Further Steps Under The PRC Company Registration Reform

by DLA Piper

Since October 2013, the PRC government has been rolling out a series of company registration reform in an attempt to set up a more transparent and efficient registration regime. As the first big step, the National People's Congress passed the Amendments to the PRC Company Law at the end of 2013 which entered into effect on 1 March 2014 (New Company Law). The New Company Law has substantially changed the registered capital landscape by replacing the paid-up capital system with a subscribed (committed) capital regime. Highlights of the amendments are summarized below:

  • A company's registered capital is based on the capital amount subscribed (committed) by its investors.
  • In general, companies are no longer subject to minimum registered capital thresholds. Investors are free to decide the capital amount based on business needs.
  • The mandatory capital contribution timelines are removed (including the deadlines for the first instalment, the full payment and any capital increase). Investors may determine the timetable freely.
  • The 70% cap on non-currency registered capital has been lifted. Investors are free to decide the proportion among cash and in-kind capital.
  • Except for specific industries, capital verification is no longer a mandatory requirement.
  • Annual inspection will be replaced by an annual reporting and disclosure system.

DLA Piper has issued a newsletter regarding the New Company Law, please click here link for details.

More Revised Regulations under the Reform

While the New Company Law provides ground-breaking changes to the overall regime, there were still questions unanswered especially whether and how foreign-invested enterprises (FIEs) may benefit from the reform given the conflicting provisions between certain FIE-specific regulations and the New Company Law. This issue remained unclear for almost two months until the State Council and the State Administration for Industry and Commerce (SAIC) issued a series of new rules and revised regulations (including a capital registration reform plan - Reform Plan) immediately before the New Company Law entered into effect. These regulations have brought, to a certain extent, consistency and clarifications to the new regime, especially its application to FIEs.

FIEs enjoying the same benefits as domestic companies

On 28 February 2014, the State Council released the revised Implementing Rules to the Sino-foreign Equity Joint Venture Law, the Sino-foreign Cooperative Joint Venture Law and the Wholly Foreign Owned Enterprise Law (collectively Revised FIE Implementing Rules), and revoked a set of FIE-specific rules in order to remove provisions conflicting with the New Company Law.

As a result, FIEs now enjoy the same treatment as pure domestic companies as brought by the New Company Law, i.e. those amendments summarized in the first section of this newsletter generally apply to FIEs.

However, we note that the Revised FIE Implementing Rules still keep the requirements of capital verification for FIEs. It is unclear whether such discrepancy is intentional. We have checked with local branches of SAIC and Ministry of Commerce (MOFCOM) in various locations and it appears that the interpretations differ among the authorities and the practice vary from place to place. Foreign investors should always check with the local government to ensure compliance with local practice.

Please also note that the concepts of total investment and registered capital of FIEs (including the mandatory ratio between them and the related headroom for borrowing foreign loans) remain unchanged.

List of industry sectors falling outside the scope of the new regime

According to the New Company Law, if any laws, administrative regulations or decisions of the State Council varies from the new subscribed capital regime, such provisions will prevail. This has created uncertainties about how extensive such exceptions will be applicable. To provide clarifications on this issue, the State Council attached to the Reform Plan a list of specific industry sectors to which the new regime will not apply. The list ranges from financial industries to other specific sectors, please refer to Appendix 1 for details. Investments in these sectors should still follow the minimum capital amounts and mandatory contribution deadlines as provided in the relevant industrial regulations. The government is working to revise some of these industrial regulations (mostly likely those in the non-financial sectors) to bring them under the scope of the new regime. Investors should keep an close eye on any legislative updates in these areas.

Annual reporting and disclosure system

Another important aspect of the reform is that SAIC has replaced the annual inspection with an annual reporting and disclosure system. The new system largely reduces the compliance burden on companies and in the meantime enhances transparency and efficiency.

According to the new regime, a company should file an annual report with AIC before end of June every year, which will be made available to the public through a new online company information database. Although the scope of information to be disclosed in such annual report is to be further regulated by the State Council, it seems to at least cover the basic company information (names of shareholders and directors, registered address, business scope, business terms, branch offices, etc), details of capital contribution status, the status of company's assets, etc. In addition, any penalties previously imposed on the company by AIC are also publicly available on the new database.

If the company fails to comply with the annual reporting requirements, it will be recorded in a non-compliance list which is published on the database. For any non-compliance for consecutive 3 years, the company will be permanently recorded in a blacklist. The detailed consequence for being on the blacklist is yet to be promulgated, however, it is likely to restrict the company's normal operation and result in penalties on the legal representative.

Relaxing the requirements on choosing registered address

To bring more flexibility to companies' operation and encourage investment in sectors such as high-technology and modern service, the Reform Plan delegates authority to local governments to relax requirements on the companies' registered address. For example, in Jilin province, companies are allowed to register at qualified residence and multiple companies in qualified industries may register at the same address.

What These Mean to Foreign Investors

As the Revised FIE Implementing Rules have granted more flexibility to the shareholders, foreign investors should review their joint venture contract and articles of association to see whether and how certain provisions can be amended. Key provisions potentially affected include those on form and timetable of capital contribution, condition precedent to capital contribution, capital verification, etc.

When deciding the capital contribution arrangement, foreign investors should be aware that although they are free to contract among themselves, the capital amount and contribution timetable still need to go through review by the approval authorities. It is possible that the authorities may challenge the arrangement if they think it does not match with the business plans as described in the application documents (e.g. the feasibility study report). Foreign shareholders should also bear in mind that their liabilities to the FIE is up to the amount of capital they committed to subscribe.

In addition, failing to comply with the capital contribution schedule will incur civil liabilities for the breaching shareholders. Further, as the capital contribution arrangement need to be recorded in the articles of association and published on the new company information database, third-party creditors can also monitor any non-compliance and bring claim against the breaching shareholders if the company cannot duly repay its debts.

Looking Forward

While the New Company Law and the registration reform have brought substantial changes to PRC companies including FIEs, the government is in the process of promoting further reforms to the regulatory regime over foreign investment. The most important step is the revisions to the Sino-foreign Equity Joint Venture Law, the Sino-foreign Cooperative Joint Venture Law and the Wholly Foreign Owned Enterprise Law (collectively FIE Laws). Revising the FIE Laws has been added to the five-year legislative plan of the standing committee of the National People's Congress and the Ministry of Commerce is soliciting public comments on the possible amendments. It is reported that certain policies currently implemented in Shanghai Free Trade Zone (Shanghai FTZ) may be incorporated into the revised FIE Laws, especially the "negative list" approach regarding government's approval. It is clear that the regulatory framework is moving in the direction of more transparency, simplicity and efficiency for foreign investment. Foreign investors should closely monitor upcoming developments in the future.

Appendix 1 List of Industry Sectors Not Subject to the New Subscribed Capital Regime

1. Joint stock limited company established by way of share offer
2. Commercial banks
3. Foreign-invested banks
4. Financial assets management companies
5. Trust companies
6. Finance companies
7. Financial leasing companies
8. Automobile finance companies
9. Consumer finance companies
10. Currency brokerage companies
11. Township banks
12. Loan companies
13. Rural credit cooperatives
14. Rural funding mutual cooperatives
15. Securities companies
16. Futures companies
17. Fund management companies
18. Insurance companies
19. Professional insurance agencies, insurance brokerages
20. Foreign-invested insurance companies
21. Direct sales enterprises
22. Foreign labor service cooperation enterprises
23. Financing guarantee companies
24. Labor dispatch companies
25. Pawnshop
26. Insurance assets management companies
27. Small-sum loan 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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