SHANGHAI — China’s Ministry of Commerce (MOFCOM) recently released the “Circular on Improving the Examination and Management of Foreign-invested Enterprise (FIE) Approval,” which substantially relaxes the incorporation requirements for foreign investment.
Based on the Circular, requirements on the ratio of initial capital contributions have been abolished, meaning that eligible FIEs can complete the business registration process without having to inject any initial capital upon startup. Meanwhile, company shareholders will be able to decide on the amount, method and deadline for capital subscriptions at their own discretion. These reforms follow the recent cancellation of the minimum registration capital of RMB30,000 for limited liability companies, the RMB100,000 minimum for single shareholder companies and the RMB5 million minimum for joint stock companies.
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FIEs will still be required to abide by the ratio between registered capital and total investment, as stipulated by the State Administration for Industry and Commerce (SAIC). The chart below shows the correlation between required minimum registered capital and total investment.
In accordance with the new Company Law, SAIC also implemented the “Enterprise Credit System,” through which companies are required to submit the amount and deadline of their capital subscriptions to SAIC. Given that the credit system enables the public to view all relevant details pertaining to the enterprises, an overly low subscribed capital might affect the general perception of the company’s abilities, and thereby hamper its growth. SAIC clarified that shareholders must be liable for the authenticity and legality of the capital contributions. Failure to pay the subscribed capital within the stipulated deadline will result in a company being listed as “abnormal” or put on a national blacklist.
Notably, although the restrictions on first-time capital contributions have been cancelled, in practice, the governing authorities will ensure that a company’s registered capital is sufficient to support its business operations for at least one year, including rent, labor costs and office expenses. Currently, the Beijing municipal MOFCOM has already started to implement this new rule.
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This now effectively means that the guidelines as concerns the amount of registered capital required is that it needs to be the amount of cash required to get the business started, and as much again to get it operationally effective. The latter issue may take time for the business to generate sufficient cash flow to cover its own costs, and this portion can in fact be spread out over several injections. However, working out these obligations and timeframes requires attention to detail, on-the-ground knowledge and good financial planning if this is to be executed without problems. It is critical that enough RC is injected from the outset and the business start up cash flow monitored with attention to detail to avoid the process of having to adjust the business license each time a new cash injection is required. It is good business practice to effectively capitalize the business at the front end of its existence to meet operational costs until profitability can be reached. If not, then a systematic diary of future cash flow injections needs to be put in place.
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