what we think

A legal development announced for 2014 will have a huge impact on how foreign investors plan their investment in China. The amended of the PRC Company Law, approved by China's top legislative organ on 28 December 2013 and to become effective on 1 March 2014, radically changes the way that registered capital is managed under Chinese law.

At present, investors must determine the amount of registered capital in advance, and record this on their business license. They must normally contribute 20% of the registered capital within 3 months, and the full amount two year from issuance of the business license. The amount must reach certain thresholds, and at least 30% must be contributed in cash. Once contributed a CPA must be retained to verify the contribution.

1. Cancellation of Minimum Registered Capital Requirements

The cancellation of the minimum registered capital thresholds should allow more small companies to invest, although it remains to be seen whether this rule-change will open the gates completely. The current legal thresholds for general companies are already quite low (CNY 100,000 for companies with one shareholder, or CNY 30,000 if there is more than one shareholder), however in practice officials have (and are exercising) the discretion to demand more from foreign investors if the proposed amount is deemed unrealistic to make the project commercially viable. It remains to be seen whether the plans of international companies to start with very small investments will be approved. Moreover, higher registered capital requirements continue to prevail in specific industries, such as banking, insurance, and international freight forwarding.

2. Cancellation of Time-requirements on Capital Contributions

The change from the system based on paid-in registered capital to one based on subscribed registered capital is expected to have the greatest impact. By allowing investors to contribute capital over a much longer period, companies are given much more flexibility in developing their operations. One consequence may be that shareholders decide on much higher amounts of registered capital then before, as they are now allows to gradually contribute these over a long time-span as the capital becomes required.

3. Cancellation of Maximum Proportion to In-kind Investments

With the cancellation of the limits on in-kind investment, investors can decide to contribute non-cash investments without restriction. IT companies, for example, could benefit by contributing highly-valued technologies, as long as they can be evaluated and title-transferred.

4. Cancellation of Verification Procedures

Companies will gain much flexibility with the cancellation of the need to engage a CPA and go through verification procedures, and amend the business license, each time that a capital contribution is made. Costs and the time needed to complete these procedures have made it unattractive for companies to split contributions in many installments. Under the new regime, investors will not be inhibited by such costs, and so can make decisions on contributions purely based on commercial considerations and the provisions in the company's Articles of Association.

Implementing Rules to Provide More Details

The amendments to the PRC Company Law have been promulgated at the highest level; however for implementation by registration authorities, detailed implementing rules will have to be issued. Expected by the time the amendments have taken effect on 1 March 2014, these will determine how much flexibility shareholders will really be given in determining their capital arrangements. What is already clear, however, is that the new rules will apply to domestic- as well as foreign-invested companies alike.

Another issue to watch for is how the rules will deal with companies that have already been established. Presumably they will fall under the new regime immediately; those companies that immediately want more flexibility will have to prepare for a change of their Articles of Association, which will become the binding document to determine the registered capital contribution arrangements that a company has in place. But will companies also be allowed to decrease the registered capital, where it is considered too high? Time will tell.

Other Rules to Come?

The amendments to the PRC Company Law were initially agreed at an executive meeting of the State Council chaired by Premier Li Keqiang, on 25 October 2013. Two other changes discussed at this meeting could also have a revolutionary impact on foreign companies doing business in China:

• information on companies registered in China should become completely transparent, easily accessed and checked by both entities and individuals. At present, the level of transparency varies from location to location, and in many districts only lawyers can check a company's registered information.
• at present, every company must have a registered address; only certain buildings can serve as registered addresses (with even stricter requirements for foreign-invested companies); and one address can only register one company. This bars the "post office model" whereby one address (such as an accountant, law firm or service provider) serves as registered address of many companies at one time. Presumably, the new rules will change some of this - though to which extent remains uncertain.

With the amendments to the PRC Company Law already promulgated, and further rules expected soon to relax other requirements, the Chinese government is giving a strong signal that it wants to boost the economy by giving more flexibility to businesses - including foreign investors. Further detail is expected in the weeks and months to come.