Since China opened its doors to foreign investment 35 years ago,
it has always asked investors to see the color of their money and
the thin capitalization of operating companies in China was
prohibited. Similar, but somewhat more relaxed, capital
requirements were later also imposed on domestic companies. With
effect from March 1, however, mandatory minimum capital
requirements of corporations in general will be abolished by an
amendment to the Company Law (the "Amendment").
In the future, capitalization requirements, if any, will be set by
specific industry regulators.
Subscribed Capital replaces Paid-up Capital
Under the current Company Law, the initial capital contribution
made upon the establishment of a company shall be no less than 20%
of the registered capital, and the investors shall paid-up all the
capital contribution as the amount of the registered capital within
two years (five years for investment companies). The Amendment
removes these requirements. Instead, the Amendment provides that
registered capital is the capital subscribed by the investors and
they alone shall determine the amount and the timing of
capitalization, unless otherwise required by law.
Minimum Cash Capital Contribution Abolished
The Amendment will also remove the current requirement that a
minimum portion of capital contribution be in cash of no less than
30% of the registered capital.
As a result, the process of incorporating and capitalizing a
company has been streamlined and promises to become faster. Without
a minimum capitalization requirement, the entrench process of
verifying capital contribution in the company registration process
is also removed. Moreover, the amount of registered capital paid in
by each shareholder will no longer be recorded on the business
The Amendment establishes the soft legal basis for the reform,
but in the coming few months, the State Administration of Industry
and Commerce is expected to amend the existing regulations or
release new regulations concerning the registration of companies to
implement these changes.
Anyone with standard form contracts who deals with small business must review the contracts for potential unfair terms.
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