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Doing business in China is popluar than before!!

The Chinese National People’s Congress amended the current Company Law with the aim of relaxing the requirements necessary to establish a company in China.  On the 7th of February 2014, the China State Council officially approved the “Plan for the Registration System Reform of Corporate Registered Capital” (“the Plan”). The aim of propelling the reform is to lower thresholds for market entry, optimize the environment of business and commerce and reform regimes on supervision and regulation, so as to ultimately build a market environment for fair competition and carry out continuous growth in the economy. The Plan attaches great importance to relaxing regulations on market entry for entities and implementing exact supervision and management on those new entities. The Plan outlines four points of measures in order to relax regulations on FIEs as well as domestic companies in terms of market entry. In this article we will be looking at the four points and evaluating what the relevance for foreign investors moving into China and expanding within China is.

With the aim of stimulating social investment and entrepreneurship, China’s National People’s Congress adopted the “Amendment to the Company Law of People’s Republic of China” on December 28, 2013, which has lowered the company establishment requirements and reformed the company capital registration regime.

The Amendment mainly introduces the following three changes:

  • Removing the registered capital requirements for company establishment.
  • Replacing the paid-up capital registration system with a subscribed capital registration system; and
  • Removing the minimum cash requirement.

It allows greater freedom and flexibility to how companies are managed and shaped. Furthermore it innovates the registration system for companies, especially in regard to the registered capital aspect.

The Legal Landscape before March 1st 2014

  • Minimum amount for the establishment of a limited liability company:  RMB 30,000
  • In case of capital contribution in installments, the first installment shall be no less than 15% paid off within 3 months after incorporation, and the margin shall be paid off within 2 years.
  • Cash contribution of all shareholders should not be less than 30% of the registered capital of the company.
  • In-kind contributions shall not exceed 30% of the registered capital for a WFOE
  • Compulsory Annual inspection for FIEs

New Applicable Legislation

On December 28th 2013, the Standing Committee of the National People’s Congress adopted the Decision of the Sanding Committee on Amending the China Company Law which is effective since 1st March 2014.
The following regulations were abolished:  Certain Regulations on the Subscription of Capital by the Parties to Sino-Foreign Equity Joint Venture Enterprises (1988) and its supplementary regulations.
And the following Regulations were modified:

  • Administration Rules on Company Registrations (2005)
  • Administration Rules on Registrations of Enterprise Legal Persons (2011)
  • Implementation Rules on the Law of Sino-Foreign Equity Joint Equity Enterprises (2001)
  • Implementation Rules on the Law of Sino-Foreign Cooperative Joint Equity Enterprises (1995)
  • Implementation Rules on the Law of Wholly Foreign Owned Enterprises (2001)

Main Changes

  • Abolition of minimum registered capital requirements
  • Elimination of contribution timing requirements
  • Cancellation of capital verification procedure
  • Replacement of annual inspection system with annual report system
  • No minimum 30% cash contribution required
  • No registration of the paid-in capital with AIC or shown on the business license anymore

Required Amount of Registered Capital

Is it possible to choose the amount of registered capital to invest? Possible in theory but not in practice. When considering applications, the relevant authorities will consider whether “sufficient” capital is being transferred or invested, as determined by the relevant scale or ratio. There are still statutory exceptions applicable to special industries.

Timeframe for Payment of Subscribed Capital

What is the timeframe for payment of subscribed registered capital for FIEs? The deadline of contributing 15% within first 3 months and full payment within 2 years is abolished. Under the new legislation, the shareholder can freely decide on the contribution timeframe through the Company’s Articles of Association. However, this timeframe must remain reasonable to the eyes of the AIC.

Capital Verification Report

Is it still necessary to issue a Capital Verification Report from a Chinese CPA Firm? It is not a statutory requirement any more AIC will not require a capital verification report. However, in practice, the Banks are still requiring this report in order to release the funds from the Capital Account to the RMB Basic Account.

Further Questions & Answers

If a company was set up before the 1st March 2014, but that the registered capital is not fully paid up, is it necessary to fully pay up the registered capital by the original deadline? Yes, unless the Company applies to the MOFCOM and AIC to amend the articles of association for an extension of the initial timeframe.

