirement is RMB 30,000. A minimum of RMB 100,000 is needed for an individual-owned company.

For certain business, the law has specific requirements on RC. See Table 2 below:

Table 2: Detailed requirements of minimum registered capital for different business types

Highlights

1. While the figures in Table 2 are mandatory, in practice, the authorities will not only consider the requirements of the Law in evaluating an investment project, they will also evaluate the future business operational requirements of the project.
2. The RC should be injected from the investors’ own accounts, ie. the FIE’s direct parent entity should inject the RC and not other affiliated entities.
3. After the remittance of the RC by the investor, the FIE is required to appoint a Certified Public Accountant (CPA) firm to verify the RC and issue a capital verification report in accordance with the prevailing PRC rules and regulations.
4. Capital contribution must strictly follow the time schedule and amount mentioned in the joint venture contract and Articles of Association. Otherwise, the bank will not accept the capital injections and the CPA firm will not issue the capital verification report.
5. If the FIE does not have sufficient funds to operate the business, eg. due to expansion, the RC can be increased.

Procedures to increase the registered capital

1. Approval by government authorities, i.e. obtaining the Letter of Approval, and renewal of the Certificate of Approval (upon approval)
2. Capital injection process
3. Verification of invested capital and issuance of the Capital Verification Report
4. Renewal of other related certificates of the FIE
5. Duration: 2~3 months

Reference Laws and Regulations

1. The Company Law of the PRC, promulgated in 2005
2. The Sino-foreign Equity Joint Venture Ratio of Registered Capital to Total Investment Tentative Provisions, the Tentative Provisions, promulgated in 1987
3. Foreign Investment Industrial Guidance Catalogue, amended on 1 Jan, 2005