The Amended PRC Company Law - More Flexibility in Establishing Companies (But With Conditions)

by Dorsey & Whitney LLP
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The new PRC Company Law, which took effect on March 1, 2014, overhauled long-standing registered capital requirements and streamlined the process of setting up companies in China. It simplified the requirements and process for establishing a company in China in ways previously unimaginable. But foreign investors, unless they set up in Shanghai's Free Trade Zone, will need to wait for changes to the foreign investment regime before they can start enjoying these benefits.

Minimum registered capital requirements now a thing of the past - for most

The amended Company Law for all intents and purposes effectively abolished capitalisation requirements. Now founders can set the registered capital amount in their company's articles of association. The old mandatory requirements, which set registered capital at RMB 30,000 (US $5,000) for a limited liability company (“LLCs”), RMB 100,000 (US $16,400) for a one-person limited liability company (“One-person LLCs”) and RMB 5,000,000 (US $820,000) for a company limited by shares (“CLSs”), have been relegated to history. Therefore, domestic shareholders can now set up a company with nominal capital. Foreign investors (which in practice have been always subject to higher registered capital requirements) can do this too - but only within Shanghai's Free Trade Zone so long as their project does not fall within the "Negative List" of projects that need to be “approved” as opposed to merely “registered”.

Replacing “paid-up registered capital” with “subscribed capital”

The replacement of paid-up capital with subscribed capital is another significant change. Under previous provisions, domestic shareholders had to make their capital contributions into LLCs and CLSs within two years of establishment (five years for a limited liability investment company); and into single shareholder LLCs in one lump sum as provided for in the articles of association of the company. Again these requirements are no longer applicable - unless you are a foreign investor. Shareholders now have the option to set their own contribution timeline. Company business licences are to reflect this change: “paid-in capital” no longer appears. Instead, business licenses only list “registered capital” as subscribed by the shareholders.

Eliminating mandatory minimum percentage contributions and currency contributions

Under the 2005 company law, the total amount of the initial capital contributions had to be no less than 20% (for both LLCs and CLSs) and 100% (one-person LLC) of the registered capital. This much maligned requirement is now history - again except, for the time being, if you are a foreign investor. Similarly, the Amendment also lifted the restriction that shareholders had to pay at least 30% of their capital contributions in cash, with the rest being made up of materials, goods, IP rights and land use rights. Shareholders now have a lot more flexibility to decide upon their schedule of capital contributions as well as the ratio of currency to non-currency contributions.

Streamlining the registration process and simplifying documentation

The 2005 company law required shareholders to make their initial contributions (no less than 20% of the registered capital) before applying to a local Administration for Industry and Commerce for a business license. They also needed to get their capital verified by a registered accountant. These requirements have been dropped except for stock companies established by way of a stock exchange listing.

Impact on foreign investment enterprises ("FIEs")

On February 28, 2014, China's company registry, the State Administration for Industry and Commerce, annulled two regulations concerning the capital registration of Sino-foreign equity joint ventures and amended eight regulations governing the registration of companies, enterprises, Sino-foreign equity joint ventures, Sino-foreign cooperative joint ventures and wholly foreign invested enterprises. These changes also took effect on March 1, 2014. Still, it appears that despite all this, registered capital requirements still apply to FIEs and that this will not change until the laws relating to foreign investment are amended to bring them into line with the Amendment.

What about highly regulated or special industries?

The Amendment states that it applies unless other laws, administrative regulations or PRC State Council decisions provide otherwise. In addition, State Council announced that its reforms do not yet apply to 27 industries, including commercial banks, foreign banks, trust companies, securities companies, and insurance companies. On March 7, 2014, Ministry of Commerce (MOFCOM) announced its intention to research how to move forward toward issuing guidance for ten service industries, encompassing finance, education, culture, medical treatment, elderly care and childcare, construction design, accounting, auditing, commercial trade, logistics, e-commerce and general manufacturing. MOFCOM will also cooperate with other related government agencies in releasing rules to ease restrictions on foreign investment proportion ceilings and business operational limits.

Conclusion

The Amendment is part of a larger process of administrative reform that is intended to reduce administrative intrusion into corporate affairs and to reduce unnecessary administrative complexity. The Supreme People’s Court has weighed in, issuing its Decisions on Amending Provisions on Issues Relating to Application of Company Law of the People’s Republic of China, which also went into effect on March 1, 2014.

What we have observed so far is not merely a procedural change. It represents part of a carefully orchestrated overhaul to corporate law with the coordination of administrative and judicial organs at both State and local levels. It represents a paradigm shift from a system of paid-in capital to a system of subscribed capital, from a system of on-site corporate annual inspection to a system of corporate public notification based on online annual reporting, and from a government-led to a more market-driven business environment. In the meantime, foreign investors have begun to experience the liberalisation in advance of any amendment to the foreign investment laws by way of the China (Shanghai) Pilot Free-Trade Zone, where under the national treatment principle, foreign shareholders are able to enjoy the same privileges as domestic local shareholders in the setting up of limited liability companies.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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