The China Company Law has been revised and will be put into effects in July, 2024. In this revision, several changes have been made, espcially for start-ups and small companies. As companies owners, you may have read many blogs, and are still confused by the complex explainations. In this article, Hongda will take you through the key changes for small companies in the easiest way!
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Since its initial enactment on December 29, 1993, China's Company Law has seen five significant amendments. The latest, the sixth amendment, began in 2019. After four rounds of deliberations by the National People's Congress Standing Committee and extensive consultation across various societal sectors, the amended law was officially passed on December 29, 2023, and is set to be effective from July 1, 2024. This revision impacts key areas such as company formation, operations, governance, individual accountability for directors, supervisors, and senior executives, and the inclusion of employee participation in governance. Operators and shareholders of companies in China need to carefully consider these changes and start preparing for their implementation. Moreover, those contemplating establishing companies in China should pay close attention to these imminent changes.
Despite having read various articles and blogs about the updated Company Law, you might still find the implications of these changes confused. Although the new law introduces numerous amendments, aspects critically important to most small and medium-sized business operators, like revisions to the company establishment and exit system and the capital contribution regime, are often briefly mentioned in these resources. In this Hongda blog, we will focus on elucidating these significant changes, particularly the revised capital contribution system. We believe this blog will give you a more concrete understanding and strategy for future company plans. Furthermore, Hongda is more than ready to assist with any company modification services you may require. Let's dive in!
Revisions to the Capital Contribution System
A major change in the recent revision mandates shareholders of limited liability companies to fulfill their capital commitments within five years of the company's inception. This marks a stark contrast to the prevailing guidelines, where shareholders had the discretion over the timing and manner of their capital contributions. Since the introduction of the subscribed capital came in 2013, this flexibility in funding timelines has been instrumental in attracting investments. Nonetheless, it has also led to instances where investors deliberately postpone contributions, occasionally resulting in inadequate capital for the company to meet its creditor obligations. The latest amendment underscores creditor protection, thereby enhancing the security of engaging in business with other Chinese companies. Here’s how the two capital contribution systems compare:
Subscribed System: In this system, shareholders are required to deposit a certain amount of capital in the company's charter, without immediate disbursement. Under this system, not only can you use cash as a means of contribution, but you can also use equity, debt, intangible assets, fixed assets, etc., as ways to actually pay in capital for your company's registration. This approach offers flexibility in operations and lowers the entry barrier for establishing a company. In this system, the pledged capital forms a part of the registered capital but isn't necessitated to be deposited straightaway.
- The subscribed system operates on a promise-based approach, where shareholders commit to contributing capital as per the company's operational needs, without immediate financial outlay.
- Companies have the liberty to determine when to call for actual capital contributions, depending on their operational requirements.
The Newly Implemented Paid-in System: This system obliges shareholders to deposit their pledged capital at the time of company formation or during capital augmentation. The authenticity of these payments is subject to verification by banks or other third-party entities. In this framework, shareholders are bound to make their pledged capital contributions either at the point of registration or within a designated timeframe.
- The paid-in system necessitates shareholders to furnish the requisite funds during the company’s registration, ensuring adequate initial capital.
- Once the shareholders execute these capital contributions, such funds are recognized as the company’s bona fide paid-in capital.
Necessary Changes for Your Company Based on the Company Law Revision
To align with the latest amendments in the Company Law, the modifications required for your established company will depend on the registered capital-related details provided during its establishment, like the capital amount, contribution currency, shareholder list, and shareholding percentages. Here, we outline potential scenarios you might face and provide guidance for appropriate actions. You can click the bullet points to read more about the strategies for the specific situation you are in!
Situation 1: Your company initially utilized the subscribed capital system and you haven't yet paid the registered capital.
Situation 2: Your company’s subscribed registration capital is too large to get fully paid.
Situation 3: Your company has no operation, or it will no longer be needed.
Situation 4: The shareholders of your company are about to changed, or the shares will be transferred.
1. Your company initially utilized the subscribed capital system and you haven't yet paid the registered capital:
In such instances, assuming your registered capital amount is reasonable, we advise completing the actual capital payment within the timeframe mandated by law to circumvent potential issues.
For foreign investment companies, the procedure for capital payment is as follows:
Step 1: Open a foreign exchange capital account at a bank. This process is very similar to setting up your basic account, and Hongda can assist in establishing this account.
Step 2: Transfer the registered capital from an overseas account under the same name of the registered shareholder into the capital account (Note: Ensure the transfer is to the foreign exchange capital account, not the basic account), and label it as 'investment funds'.
Step 3: Once the funds arrive in your foreign exchange capital account, obtain a foreign exchange receipt confirmation from the bank.
Step 4: Produce a capital verification report. We highly recommend contacting Hongda as it requires professional issuance.
Step 5: Remit the stamp duty.
