On 24 June 2014, China's Ministry of Commerce
("MOFCOM") published an internal notice
("Notice") that significantly simplifies
the capital registration system for foreign-invested enterprises in
China ("FIEs"). An amendment to
China's Company Law which came into effect on 1 March 2014
relaxed the capital contribution and verification requirements for
companies establishing in China. However, as FIEs are also
regulated under special laws and regulations in addition to the
Company Law, it remained uncertain, prior to the publication of the
Notice, to what extent the new registered capital regime under the
Company Law would be applicable to FIEs. In practice, local MOFCOM
offices continued to apply the previous rules to FIEs.
As expected, the Notice removes the uncertainty and provides that FIEs shall also come within the relaxed capital contribution and verification requirements of the amended Company Law. The main changes announced in the Notice are as follows:
- Subscribed capital to replace mandatory capital contribution. A subscribed capital system is adopted. Any restrictions or requirements on the percentage of initial capital contribution, the percentage of cash versus in-kind capital, and the timing and amounts of contributions are all removed. Instead, these specifics are to be agreed upon by investors and shareholders at their sole discretion and must be stipulated in the joint venture contracts and articles of association of a FIE.
- No minimum registered capital, subject to certain exceptions. Minimum registered capital requirements are removed, except that companies operating businesses in certain sectors will continue to be subject to minimum capital thresholds imposed by industry-specific laws and regulations. In addition, the Notice points out that the fixed ratios between total investment and registered capital will continue to apply, which means MOFCOM is likely to continue requiring a FIE to maintain certain minimum registered capital commensurate with its total investment.
- Contribution verification requirements eliminated. According to the Notice, except for FIEs in certain limited industries (mostly in financial sectors), to which the new subscribed capital system does not apply, any actual contribution of subscribed capital by investors no longer needs to be reviewed and verified by government authorities. FIEs are now only required to submit certain documents evidencing the actual capital contributions to local MOFCOM offices for filing and data collection purposes after the contribution.
The new rules under the Notice will benefit FIEs that are being established or are recently established. Companies established more than two years ago presumably have already fully contributed their registered capital. The Notice clarifies that investors of FIEs that were approved prior to 1 March 2014 must continue to perform their capital contribution obligations under their original joint venture contracts and articles of associations. Recently established FIEs, however, may consider applying for amendments to their joint venture contracts and articles of association so as to take full advantage of the flexibility under the new rules.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.