Thursday, March 27, 2014

Client Updates: China simplifies company law



March 2014
VISTRA
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China simplifies company law

The Chinese government has made significant changes to PRC Company Law that are designed to reduce bureaucracy and foster growth.

The amendments became effective on 1 March 2014 and aim to reduce administrative burdens, ease registration processes and unify procedures nationwide, to boost investments and spread economic growth.

The most significant change has to do with the way registered capital is applied under Chinese law.





 
Background

Until now, Chinese Company Law specified clear minimum registered capital requirements, including:
  • CNY 30,000 for limited liability companies with multiple shareholders;
  • CNY 100,000 for single-shareholder limited liability companies; and
  • CNY 5,000,000 for companies limited by shares.
In addition, the registration process required approval from local authorities based on industry focus, project, scale and location. Investors had then to determine the amount of registered capital in advance, confirm it with local authorities and have it indicated on their business license. Every installment or further additional contribution had to be updated and recorded on the business license.

When setting up a new company, investors would have to contribute 20% of the registered capital within three months from obtaining the business license, and the full amount within two years. Requirements would vary across the country, for example, in southern cities, companies were expected to contribute 15% within three months and the remainder within one year. With each contribution, a local Certified Public Accountancy (CPA) firm had to produce a capital verification report.

Streamlined business law

China’s Company Law has been amended so that:

1. Registered capital minimums removed

The amendments mean that companies with one shareholder are no longer required to register capital of CNY 100,000, while companies with more than one shareholder are not required to register capital worth CNY 30,000.

In practice, local authorities will probably have discretion to require appropriate investments from foreign companies or individuals if the proposed amount is deemed unrealistic to make the project commercially viable. Moreover, several regulated industries will retain high registered capital requirements, for example banking, insurance, international freight forwarding and leasing.

2. Capital contribution deadlines removed

Under the amendments, deadlines for capital contributions no longer apply. The State Administration for Industry and Commerce (SAIC), which grants business licenses, now allows shareholders to decide their own contributions schedule for registered capital.
This will allow foreign direct investors to be more flexible with their Chinese subsidiaries while saving valuable time and effort related to administrative capitalisation schedules.

3. No capital verification reports and AIC updates

The amended law eliminates the requirements to update the Administration of Industry and Commerce (AIC) on capital contributions and provide them with a capital verification report certified by a local CPA firms. Also removed is the minimum cash requirement, which was of at least 30% of the total investment.

Although the AIC no longer requires a capital verification report, this document will still need to be provided to other authorities and to the bank during post-registration procedures.

Local AIC at the municipal, provincial and city level will gradually release their local implementation rules to carry out the reform.

Changes for foreign investors

The reforms to Company Law also abolished administrative regulations pertaining to capital contribution requirements for Sino-foreign joint ventures, and revised eight regulations regarding capital contributions upon incorporation.

The changes will apply to all companies established in China as of 1 March 2014, including domestic companies and foreign-invested companies (FIEs).

However, there is uncertainty as some FIEs are established under separate laws that still require the payment of registered capital within certain timeframes and capital verification. The amounts and form of registered capital are also subject to approval. It is not yet clear when and how the Company Law amendments will apply to FIEs.

However, China’s Ministry of Commerce and the SAIC are currently reviewing foreign investment laws and have said that the FIE laws will be revised.

Once FIE laws are revised, it is expected that FIEs will benefit from the new Company Law amendments and foreign investors are very likely to appreciate the timing and flexibility over capital contributions.

Vistra China will continue to monitor and provide updates on new developments as they occur.





 
If you have any questions, please contact:


Thun Lee
+86 21 6361 5468





 

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