subject: Recapitalizing A China Business [print this page] As was recently reinforced by the Dalian governments move to bar foreign investors with investments below a certain threshold from hiring foreign staff, a companys cash flow and registered capital are critical, yet often overlooked, aspects of setting up a business in China.
In the Dalian case, the government has issued a directive that if a foreign-invested enterprise has registered capital below RMB3 million, then the local government will restrict the number of foreign employees eligible to work for that company in China. If this rule is taken up in other locations, lower capitalized foreign investors in China may need to recapitalize their operations in order to increase their expatriate staff. This is over and beyond the original intention for registered capital, which has until now been required either as a market entry need to weed out financially weak investors, but more pragmatically for the smaller investor, registered capital is required to fund business operations until it is in a position to fund itself.
New to China investors
Generally speaking, this should be catered for in the feasibility report a business plan that is submitted to the authorities as part of the application process. The amount invested however should be, as mentioned, enough to fund the business until it can break even from its own operations and trade. However, in order to attract new investments, many government agents do not pay much attention to details of this report. Often, they will indicate a minimum amount as all that is required to obtain your business license.
The business can come to a shuddering halt very quickly if the registered capital amount is insufficient to support the operations cash flow. It is also not just a simple matter of wiring additional funds to China to tide the business over. Accordingly it is very important that your business plan has accurately identified the true cost of your operations in China, and seek professional assistance if you are not sure. Assuming you have correctly funded your business, then the matter can be laid to rest.
Running out of cash flow
If you do run out of operational money, you will not be able to pay your staff, your suppliers, and your utilities. In effect, your business has run out of cash flow. It is vital you properly capitalize your business in China in accordance not just with government guidelines over minimum registered capital, but also with regards to pure economic and operational realities. However, if your sums have gone wrong, and you run out of operational cash flow, you will need recapitalization. However, if you do this without following the correct procedures, then the additional amount invested into the business can be treated as income and will accordingly be subject to income tax. In order to avoid this and correctly allocate the investment as registered capital (which is not taxable), the procedures to be followed include:
* Application to increase the registered capital with the original business licensing authority
* Application to the State Administration of Foreign Exchange to transfer funds into your Chinese bank account for the purpose of recapitalization
* Application for a new capital verification certificate
* Reissuing of your business license reflecting the new registered amount; this is important as the registered capital amount is also the limited liability status of the business
These steps take between six to eight weeks to complete.
by: Dezan Shira & Associates
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