Company Registration Reforms – China State Council

Late in 2013, the China State Council announced unprecedented reforms to the company registration system, resulting in five new policies. Whilst these policies are yet to be drawn down into legislation by the State Administration for Industry & Commerce (SAIC), they nonetheless herald a new era of lower hurdles and greater transparency when registering a company in China, as well as bring China’s policies more into line with international standards.

The five major policies are as follows:

1. Removal of the minimum registered capital requirements for companies. Previously, all investors, whether foreign or domestic, were required to invest a certain amount of capital in an accredited Chinese bank account, for independent verification by a certified accountant, prior to registering a company. This capital could then be used for working capital (and any other purposes), but did place a capital burden on investors. Whilst the amounts required have steadily decreased over time, the new policy has removed all registered capital requirements, along with the ratio of the initial payment and the deadline for contribution of the entire amount. However, this relaxation in policy must be considering in light of the next policy.

2. Changing the compulsory registered capital regime to a subscription regime. Although the requirements for registered capital have been abrogated, in its place the State Council has implemented a subscription regime. This subscription regime provides that the founders of a company voluntarily prescribe the amount of capital contribution, form of contribution (i.e. in cash or kind), and the due date for contribution. The policy provides that the founders themselves assume liability for the legitimacy of this subscription regime.

3. Replacement of the annual inspection requirement with an annual reporting requirement. In an apparent move to increase transparency, the annual inspection requirement is to be replaced by an annual reporting requirement, the product of which will be available for inspection by the public.

4. Relaxation of the enterprise business residence requirement. The State Council has stated that legislative power in relation to registration conditions of the “business residence” for companies shall be delegated to local governments. This delegation is premised on the understanding that local governments will relax the registration conditions as required to provide for more convenient incorporation.

5. Development of a company “credit” system. A company “credit” system is to be developed and made available to the general public, which will include each company’s annual report under the new policy regarding annual reporting requirements, along with details of each company’s registration record and its business qualifications. In a unique move, a company’s electronic business license (i.e. its certification of incorporation) is to have the same legal effect as its hard copy business license. Further, a blacklist of non-compliant companies will be established.

The risks with the new policies as outlined by the State Council are manifold. It is highly likely that the aspirational policies of the State Council will be seen to be significantly diluted when drawn down into legislation. These policies will require the SAIC to draft significant revisions to the Company Law, joint-venture laws, and a myriad of supplementary legislation and implementing regulations.

Secondly, this dilution may also occur at a national departmental level, when organs of the national government (i.e. Customs, Tax Office, etc) draft their own implementing regulations to enforce the legislation as drafted by the SAIC. Further, there is a risk that or local governments further down the food chain to the national bodies may well enact regulations that place a higher burden on investors than the new policies provide for, irrespective of the inconsistency in doing so, as has frequently occurred in the past. The vagueness of some of these policies – in particular, the scope of the new subscription regime for capital contributions – provides inherent discretion to local governments to enact more onerous requirements than the policies indicate.

 

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