In the past few months, the PRC government has launched a series of company registration reforms with a view to reducing administrative burdens and simplifying the registration process for companies in China. Following the passing of the Amendments to the PRC Company Law by the National People’s Congress at the end of 2013 (the “New Company Law“), the State Council, on 19 February 2014, released the revised Implementing Rules to the Sino-foreign Equity Joint Venture Law, the Sino-foreign Cooperative Joint Venture Law and the Foreign Wholly Owned Enterprise Law (collectively the “Revised FIE Implementing Rules“), and repealed a set of FIE-specific rules in order to confirm the application of the changes in the New Company Law to foreign-invested enterprises (“FIEs“). Both the New Company Law and the Revised FIE Implementing Rules took effect on 1 March 2014.
In this article, we summarise some major changes that may benefit FIEs under the New Company Law and the Revised FIE Implementing Rules:
- Shift from paid-in capital to subscribed capital system: The previous concept of “paid-in” registered capital amount has been replaced with the concept of “subscribed” registered capital amount. This means that, except for specific industries as otherwise required by the laws or regulations, the company’s registered capital is the total amount of capital contributions subscribed by its investors pursuant to the Articles of Association of the company (“AoA“) and the investors may determine the amount, method and timing for payment of their capital contribution in the AoA. Having said that, as the AoA of an FIE is subject to examination and discretionary approval by the competent approval authority, namely the Ministry of Commerce or its local delegated authorities, it is unclear whether any relevant approval authority may impose special requirement on the payment of the registered capital in practice before granting its approval. It is therefore advisable for foreign investors to pay special attention and check with the respective local authorities when they seek to rely on this new initiative.
- Removing minimum registered capital amounts requirement: Under the New Company Law, the statutory minimum registered capital amounts for limited liability companies (RMB30,000), single-shareholder limited liability companies (RMB100,000) and companies limited by shares (RMB5,000,000) have been removed. Thus, theoretically speaking, FIEs are now no longer subject to minimum registered capital amounts. However, since the FIEs are still subject to the prescribed ratios between their total investment amount and registered capital, a FIE’s registered capital amount may still need to be commensurate with its business scale. In addition, companies operating business in certain specific sectors (such as banking, insurance, international freight forwarding and leasing etc.) are still subject to minimum capital thresholds.
- Removing restrictions on method of capital contribution: Prior to the amendments, the cash portion of registered capital contributions was required to comprise at least 30% of a PRC company’s registered capital. For Wholly Foreign Owned Enterprise (“WFOE”), there was an additional requirement that capital contributions in kind in the form of intellectual property rights or know-how should not exceed 20% of the registered capital of the WFOE. Under the new PRC registration regime, such restrictions have been removed. Investors now have more freedom to decide the ratio between cash and non-cash capital contribution that fits the company’s business needs.
- Removing the requirement for registered capital to be paid within a certain timeframe: The previous requirements to pay up registered capital within certain timeframes have been repealed. The investors, in theory, could now freely determine their contribution timetable in the FIEs’ AoA.
- Removing mandatory requirement for capital verification: Capital verification requirement has been removed under both the New Company Law and the revised Implementing Rules to the Wholly Foreign Owned Enterprise Law. However, we note that the revised Implementing Rules to the Sino-foreign Equity Joint Venture Law and the Sino-foreign Cooperative Joint Venture Law still keep the requirement of capital verification. Therefore, it is advisable for foreign investors of joint ventures to confirm with the local approval authorities in respect of their requirement for capital verification.
Though there are still uncertainties as to how these changes may be implemented in practice, we see that the New Company Law and the Revised FIE Implementing Rules have brought about a high degree of flexibility for foreign investments in China. We will continue to closely monitor any upcoming development on the laws and regulations governing FIEs, and keep you posted in time.