Year 2013 ended with what may be a very important reform in the PRC corporate law.
On December 28, 2013 twelve amendments to the PRC Company Law have been officially approved1. The so-revised PRC Company Law will enter into effect as of March 1, 2014.
The amendments mainly focus on the registered capital of limited liability companies – including also one-person limited liability companies and joint-stock limited liability companies.
No more statutory thresholds
Under its current version, PRC Company Law (art. 26) requires than any limited liability company shall have a minimum registered capital of at least 30,000 RMB, unless a higher amount is required by specific laws and regulations.
The revised law deletes this requirement: in other words, investors are free to decide the amount of the registered capital into their companies, as there shall be no more minimum registered capital for limited liability companies. Minimum thresholds required by specific laws/regulations for specific industries (e.g.: banks, insurance, logistics, etc..) will not be concerned by the revision of PRC Company law, and therefore will still apply.
Registered capital no more condition for approval
Under the revised law (art. 23), the amount of registered capital ceases being a condition for the establishment of the company.
In practice, this should mean that – except when minimum thresholds are required by specific laws/regulations (e.g.: banks, insurance, logistics, etc..) – the authority – during the approval process for the set-up of the company – shall not question the amount of registered capital as determined by the investors.
Cash contribution no more mandatory
Cash contribution accounting for at least 30% of the registered capital (art. 27.3) will not be mandatory anymore.
In theory, this opens the doors for full in-kind contribution – mainly through IP (trademarks, know- how, patents), domain names, equipment, land use rights. Perspectives for high-technology companies – and particularly start-ups – may become interesting.
Quicker set-up procedure
Under the revised Company Law (art. 7), only the registered capital shall appear on the company business license, while the paid-in capital will not be reported anymore.
At the same time, after every injection of registered capital, capital verification report will not be requested anymore. This will simplify the set-up procedure as well as companies’ operation – as company funds will be available for use a couple of weeks before than it happens now.
Impact on foreign investors still uncertain
Whether such a reform really marks the end of an era, it remains to be seen.
In theory, the new Company Law allows investors to set up companies with a registered capital as low as 1 RMB, or to capitalize without any amount of cash. In some municipalities in Guangdong province the reform has been already tried on a pilot-project basis.
This revision arrives shortly after the much-feted Shanghai Free Trade Zone’s reform – which include, amongst other, a highly simplified and straightforward approval procedure for foreign investments (unless listed in the so-called “negative list”) and RMB convertibility.
Is China’s corporate system really becoming more similar to Hong Kong’s?
At least from foreign investors’ perspective, things should not be taken for granted as most of the current limitations to foreign investors remain untouched.
- FIE’s financing still limited
FIEs capacity to be financed is still legally limited by the registered capital/total investment ratio: basically, the lower the registered capital, the narrower is the FIE’s borrowing gap (i.e. the amount of loans from the parent company or overseas banks).
Moreover, on-shore loans by PRC banks are in practice rarely accessible – in significant measure – to FIEs.
Until these legal limitations remains, and until Chinese banks’ policy will not become more supportive of FIEs, foreign investors in practice will not be able to take advantage of the registered capital reform.
- Implementation by local authorities
Approval of thin-capitalized FIEs is a little of a Copernican revolution for China as we know it.
MOC and AIC’s officers in China for decades have approved only FIEs with a solid registered capital. In fact, authorities have always seen FIEs registered capital as a tangible guarantee. Because of its nature of pure work capital, FIEs’ registered capital has had its importance in the approval process as it (i) guarantees sustainability of the investment – i.e. it covers all costs until break-even – and (ii) reduces the risk of insolvent companies. This is basically why even for small trading companies2 authorities in China still require a higher capital contribution.
After Company Law’s revision, how keen will become these same officers to approve thin-capitalized foreign investments? Based on our experience, it is likely that – for a relatively long time – authorities (especially out of first-tier cities) will still require the registered capital to cover the costs until the expected break-even.
Moreover, it shall not be ignored that local authorities and officers in many PRC investment zones receive yearly performance evaluation based also on the volume of investments attracted; as FIEs’ registered capital accounts for a big slice of their budget, they may not be so motivated to quickly implement the law.
Finally, specific regulation3 for foreign-invested enterprises (WFOE and JV) have not been amended accordingly. As of today, IP capital contribution for WFOEs is still capped at maximum 20%; moreover, both WFOEs and JVs are still required to carry out capital verification reports after every capital injection4.
Even if the impact for foreign investors may be little in the immediate, FDI system, as announced by PRC government5 in 2013, is clearly evolving towards bureaucratic simplification – under both legal and financial/operational point of view.