China's New Company Incorporation Rules
This article looks at China's plans for removal of the registered capital system for incorporating local and foreign companies in China, as well as other company incorporation changes that are due to be implemented in early 2014.
On 25 October 2013, Premier Li Keqiang chaired a State Council executive meeting to promote the company’s registered capital registration system reform, reduce business costs, and stimulate social investment vitality. The meeting stressed the implementation of the registered capital registration system reform, and clarified the reform of the five points as referred to below.
Relaxation of Condition for Registered Capital
According to the meeting, in addition to laws and regulations as otherwise provided, the minimum registered capital of a limited liability company - RMB30,000, the lowest one-person limited liability company registered capital - RMB100,000, and the minimum registered capital of joint stock limited company - RMB5 million, under the current PRC Company Law (2005 Revision), will be abolished. And also, neither the proportion of the first registered capital installation (not less than 25% under the Company Law) nor the duration of fully registered capital contribution (2 years for limited liability companies and 5 years for investment companies under the Company Law) will be limited any longer. Paid-in capital will not be registered with the AIC.
It is worth noting that the cancellation of minimum registered capital does not mean cancellation of registered capital – registered capital is still one of conditions for company registration in the future, since investment is necessary for newly incorporated companies after all. But the threshold is removed – how much money will be invested in depends on the investor(s). In other words, this does not mean the investors/shareholders will really not need to pay any registered capital, but just means that the government will not verify the registered capital during the establishment of the company. Any details on registered capital contribution, i.e. how much registered capital will be paid by the shareholder(s), when the registered capital will be paid etc. need to be referred to in the Articles of Association. And the shareholder(s) shall implement as required by the Articles of Association.
Change of Company Annual Inspection System
The current enterprise annual inspection system will be changed to a new system called annual report. All the company information will be transparent for the public – they can be accessed and checked by any entities or individuals. Further, the meeting required to establish a fair and standard selective-check system, to overcome the arbitrariness of the check and improve the fairness and efficiency of government management and performance.
Under the current enterprise annual inspection system, every PRC company, including domestic companies and foreign invested companies (FIEs), is required to file a written annual inspection report with the AIC. In some cities, some designated companies are required to file an audit report issued by a qualified accounting firm as well.
Relaxation of Business Place Registration
The meeting required to relax the conditions for business place registration, to facilitate the company registration. However, the details of the relaxed conditions are not referred to in the meeting – these will be specified by local governments in the future.
Promotion of Enterprise Credit System
According to the meeting, the government will vigorously promote the construction of enterprise credit system and focus on the information publicity and sharing. The enterprise registration, annual reports, and qualification etc. will be published through a special credit & information system. It will also implement e-business license and full electronic registration and management – the e-business license will has the same legal effect as the current paper one. The credit constraint mechanism will be improved – the irregularities will be included in Black List that is public to all the society, so as to make a violation to be restricted everywhere and increase the enterprises’ “dishonesty costs”.
Change of Paid-in Registered Capital to Subscribed Registered Capital
To reduce the cost of starting a business, the government will change the current paid-in registered capital system to subscribed registered capital system, which means the registered capital verification report will not be necessary any longer. Under the new system, the amount of subscribed registered capital, how to pay the registered capital in, and the capital contribution schedule etc. may be negotiated and agreed by the shareholders at their own discretion, based on the improved laws and regulations. The shareholders will be responsible for authenticity and legality of the agreed registered capital contribution. For example, when setting up a WFOE, the investor could just pay in 10% on opening and then the rest in 5 years, as per the upcoming new policy. As talked to the SAIC, the new rules are not in place now – the current Company Law is still effective and binding until the new policy commences operation in due course. There is a rumor that the new rules will start to apply from early 2014 in some cities.
As further clarified by the Director of SAIC – Zhang Mao on 7 November, all the new company rules referred to above will apply to all kinds of PRC companies, including domestic companies as well as FIEs. The simple pre-approval for company incorporation and the reduced market entry threshold will absolutely benefit for foreign investors.
It’s really good to see that the Chinese government gets to change its current complicated pre-approval for company incorporation and tends to focus on supervision of incorporated company operation only, although the new system will not commence operation until the Company Law, the relevant provisions of Criminal Law and subsequent corresponding regulations and rules, such as Regulations of the PRC on the Administration of Company Registration are updated as per the spirit of the meeting. For now, the amendment to Company Law has been placed on the agenda and is expected to be introduced soon.
ABOUT THE AUTHOR: Yu Du and Matthew Murphy
Yu Du and Matthew Murphy are Partners in the MMLC Group. A leading boutique international law firm.
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Disclaimer: While every effort has been made to ensure the accuracy of this publication, it is not intended to provide legal advice as individual situations will differ and should be discussed with an expert and/or lawyer. For specific technical or legal advice on the information provided and related topics, please contact the author.