Key Points

  • Amendments to the PRC Company Law applicable to the foreign  investment sector
  • Detailed implementing rules released to implement the  Amendments to the PRC Company Law
  • Confusion and breakthrough in terms of implementation of the  Amendments to the PRC Company Law

Background

On December 28, 2013, the Standing Committee of the National  People’s Congress of the People’s Republic of China released its  “Decision on Amending the Marine Environmental Protection Law of  the People’s Republic of China and Other Six Laws”, deciding to amend  the PRC Company Law for an adoption of a new company registration  system, among others. This decision has taken effect since March 1,  2014. This new company registration system relaxed the governmental  supervision required to a large extent, especially in registered capital  aspect. In the last issue of our Chinese Update we have introduced and  analyzed the amendments (“Amendments”) to the Company Law of  the People’s Republic of China (“PRC Company Law”).

To implement the Amendments, the State Council of the People’s  Republic of China (“State Council”) and its executive agencies  as well as the Supreme People’s Court of the People’s Republic of  China (“Supreme People’s Court”) have issued a series of new  implementing rules and amended the existing rules which had  conflicts with the Amendments. The newly issued implementing  rules and the amended rules have implemented the Amendments  extensively and comprehensively. 

Application of the Amendments in Foreign Investment Sector

As expected in the last issue of our China Update, a similar company  registration system has also been adopted and implemented in  foreign investment sector starting from March 1, 2014.

  • Articles 217, 26 and 80 of the PRC Company Law

Pursuant to Article 217 of the amended PRC Company Law, the  amended PRC Company Law applies to foreign-invested limited  liability companies and companies limited by shares, unless  otherwise provided in laws on foreign investment. Further, in  accordance with Articles 26 and 80 of the amended PRC Company  Law, the minimum amount of registered capital and the capital  contribution period for limited liability companies and companies  limited by sharesare not required; unless otherwise provided by  laws, administrative regulations or decisions of the State Council.

  • No. 648 Decree of the State Council 

 As to foreign invested enterprises (“FIEs”), besides the PRC  Company Law, the registered capital and the capital contribution  of FIEs were historically regulated by (i) the Detailed Rules for  the Implementation of the Law of the People’s Republic of China  on Wholly Foreign-owned Enterprises promulgated by the State  Council (“Implementation Rules on WFOEs”) and (ii) the  provisions on capital contribution in Sino-foreign equity joint  ventures (“Provisions”) promulgated in 1988 and 1997 jointly  by the Ministry of Foreign Trade & Economic Cooperation (the  predecessor of the Ministry of Commerce of the People’s Republic  of China (“MOFCOM”)) and the State Administration for Industry  & Commerce of the People’s Republic of China (“SAIC”) with the  approval of the State Council.

On February 19, 2014, the State Council released its decree  No. 648, namely the State Council’s Decision on Repealing  and Amending Certain Administrative Regulations (“Decree  No. 648”), deciding to repeal the Provisions and amend the  Implementation Rules on WFOEs, among others. This decision  has taken effect since March 1, 2014. In accordance with the  Decree No. 648, starting from March 1, 2014 the shareholders  of FIEs are no long required to pay (i) either all registered capital  within six months in case of payment in a lump sum, (ii) or at  least 20% of the registered capital within three months and  the remainder within two years after the establishment of  FIEs in case of payment by installments. The shareholders may  make capital contribution at any time before expiration of FIEs’  operation period. Furthermore, the Decree No. 648 has also  amended other articles of the Implementation Rules on WFOEs  which had conflicts with the Amendments. 

Implementation of the Amendments

Recently, the State Council and its executive agencies as well as the  Supreme People’s Court have issued a series of new implementing  rules and amended the existing rules which had conflicts with the  Amendments, mainly including:

  1. the State Council’s (1) Guofa (2014) No.7, namely the Notice of  the State Council on Promulgation of the Scheme for Reforming  Capital Registration System, which was promulgated and took  effect on February 7, 2014; and (2) Decree No. 648, which was  promulgated on February 19, 2014 and took effect on March 1,  2014; and
  2. the SAIC’s (1) decree No. 63, namely the Decision on Amending  the Detailed Rules for the Implementation of the Regulations  of the People’s Republic of China on the Administration of  Registration of Enterprises as Legal Persons, the Administrative  Provisions on the Registration of Foreign-funded Partnerships,  the Administrative Measures for the Registration of Sole  Proprietorships and the Administrative Measures for the  Registration of Individually-owned Businesses, which was  promulgated on February 20, 2014 and took effect on March 1,  2014; (2) decree No. 64, namely the Administrative Provisions  on Registration of Registered Capital of Companies, which was  promulgated on February 20, 2014 and took effect on March  1, 2014; and (3) Gong Shang Qi Zi (2014) No. 28, namely the  Notice on Ceasing Annual Inspection of Enterprises, which was  promulgated and took effect on February 14, 2014; and
  3. the Notice on Performing Joint Report of the Business Operation  of Foreign Invested Enterprises for the Year of 2014 (“Shang  zi han (2014) No.175”), which was jointly promulgated by  MOFCOM, the Ministry of Finance, the State Administration  of Taxation, the National Bureau of Statistics and the State  Administration of Foreign Exchange and took effect on April 18,  2014; and
  4. the Supreme People’s Court’s Fashi (2014) No. 2, namely  the Decision on Amending Provisions on Issues Relating to  Application of Company Law of the People’s Republic of China,  which was promulgated on February 20, 2014 and took effect on  March 1, 2014.
  • Registered Capital System

Implementing the system for registration of capital  subscription – From March 1, 2014, the old system for  registration of paid-in capital has been ceased. Meanwhile,  a new system for registration of capital subscription has  been adopted. Under the new system, the shareholders of a  company are only required to register the registered capital  of the company that they subscribed with the registration  authority. The shareholders may at their will agree on the  respectively subscribed capital amount, the method and time  limit of contribution and etc., which only need to be recorded  in the articles of association of the company. Nevertheless, the  shareholders shall be responsible for truthfulness and legitimacy  of their capital contribution.

