We discussed about the registered capital contribution requirement under the New Company Law in our previous article (What You Need to Do Under the New PRC Company Law). We got some inquiries asking for advice about how to pay in capital in adherence to the statutory requirements. We realized that some foreign invested businesses, especially where the ultimate beneficiary owners are foreign individuals, had no idea about the foreign exchange rules regarding the capital bank account. In this article, we will share with you the relevant rules and the procedures of paying the registered capital.
Foreign Exchange Control
In China, companies must comply with a “closed” capital account policy. This means that money cannot be freely moved into or out of the country unless it abides by strict foreign exchange rules. Foreign currency transactions are classified into two separate categories: those under the capital account and those under the current account.
- Capital Account
The capital account deals with capital import and export, direct investments, and loan and securities, which includes outbound foreign direct investment (FDI), principal repayment on foreign debts, investment in securities, and more. The transactions under capital account are under more stringent control.
- Current Account
The current account applies to ordinary recurring business transactions, including trading / non-trading receipts and payments, payment of interest on foreign debt, and repatriation of after-tax profits and dividends, amongst other transactions.
Procedures of Capital Injection
- Open a foreign exchange / cross-border RMB (depending on the currency of the registered capital) capital bank account
As aforementioned, registered capital is classified under the capital account. Therefore, a designated bank account should be set up to receive the capital. It’s worth to note that the cross-border RMB is also treated as foreign exchange, and therefore it follows the foreign exchange control rules.
- Complete the Foreign Direct Investment (FDI) registration
Foreign invested businesses need to submit an application form that contains the information about the foreign investor(s) as well as the foreign invested company itself to the bank to complete the FDI registration.
- Inject capital
It’s time for the shareholder(s) to send money to the capital bank account. The amount should not be more than the registered capital and must be paid directly from the shareholder(s)’ business account.
- FDI Declaration
This step is about official confirmation of the capital injection. The State Administration of Foreign Exchange (SAFE) is the official department which confirms the amount of the injected capital.
Step 3 & 4 may repeat if the registered capital is not paid in one go.
Using the Money in Capital Bank Account
The money in the capital bank account is under strict control and cannot be used freely. Technically speaking, the paid-in capital can only be used for the business operation purpose but not for making investment or purchasing properties. And therefore, each payment from the capital bank account should be supported by agreements and fapiaos to prove that the money is used in compliance to the statutory requirements. Foreign invested companies must follow either of the below procedures to transfer money out of the capital bank account:
- Foreign exchange conversion from capital bank account to RMB bank account
The limit for each conversion is USD50,000, and the limit for the accumulated monthly conversion is USD100,000. No supporting documents are required for the first time of conversion. But from the second conversion, companies must submit the list of payments made from the last conversion and the relevant agreements and fapiaos to the bank for verification. The bank has the right to reject the conversion where they find the money for the last conversion is not used compliantly.
- Payment directly from capital bank account
The payment can be made directly from capital bank account to the vendor’s bank account as long as the agreement with the vendor and the fapiao for the transaction can be provided to the bank.
Foreign exchange control is a big headache to almost all the western businesses as there are no such controls in the western countries. If you encounter any problem about foreign exchange transactions, please feel free to let us know.
