Raise or Fold: Changing the Registered Capital of a Company in China

Posted by Reading Time: 7 minutes

By Rainy Yao, Maria Kotova and Matthew Zito

SHANGHAI — In China, the Company Law stipulates that all enterprises, foreign-invested or otherwise, must register a fixed level of operational capital with the relevant authorities—deemed the company’s “registered capital”—as part of the basic corporate establishment process. Owing to strict foreign exchange controls, a foreign company’s registered capital is often the only funds it has access to for paying its operational expenses prior to becoming cash flow positive.

This core piece of information is contained within a company’s articles of association and printed on its business license, making it somewhat burdensome to modify. Nevertheless, for a variety of reasons, it is sometimes necessary (or beneficial) for a company to increase or decrease its registered capital. Doing so requires filing an application with the original Administration of Industry and Commerce (AIC) of registration, with the procedure strongly differing between an increase or decrease. Like other types of company registered information (name, business scope, etc.), changes of registered capital are publicly accessible via AIC records.

Until recently, foreign investors were required to carefully estimate the amount of registered capital needed, as they were obliged to pay in the total amount within two years. However, pursuant to the revised Company Law implemented on March 1, 2014, the time-frame for capital contributions has been eliminated, as well as any minimum levels of registered capital. Therefore, investors may now decide on both the amount of registered capital (also called “subscribed capital”) and the period of capital contributions; however, these remain contingent upon approval from local government authorities.

Increase of Registered Capital

Generally, companies increase their registered capital for three types of reasons: financial, strategic and regulatory. Under the first category, the most common of the three, companies often underestimate their capital requirements and simply run out of money to conduct operations in China. As noted, this problem is especially severe for companies that have yet to become cashflow positive. Because an FIE’s ability to take out loans is pegged to its amount of registered capital (see chart), an increase in the latter can widen the company’s borrowing quota and allow for an inflow of additional capital.

Strategic reasons include using a higher registered capital to attract potential clients or investors, or to demonstrate the company’s fiscal capacity during bidding for a certain project; because registered capital is publicly accessible information, it can be used to evaluate the company’s competitiveness.

Prior to the adoption of the revised Company Law, both registered capital and paid-in capital were displayed on a company’s business license. Newer licenses, however, display only the company’s “subscribed capital” (i.e. registered capital). This has created a dual system in which a company’s registered information is differently available for public access based on when its business license was issued. Otherwise, a company may also use an increase of registered capital to adjust its shareholder structure or shareholder ratio through modifying the contributions of individual investors.

Lastly, in some cases a company is legally required to increase its registered capital, as when expanding its business scope, opening a branch company, acquiring special licenses, or to fulfill other qualifications (e.g., a listed company must have a registered capital of over RMB30 million).

Step 1 — The company must provide a reasonable explanation for the increase in registered capital to MOFCOM and obtain its approval.

Step 2 — The company should file an initial application with the original AIC of registration within 30 days of the decision to increase registered capital. This requires its business license and the ID card of the legal representative (or an entrusted party). If the increase is more than 20 percent of the original registered capital, the funds must be verified by a legally authorized audit or accounting firm.

Step 3 — The company must apply to the original AIC of registration for a new business license. This requires the following (in both original and duplicate):

  • An application form (as obtained in Step 1)
  • Proof of the applicant’s legal authorization
  • A legal resolution or decision specifying the increase to be made
  • The revised contract and charter (only applicable to partnership enterprises)
  • The revised articles of association signed by the legal representative
  • A capital verification  report (as obtained in Step 2)
  • Other relevant materials
  • A copy of the previous business license

Note: Where a company limited by shares increases its registered capital by way of a public or non-public issuance of new shares, it is required to obtain the approval of the China Securities Regulatory Commission. All materials should be translated into Chinese and affixed with the seal of a translation company.

Step 4 — The company should transfer the additional capital directly into its capital account. The company must also pay a fee for the increase of registered capital, which varies according to the chart below.

According to the Shanghai AIC, the application will be processed within 15 workdays of receipt. If successful, the company will be issued a new business license.

