China Issues Rules on Transition Period for Complying with New Registered Capital Rules
Under the amended Company Law, shareholders of limited liability companies will be required to pay their subscribed capital within five years of corporate establishment. Companies established before the new Company Law takes effect will be given a three-year transition period to adapt to the new rules on registered capital in China.
At the end of 2023, China’s legislature adopted an amendment to the Company Law, which introduced new regulations on the term of payment for subscribed capital, as well as requirements to publicly disclose the amount of registered capital.
The amended Company Law comes into effect on July 1, 2024, meaning any companies established after this date must comply with the new rules on subscribed capital.
In order to accommodate companies that are established before the amended Company Law comes into effect and have subscribed capital payment terms exceeding the five-year time limit, a transitional period will be implemented. During this transitional period, these companies will be required to gradually adjust the contribution period to meet this requirement.
To provide guidance and ensure the implementation of this transition period, the State Council has released a draft version of the Provisions on the Registered Capital Registration Management System (the “draft provisions”) for public feedback until March 5, 2024. The draft provisions, if adopted in their current form, will also come into force on July 1, 2024.
Changes to the registered capital system in the amended Company Law
Registered capital is the initial investment dedicated by shareholders to a company—either a joint venture or a wholly foreign-owned enterprise (WFOE) in the foreign investment regime. This amount must be registered with the local branch of the State Administration of Market Regulation (SAMR) when a company is incorporated. It is included in the company’s business license, Articles of Association (AoA), and the investment certificate issued to shareholders after incorporation.
Registered capital in China can be in the form of cash or in-kind contributions, such as the provision of equipment, intellectual property, or even labor. However, in-kind contributions can only account for up to 20 percent of the total registered capital amount.
Subscribed capital model
China follows a subscribed capital model, which means that the capital contributions do not need to be paid upfront. Previously, the subscribed capital could be injected under a schedule determined by the company itself. However, in the 2023 amendment to the Company Law, shareholders of a Limited Liability Company (LLC) must pay their subscribed capital in full within five years of the company’s establishment.
Besides new rules on the subscribed capital in LLCs, promoters of a joint-stock company established by initiation or private placement are also required to pay in full the shares subscribed by them. Moreover, for a joint-stock company that is established by initiation or private placement, the promoters are required to pay the shares subscribed by them in full.
If a joint-stock company increases its registered capital, it must register changes in registered capital after the shareholders of the company have paid in full.
Transition period for implementation of the new registered capital system
For companies established before the amended Company Law takes effect, with a subscribed capital payment term (“contribution period”) exceeding five years, the transition period will extend from July 1, 2024, to June 30, 2027.
If an LLC is established before July 1, 2024, but the remaining contribution period for its shareholders is less than five years from July 1, 2027, the company does not need to make any adjustments during the transition period. However, if the remaining contribution period exceeds five years, then it must be adjusted to be within five years during the transition period. That is to say, the final date for LLCs established before July 1, 2024 to complete their capital payment is June 30, 2032.
Meanwhile, for joint stock companies established before the implementation of the amended Company Law, the funds for subscribed shares must be fully paid within the three-year transition period (before June 30, 2027).
Reducing registered capital during the transition period
When reducing the registered capital, the amount of deducted capital that can be remitted overseas or reinvested domestically is generally limited to the paid-in registered capital of foreign investors, excluding equity such as capital reserves, surplus reserves, undistributed profits, and so on. If the capital reduction proceeds are used to make up losses on the book or to reduce the foreign party’s contribution obligations, the amount of capital reduction proceeds shall be set at zero, unless otherwise stipulated.
However, under the draft provisions, if a company that is established before July 1, 2024, wishes to apply to reduce registered capital but does not reduce the actual paid-in capital during the transition period, it can do so through a comparatively simpler process – by announcing the reduction to the public through the National Enterprise Credit Information Publicity System for a period of 20 days. The company must meet all of the following conditions to be able to do so:
- The company has no outstanding debts or debts significantly lower than the company’s actual paid-in registered capital;
- All shareholders undertake joint and several liabilities for the company’s debts before the reduction within the original subscribed capital range; and
- All directors undertake not to impair the company’s ability to perform debts and sustain business operations.
If no objections are raised by creditors during the publicity period, the company can proceed with the registration of capital reduction based on the application and commitment letter.
If the above conditions are not met, the company must reduce its registered capital the usual way, which we have covered in our article on Increasing and Decreasing Registered Capital in China.
Anomalies in subscribed capital
If a company is established before July 1, 2024, and has a contribution period exceeding 30 years or total subscribed contributions exceeding RMB 10 billion (US$1.4 billion), the company registration authority may assess the authenticity of the registered capital. This will be based on factors such as shareholders’ contribution capabilities, main business projects, and asset size.
During this process, the company registration authority may request the company to explain its situation, organize industry professional institutions for evaluation, or negotiate with relevant departments for assessment.
If it is determined that there are significant anomalies in the contribution period or amount of subscribed capital, the company may be required to adjust the contribution period and amount within six months. The adjusted contribution period cannot exceed five years from July 1, 2027.
Some companies established before July 1, 2024, that are involved in strategic or critical fields may be exempted from having to adjust the contribution period and can continue with their original payment schedule if given consent by the relevant department of the State Council. These include companies that:
- Undertake major national strategic tasks;
- Are related to the national economy and people’s livelihoods; or
- Are involved in projects of national security or public interest.
These companies can be private companies, foreign-invested companies, state-funded companies, or other types of companies.
In addition to the new time limit, the amended Company Law also stipulates new requirements for companies to disclose their registered capital. Specifically, companies must disclose the following information on capital registration through the National Enterprise Credit Information Disclosure System (among other information) within 20 days of the information being known:
- The amount of capital contribution subscribed and paid by shareholders of an LLC, the method and date of capital contribution, and the number of shares subscribed by the promoters of a joint stock company; and
- Changes to the equity and share information of shareholders of LLCs and promoters of joint stock companies.
Companies must also upload shareholder lists, financial statements, and other relevant materials explaining shareholders’ actual payment situation through the National Enterprise Credit Information Disclosure System.
If a company adjusts the contribution period for its shareholders during the transition period, it must record this change in the AoA and disclose it to the public through the National Enterprise Credit Information Publicity System.
Consequences for failing to make adjustments during the transition period
If an LLC established before July 1, 2024, does not adjust the capital contribution period during the transition period, the company registration authority may give it 90 days to adjust the capital contribution period. This capital contribution period cannot exceed five years from July 1, 2027.
If a company still fails to adjust the period and amount of its capital contribution, the company registration authority will place a special mark against the name of the company on the National Enterprise Credit Information Disclosure System. This mark will be visible to the public, including potential partners, clients, and vendors.
China Briefing is written and produced by Dezan Shira & Associates. The practice assists foreign investors into China and has done so since 1992 through offices in Beijing, Tianjin, Dalian, Qingdao, Shanghai, Hangzhou, Ningbo, Suzhou, Guangzhou, Dongguan, Zhongshan, Shenzhen, and Hong Kong. Please contact the firm for assistance in China at email@example.com.
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