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 license.
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.
As we reported in our last China Alert (Seeking New Advances Amid Stability: The New China (Shanghai) Pilot Free Trade Zone; 12/11/2013), the new Shanghai Free Trade Zone abolished government approvals for all foreign investment enterprises. Unfortunately, the Company Law Amendment does not go this far, but the trend is positive and, if the Shanghai FTZ is a model, there should be more reforms to look forward to. As always, the devil will be in the detail.
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