How Capital Verification Can Help You Pick the Right Customers and Avoid Losing Money!

By Richard Hoffmann, ECOVIS Beijing

With an increasing rate of foreign companies coming to China seeking trade opportunities, a horizon of concern arises. Most concerns are related to the ability to pay and reliability of the potential stakeholders. Capital Verification is an instrument introduced by the Chinese government which helps to estimate the creditworthiness of potential or current partners.

With an increasing rate of foreign companies coming to China seeking trade opportunities, a horizon of concern arises. Most concerns are related to the ability to pay and reliability of the potential stakeholders. Capital Verification is an instrument introduced by the Chinese government which helps to estimate the creditworthiness of potential or current partners.

When the Capital Verification was introduced for the first time (1983), China was in an important transition from a planning economy to a “socialist market economy”. The government began to change from a direct and strong controller to one more relying on market self-adjustment. Capital verification was firstly introduced as a government administrative mechanism. As the Chinese industry established systematic standards and gradually professionalized itself, capital verification found its niche within the auditing profession.

In March 2014 one of the biggest changes in the Chinese Company Law happened. One major change in relation to Capital Verification is that capital is not anymore required to be registered in paid in form but in form of subscribed capital instead. It means that during the time when paid-up capital was in the process of evaluation, a company had limited access to its assets.

In new version of the business license, there is no place determined to show paid-in capital. The purpose of the law change is aiming to give more freedom and activate the market in that way. Establishing companies became easier. In comparison with before there is no minimum registered capital except that companies operating businesses in certain sectors will continue to be subject to minimum capital thresholds related to industry-specific laws. Nevertheless, the fixed ratios between total investment and registered capital continue to apply. The amount of capital registered during the capital verification can help estimate the value of the company and help indicate company’s strength and that can be significant hint for potential investors.

However, when the company does the settlement of exchange (foreign money transaction), the capital verification report is still a required document by the bank. Otherwise, the capital cannot transfer from the capital bank account to the company’s daily operation bank account, which means the capital could not be used within China. We believe this process will be abandoned in the future to speed up the transactions.

The process of capital verification itself has different parts. When transferring funds to the capital bank account, an auditing firm needs to collect a bank confirmation letter which is later on used to apply for a SAFE (State Administration of Foreign Exchange) approval which takes about a day to obtain. SAFE has an online governmental information platform to apply on. If the information imputed in the system matches those gathered and stored by the system in the past, the auditing company will get issued an approval. This process takes approx. 3 to 4 days. After the SAFE confirmation, the auditing firm can confirm that the transfer of funds literally happened and a report of capital verification can be issued. This process may need 1 to 3 days. The process is completed by obtaining an anti-bogus identity which is issued by the CICPA (Chinese Institute of Certified Public Accountants) and it provides a unique identity serial number which stands for the authenticity (see the graph below).

Different security requirements are applied in different manners. Asking for a capital verification certificate is a useful way to spot actual financial position of your Chinese customer, especially when it comes to extending credit or other supply terms. It is not difficult to provide and it costs reasonable amount in case of administration.

For further information on the Capital Verification and its implications, please contact us.

with contribution by Peter Jakubo (ECOVIS Beijing)

	Richard Hoffmann is a Partner at ECOVIS Beijing China. Richard obtained an honor’s degree in law and worked in Germany, America and China for various prestigious law firms prior to joining ECOVIS. He has published more than fifty articles in international magazines, frequently speaks at high profile events in China and abroad and is often invited as a legal expert by international TV. Contact: richard.hoffmann@ecovis.com
Ecovis Beijing is the trusted tax and legal advisor of several embassies and official institutions in China. It specializes in mid-sized international companies and focused on tax & legal advisory, accounting and auditing. If you’re interested in finding out more about tax and legal, don’t hesitate to sign up to our Newsletter or give us a call +86 10-65616609 (ext 811/806) or contact us directly via Beijing@ecovis.com