As reported in our newsletter in January 2014, the PRC Company Law has been amended as of 1 March 2014. The amendments mainly refer to registered capital issues. E.g. the requirements on minimum registered capital as well as the two years’ deadline for capital contributions have been abolished, the paid-in registered capital is no longer subject to registration and it is also not a must any more to engage a certified public accountant to issue a capital verification report for capital contributions.
Back then it was still unclear whether such ease of restrictions also applies to foreign invested enterprises (“FIEs”). In addition to the PRC Company Law, FIEs are subject to specific foreign investment laws. For wholly foreign-owned enterprises (“WFOEs”) these are the PRC Law on Wholly Foreign-owned Enterprises, of 31 October 2000 and the Implementing Regulations of the PRC Law on Wholly Foreign-owned Enterprises, of 12 April 2001. For Equity Joint Venture Enterprises they are the PRC Law on Sino-foreign Equity Joint Ventures of 15 March 2001 and the Implementing Regulations of the PRC Law on Sino-foreign Equity Joint Ventures of 8 January 2011. For Cooperative Joint Ventures they are the PRC Law on Sino-foreign Cooperative Joint Ventures of 31 October 2000 and the Implementing Regulations of the PRC Law on Sino-foreign Cooperative Joint Ventures of 4 September 1995. To unify these laws with the amended PRC Company Law on 19 February 2014 the PRC State Council issued several amendments to the existing laws and regulations governing FIEs and company registration. All amendments will take effect on 31 March 2014. The main changes are follows:
1. The Amendment to the Implementing Regulations of the PRC Wholly Foreign-Owned Enterprise Law (“WFOE Regulations Amendments”) confirms that the changes in the PRC Company Law also apply for WFOEs.
The current regulations require that the registered capital of a WFOE must be in accordance with its business scale. Such requirement is deleted in the WFOE Regulations Amendments. Thus, theoretically speaking, a WFOE can have a registered capital of only 1 RMB. However, it remains to be seen whether the Chinese authorities will really implement this. Further, since FIEs are also subject to the concept of total investment, there are statutory ratios between the total amount of investment and the registered capital and the balance between total amount of investment and registered capital defines the financing capacity of FIEs, as long as the concept of total amount of investment is not abolished, low registered capitals not in line with their business scale will not be feasible for FIEs in practice.
The current law requires that foreign investors make their capital contribution to a WFOE in full within 2 years after issuance of the business license. This clause has been deleted. The shareholders can now stipulate the capital contribution schedule in the Articles of Association of the WFOE. It is also no longer necessary to get the capital contribution verified by a certified public accountant.
The old law provided that capital contributions in kind in the form of intellectual property rights or know-how shall not exceed 20% of the registered capital of the WFOE. These restrictions are now deleted. The change is in line with the amended PRC Company Law which no longer requires a minimum cash contribution.
2. Unlike the WFOE laws, the above mentioned old joint venture laws do not contain stipulations on minimum registered capital and deadlines for capital contributions. Consequently, the Amendment to the Implementing Regulations of the PRC Sino-foreign Equity Joint Venture Law and the Amendment to the Implementing Regulations of the PRC Sino-foreign Cooperative Joint Venture Law only provides that the Articles of Association of a Joint Venture shall include stipulations on the capital contribution schedule and the contribution method. The requirements on the registered capital and deadlines for capital contribution for Equity Joint Venture Enterprises and Cooperative Joint Venture Enterprises were stipulated in the Certain Regulations on the Subscription of Capital by the Parties to Sino-Foreign Joint Equity Enterprises and their Supplementary Regulations, both of which were abolished on 1 March 2014. In the absence of a specific regulation, the PRC Company Law applies. I.e. there are no contribution deadlines and capital contributions can be entirely contributed in kind.
3. Until now, all companies including FIEs had to participate in an annual inspection in each calendar year. The deadline was end of June of the following year. The amended PRC Administration Regulations of Company Registration abolish the annual inspection. Instead, FIEs as other companies only need to submit during the period of 1 January to 30 June of a calendar year their annual report for the preceding year through the Enterprise Credit Information System to the Administration for Industry and Commerce. The latter will disclose part of the content of such annual report online. Which parts will be disclosed to the public exactly, is not yet clear. Detailed stipulations on this issue are expected to be issued by the State Administration for Industry and Commerce soon.