On 17 June 2014, the Chinese Ministry of Commerce (MOFCOM) published the Notice of Improvements on Foreign Investment Examination Management (the Notice) which introduces the capital subscription system into the registration of foreign invested enterprise (FIE) by eliminating the examination and approval of registered capital and capital contribution for most of FIEs.

Background

Before the promulgation of the amended PRC Company Law, companies registered in China including FIEs are subject to the paid-in capital registration system, under which the registered capital must be higher than a certain minimum set forth by laws and regulations and must be paid up within a certain time period. Even though the registered capital can be paid by instalments, the law stipulates the minimum amount of the first instalment and the timeframe within which the registered capital must be paid up in full. All of these legal requirements restrict the flexibility of business operations and are viewed as obstacles for attracting the investment.

With an aim to reduce these restrictions, since November 2013, a series of laws and regulations have been recently promulgated by the Chinese authorities to introduce the capital subscription system and remove the paid-in capital registration system.

  • On 12 November 2013, the Central Committee of the Communist Party of China issued the Decision on Several Major Issues on Comprehensively Deepening Reforms (the Decision). One of the reforms identified in the Decision is to gradually change the paid-in capital system to the capital subscription system. The Decision of the communist party of China cannot be enforced directly, but its principle will be put into law by promulgating new statutes or revising existing ones, so that the projected reforms would be implemented and guaranteed by legal force.
  • To implement the capital subscription system proposed in the Decision on 28 December 2013, the Standing Committee of the National People's Congress passed the decision to amend the PRC Company Law to adopt the capital subscription system to replace the paid-in capital system.
  • In this regard, on 7 February 2014, the State Council issued the Reform Plan on the Registered Capital Registration System (the Reform Plan), which provides detailed rules guiding the implementation of the capital subscription system.
  • Immediately afterwards on 20 February 2014, the State Administration of Industry and Commerce published a new version of the Administrative Regulations on the Company Registered Capital Registration to provide detailed registration rules for domestic Chinese companies.

However in China FIEs are governed by additional laws and regulations specifically related to FIEs, in addition to laws such as Company Law. Pursuant to the principle provided in the amended Company Law, and to implement the Reform Plan, MOFCOM, as China's highest authority governing foreign investment and approving the establishment of FIEs, issued this Notice to introduce the capital subscription system into the FIE registration process.

Capital subscription system

According to the Reform Plan, capital subscription system means that the shareholders have the sole discretion to decide the amount of capital to be subscribed, capital contribution timeframe and the type of capital contribution, as long as they are written in the articles of association of the company and registered with the company registration authority. Under the capital subscription system, it is therefore theoretically feasible for company initiators to set up a company with no capital contribution. This is a major change from the previous system whereby any company in China must meet the legally binding registered capital requirements.

There are certain exceptions to the new capital subscription for FIEs. In certain industries, minimum registered capital is still required for a FIE, and in some other industries the paid-in capital registration system remain unchanged. These exceptions are explained in detail in paragraph 3.2 below.

Reforms called for in the Notice

The Notice abolishes:

  • the restrictions and requirements on the proportion of initial capital contribution; the proportion of monetary contribution; and the timeframe for capital contribution;
  • the minimum registered capital requirement (with exceptions); and
  • examination of capital contribution (with exceptions), i.e. no capital verification report is required to be submitted for examination and approval by government authorities.

It should be noted that based on our telephone consultation with MOFCOM, we understand that where there is any conflict between the provisions in the Notice and those in other existing MOFCOM regulations, the Notice shall prevail. For example, Article 30 of the Implementing Rules of the Foreign Invested Enterprises (Implementing Rules) provides that the registered capital of wholly foreign invested enterprises, if paid by instalments, shall be paid within three years and the first instalment shall be not less than 15% and be paid within 90 days. These requirements under the Implementing Rules conflict with the Notice's abolishment of the proportion of initial capital contribution as well as the timeframe for capital contribution, and therefore are no longer valid after the issuance of the Notice.

Comparison with previous requirements

Compared with the requirements on capital contribution under the paid-in capital registration system the Notice has the following significance:

Click here to view table.

*This is not provided in the Notice but is based on our telephone consultation with MOFCOM.

Exceptions to the capital subscription system

According to the Notice and the Reform Plan, 27 sectors and industries are not eligible for the capital subscription system. Most of them are related to financial services. The continuing capital requirement for companies in these industries is presumably for the purpose of maintaining financial stability of the nation and protecting relevant creditors and debtors. These sectors and industries include: companies limited by shares established by public offering, commercial banks, foreign-funded banks, financial asset management companies, trust companies, finance companies, financial leasing companies, auto finance companies, consumer finance companies, currency brokerage companies and village and township banks.

Exceptions to minimum registered capital

The Notice abolishes the requirement of minimum registered capital unless it is otherwise required by laws or regulations for specific sectors. Based on our search, specific minimum registered capital requirements are still in place for foreign investment in the following industries (not exhaustive):

Click here to view table.

Ratio between registered capital and total investment

Although the Notice abolishes the requirement of minimum capital, the statutory requirements on the ratio between the registered capital and the total investment of an FIE continue to be in effect:

Click here to view table.

FIEs incorporated before 1 March 2014

FIEs whose incorporation was approved before 1 March 2014 shall continue to perform their capital contribution duties pursuant to their articles of association and/or joint venture contracts. However, investors of the FIE may apply to the competent counterparts of MOFCOM to revise the articles of association and/or joint venture contract.

Foreign exchange administration

According to the Notice MOFCOM shall conduct foreign exchange statistics based on the actual paid-in capital either in foreign exchange or in offshore RMB, which shall be evidenced by the capital contribution certificate issued from the FIE to shareholders after each capital contribution, as well as other required supporting documents. The capital contribution certificate shall state the type, amount and currency, and date of the contribution.

Comments

The Notice is specifically targeted at eliminating the statutory registered capital requirements previously imposed on FIEs. After the Notice foreign investors now have more flexibility with regard to increase or decrease of the registered capital, as well as the pace of making capital contribution.

Currently in China, the company registration regime is under a significant reform including the capital subscription system, the electronic registration system and the negative list system, for the purpose of lowering market entry costs, liberalising market players and ultimately creating a transparent, equal and legal market for both domestic and foreign investors in order to attract investment and boost the market economy. Due to the large amount of new and revised laws and regulations being published in response to the call for reform, certain provisions between the new and old rules may conflict with each other. Based on our telephone consultation with MOFCOM, we understand that more regulations or revisions to the existing regulations are expected to be published to unify the administration of foreign investment.