Decrease of Registered Capital

Though rarer, it is possible for a company to apply for a reduction to its registered capital. This occurs primarily in cases in which the original amount was overestimated and a better use of the funds has been determined by the company. In other cases, because a company’s registered capital represents liability on the part of its individual investors, it may be strategic to reduce the amount. But most importantly, a decreased level of registered capital may permit the company to repatriate profit as dividends. Unless its registered capital is fully paid in, a WFOE cannot repatriate dividends. Moreover, investors should be warned that at least ten percent of company annual profits must be placed in a reserve fund account until this reaches 50 percent of the company’s registered capital. This means that with a lower registered capital, a company is able to sooner begin repatriating its profit.

There are several scenarios, however, in which an FIE seeking to reduce its registered capital will likely raise a red flag with the relevant authorities and lead to a rejection of the application: (1) where the post-adjustment amount of registered capital is less than the legal minimum; (2) where the FIE is involved in ongoing judicial or arbitration procedures; (3) where the post-adjustment amount is less than the minimum required for production or operations as stipulated in the company charter; and (4) where the company charter of a Sino-foreign joint venture allows the foreign party to recover their investment and the foreign party has previously done so. Because of these potential risks, the procedure to decrease the registered capital of a company is slightly more complex than to increase it.

Step 1 — The company should convene a shareholder meeting, and prepare a balance sheet and a list of assets. The specific decrease of its registered capital should be determined.

Step 2 — The company must notify its creditors within ten days of the shareholder resolution and publish a newspaper announcement within 30 days. The creditors may ask the company to settle its debts or provide a guarantee to do so within 30 days of their receipt of notification (or within 45 days for those creditors not receiving notification). If the decrease is more than 20 percent of the original registered capital, the funds must be verified by a legally authorized audit or accounting firm.

Step 3 — The company must provide a reasonable explanation for the decrease in registered capital to MOFCOM and obtain its approval.

Step 4 — The company must apply to the original AIC of registration for a change of registered information within 45 days of the newspaper announcement and within 90 days of the original resolution. This requires the following (in both the original and duplicate):

  • An application form
  • Proof of the applicant’s legal authorization
  • A legal resolution or decision specifying the decrease to be made
  • The revised contract and charter (only applicable to partnership enterprises)
  • A capital verification  report (as obtained in Step 2)
  • The revised articles of association signed by the legal representative
  • Proof of the company’s public announcement of the reduction to its registered capital
  • Documentation of the company’s debt clearance or debt guarantees
  • Other relevant materials
  • A copy of the previous business license

Note: All materials should be translated into Chinese and affixed with the seal of a translation company.

Changing the registered capital of a company in China is not easy and requires the coordination of various types of documentation, governing authorities and company personnel. Given the proper planning, however, it can be done. Whether for keeping company operations afloat or enabling profits to be sent home sooner, setting the right amount of registered capital can be a critical factor for the success of your business in China. For these and other reasons, companies are strongly advised to contact the professional tax and legal advisory team of Dezan Shira & Associates.

Asia Briefing Ltd. is a subsidiary of Dezan Shira & Associates. Dezan Shira is a specialist foreign direct investment practice, providing corporate establishment, business advisory, tax advisory and compliance, accounting, payroll, due diligence and financial review services to multinationals investing in China, Hong Kong, India, Vietnam, Singapore and the rest of ASEAN. For further information, please email china@dezshira.com or visit www.dezshira.com.

Stay up to date with the latest business and investment trends in Asia by subscribing to our complimentary update service featuring news, commentary and regulatory insight.

RELATED READING

Adapting Your China WFOE to Service China’s Consumers
In this issue of China Briefing Magazine, we look at the challenges posed to manufacturers amidst China’s rising labor costs and stricter environmental regulations. Manufacturing WFOEs in China should adapt by expanding their business scope to include distribution and determine suitable supply chain solutions. In this regard, we will take a look at the opportunities in China’s domestic consumer market and forecast the sectors that are set to boom in coming years.

Strategies for Repatriating Profits from China
In this issue of China Briefing, we guide you through the different channels for repatriating profits, including via intercompany expenses (i.e., charging service fees and royalties to the Chinese subsidiary) and loans. We also cover the requirements and procedures for repatriating dividends, as well as how to take advantage of lowered tax rates under double tax avoidance treaties.

Leave a Reply

Your email address will not be published. Required fields are marked *