When China’s Company Law was first drafted, its primary concern was to regulate State Owned Enterprises according to modern business management techniques. However, it lacked reference to experience. In the past six years, the Chinese market has also changed. As a result, there was an urgent need for amendments to the law.
Key Points of the Amendment
(i) Capital limitation
The requirements for the minimum registered capital for setting up limited liability companies have been scrapped entirely. Previously, ¥30,000 had to be provided for limited liability companies, ¥100,000 for limited liability companies formed by a single person and ¥5 million for joint-stock limited companies.
There will be no more limits on the proportion and duration of the paid-in capital, and this will no longer be a matter of industry and commerce registration.
(ii) Deposit capital
Instead of depositing a fixed amount of registered capital that cannot be spent freely in a corporate account, shareholders will be able to determine amount and duration of registered capital at their own discretion. They will be held liable for the authenticity and legitimacy of their investment payments.
(iii) Business site
Requirements on the site registered for business operation will be relaxed.
(iv) Annual report
To improve transparency and strengthen business credit, the current annual inspections on registered companies will be replaced by annual reports open to public inquiry, while companies that commit aberrant behaviour will also be made public.
(v) Procedure of registration
The registration procedures are simplified by canceling the requirement of a capital contribution verification report.
The reforms are aimed at unleashing market dynamism, encouraging private businesses and boosting employment.
They will foster a market environment of fairness and competition, mobilize social capital, and encourage small and micro enterprises to grow and boost employment, according to a statement released after the State Council.
“It is necessary that the measures be carried out across the board,” the statement said, adding the move is in line with general market expectations and conducive to expanding social investment and strengthening the steady economic trend.
On the downside, this may also trigger more bogus companies without sufficient capital and assets.
Impact on Foreign Invested Companies
FIEs are subject to special laws and regulations, which are in line with the current Company Law with regards to the above paid-in capital registration, mandatory capital contribution schedule and capital verification requirements.
However, once the Amendment takes effect, those specific provisions will become invalid, as they are inconsistent with the Amendment. In practice, authorities will still need to issue guidance on how to make the procedural adjustments.
In addition, how the Amendment will retroactively apply to companies established before its effectiveness also remains unknown. For instance, if an existing FIE has a capital contribution deadline after the Amendment comes into effect, can its shareholders revise its articles of association to extend the contribution schedule? The feasibility of this plan and others will require clarification from authorities.
This article is intended solely for informational purposes and does not constitute legal advice. Although the information in this article was obtained from reliable official sources, no guarantee is made with regard to its accuracy and completeness.