Introduction
On October 28, 2015, the Ministry of Commerce of People’s Republic of China (MOFCOM) issued the "Decision on Revising Certain Regulations and Regulated Documents" (MOFCOM order No.2 of 2015), which took effect on the same day.
The "Decision" makes revisions to 29 regulations and regulated documents in order to "promote the reform for the registered capital registration system and the transformation of the government functions, facilitate the convenience of industry and commerce registration, practically optimize the business environment and further vitalize the market and motives for development, in accordance with the requirements of the Circular of the State Council on Printing and Issuing the Reform Proposals for the Registered Capital Registration System (Guo Fa (2014) No. 7) and the Circular of the General Office of the State Council on Issues Concerning Accelerating the Implementation of the Registered Capital Registration System Reform (Guo Ban Han [2015] No. 14)".
The Decision encourages foreign investments by eliminating restrictions on the minimum threshold and initial installment of registered capital, contribution schedules, capital verifications, and annual inspection. Therefore, the new regulations are in line with emphasis and highlights set up by the New Company Law (amended in 2014) regarding the reform of registered capital regime.
In general, the New Company Law, set up the following changes regarding the registered capital system in China:
a) Amount and Form. Unless provided otherwise by laws, administrative regulations, or the decisions of the State Council, the minimum registered capital requirements, along with the certain percentage of initial capital contribution and the minimum cash contribution have been eliminated for newly established enterprises in China under the New Company Law. The foreign investor has now the discretion in determining the amount of registered capital for its operation in China based on business needs, rather than the approving authority based on “the match of the amount of registered capital and the company's operational scale”;
b) Contribution. The "Capital Paid-In System" has been replaced by "Capital Subscription System". The capital Paid-In System requires companies to file details of both their registered capital and paid-in capital with the State Administration for Industry and Commerce or its relevant branch, and required enterprises to engage an accounting firm to verify the mandatory capital contribution accordingly. The amendments greatly simplify the capital contribution process establishing that an investor has the sole discretion in determining, as provided in the Articles of Association (Capital Subscription System), the amount, form, and contribution schedule of the company's registered capital, which is duly disclosed to the public via the National Enterprises Credit Information Publication System set up by the State Administration of Industry and Commerce (“SAIC”);
c) Supervision. The annual inspection system has been replaced by an annual reporting system, where companies are required to submit annual reports including information on the company’s paid-in capital. The SAIC or its local branches will conduct random review of the contents of a company’s public reports and will impose administrative penalties on those companies that are found to have concealed information or provided false information in their annual reports. Further, companies that fail to publicize their annual reports could be listed in the “List of Enterprises with Abnormal Business Operations” or the “black list” on the Public System.
The main changes of the Decision
Thus, following the New Company Law, the main changes of the Decision are:
Modification regarding the Establishment and Annual Inspection of FIE: Requirements and restrictions on the minimum registered capital, the time limit of capital contribution, the percentage of first-time capital contribution, percentage of contribution by cash, and further simplifies the procedure of the establishment and the annual joint inspection are abolished or changed for Foreign Investment Joint Stock Companies, Foreign Invested Venture Capital Enterprises and Foreign-Invested Commercial Enterprises.
Merger and Division of FIE, Reinvestment of FIE and Equity Contribution of the FIE: Certain amendments are made to the regulations governing mergers, division, and investment of foreign capital within the PRC, including merger and division of FIEs, reinvestment by FIEs within the PRC, capital contribution made with equity by FIEs, and FIEs’ strategic investment in listed company. In case of merger and division for example, the Decision abolishes that "...any merger and division of foreign-invested enterprises shall be not allowed until the foreign investors have paid up their capital contribution or provided cooperation conditions pursuant to the provisions of the company’s contract and articles of association and actually commenced production and operation; and any merger or division of the FIE shall submit the capital verification reports to relevant approval authorities". In case of reinvestment in any encouraged or permitted sector to establish any new entity, the FIE will not be required to submit the capital verification reports, which demonstrates that the registered capital has been paid up in full amount. Therefore, the requirement of to not exceed the 50% of its net assets of the accumulated investment and, the requirement of pay up the registered capital before making investments in China, are abolished. In case of Equity Contribution of the FIE, the following requirements are abolished: a) the equity shall not be used for the capital contribution under the circumstances that the registered capital of the FIE has not been paid up and the FIE fails to participate or pass the joint annual inspection of the previous year; b) the total amount of equity contribution by all shareholders of the FIE and other non-monetary contributions shall not exceed 70% of the registered capital of the invested enterprise; and c) where the FIE intends to make equity contribution, it shall submit relevant certificate to the approval authority in order to prove it has passed the joint annual inspection.
The requirements of the minimum registered capital abolished for selected industries: These industries include auction enterprises, foreign leasing industry, foreign international freight agents, wholesale and storage of refined oil, sale and storage of crude oil, foreign engineering contractors, foreign aid material, foreign logistics and commercial factory.
For your reference:
MOFCOM Order No.2 of 2015:
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