CHINA AMENDS COMPANY LAW: INTRODUCES REFORMS TO THE REGISTERED CAPITAL SYSTEM
On December 28, 2013, China adopted a new amendment to the company law which will become effective on March 01, 2014. All the changes listed here have already been in force in the Shanghai Free Trade Zone. Following are the details of the changes in registered capital system:
- "Subscribed registered capital” system will replace “paid-in registration capital system:
The current paid-in capital system requires that the initial capital contribution shall not be less than 20 per cent (15 per cent for foreign invested enterprises) and the registered capital shall be fully paid within 2 years from the date of establishment of the company. Commencing March 01, 2014, the restrictions on the ratio of initial capital contribution and the time limit for capital contribution will no longer exist, unless the law, regulations or decisions of the State Council otherwise specifies for certain companies. The shareholders may at their own discretion agree on the amount of registered capital and the time limit in the article of association.
- Requirement for the minimum registered capital will be eased:
The current company law requires the minimum registered capital of RMB 30,000 for limited liability companies, RMB 100,000 for single shareholder companies and RMB 5,000,000 for joint-stock companies with limited liability. However, after the amendment, the minimum registered capital requirement will be abolished, unless otherwise specified by the laws or regulations for certain companies. The removal of this requirement will enable the companies to reasonably reduce their registered capital to their business needs. The shareholders are required to state only that amount in the article of associations that they agree to subscribe.
- Requirement for minimum capital contribution in cash will be removed:
The current law requires the shareholders to pay at least 30% of the total contribution in cash. The amendment will lift this requirement allowing the shareholders the flexibility to make the initial contribution in various ways, such as cash, kind, intellectual property rights, land use rights or other non-monetary properties.
- Registration procedure and requirements for documents will be simplified:
Under the existing law, a company is required to submit a capital verification report to the company registration authority for each capital payment which follows the formality of updating paid-in-capitalamount on its business license. The amendment eliminates the requirement for capital verification reports. The company will no longer be required to engage a public accounting “CPA” firm to make a capital verification report every time a shareholder is contributing capital to the company. The registered capital amount will no longer appear on the business license. Removal of these requirements will save investors a substantial amount of time and cost in setting up a business.
The new amendment remains silent on the issue of maximum amount that can be financed from the overseas affiliate. An FIE is required to maintain the minimum ratios of registered capital to its total investments (also known as debt-to-equity ratio). The difference between total investment and the registered capital is the maximum amount the FIE can finance by offshore borrowings. Since the minimum capital contribution requirement will be abolished under the new company law, it remains to be seen how this is going to impact the financing for foreign invested enterprises.