For the vast community of expatriates living and working in China, as well as business owners operating Wholly Foreign-Owned Enterprises (WFOEs), the most encouraging recent news is undoubtedly the joint announcement by the Ministry of Finance and the State Taxation Administration: The preferential Individual Income Tax (IIT) policies regarding tax-exempt allowances for foreign nationals have been officially extended to December 31, 2027.
For investors establishing a new Wholly Foreign-Owned Enterprise (WFOE) in China, receiving your business license is a milestone that marks the end of the registration phase. However, this is only the first step in operational compliance. Before you can officially begin commercial activities, you must tackle a core financial challenge: how to comply with China's foreign exchange regulations to successfully inject, convert, and use your registered capital.
China maintains strict foreign exchange controls. The inflow and outflow of capital for Foreign-Invested Enterprises (FIEs) must adhere to the specific regulations of the State Administration of Foreign Exchange (SAFE). Improper handling can lead to delays in receiving funds, frozen accounts, or even having your capital returned to the sender. This article provides an objective, detailed breakdown of the four key compliance stages for managing your WFOE's foreign capital.
FDI Registration & UBO Disclosure
Before visiting a bank to open accounts, a WFOE must complete two foundational compliance registrations. These are mandatory prerequisites for the bank to accept your account opening application.
1. FDI Registration
Under current regulations, the authority to handle foreign exchange registration for FIEs has been delegated from SAFE directly to banks. Once you have selected your bank, you must submit your Business License, Articles of Association, and Shareholding Structure Chart. The bank will then register your information in the SAFE system and generate a Business Registration Certificate. This certificate is essential for activating your Forex Capital Account; without it, the account cannot receive funds from overseas.
2. Ultimate Beneficial Owner (UBO) Disclosure
To comply with China’s Anti-Money Laundering Law and "Know Your Customer" (KYC) regulations, banks must perform a strict "look-through" identification of the enterprise's Ultimate Beneficial Owner (UBO). Specifically, banks are required to identify and verify any natural person who directly or indirectly holds more than 25% of the company's equity or voting rights. If your shareholder structure involves multiple layers of offshore entities, the bank may require complete "ownership penetration documents" until the specific individual at the top is identified.
Account Needed & Registered Capital Injection Process
Once the bank completes the compliance registration and KYC review, the WFOE can officially begin the account opening process. Operationally, a WFOE in China generally opens two specific bank accounts:
- RMB Basic Account: This is the enterprise's primary operating account, used for daily income and expenses, tax payments, and salary disbursement.
- Foreign currency Capital Account: This is a regulated, dedicated account used specifically for receiving and holding registered capital remitted from overseas. Please note,the currency of this account needs to be determined while opening the account, and the registered capital injectedneeds to be the same.
When the accounts are open and you are ready to inject foreign capital, you must pay close attention to the transfer details. China's banking system strictly enforces the "Same-Name Remittance" principle during audits. This means the name of the remitter must match the shareholder's name listed in your Articles of Association letter-for-letter.
- If the shareholder is an Entity: Funds must be remitted directly from a bank account under that specific overseas shareholder company's name. Remittance via a parent company, affiliate, or any third party is strictly prohibited.
- If the shareholder is an Individual: Funds must be remitted from the shareholder’s personal bank account under their own name. Remittance via other individuals (such as relatives or friends) or other companies they own is strictly prohibited.
The banking system automatically cross-checks remitter information. Even a minor mismatch in the name will highly likely result in the funds being intercepted by the bank's compliance department and returned to the sender, causing unnecessary delays and exchange rate losses.
Registered Capital Settlement & Usage
After the overseas transfer is successful, the registered capital will land in your company's Forex Capital Account. However, this does not mean the money is immediately available for domestic payments. The funds must first be converted into RMB through a legal settlement process.
At this stage, China implements a "Discretionary Settlement" policy. In other words, FIEs have the autonomy to choose when and how much to convert based on their business needs and judgment of the exchange rate market. You can choose to convert 100% of the funds in your capital account into RMB at once. Alternatively, you can convert only a portion (e.g., converting just the $50,000 needed for next month's operations) while keeping the remaining funds in foreign currency. This flexibility allows enterprises to convert funds when exchange rates are favorable, hedging against fluctuation risks while ensuring sufficient liquid RMB is available for unexpected needs.
Standardized Settlement and Payment Process
- Settlement Application: The enterprise submits a request to the bank based on recent expenditure plans.
- Transfer to Converted Account: This is a critical compliance checkpoint. The converted RMB funds generally cannot be transferred directly to your RMB Basic Account for mixed use. Instead, they must enter a designated "RMB Capital Converted Account."
- Outbound Payment: Funds should be paid point-to-point from this designated account to the final beneficiary (such as suppliers, landlords, or employee payroll accounts).
When processing payments, the bank is also required to verify the authenticity of the usage. Especially for large single payments (typically over $50,000), the enterprise must provide supporting background materials to prove the transaction is genuine, for example:
- House lease contracts and corresponding invoices;
- Procurement contracts and supplier invoices;
- Employee payroll lists and social insurance payment proofs.
Practical Demo: How to Pay Salaries Using Forex Capital?
Paying salaries is one of the most common uses of WFOE capital. Since employee wages must be paid in RMB, the operational steps are as follows:
- Step 1: Calculate Total The finance department calculates the total payroll required for the month (including net salary + individual income tax + the personal portion of social insurance).
- Step 2: Settlement Apply to the bank to convert the equivalent amount of foreign currency from the "Capital Account" to the "Converted Account."
- Step 3: Submit Documents Submit the Payroll List, Tax Filing Receipt, and Social Insurance Payment Slip to the bank to prove the authenticity of this expenditure.
- Step 4: Fund Allocation Upon verification, the bank typically executes payment in one of two ways:
- The bank batch-transfers funds directly from the "Converted Account" to employees' personal bank cards;
- Or, the bank authorizes the transfer of the exact total payroll amount to the enterprise's "RMB Basic Account," provided the enterprise distributes it to employees immediately and does not hold it in the account.
Negative List & Subsequent Tax Obligations
Once funds are available for use, the enterprise must also adhere to compliance limits on capital usage and fulfill corresponding tax filing obligations.
1. Capital Usage "Negative List"
According to SAFE regulations, the capital of FIEs and the RMB funds obtained from settlement must be used for genuine self-use expenses within the business scope. They must not be used for the following purposes (unless the business scope explicitly includes such activities):
- Shall not be used for securities investment or stock trading;
- Shall not be used for issuing loans (except for internal finance companies);
- Shall not be used for purchasing non-self-use real estate (except for real estate development enterprises).
2. Stamp Duty Declaration
This is a compliance step often overlooked by startups. Once registered capital is actually paid in, it constitutes "Paid-in Capital" in financial terms. According to China's Stamp Tax Law, the enterprise must declare and pay Stamp Duty on the capital account books at a rate of 0.025% of the paid-in amount during the filing period of the following month. This is a necessary cost for establishing a good tax credit record.
Conclusion
The injection and management of foreign exchange capital is a crucial link in the WFOE operational process, directly determining whether the enterprise can smoothly launch its business in China. From the accuracy of FDI registration to the compliance of every fund usage, each step requires precise execution and management.
Ensuring process compliance not only guarantees the safe arrival of registered capital but also serves as the foundation for building a robust financial system. Hongda is dedicated to providing foreign enterprises with end-to-end services—from bank account coordination and forex compliance guidance to subsequent tax filings—helping you mitigate compliance risks and ensuring every cent of your capital is efficiently converted into business value.
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