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Business Development Director, TMF China
Published
02 October 2018
Read time
3 minutes

Three ways to fund your business in China

Raising funds from overseas in China can be tricky. The Chinese government implements strict rules governing cross-border financing, however, this doesn’t mean it is impossible. Here are three ways companies can raise funds from foreign firms.

Companies operating in China may seek to raise funds from time-to-time, in order to expand. If you are uncertain of the compliance requirements in China, this might help. According to TMF Group’s Financial Complexity Index 2018, the world’s second largest economy is the most complex jurisdiction in terms of financial compliance.

Despite the strict regulatory environment, there are three ways a company in China can raise funds overseas: capital increment, foreign loan and business contracts.

Three alternatives to raise funds overseas

Capital increment

A company is legally required to raise its registered capital when it plans to expand its business scope to fulfil the compliance requirements in China.

Under the regulations, the company needs to get approval from the Ministry of Commerce of the People's Republic of China (MOFCOM).

Upon approval, the company should apply for a new business license to the original Administration for Industry and Commerce (AIC) of registration. Following that, the company should transfer the additional capital directly into its capital account. The company must also pay a fee for the increase of the registered capital.

Although this method does not incur tax, a company may take a longer time to raise its registered capital due to the complex procedures and strict requirements. 

Foreign loan

Companies in China can apply for borrowing from foreign or international institutions to expand their operating funds under strict regulations.

The Chinese government issued a circular about the improved macro-prudential management of fully covered cross-border financing on 12 Jan 2017. This has made foreign loans a more appealing option for companies in China looking to raise funds.

Under the new policy, the Chinese government has introduced a new method called “outstanding cross-border financing”, when it comes to foreign loans.

The “outstanding cross-border financing” of an enterprise or financial institution is calculated using a risk-weighted approach and businesses in China are not allowed to exceed the specified upper limit in terms of overseas fundraising.

In the past, enterprises looking to get a foreign loan only had one option: ‘investment balance’, which is the gap between the paid-up capital and total investment of a company.

The new policy introduces a new option that allows the company to raise its foreign borrowings based on the calculation of its (doubled) capital or net asset value minus outstanding borrowings. In addition, the new policy covers other foreign currencies whilst the older policy only covers Renminbi.

Companies in China can now choose from these two options when it comes to applying for a foreign loan. Nonetheless, they must apply to get approval from the State Administration of Foreign Exchange before getting any foreign loan.

Once approved, the company will need to open a foreign loan account in any bank within the country to allow funds transfer from the foreign creditor.

Business contracts

Under this approach, a multinational corporation (MNC) can pay its affiliate company in China as a service provider, provided always that it is indeed providing a service to an overseas affiliate. Once a business contract is signed between the two entities, the company in China can receive payment from the MNC located outside the country.

However, companies receiving any revenue from overseas are obliged to pay taxes at the prevailing rate. In this case (business contract), payments coming from the overseas parent company or affiliate will be treated as revenue and will be taxed by the authorities.

Talk to TMF Group

Although it is now easier for companies in China to raise funds from overseas institutions, it can still be complicated to comply with the procedures and reporting requirements.

TMF China can help our clients to analyse their requirements and conditions to determine the best alternatives to raise funds. We aim to help our clients with cost-efficiency, operation-simplification and regulation-compliance, to ensure and support their full focus on marketing and core business.

Want to know more about our servicesTalk to us.

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