Registered capital requirements for foreign-invested enterprises (FIEs) in China have been partially relaxed. The changes largely mirror the recently-effective amendments to China’s Company Law (see our e-bulletindated 23 January 2014).

Effective from 1 March 2014, the new rules are aimed at consistency between the Company Law and the various laws and regulations that apply to FIEs. Unfortunately, however, some of the requirements that were removed from the Company Law will continue to apply to FIEs. This suggests an intention to continue regulating FIEs separately from domestically-invested enterprises.

Background

The amended Company Law, effective 1 March 2014, simplified the capital system applicable to domestically-invested enterprises in China. The key changes were:

  • Mandatory paid-up capital replaced by a subscribed capital system
  • Capital verification requirements removed for (i) limited liability companies, and (ii) companies limited by shares that are established by promotion
  • No minimum registered capital (though industry-specific requirements will still apply)
  • Minimum cash contribution to capital removed

The extent to which these developments applied to FIEs, however, was not clear.

New rules for FIE registered capital

FIEs now can take advantage of many of the changes to China’s Company Law:

  • Removing minimum amounts of registered capital

FIEs are now no longer subject to minimum registered capital amounts. However, in practice, MOFCOM and its local branches are likely to continue requiring an FIE’s total investment to be commensurate with its planned business. Moreover, the fixed ratios between total investment and registered capital continue to apply. The effect of these continuing requirements is that MOFCOM and its local branches are likely to continue requiring FIEs to have a minimum registered capital.

In addition, companies operating business in certain sectors are still subject to minimum capital thresholds.

  • Removing mandatory timetable of capital contributions

Investors in FIEs are now required to pay up registered capital in accordance with articles of association and, if relevant, the joint venture contract. The previous requirements to pay up registered capital within certain timeframes have been repealed.

This is good news for investors that are planning to establish one or more FIEs in China. (Most companies established more than two years ago should already have fully paid up registered capital.)

Most FIEs that were recently established, however, will require amendments to their articles of association before they can take advantage of the new flexibility. We understand that MOFCOM may be preparing to issue rules that specify the way in which articles of association can be amended.

  • Removing cap on non-currency capital contribution

Investors may now contribute more than 70% of an FIE’s registered capital in kind. Such contributions, however, will remain subject to approval.

  • Removing mandatory requirement for capital verification

Capital verification has been largely removed from the Company Law; however, capital verification is still needed for the following FIEs:

  • wholly foreign-owned enterprises operating in certain sectors, such as banks.
  • Sino-foreign equity joint ventures
  • Sino-foreign cooperative joint ventures
  • Foreign-invested companies limited by shares that are established by share offer

Comments

It is promising to see the Chinese government take steps to align the FIE regime with the recent relaxation of registered capital requirements under the Company Law. It would be more encouraging, however, if China brought the two systems closer together by further conforming the FIE regulations with the Company Law.

With detailed implementing rules still expected, it is hoped that China will use the implementing rules to further simplify the registered capital requirements for FIEs. Experience, however, suggests that they might not.

In the meantime, the new rules promise greater flexibility for companies being established and for companies that have recently been established.