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China – Set To Reform Company Registered Capital Regime.

4 December, 2013

 

 

China recently indicated that it will reform the current registered capital requirements for companies in China. The changes, once made, will significantly simplify foreign investment in China.

 

The reform plans were announced by Chinese Premier Li Keqiang at an executive meeting of the State Council on 25 October 2013. The goal of the reform is to support a faster pace of economic reform and to encourage investment in China. Highlights of the reform include changing the current paid-up capital regime to a subscribed capital regime, lifting minimum registered capital requirements and relaxing timing requirements for capital contribution. With these changes, China plans to align its company registration system with international practice.

 

The State Administration for Industry and Commerce (SAIC) is currently coordinating with various governmental bodies to amend the Chinese Company Law and to promulgate new regulations in order to implement the reform. SAIC officials have stated that, based on the principle of national treatment, all foreign-invested enterprises (FIEs) will benefit from the new rules.

 

Following a brief explanation of “total investment” and “registered capital” under the current foreign investment regime, we outline below the current rules and indicate how they can be expected to change:

 

Total Investment And Registered Capital

 

An FIE must have a registered capital and a total investment.

 

Registered capital is the total amount of equity made by the investors to the FIE, which must be paid in accordance with time schedules prescribed by law.

 

Total investment is the projected amount of capital necessary for the FIE to be established and become operational. An FIE may borrow foreign exchange loans up to the difference between its registered capital and total investment.

 

An FIE’s registered capital is subject to a fixed proportion of its total investment. For instance, an FIE with a total investment of up to US$3 million must be funded by at least 70% registered capital. This limits the amount of foreign debt that an FIE can incur.

 

Under the proposed reform, investors of an FIE may contractually agree on the capital to be subscribed. They may also agree on the form and timing of contributions. However, other than the matters set out below, it is unclear whether or how the proposed reform will impact China’s overall foreign investment regime.

 

Minimum Amounts Of Registered Capital

 

Current law: Expected changes:
The Company Law requires a minimum registered capital of:

  • RMB30,000 for a limited liability company with multiple investors
  • RMB100,000 for a limited liability company with a single investor
  • RMB5 million for a company limited by shares

In practice, particularly for FIEs, approval authorities often require a higher amount of registered capital.

A foreign-invested company limited by shares must, by law, have a registered capital of RMB30 million.

Certain industry-specific regulations also require larger amounts of registered capital.

The general minimum registered capital requirements will be lifted. However, industry-specific minimums may remain.It is unclear whether the RMB30 million for foreign invested companies limited by shares will remain or be lifted.

 

 

Timing Of Capital Contributions

 

Current law: Expected changes:
Registered capital may be paid in one lump sum or in instalments.If paid by lump sum, then entire registered capital must be paid in within six months of issuance of an FIE‘s business licence.

If paid by instalment, an initial payment of at least 15% (or, in some localities, at least 20%) must be paid within three months of the issuance of the FIE’s business licence, and the balance must be paid within two years.

A China holding company has up to five years to pay the balance of registered capital exceeding US$30 million.

The timing requirements will be lifted.Investors may agree on the timing of capital contributions.

 

Capital Verification

 

Current law: Expected changes:
Each payment of registered capital must be verified by a duly qualified accountant registered in China, who will issue a capital verification report.Verification reports must be filed at the relevant local SAIC. Capital verifications will no longer be required to be filed with SAIC.

 

Our Observations

 

While the direction of reform is good news for foreign investors, the actual benefits derived will depend very much on the implementing details. For instance, we do not yet know whether the concept of total investment will still be applicable. As the difference between total investment and registered capital limits an FIE’s foreign exchange borrowing capacity, it is unclear whether the reform will impact foreign exchange financing of FIEs.

 

Another area of uncertainty, at this stage, relates to the FIE approval regime. Under the current FIE approval regime, the total investment is one of the factors to determine whether an FIE is subject to approval at the municipal, provincial or central level. If the concept of total investment is abolished along with the concept of registered capital, then the FIE approval system will also need to be revised. It may be that China is contemplating a registration-only system for FIEs, similar to the one being rolled out in the Shanghai Free Trade Zone.

 

The relaxation of registered capital requirements confirms that the Chinese authorities are planning to transform the post-establishment supervision of companies in China. New policies in this respect were announced in the same State Council’s executive meeting. The announced policies include replacement of the current enterprise annual inspection system with a more transparent and unified annual reporting system whereby annual reports of enterprises will be made available to the public. In addition, it was announced that an enterprise credit system would be developed so that non-compliant companies can be “blacklisted” on a publicly available register.

 

Foreign investors and FIEs in China should keep a close eye out for the implementing laws and regulations. Subject to the announced details, implementation of the reform could well be some of the most significant foreign investment changes over the last decade.

 

herbert smith Freehills

 

For further information, please contact:

 

Karen Ip, Partner, Herbert Smith Freehills
[email protected]

 

Gary Lock, Partner, Herbert Smith Freehills
[email protected]

 

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