Home  Contact Us
  Follow Us On:
 
Search:
Advertising Advertising Free Newsletter Free E-Newsletter
Magazine
  
      2024       2023       2022       2021       2020       2019       2018       2017       2016       2015       2014       2013       2012       2011       2010       2009       2008

LEGAL: FINANCING YOUR WFOE IN CHINA
Share to

FINANCING YOUR WFOE IN CHINA
By Garrigues

BT 201912 LEGAL 01The Wholly Foreign Owned Enterprise (“WFOE”) is the most common alternative for structuring the foreign investment in the People´s Republic of China (“PRC” or “China”, for the purpose of this article, shall exclude Special Administrative Regions of Hong Kong, Macau and Taiwan Region). Considering the foreign exchange control policies on capital inflows and outflows applicable in China, it is of relevance for the investors to determine the financial needs of its WFOE at the time of its incorporation, as well as to know the alternatives for financing a WFOE during its business term.

BT 201912 LEGAL 03Based on the above, in this article we will summarize the main alternatives for an investor to finance its WFOE in China.
 

1. Registered Capital contributions

As per the amendments of the Company Law effective since 2014, the investors can choose the contribution schedule of the registered capital (namely the share capital) (“Registered Capital”) of its WFOE, with no obligation to perform an initial capital contribution at the time of incorporation of the company. The Registered Capital is the capital contribution made by the investors to the WFOE and represents the limit of the shareholders’ liabilities and obligations towards third parties. As per the current law and regulations, and in any case depending on the criteria of the relevant authority due to the business scope and location of the company, the registered capital of a company can be contributed during the term of the company.
 

Therefore, investors can contribute the Registered Capital of the WFOE based on its financial needs.
 

However, it is also important to balance the amount of the Registered Capital, due to it will be equal to the maximum liability of the investor. Therefore, a high registered capital will imply a high liability for the investor.
 

Each of the Capital Contribution will trigger procedures with the State Administration of Foreign Exchange (“SAFE”) and will also be subject to a tax rate levied on the capital contributions equal to 0,025% for each instalment as paid-in capital until the total registered capital has been fully paid.

BT 201912 LEGAL 022. Capital increase

In case that the Registered Capital of the company has been already contributed, but there are still financial needs, the investor may consider increasing the Registered Capital of the company and proceeding with the capital contribution according to the financial needs of the company.
 

This alternative may imply, amongst others, the amendment of the articles of association of the WFOE, as well as the alteration of its Business License. This alternative may take around 8 weeks to be fully implemented.
 

The capital increase will also imply the increase of the Financing Quota (as defined in the following section).

BT 201912 LEGAL 063. Foreign loan

Investors can also consider executing a foreign loan for financing its WFOE.
 

To be qualified as foreign loan, the lender shall be a related or unrelated foreign. Commonly, the foreign lender is the investor of the WFOE or a related company of the investor.
 

The aforementioned loan shall be registered before the SAFE and it is necessary the opening of a specific bank account for receiving the loan. The procedures for the implementation of this alternative are simpler than the capital increase and it could be estimated to have this alternative implemented within 4 weeks. Besides, the WFOE may return the loan as per the terms agreed in the loan agreement, which grants some flexibility to this option.
 

The total amount of the loan shall be lower than the Financing Quota of the company at the time of execution of the loan.

BT 201912 LEGAL 04Financing Quota

The financing quota is the maximum amount that may be financed by foreign loans (the “Financing Quota”).
 

Traditionally the Financing Quota is calculated as the difference between the total investment and the Registered Capital of an entity. However, as per a recent reform, foreign invested enterprises may also choose to adopt a new framework for borrowing foreign loan, under which the capacity of borrowing foreign loan will be mainly based on the net asset value of the foreign invested enterprise.
 

Therefore, under the PRC law and regulation, such Financing Quota may be determined via two modes as follows:
 

- Mode 1: the maximum Financing Quota shall be equal to the difference between total investment and registered capital of a foreign invested enterprise;
 

- Mode 2: the maximum Financing Quota shall be equal to the amount of twice the net assets of the foreign invested enterprise.
 

Currently, a foreign invested company is allowed to apply for the implementation of either mode for the calculation of its Financing Quota. However, once adopted, the calculation mode could not be changed again.
 

In addition to the previous three alternatives for financing your WFOE in China, it is to be noted that in case that a WFOE perform services for the investor or for a related company of the investor, such investor (or the related company) shall compensate the WFOE for the provision of the aforementioned services. Commonly, the services provided in China by a WFOE to its investor are services related to the development of commercial strategies, sales support or marketing support, amongst others.
 

The description, provision method, as well as the compensation for such services, shall be included in an intra-group service agreement. For the capital inflow to the WFOE for the provision of services under the relevant intra-group service agreement, such agreement has to be registered before the relevant bank, which will act on behalf of the SAFE, reviews and checks the evidences and documents supporting the economic reality of the transaction and its consistency with the services included in the intra-group service agreement.
 

For the commercial services below mentioned, a 6% VAT plus local charges will be taxed. In any case, the specific applicable VAT rate will depend on the classification given by the authorities to the services provided. Besides, revenues from the aforementioned provision of services will be subject to the relevant Enterprise Income Tax currently amounting to 25%.
 

From the transfer pricing perspective, the service fee charged for the services under the agreement shall reflect an arm’s length principal. Therefore, it is strongly recommended that a benchmark study shall be conducted in China for transfer pricing purpose.

BT 201912 LEGAL 05外商独资企业(WFOE)是在中国进行外商投资的最常见选择。本文将对投资者在中国为其外商独资企业进行融资的方式做一小结。
 

注册资本出资。根据《公司法》修正案,投资者可以选择其外商独资企业注册资本的出资时间表,无需履行初始出资义务。投资者可以根据其财务需要缴纳外商独资公司的注册资本。
 

增资。如果公司的注册资本已经缴纳,但仍有财务需要,投资者可以考虑增加公司的注册资本,并根据公司的财务需要继续出资。
 

国外贷款。投资者也可以考虑执行外国贷款,为其WFOE融资。贷款应在国家外汇局登记,并有必要开立接受贷款的特定银行账户。贷款总额应低于执行贷款时公司的融资额度。

    Subscription    |     Advertising    |     Contact Us    |
Address: Magnetic Plaza, Building A4, 6th Floor, Binshui Xi Dao.
Nankai District. 300381 TIANJIN. PR CHINA
Tel: +86 22 23917700
E-mail: webmaster@businesstianjin.com
Copyright 2024 BusinessTianjin.com. All rights reserved.