On December 28, 2013, the Standing Committee of the National
People's Congress passed certain amendments to the PRC Company
Law, effective as of March 1, 2014. These amendments have relaxed
certain registered capital requirements for domestic and foreign
companies in China.
In connection with implementing the amendments, several related
administrative regulations have been amended or newly promulgated,
such as the Regulations on Registration Administration of
Companies and the Administrative Provisions on the
Registration of the Registered Capital of Companies. Further,
the State Council has amended the following three regulations
governing foreign invested enterprises ("FIEs") to ensure
that the new registered capital requirements apply to all FIEs as
well: (i) the Implementing Rules for the Wholly Foreign-owned
Enterprises Law (the "Implementing Rules on WFOE
Law"), (ii) the Implementing Rules for the Chinese-Foreign
Cooperative Joint Venture Law, and (iii) the Implementing
Rules for the Chinese-Foreign Equity Joint Venture Law. These
regulatory changes also became effective as of March 1, 2014.
The major changes in the registered capital system applicable to
all FIEs in China are as follows:
Certain Registered Capital Requirements Have Been Eliminated
In general, minimum registered capital for establishing an
enterprise in China is no longer required under the amended PRC
Company Law, unless laws, administrative regulations, or the
decisions of the State Council provide otherwise. Further, the
amendments to the Implementing Rules on WFOE Law deleted the
requirement that "the amount of registered capital of an FIE
shall match the company's operational scale," meaning that
it is the foreign investor of an FIE, rather than the approving
authority, that has the discretion in determining the amount of
registered capital for its operation in China based on business
needs.
The 20 percent initial capital contribution (or 15 percent for
WFOEs) has been eliminated, and the 30 percent minimum cash
contribution is no longer required. In addition, the amendments to
the Implementing Rules on WFOE Law eliminated the 20 percent cap
for in-kind capital contribution with industrial property rights
and proprietary technology.
"Capital Paid-In System" Replaced by "Capital Subscription System"
Before implementation of the new registered capital system,
domestic and foreign investors were required to contribute or pay
up the first installment of registered capital within 90 days and
the remainder within two years from the date of incorporation.
Starting from March 1, 2014, an investor has the sole discretion in
determining, as provided in the Articles of Association, the
amount, form, and contribution schedule of the company's
registered capital. Accordingly, companies are no longer required
to engage an accounting firm to verify mandatory capital
contribution and register (subject to public disclosure) the
paid-in capital amount with the company registration
authority.
However, companies should disclose the amount, form, and
contribution schedule as well as the paid-in capital amount via a
public disclosure system. The State Administration of Industry and
Commence ("SAIC") has set up the National Enterprises
Credit Information Publication System (http://gsxt.saic.gov.cn/) (the
"Public System"), through which anyone can check the
shareholding and capital contribution information of all companies
incorporated in China. Therefore, although the PRC government no
longer mandates paid-in capital of a company under the current PRC
law, the company should still carefully plan its capital injection
into its China entity, because the capital contribution information
will be publicly available and will be used as one of the major
criteria by third parties to determine the company's
creditworthiness.
Please note that pursuant to the Notice of the State Council on
Printing and Distributing the Reform Plan for the Registered
Capital Registration System (the "Registered Capital
Reform Notice"), those types of companies listed in Appendix I
attached hereto are still subject to the "capital paid-in
system," meaning that their investors still must contribute
mandatory registered capital pursuant to applicable laws and
regulations.
Annual Inspection Replaced by Annual Reporting
Pursuant to the Registered Capital Reform Notice, the annual
inspection system has been replaced by an annual reporting system,
where companies are required to submit annual reports including
information on the company's paid-in capital. The SAIC or its
local branches will conduct random review of the contents of a
company's public reports and will impose administrative
penalties on those companies that are found to have concealed
information or provided false information in their annual reports.
Further, companies that fail to publicize their annual reports
could be listed in the "List of Enterprises with Abnormal
Business Operations" or the "black list" on the
Public System.
On February 14, 2014, the SAIC published the Notice on Ceasing
the Annual Inspection of Enterprises, confirming the
revocation of the annual inspection system of companies in China.
However, as of the date of this Commentary, the SAIC has
not yet published detailed rules for the implementation of the
annual reporting requirements and relevant procedure.
Conclusion
The recent changes in the registered capital system in China provide foreign investors of FIEs with additional flexibility in capitalizing their investment projects in China. However, in view of the new public disclosure system, foreign investors should still be prudent in planning their capital investments in China, given the potential implications on corporate creditworthiness and standing in China.
Appendix I: Industries Not Eligible for the System of Registering Subscribed Registered Capital for the Time Being
Name |
Legal Authority |
|
1 |
Companies limited by shares established by public offering |
Company Law of the People's Republic of China |
2 |
Commercial banks |
Law of the People's Republic of China on Commercial Banks |
3 |
Foreign-funded banks |
Regulations of the People's Republic of China on the Administration of Foreign-funded Banks |
4 |
Financial asset management companies |
Regulations on Financial Asset Management Companies |
5 |
Trust companies |
Law of the People's Republic of China on Banking Supervision and Administration |
6 |
Finance companies |
Law of the People's Republic of China on Banking Supervision and Administration |
7 |
Financial leasing companies |
Law of the People's Republic of China on Banking Supervision and Administration |
8 |
Auto finance companies |
Law of the People's Republic of China on Banking Supervision and Administration |
9 |
Consumer finance companies |
Law of the People's Republic of China on Banking Supervision and Administration |
10 |
Currency brokerage companies |
Law of the People's Republic of China on Banking Supervision and Administration |
11 |
Village and township banks |
Law of the People's Republic of China on Banking Supervision and Administration |
12 |
Loan companies |
Law of the People's Republic of China on Banking Supervision and Administration |
13 |
Rural credit cooperative |
Law of the People's Republic of China on Banking Supervision and Administration |
14 |
Rural fund mutual assistance cooperatives |
Law of the People's Republic of China on Banking Supervision and Administration |
15 |
Securities companies |
Securities Law of the People's Republic of China |
16 |
Futures companies |
Regulations on the Administration of Futures Trading |
17 |
Fund management companies |
Law of the People's Republic of China on Securities Investment Funds |
18 |
Insurance companies |
Insurance Law of the People's Republic of China |
19 |
Specialized insurance agencies and insurance brokerage firms |
Insurance Law of the People's Republic of China |
20 |
Foreign-invested insurance companies |
Regulations of the People's Republic of China on the Administration of Foreign-invested Insurance Companies |
21 |
Direct sales companies |
Regulations on the Administration of Direct Sales |
22 |
Foreign labor services cooperative enterprises |
Regulations on the Administration of Foreign Labor Services Cooperation |
23 |
Financing guarantee companies |
Interim Administrative Measures for Financing Guarantee Companies |
24 |
Labor dispatching enterprises |
Decision of the 28th Executive Meeting of the State Council on October 25, 2013 |
25 |
Pawn shops |
Decision of the 28th Executive Meeting of the State Council on October 25, 2013 |
26 |
Insurance asset management companies |
Decision of the 28th Executive Meeting of the State Council on October 25, 2013 |
27 |
Small-amount loan companies |
Decision of the 28th Executive Meeting of the State Council on October 25, 2013 |
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