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China Reforms its Registered Capital System for Companies
1 April 2014

The Standing Committee of the National People’s Congress amended the PRC Company Law which amendments came into effect on 1 March 2014. Most of the amendments relate to the reform of the paid-up registered capital system which aims to simplify the company registration process in the PRC.

Further to the above amendments, the Administration of Industry and Commerce (“AIC”) has also amended the PRC Company Registration Management Regulations (“Management Regulations”) as well as other relevant regulations. Some of the salient features of the new changes are highlighted below.

System for Contribution of Registered Capital

Unless the laws provide otherwise, the requirement of a minimum amount of registered capital for limited liability companies, one person limited liability companies and companies limited by shares is now removed. Hence, the minimum amounts of registered capital formerly at Rmb30,000, Rmb100,000 and Rmb5 million respectively are now no longer applicable.

Consequence to the above, the following requirements concerning capital contribution schedule and cash ratio are also now abolished together with the removal of the minimum registered capital requirement :-

(i) The amount of registered capital paid by cash should not be less than 30% of the total registered capital;

(ii) Payment of the entire registered capital in one single installment by the shareholder in a one person limited liability company; and

(iii) Payment of 20% of the registered capital as the first installment, with the remaining to be paid up within 2 years.

Therefore, shareholders may now decide how and when to schedule their capital contribution to the Mainland company giving greater flexibility for investment planning in China. Moreover, the removal of the 30% cash requirement implies that the shareholders are allowed to pay the registered capital entirely by non-cash assets such as intellectual property and land use rights etc unless the assets are expressly prohibited by law to be used for capital contribution.

Company Registration Procedures and Business License

As a result of the amended Company Law, the documents required to be filed with AIC for company incorporation are also simplified. The shareholders are now only required to set out the number of shares or equity to be subscribed by every shareholder in the Articles of Association. The Company is no longer required to submit a capital verification report to AIC.

The amount of paid up registered capital will not be set out in the new version of the business licenses issued on or after 1 March 2014 but the amount of registered capital will still be stated in there.

Annual Report instead of Annual Inspection

In respect of the annual inspection to be carried out by every PRC company, the Management Regulations have now replaced it with an annual report to be filed with the AIC. As to the contents of the annual report, the State Council will publish more details later. It remains to be seen whether the annual report will require the shareholders to report the actual amount of paid up registered capital in the last financial year, in addition to the normal accounting details such as the income and expenditures and profits and losses.

Impact on Foreign Invested Enterprises (“FIE”)

The Wholly Foreign-Owned Enterprise Law, Sino Foreign Equity Joint Venture Law and Sino Foreign Co-operative Joint Venture Law still require the foreign investors to pay certain amount of registered capital in cash and set various deadlines for their capital contribution (such as payment of 15% of the registered capital within 90 days of the issuance of the business license). These requirements conflict with the latest amendments to the PRC Company Law. It is expected that the further circulars will be published to clarify how to deal with these FIE requirements in the light of the latest amendments.

The authorities should also clarify whether FIEs incorporated before 1 March 2014 should still pay its registered capital according to the designated schedules.

If you have any questions on the above or other issues regarding doing business and making investments in Mainland China, experienced lawyers in our China Business Department will be happy to assist you.

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