- 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
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 shares1 are 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:
- 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
- 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
- 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
- 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.
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.
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:
- 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;
- 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.
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.