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China’s State Council Relaxes Foreign Investment Capital Requirements

March 14, 2014

 

China’s State Council recently issued a notice that amends certain provisions of the implementing regulations to China’s three primary foreign investment laws (the “Notice”), namely by relaxing certain capital-related requirements for establishing and registering foreign-invested enterprises (“FIEs”) in China. The Notice was issued on February 19, 2014, and followed the adoption by the Standing Committee of the 12th National People’s Congress of the People’s Republic of China (the “PRC”) on December 28, 2013, of the Amendments to the PRC Company Law (the “Company Law Amendments”, and together with the Notice, the “Amendments”), which became effective on March 1, 2014. The Notice applies the Company Law Amendments to FIEs, which include both equity and cooperative Sino-foreign joint ventures and wholly-foreign owned enterprises. In addition to the Amendments, the State Council and the State Administration for Industry and Commerce (the “SAIC”) have announced changes to the annual filing requirements for all companies registered in China.

This alert provides a summary of the amendments, as well as the potential impact on foreign investment in China.  

Summary of the Amendments


Removal of Minimum Registered Capital Amounts and Timing Requirements

Statutory minimum registered capital amounts for limited liability companies (“LLCs”), single-shareholder LLCs and joint stock companies have generally been removed unless a minimum investment amount is required for a company by other laws or regulations. In addition, the Amendments have eliminated the previous statutory requirements on the deadlines by which shareholders had to contribute an initial percentage and the full amount of their agreed registered capital contributions. Instead, investors will now need to agree and specify the form, amount and timing of each shareholder’s capital contributions in the company’s articles of association. Theoretically, foreign investors might now be able to form FIEs with registered capital amounts far below the previous statutory minimums. Without further liberalization of China’s foreign exchange regime, however, registered capital contributions will likely continue to be the primary method for foreign investors to provide offshore funding to their China subsidiaries.



No Minimum Percentage for the Cash Portion of Capital Contributions

Prior to the Amendments, the cash portion of registered capital contributions was required to comprise at least 30% of a PRC company’s registered capital. The Amendments eliminated this minimum cash percentage requirement, which means that a foreign investor can now theoretically make all of its FIE’s capital contributions in the form of non-cash assets, such as technology. However, investors generally need to justify the declared value of in-kind contributions through an appraisal report from a qualified PRC accounting firm and all in-kind registered capital contributions need to be transferred (as opposed to licensed) to the company in order to be considered part of the investor’s registered capital contribution.



Paid-in Capital Contributions No Longer Need to Be Verified or Registered

The previous concept of a Chinese company’s “paid-in” registered capital amount has been replaced with the concept a “subscribed” registered capital amount. This fundamental change means that, except for companies in certain specific sectors, after a shareholder has made its agreed capital contribution, the company no longer has to have the contribution verified by a PRC accounting firm or submit a capital verification report to the applicable local branch of the SAIC to have the contribution registered and reflected on the entity’s business license. Instead, the status of a shareholder’s paid-in capital contributions only needs to be reflected on a share/equity certificate issued by the company and in the company’s annual filings with the SAIC. Nevertheless, a shareholder will still be liable for the full amount of the capital contributions that it agrees to make, as will be set forth in the publicly-searchable articles of association of the company that are filed with the local branch of the SAIC.



SAIC Annual Inspection System Replaced by Annual Filing System

In addition to the Notice, the State Council and the SAIC have announced that the current company annual inspection system will be replaced by an annual filing system. Authorities have advised that both domestic companies and FIEs will only need to file annual reports via their applicable local SAIC. Such reports will require information on the status of the capital contributions by the company’s shareholders and the company’s assets, and will be available to the general public. Without corresponding amendments to the annual inspection requirements of other authorities, however, it is unclear whether this change might take away the convenience of the current joint annual inspections that are available in many cities, theoretically imposing greater time burdens and costs on companies.

Impact on Foreign Investment

Although there are still some uncertainties and practical issues to be addressed, foreign investors should see more flexibility and greater efficiency in investing in private sectors in China. Specifically, the Amendments should provide foreign investors with more options to make and adjust their equity investments in China, both in terms of the amount of their capital contributions and the timing for injecting them.

Moreover, the Amendments might signal a major change in Chinese corporate law, possibly indicating a future that resembles a system more familiar to foreign investors. Of particular note, the Ministry of Commerce (“MOFCOM”) recently requested public comments to amend China’s three primary laws governing FIEs. We anticipate that China’s central authorities such as the State Council, the SAIC, MOFCOM, the State Administration of Foreign Exchange and other regulators will issue further guidelines to implement the Amendments, and that provincial and local authorities will issue guidelines governing local implementation. We will continue to monitor regulatory developments in this area as China continues to develop its corporate law regime.

 


This memorandum is a summary for general information and discussion only and may be considered an advertisement for certain purposes. It is not a full analysis of the matters presented, may not be relied upon as legal advice, and does not purport to represent the views of our clients or the Firm. Qiang Li, an O'Melveny partner licensed to practice law in New York, Wendy Pan, an O'Melveny partner licensed to practice law in New York, Delaware, and Pennsylvania, Carl Heiberg, an O'Melveny counsel licensed to practice law in New York, and Stewart Wang, an O'Melveny associate licensed to practice law in New York, contributed to the content of this newsletter. The views expressed in this newsletter are the views of the authors except as otherwise noted.

O'Melveny & Myers LLP is a foreign law firm registered with the Ministry of Justice of the People's Republic of China. Under current Chinese regulations, we are allowed to provide information concerning the effects of the Chinese legal environment, but we are not authorized to practice Chinese law or to render legal opinions in respect of Chinese law. We work in cooperation with a number of Chinese law firms. Should you require a legal opinion in respect of any Chinese law matter, we would be happy to assist you in obtaining one from a Chinese firm.

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