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China’s State Council Relaxes Foreign Investment Capital Requirements

Q: Will new amendments on PRC Company Law apply to FIEs?

 

A: Yes. The Standing Committee of the 12th National People’s Congress of the People’s Republic of China (the “PRC”) promulgated the Amendments to the PRC Company Law (the “Amendments”) on December 28, 2013, which will became effective on March 1, 2014. According to a notice (the “Notice”) issued by China’s State Council on February 19, 2014,  certain provisions of the implementing regulations to China’s three primary foreign investment laws are changed according to Amendments and which will also apply to foreign-invested enterprises(the “FIEs”).

 

Q: Does the Amendments abolish any minimum requirements on the amount of registered capital and time frame for the capital contribution? 

 

A:  Yes. The Amendments has abolished the requirements on the minimum amount of registered capital for the limited liability companies ( the “LLCs”), single-shareholder LLCs and joint stock companies(except for the companies in some specific sectors, such as bank or financial institutions). Also, the Amendments eliminated the requirements on the time frame of making capital contribution (in the past, a foreign investor had to make initial capital contribution within 3 months and contribute the full amount of their agreed registered capital contributions within 2 years). Now the Amendments, theoretically, allow a foreign investor to form FIEs with registered capital amounts far below the previous statutory minimums and make capital contribution according to timing specified in their articles of association, other than the time frame stipulated by laws or regulations.

 

Q: Is there any minimum percentage requirement on the cash portion of capital contribution under the Amendments?

 

A: No. Before the Amendments take effect, the cash contribution in LLCs or FIEs should account for at least 30 % of the registered capital. Now the Amendments abolished such requirements, which means a foreign investor might, theoretically, be able to make all of its capital contribution in the form of non-cash assets.

 

Q: is a foreign investor allowed to subscribe for the amount of registered capital?

 

A: Yes. Under the Amendments, a shareholder in LLCs or FIEs is allowed to subscribe for the amount of registered capital as stated in their articles of association, unless otherwise specified by laws, administrative regulations or State Council’s decision for the companies in certain specific sectors. However, please note that a shareholder will still be liable for the full amount of the capital contributions that it agrees to make in line with the timing specified in their articles of association. Nevertheless, after a shareholder has made its agreed capital contribution, the company is not required, under the Amendments, to verify the contribution or submit a capital verification report to local branch of the Sate Administration for Industry and Commerce(the “SAIC”), unless otherwise specified by laws, administrative regulations or State Council’s decision for the companies in certain specific sectors.

 

Q: Will the annual inspection system be replaced by annual filing system?

 

A: Yes. As required by the Amendments, Notice and other relevant revised regulations, SAIC will not conduct annual inspection on the LLCs or FIEs any more and new annual filing system will be adopted. Under annual filing system, the LLCs or FIEs will only be required to annually prepare a report which disclose information on the status of the capital contributions by the company’s shareholders and the company’s assets, and file the same with the local branch of SAIC on an annual basis. Such report and filing will be available to the general public.

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