China Capital-Adequacy Requirements For Foreign Investors: Same Deal Here
by Brendon Carr
Over at China Law Blog Dan Harris touches on the topic of minimum capital-adequacy requirements for foreign investors in China. Unlike Korea, where foreign investors are rarely required to provide capital greater than that required of Korean investors, China apparently demands that a foreign investor prove the adequacy of working capital. And it seems a lot of investors are exercised about it. But just because the Korean government doesn’t impose a requirement doesn’t mean it’s a real issue for investors here.
Capital-adequacy requirements mean a business plan is required, and some consideration of how much money is really necessary for the solvency of the business on an ongoing basis. There will need to be enough funds for local staff salaries and any expatriate manager’s salary, rent, and any capital expenses (computers, tables, chairs, telephone lines, Internet service, etc.) which are necessary to get set up. Anyone plunging into a business overseas without a clear and thorough business plan is headed for trouble.
Because Korean commercial landlords typically require enormous “security deposits” of 10 months’ rent or more, a company established at the minimum capital of W50,000,000 can quickly run out of money. Registering new capital costs a lot in registration taxes and attorneys’ fees, but if head-office support to the company is not registered as capital then it’s either a loan (also subject to reporting requirements, which can be expensive to comply with) or business income—which is taxable at ordinary income tax rates. Dan explains this in his post, but it goes the same for Korea.
Getting money back from the Korean subsidiary is limited as well. Funds can be retrieved only as dividends, which are taxed twice.
This is why I always recommend a branch office rather than a corporation—a branch is basically transparent for accounting purposes and can take money out (and put money in) without special procedures.
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