The release of the revised Company Law on 29 December 2029 has attracted a great deal of attention among the owners and management of companies in China, particularly on the tightened capital contribution requirements. Just before the Chinese New Year of 2024, we see a further step in the implementation of the revised Company Law: The Chinese government released the Draft Provisions on the Implementation of Registration Administration System for Registered Capital for public opinion.
The Draft Provisions explicated the capital contribution requirements for companies in a variety of circumstances. In this article, we focus on the implications of the Draft Provisions for the limited liability companies which is the most common form for foreign investors.
We refer to existing companies as those registered before 1 July 2024.
Newly established companies: 5-year capital contribution period
From 1 July 2024, newly established companies must make a full capital contribution within 5 years of incorporation. This has to be stipulated in the Articles of Association of the companies.
Companies established before July 2024: “3+5” adjustment schedule
The Draft Provisions provide for a three-year transition period, i.e. from 1 July 2024 to 30 June 2027, for companies registered before the promulgation of the new Company Law. During this transition period, companies whose capital contribution period exceeds the statutory 5 years will have to adapt themselves to comply with the new regulations.
Exceptions:
- Companies whose remaining capital contribution period is less than 5 years from 1 July 2027 do not need to make an adaption.
- Companies undertaking major national strategic tasks, involving people’s livelihood, national security or major public interests may make capital contributions in accordance with the original capital contribution time with the approval of the competent department of the State Council or the people’s governments at the provincial level or above.
Example:
Company ABC was established on 1 December 2019 and its shareholder subscribed a registered capital of RMB 1 million by 30 November 2038. Until 1 July 2027, it would have a remaining capital contribution period of more than 5 years, so it must apply for registration to adjust its capital contribution period during the three-year transition period (1 July 2024 to 30 June 2027). For example, it can apply for registration on 1 June 2027 to reformulate its Articles of Association and change the capital contribution period to 30 May 2032.
Increase of registered capital: 5-year capital contribution time
From 1 July 2024, increased registered capital must be paid in by the shareholders that have subscribed to the increased amount within 5 years of the registration of the capital increase.
Companies with unusual registered capital structure
The Draft Provisions provided more clarify on the situation of “companies with clearly abnormal capital contribution amount and timeline”.
- The registration authority may reject the company’s registration applications if it sees an apparently excessive amount of registered capital, which is in contrary to general knowledge and the industry characteristics, indicating the inability of full capital contribution.
- For companies registered before 1 July 2024 with a capital contribution period of more than 30 years and a capital amount of more than RMB 1 billion, in order to verify the business status of these companies, the registration authority may require the companies to provide statements, organize an evaluation by professional organizations or consultation with other government departments. If they are found to have abnormal capital contribution amount and period, the authority may require such companies to make adjustments in accordance with the new Company Law within 6 months.
Reduction of registered capital during 3-year transition period
For companies established before 1 July 2024, the Draft Provisions put forward the possibility of reducing the registered capital during the 3-year transition period. According to the Draft Provisions, existing companies that meet certain conditions may apply to reduce their registered capital (not reducing paid-in capital) with a relatively simplified approach, provided that no objection has been raised by creditors during the 20-days public announcement period.
The conditions include:
(I) there is no outstanding debt, or the debt is obviously less than the paid-in share capital of the company;
(II) all shareholders undertake to be jointly and severally liable for the debts of the company prior to the capital reduction to the extent of their originally subscribed capital contribution; and
(III) all directors undertake not to impair the company’s ability to repay its debts and the company’s going-concern capacity.
Companies that do not meet these conditions should refer to the regulations of the Company Law on the regular formalities of capital reduction when considering a reduction of their registered capital.
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Important notes:
We draw your attention to the scenario that in certain areas, e.g. some industry parks, there may be specific requirements on the amount of registered capital for companies registered in their area. In such a case, the company should also discuss with the relevant parties to clarify the implications if it is considering to reduce its registered capital.
Disclosure of information to the public
The revised Company Law and the Draft Provisions provide that a company shall, within 20 working days from the date on which the information is formed, make relevant capital contribution information public through the National Enterprise Credit Information Publicity System:
- The amount of capital subscription and contribution made by its shareholders;
- The method and date of the capital contribution;
- changes of shareholding information.
As supporting documents, the company shall upload to the system the register of shareholders, financial statements and other relevant materials showing the capital paid in by shareholders.
Simplification of company registration formalities
The Draft Provisions stipulates that the company registration authority shall optimize the registration procedures and formalities to facilitate the companies’ adjusting the period and amount of their capital contribution. It remains to be seen how local registration authorities will respond to these regulations in practice.
Conclusion
The Draft Provisions provide clarification and interpretation of the new capital contribution requirements, especially for companies registered before 1 July 2024. We advise shareholders and management of affected foreign-invested companies to observe the regulatory progress, review their capital contribution status and if applicable, consider the possible adaptations to their capital contribution time to comply with the new Company Law.
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Lena Li
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