Relaxing the requirements for registration of registered  capital – From March 1, 2014, the regulatory authorities have  no longer limited (i) the minimum amount of registered capital  and registered capital contribution (unless otherwise provided in  laws, administrative regulations and State Council’s decisions);  (ii) the ratio of initial contribution of capital; (iii) the ratio of  monetary capital contribution; and (iv) the time limit for full  contribution. Furthermore, the paid-up capital has no longer  been an item to be registered with the registration authority and  no capital verification report has been required upon company  registration.

Excluding the application to 27 sectors – However, the  following 27 sectors shall keep regulated by the original  and existing provisions and not be subject to the system for  registration of capital subscription temporarily: companies  limited by shares established by way of a share offer, commercial  banks, foreign invested banks , financial asset management  companies, trust companies, financial companies, financial  leasing companies, auto finance companies, consumer finance  companies, money brokers, village banks, loan companies,  rural credit cooperatives, rural fund cooperatives, securities  companies, futures companies, fund management companies,  insurance companies, insurance agency and insurance brokers,  foreign invested insurance companies, direct sale companies,  foreign labor cooperation companies, financing guarantee  companies, labor dispatching companies, pawn shops, insurance  asset management companies, and small loan companies.

  • Annual Report and Disclosure System

Starting from March 1, 2014, the old system of annual review  for companies has been ceased. A new system of annual report  and disclosure for companies has been adopted. Under the new  system, companies are required to submit their annual reports  to the registration authority via a credit disclosure system from  January 1 to June 30 each year. Companies’ annual report will  be disclosed to the public and any of entities and individuals may  search for such report online. Companies shall be responsible for  truthfulness and legitimacy of their annual reports.

  • Credit Disclosure System

The Chinese government will establish and develop a credit  disclosure system. The registration authority will record and  disclose the information in connection with the registration,  filling and supervision of companies in such system. A name  list respecting business irregularities will also be established to  record the companies which fail to submit their annual reports  within the required time limit or cannot be reached via their  registered domiciles (business premises). Such name list will be  disclosed to the public via the credit disclosure system as well. 

  • Registration System

Simplifying the process for registration of domiciles – the  registration authority will register a domicile for an applicant as  long as the applicant submits the proof of its legal use of such  domicile.

Promoting the system for electronic registration and  management – the Chinese government will establish a  system of digital certificate for management of registration as  well as promote e-business licenses and full-course electronic  registration and management. E-business licenses have equal  legal effect with their hardcopies.

Relaxing administrative interventions in autonomy  of companies – the registration authority will relax its  administrative interventions in autonomy of companies. For the  application materials that applicants submit for registration, the  registration authority only implements a formality examination.

Confusion and Breakthrough

We have seen significant innovations in the reform of company  registration system. Nevertheless, this reform is pretty new  for Chinese regulatory authorities. It is hard for them to avoid  any confusion in the course of implementation. Naturally, some  breakthroughs have also emerged together.

  • Confusion

During a transition period from the old company registration  system to the new one, companies have been encountering  some confusion, especially in annual report aspect. Before the  reform, companies entirely understood how to go thought the  yearly annual review within the required time limit. But, for the  annual report for 2014, it seems unclear as to how to complete it,  despite the fact that the deadline is approaching.

Over the years, SAIC and other regulatory authorities jointly  issued notices instructing companies going through yearly annual  review and conducted review for companies collaboratively.  However, for 2014 the Shang zi han (2014) No.175, the sole  notice instructing annual report of 2014, was jointly issued by  MOFCOM and other regulatory authorities but excluded SAIC,  the main authority in charge. In accordance with the Shang zi han  (2014) No.175, FIEs shall complete their information filling via an  online joint submission system to complete the annual report for  2014 during the period from April 21 to June 30, 2014.

Currently, FIEs have started filling their information online as  required. It seems that the data filled by FIEs is required to be  more accurate. Any inaccuracy could impact the process for  annual report. For the time being, it is unclear as to how to go  through the process of annual report with the local branches of  SAIC. 

  • Breakthrough

On January 11, 2014, the Management Committee of Suzhou  Industrial Park issued the Implementing Scheme on the  Reform of Industrial and Commercial Registration System. This  implementing scheme allows:

  1. a real property for residential use to be registered as the domicile  of a company as long as all landlords of the building consent on  such registration and the landlords’ consent can be verified by the  owner committee or the property management company; 
  2. a real property to be registered as the domicile of more than  one companies through an agency being engaged in corporate  secretary service.

In addition, this implementing scheme adopts a system of  registration replacing the system of approval for establishment  of FIEs. FIEs can be directly registered with the registration  authority for establishment with reference to domestic  companies. Furthermore, it also allows a Chinese individual  to set up joint ventures with foreign investors. This actually  means a relaxation of market access far more than a reform of  company registration system.

Conclusion

Although there is some confusion in terms of implementation of the  reform, we expect that the regulatory authorities can collaborate with  each other and perform their respective duty and function well. Along  with the promoting of the new system and the accumulating of the  authorities’ experiences, the confusion may be eliminated gradually. All  aspects of the reform are expected to be implemented and performed  sufficiently. Meanwhile, companies may be liberated from tedious  registration affairs and devoted themselves to their business operation.