7 November 2013
An executive meeting of the State Council led by Premier Li Keqiang on 25 October 2013, unveiled an unprecedented reform to China's company registration system. According to Premier Li, this reform aims to "create fair competition and support smaller businesses, especially innovative enterprises" by establishing a transparent and efficient modern company registration system.
Main Proposed Changes
The reform proposed the following significant changes:
The minimum registered capital requirements to be removed
The minimum capital requirements of RMB 30,000 to start a limited liability company, (RMB 100,000 for an individual company) and RMB 5 million for a joint stock company, will be cancelled.
No required schedule and proportion for the paid-in capital
After the reform, there will be no restrictions on the percentage of registered capital the shareholders have to pay in when the company is established and time frame when the registered capital has to be fully paid in. The paid-in capital will no longer be a registration matter at the administrations of industry and commerce, which means companies will be able to save the expenses for capital verifications.
Company's annual inspection to be cancelled
The current annual inspection of companies will be replaced with an annual reporting system. Company information such as registration, annual reports, qualifications can be viewed online to increase the transparency of business operations.
Registration address requirements to be relaxed
The reform also proposes less restrictions on companies' registration addresses but the implementing details are subject to local governments.
Potential Impacts of the Reform
The reform reflects that the government administration tends to change from pre-approvals to afterward supervision. It will greatly lower the thresholds for smaller and private businesses to establish new operations. However, whether and how the aforesaid proposals will be followed is still a question.
First, it is unclear whether the proposals will be equally applicable to foreign-invested enterprises ("FIEs") in China. Chinese law provides the concept of total investment for FIEs, which is the combination of registered capital and debt financing. Minimum amounts of registered capital are specified when an FIE's total investment reaches different thresholds. Should the minimum requirements for FIE's registered capital be removed following the blueprint and spirit of the reform? If this is the case, will the concept of total investment still be in place since the difference between total investment and registered capital represents an FIE's borrowing capacity? Accordingly, under the current approval regime, the total investment amount is one of the factors to determine whether the FIE is subject to municipal, provincial or central level commerce authority's approval, and the removal of total investment will certainly impact the FIE's approval hierarchy.
Second, according to Chinese Criminal Law, a shareholder, in violation of the Company Law, may be subject to criminal liability if he makes a false capital contribution by failing to pay the promised cash or tangible assets or to transfer property rights, or surreptitiously withdraws the contributed capital after the incorporation of the company. Under the proposed reform, however, the proportion and schedule for the payment of capital will depend on the shareholders of the company and the paid-in capital is no longer a registration matter. Therefore, the relevant provisions of the Criminal Law should be revised to be consistent with the changes in the Company Law.
The State Council's meeting simply reveals the direction of the much-anticipated reform to inspire private-sector companies to invest and grow. At the implementation level, it will involve China's legislation authority, National People's Congress to promulgate new laws and regulations and require various governmental authorities' coordination. Whether the depth and strength of the reform will go in the upcoming years as people expect is still a wait-and-see.