Tax is never a popular subject, wherever you do business, but it is unavoidable.
Every foreign investor needs to be aware of what taxes they are liable for, how to calculate those liabilities, and when you can claim exemptions.
Registered capital
The minimum registered capital requirements
Foreign investors enjoy national treatment (meaning regionally consistent) in setting up trading companies with minimum registered capital in accordance with the Company Law of China. Minimum registered capital requirements are very substantially reduced from the previous levels, in general RMB100,000 is sufficient. But whatever the minimum registered capital requirements, you must ensure that the registered capital is sufficient for your initial cash flow, not simply to satisfy regulatory needs.
Correctly calculating your total and registered capital requirements
One of the most common, and most serious, problems with WFOE and FICE applications, especially for small businesses, is the issue over registered capital. This is a much misunderstood area. Confusion exists, and many ill-advised investments are made in China due to misinterpretation of the local government’s term “minimum registered capital.” This is meant as a guideline only, and is not supposed to be a ruling on how much you need to invest.
Additionally, there is often conflict here between the local government – keen on securing another foreign investor in order to meet its targets – and other government departments responsible for monitoring and managing China business issues, especially the tax bureau and customs.
It is important to note that tax collection is administered centrally, while the approvals process is at a local level. This means conflicts can and do arise between what the local government says in order to attract your investment, and what the tax bureau then says in dealing with any lack of compliance. And by then it’s too late – you’re already committed – and you have no choice other than to go through additional pain and hassle to get things put right, usually involving more investment capital.
In fact, some local government officials are downright reckless when using minimum registered capital requirements as a sales pitch. The amounts they may state may not be in compliance with the actual needs of your business or other government department requirements – the classic obfuscation that so often blurs the thinking and otherwise competent planning by international investors.
Registered capital is a key issue when structuring your investment and planning its financing – you need to get this right or face serious problems – either immediately, or later on. They can be avoided.
