Regulation & Standards

Company Law in China

Published: May 2014

Portrait of David Ling
David Ling, Tax Partner, KPMG China:

In China there are two main forms of company, domestic companies and Foreign Investment Enterprises (FIEs). Historically, Chinese Company Law has only covered domestic companies. In recent years however, amendments have been made allowing FIE regulations to mirror those of domestic companies, but these changes are often introduced some time after the domestic regulations and are often watered down. Although the 1st March 2014 Company Law revisions have been introduced for FIEs, the full nature of these has yet to be disclosed. The Ministry of Commerce will shortly issue circulars to incorporate the revisions to current rules governing FIEs.

The first major change which the revised Company Law has introduced is the removal of minimum registered capital requirements. Companies are no longer required to submit government specified capital when registering a business. Instead, they can decide internally how much capital they wish to register. There are certain industries, however, such as banks and insurance companies, which still have to comply with the legacy minimum registered capital requirements.

A second key change is that the capital contribution period has been removed. Companies therefore no longer have to comply with strict timeframes to supply their registered capital and this again can now be a decision made internally.

The removal of the contribution ratio when a new company is established is another change introduced with the revised Company Law. This revision now permits companies to decide themselves what ratio of intangible and tangible items they wish to use, as contributions for their registered capital allowing for greater flexibility.

Another change sees the removal of the capital verification requirements. In the past, verification was required by regulatory bodies for any capital being contributed. While contributions such as cash have often been easy to verify, items such as machinery have not. This often complicates and slows down the registration process.

To provide an example of this, if a company is required to contribute $1m upon registration, half cash and half machinery, the cash could be simply verified, however the machinery will need to be imported and processed through a number of authorities who may value the machinery less than the company. If this happens there can be a shortfall in the registered capital, requiring more cash or machinery to be introduced. The company will also be required to renew their previous approval documents which can be a long and arduous process. Thanks to the removal of these procedures the registration process is now greatly simplified and the workload for treasurers is reduced.

Overall, the revisions to the Chinese Company Law have simplified the company registration period in China. In doing so the role of the corporate treasurer has also been made easier. In the past they would be required to calculate the registered capital, the capital contribution period and also manage the verification process. Now, thanks to the revisions, these requirements have been removed and transformed into internal company decisions rather than government requirements. Looking to the future I think there will be further improvement. The government ultimately wishes to move towards a market-oriented economy and already a large amount of government approval procedures have been either simplified or renewed. This is a trend which the Company Law fits and one which we can expect to continue in the future.

Portrait of Sun Hong
Portrait of Tony Zhong
Sun Hong, Partner and Tony Zhong, Associate, Norton Rose Fulbright:

The Company Law amendments are one of the reforming initiatives taken by the new leadership of China to stimulate non-governmental capital investment and economic activities. The ultimate aim of all these reforms is to further develop China’s corporate system as well as the overall economic system more broadly, on a free market basis with less intervention from the government.

The key changes under the new laws will see the abolition of minimal capital requirements, for companies of all types, unless there are any special requirements under the laws, administrative regulations or decisions made by the State Council. Paid-in capital will also no longer be one of the registration items required on the business licence of a company, which will now only display the capital subscribed by the shareholders. Furthermore, the legacy timeframes which dictate when registered capital will need to be paid in will cease to apply, unless otherwise falling within the exceptions. Finally, capital verification reports evidencing shareholders’ actual capital contribution will also no longer be required by the State Administration for Industry or Commerce or its local counterparts.

The key theme of the Company Law amendments is to change the capital registration system from the legacy system to a subscribed capital registration system. This batch of amendments however only reflects part of the registered capital reform which is being rolled out across China. Other elements of the reform include the government changing its annual inspection system to an annual reporting system. The establishment of a credible system is another reform which will be accomplished through making registration records, annual reports, and qualification documents of all enterprises publicly available on electronic platforms. Finally the legacy residency requirements for enterprises in China will also be relaxed under the proposed reforms.

In the coming months we can also expect to see other regulatory changes including allowing listed companies determined by the China Security Regulatory Commission to be able to issue preferred shares publically. Furthermore, we can expect to see both listed and non-listed public companies able to issue non-public preferred shares once the draft regulations have been finalised.

The amendment of laws concerning foreign invested enterprises (FIE laws) has also been put on the agenda of the National People’s Congress. The market expects that the new FIE laws will resolve existing inconsistencies with the Company Law and a more flexible legal regime for foreign investment in China. Finally, various other administrative regulations and provisions will be amended by the State Council in the next few months, to correspond with and supplement the Company Law amendments.

In light of the recent capital registration system reforms, corporate treasurers may enjoy more flexibility in structuring capital payment arrangements while making new investments into China. Existing operations in China will also benefit from a (generally speaking) more relaxed regulatory environment going forward. However, the fundamental regulatory regime governing foreign-invested enterprises (including the foreign exchange control over cross-border flow of funds under capital items) still remains in place. The Chinese government has determined to introduce further reforms to the administrative and economic systems and there are more expected. It is worthwhile for corporate treasurers to keep a close eye on the further evolvement of China’s regulatory landscape so as to take advantage of the further opening-up of the world’s second-largest economy.

Portrait of Wei Liu
Wei Liu, Corporate Partner, Pinsent Masons:

China’s refreshed company law represents a steep change for the country’s economy as the authorities seek to nurture new businesses and entrepreneurial flair in mainland China. Promoting the domestic private sector on a global scale is at the heart of the simplified rules as China now reflects the company law structure of buoyant economies such as Hong Kong and the UK.

A number of onerous rules have been abolished to pave the way for a surge in new Chinese businesses, particularly fledgling start-ups with relatively minimal cash flow. These companies will now no longer be constrained by the 30% required cash contribution. For lucrative businesses, unlocking these funds boosts liquidity, providing cash flow to invest in growth and development.

Statutory minimum thresholds for registered capital, capital contributions and documentation to verify paid-in capital all acted as a deterrent to new business ventures in China. These obstacles have now been stripped out, reducing barriers to entry for domestic companies.

Is there a global impact? Absolutely. Domestic Chinese companies will now have more ‘pulling power’ when looking to attract overseas joint venture partners. Increased liquidity leads to more investment and drives opportunities to operate on a global scale.

Transparency of finances is of paramount importance as companies are now required to file annual reports, prompting a fresh approach to ethical and responsible business practices. In time, this will be a selling point to international entities looking to establish tie-ups with lucrative and successful Chinese businesses.

The new flexible laws are a turning point for China’s economy but benefits will not be instantaneous. There will be a gradual process requiring education and support as businesses transition from the old system to the new. But with flexibility comes opportunity to expand and promote Chinese businesses on a global scale.

The next question:

“What benefits – both financial and non-financial – can establishing an in-house bank in the Asia Pacific region offer to the treasury function? Also, what advice can readers share on best practice for setting up an in-house bank within APAC?”

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