According to a statement posted on China’s government website, a reform plan was recently approved by an executive meeting of the State Council chaired by Chinese Premier Li Keqiang. The plan aims to reform China’s business registration system to reduce business costs and promote investment. The announcement identified five major areas for reform:
- Registered capital requirements. The State Council reform aims to relax the requirements for registered capital by removing the minimum registered capital of RMB 30,000 for limited liability companies and RMB 5,000,000 for companies limited by shares. It further tries to eliminate the requirements for initial capital contributions and related time restrictions.
- Annual inspection system. The announcement states that the current compulsory annual inspection system shall be replaced by an annual reporting system which is open to public query, and a fair and standardized selection inspection system shall be established.
- Place of business registration requirement. The reform will liberalize the requirements for business residence (place of business) registration. The specific details of registrations relating to business residence will be determined by local governments.
- Enterprise credit system. The State Council will promote the establishment of an enterprise credit system. Through a public information sharing system, the information for enterprise registration, annual reports, qualification and credibility will be made available to the public. In addition, a black list will record corporate irregularities and be published. Further, the implementation of e-business licenses, electronic registration and management are still under consideration.
- Paid-in capital registration system. The reform promotes a subscription capital registration system in place of the current paid-in capital registration system, to help reduce the cost of starting up a business. It aims to leave the investors the autonomy to agree on capital subscription, forms of contribution, contribution timelines, etc., and to hold investors liable for fulfilling capital contribution commitment. The paid-in capital will no longer be a requirement for enterprise registration.
This announcement potentially represents the most significant initiative in China’s enterprise legal system since the enactment of the new Chinese Company Law of 2006. The key objectives are to lessen government registration requirements, lower market entrance barriers and encourage the establishment of new businesses.
Entrepreneurs, especially those investing from overseas, should read the new reform plan in the context of the following:
- Earlier this year, a pilot program of “zero paid-in capital” registration was carried out in some cities in China, including Qingdao, Foshan, Shenzhen and others, which was aimed to stimulate interest in new business ventures. The new State Council announcement tries to broaden the scope of the program and seeks to expand it nationally. For foreign investors, the relaxation on annual inspections, place of business registration and paid-in capital will represent a welcome improvement over current practice. Entrepreneurs in China may now start a “1 Yuan Company” more quickly, as their counterparts in Hong Kong or Japan do.
- It is not expressly stated whether the above reform will apply to foreign invested enterprises. However, the relaxed registered capital requirement and the subscription capital registration system has already been implemented in the Shanghai Free Trade Zone with regard to new enterprises, including foreign invested enterprises. It is expected that each of the above areas for reform will apply to foreign invested enterprises as well as local enterprises.
- The stated reform is not likely to take effect in the immediate future, however, as legislation is required to remove and amend relevant provisions in current laws before the reform can take effect, e.g., the PRC Company Law, Company Registration Management Regulation, as well as many other administrative rules and regulations. The State Council will likely push forward the legislation reform through the National People’s Congress or its Standing Committee, as well as the ministries of the State Council within the next year.
While significant in its announcement, this reform will not have an immediate effect, and the details are still forthcoming as China’s company registrar and market supervisor, the State Administration of Industry and Commerce, has been researching relevant rule changes and procedural adjustments to move this reform forward. A plan for legislative amendments may be put forward in the coming year. For many Chinese and foreign entrepreneurs, the current registered capital requirements are of less concern than the relatively onerous approval requirements, applicable taxes and fees, annual inspections and industrial certificates. The reform this Statement outlines signifies an important transformation from what can sometimes be an arbitrary and complex inspection system to something more fair and transparent.