You may wonder about the foreign exchange capital account's purpose and why your registered capital must be deposited into it. This type of account, commonly used by entities engaged in international trade or investment, allows for the management of foreign currency transactions. In China, its primary uses include managing currency exchanges, tracking capital transactions, and handling risk.
While your registered capital initially needs to be transferred into a foreign exchange capital account, this doesn't imply that the funds are locked in the account like a security deposit. Instead, these funds can be actively used for your company's day-to-day operations, including:
- Business Operations: Expenses like renting office spaces, acquiring office equipment, disbursing employee salaries, paying into employee social security, and making direct payments for trade purchases in line with contracts.
- Investment Activities: Using the capital to invest in other domestic companies as a shareholder. Note, however, that these funds should NOT be used for stock or fund investments.
2. Your company’s subscribed registration capital is too large to get fully paid:
If your company's initial registered capital at inception is excessively large, making it impractical to fully pay within the time frame mandated by law, then you'll need to apply for a reduction in registered capital with the Bureau of Industry and Commerce.
The capital reduction procedure, governed by stringent legal and regulatory stipulations to safeguard creditors' and shareholders' interests, can be quite elaborate. The essential steps include:
Step 1: Crafting a Shareholders' Meeting Resolution: Formulate a comprehensive plan for capital reduction, detailing the rationale, amount, methodology, and schedule.
Step 2: Public Announcement of Capital Reduction: Disclose the resolution on an appropriate public platform, such as the company's website, official gazette, or media outlets, to inform creditors. A specified period (typically 30-45 days) should be allowed for creditors to express objections.
Step 3: Revising the Company Charter: Update the company's charter and relevant legal documents to mirror the allocation of registered capital after the reduction.
Step 4: Completing Official Registrations: File the revised charter with the Bureau of Industry and Commerce and fulfill all related formalities for registration.
If your company is handling undistributed profits during the capital reduction, the equitable distribution of interests between creditors and shareholders must be meticulously managed. Hongda is available to offer expert tax and legal advisory services to facilitate the seamless execution of your capital reduction.
3. Your company has no operation, or it will no longer be needed:
If your company is currently non-operational or will no longer be utilized for business activities, it's advisable to proceed with its deregistration. This action not only mitigates potential legal complications but also curtails ongoing expenditures associated with maintaining the company.
The company deregistration process encompasses several key steps:
Step 1: Settling all outstanding tax liabilities and cancelling the tax registration.
Step 2: Revoking the industrial and commercial registration.
Step 3: Closing all company bank accounts.
Step 4: Transferring any residual funds in the bank accounts to the parent company, should your company be a subsidiary.
Step 5: Invalidating the company seal.
4. The shareholders of your company are about to changed, or the shares will be transferred:
In scenarios where your company experiences a transfer of shares or changes in its shareholder composition, some shareholders might opt to divest their stakes to others. During such instances, it becomes necessary to update equity and shareholder information. The following documents should be prepare.
- A post-change shareholding structure diagram, illustrating the revised equity distribution.
- Identity details of the incoming shareholders.
- Information about the percentage of equity being transferred and details regarding the transfer value.
- The company's financial statements.
It's crucial to remember that the identity verification documents for new shareholders vary based on the transferee's status:
- For transferee shareholders from Hong Kong or Macau, company registration documents must be validated and authenticated by China Legal Service (Hong Kong) Co., Ltd., or China Legal Service (Macau) Co., Ltd.
- For transferee shareholders from overseas, notarized documents certified by a Chinese embassy or consulate in the respective country or region are needed. For more information on consulate and Hague Apostille certification, refer to our blog on the Hague Apostille.
- Mainland Chinese natural persons should provide original identity proofs or be physically present for verification. Foreign natural persons, on the other hand, can submit a notarized document with a passport and signature sample.
Share transfer involves a comprehensive process that engages multiple sectors. Each action in this process demands meticulous consideration and preparation, particularly when drafting the equity transfer agreement. As share transfers may encompass issues like the fairness of the equity price and tax liabilities, which can affect both parties, thorough tax planning and legal consultation are essential beforehand to optimize tax obligations and streamline the transfer process. Hongda is equipped to help draft your equity transfer agreement, ensuring a smooth transition of ownership.
Moreover, for companies looking to acquire shares from other entities, consider these aspects:
- Tax Reporting: The transferring party must declare and settle the relevant taxes with tax authorities within the stipulated timeframe to prevent late fees and fines.
- Tax Agreements: If the transferring party is a foreign entity or individual, examine any existing tax treaties between China and their home country, which could potentially lower the tax implications on the equity transfer.
Conclusion
Having read this blog, you should now have a clearer picture of the revised registered capital contribution system under the new Company Law and an understanding of the necessary changes for your company under various scenarios. Navigating industrial and commercial registration changes can be intricate and time-consuming. Reach out to Hongda for a free consultation to discuss your specific needs, where we'll provide expert guidance and services. Furthermore, keep an eye out for Hongda's upcoming 'Industrial and Commercial Information Change' service page for more information.