If the original deadline is expired and that the Company did not fully paid up the capital yet, what would be the consequences? In theory, the Company could be fined during the Annual Inspection process. However, in practice, the penalty does not systematically apply.

What kind of in-kind contributions are allowed? In addition to cash contributions, registered capital can include tangible and intangible assets that can be monetarily valued and legally transferred, such as physical objects, intellectual property right, know-how or land use right, etc. The minimum 30% cash requirement has been removed: this means that in theory, investors could contribute as much as 100 percent of the total registered capital in the form of the aforesaid non-cash assets. Such non-cash assets must be valued by appraisal organizations registered in China.

Can a foreign investor remit dividends outside China if the company’s registered capital is not fully paid up? Yes – but only according to a verbal confirmation of SAFE.

Can a foreign investor apply for a Loan from the Parent Company if the Company’s registered capital is not fully paid up? No – The Registered Capital must be fully injected before applying to a Foreign Loan from the Parent Company. In any event, the amount of the Loan amount must be the difference between the Total Investment and the Registered Capital as mentioned in the Company’s Articles of Association.

With the new Amendment, for Companies setup before the 1st of March 2014, is it necessary to amend the articles of association? No, unless you want to change the amount and/or contribution schedule of the registered capital or any other item such as the Business Scope.

Are there changes in the approval and registration process and timeline in terms of setting up FIEs or subsequent change? No material change, except simplified procedures in the Shanghai Free Trade Zone.

In Conclusion
The minimum investment requirement is abolished. This means that the Shareholders / promoters may decide the amount of capital to subscribe.

HOWEVER It is important to recognize Registered Capital amounts (your investment) should be measured against the businesses cash flow needs and not against minimum qualified amounts issued as guideline - AND to check the regulations for applying for General VAT Taxpayer Status.

General VAT Payer Status:

The tax authorities have the following stipulations regarding the application process:

  1. The company requires a minimum registered capital of USD 140,000 (RMB 1,000,000)
  2. The company must have already achieved a sales turnover at a minimum of RMB 800,000 as a small scale tax payer.
  3. The company MUST be operational (tax officers vary in how they define “operational” must basically the definition means there should be more than 2 employees in the company and the office size should be a minimum of 20sqm)
  4. The company must have a sound accounting system in place.

The benefit of having the General Tax Payer Status is that it gives the company the right to issue VAT receipts to its clients in China. In January 2009 the requirements for the application for a General Tax Payer Status changed, in that now the company has to have a registered capital of at least RMB 1 million and an annual sales turnover of RMB 800,000 (previously this was RMB 1.8 million). The general VAT rate for General Taxpayers is 17 percent. The General Tax Payer will usually purchase goods during the course of doing business. The VAT paid is known as Input VAT. The Input VAT can be deducted from the Output VAT which has to be paid when selling products. The VAT Payable is calculated on a monthly basis using software provided by the tax bureau. The application for this step is conducted by your designated accountant and takes approximately 2 months to complete (as long as the above requirements can be fulfilled).

The statutory schedule for capital contribution is abolished. Shareholder(s) may agree on the schedule in the company’s articles of association the amount of capital, form(s) of contribution, and schedule for contribution. Note that if the authorities deem the contribution period unfeasible, they tend to require an additional feasibility study to verify the commercial rationale behind the contribution period. Basically it has to make sense – will the cash sustain the entity?!

There is no capital verification report requirement anymore. However banks still tend to require the report to process the funds.

If investment is in restricted industry with clear requirements to the investment / investor, capital requirements are still applicable HOWEVER: Approval processes are still at the discretion of the authorities at the local level (e.g. MOFCOM and AIC). Therefore, we cannot guarantee that these modifications will apply to Foreign Invested Entities. In practice it can be possible, that the local level still insists on their previous requirements (e.g. a registered capital of minimum RMB 1 million).

The most important item is that companies need to ascertain how much investment capital they require (in terms of cash investment) in order to start-up, maintain and sustain the entity, before it can be fully self-running and not reliant on the shareholders.