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!
Revisions to the Capital Contribution System
For limited liability companies established on or after July 1, 2024, Article 47 generally requires shareholders to pay their subscribed capital in full, in accordance with the articles of association, within five years from the company's establishment. Where laws, administrative regulations, or State Council decisions provide otherwise, those special rules apply. 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 is how the revised rules place a statutory time limit on the subscribed capital system:
Subscribed System: Under the subscribed capital system, the amount, method, and date of each shareholder's contribution are recorded in the company's articles of association, and payment may be made according to that schedule within the applicable statutory period. 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.
- Under the subscribed capital system, shareholders contribute according to the schedule stated in the articles of association, subject to the applicable statutory deadline and any special rules.
- Companies may set contribution dates in their articles of association, but those dates must comply with the applicable statutory deadline and any special rules.
The Five-Year Limit Within the Subscribed Capital System: The revised Company Law does not generally replace the subscribed capital system with a paid-in-at-registration system. Instead, Article 47 generally requires the subscribed capital of a newly established limited liability company to be paid in full within five years from establishment. When foreign-currency capital is received from abroad, the bank checks the applicable registration information, available inflow amount, source, and nature of the funds and completes the required monetary-contribution entry registration. This compliance review is not the same as a formal capital verification report issued by an accounting firm. Shareholders must make their contributions according to the dates stated in the articles of association and within the applicable statutory period.
- Limited liability company shareholders are not generally required to pay all subscribed capital during registration; the applicable payment schedule is governed by the articles of association, Article 47, and any special rules.
- 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:
For companies established before July 1, 2024, the transition rules in State Council Order No. 784 should be reviewed before determining the applicable contribution deadline. In general, where the remaining contribution period measured from July 1, 2027 exceeds five years, it must be adjusted by June 30, 2027 so that the remaining period does not exceed five years, subject to the exceptions in the Order.
For a foreign-invested company receiving a foreign-currency capital contribution from an overseas investor, the following account and bank-processing requirements generally apply. Cross-border RMB contributions and non-monetary contributions follow different procedures and do not use this foreign-exchange capital-account route.
Step 1: Complete the applicable foreign direct investment foreign-exchange registration and open a foreign-exchange capital account in the foreign-invested company's name.
Step 2: The bank checks the written application, relevant registration credential, and capital inflow control information before processing the incoming funds.
Step 3: The bank records the source and nature of the funds and completes the required domestic direct-investment monetary-contribution entry registration. Where that registration is required, the funds cannot be used before it is completed.
Step 4: Subsequent settlement, transfer, and payment must follow the current capital-account and bank-review rules. Cross-border RMB and non-monetary contributions, including eligible tangible assets, intellectual property, equity, and debt, do not follow this foreign-exchange capital-account route.
Where an overseas investor contributes registered capital in foreign currency, the foreign-exchange capital account is used to receive and manage that contribution under the applicable SAFE rules. This account route does not apply to every form of registered-capital contribution.
Foreign-currency capital contributed from abroad is generally received through the foreign-exchange capital account, but cross-border RMB and non-monetary contributions follow different channels. Use of the foreign-currency funds after receipt remains subject to monetary-contribution entry registration where required and the current settlement, transfer, payment, and bank-review rules.
- 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 may be unable to meet its subscribed-capital obligation:
Shareholders remain responsible for paying their subscribed capital in full by the applicable due date. If a shareholder fails to pay on time, the board must review the contribution and the company must issue a written demand for payment, which may include a grace period of no less than 60 days. If the shareholder still fails to pay after that period, the company may, following a board resolution, issue a notice causing the shareholder to lose the unpaid equity. That equity must then be transferred or the corresponding registered capital reduced and cancelled; if neither occurs within six months, the other shareholders must make the corresponding contribution in proportion to their contributions. If the company cannot pay a due debt, the company or a creditor whose claim is due may also require a shareholder to pay subscribed capital before its original due date. A separate voluntary capital reduction may be considered where appropriate, but it is not the only or automatic result of a missed contribution deadline.
A voluntary reduction of registered capital must follow the statutory capital-reduction procedure.
The company must obtain the required shareholders' resolution and prepare a balance sheet and property inventory. It must notify creditors within 10 days after the resolution and publish an announcement in a newspaper or through the National Enterprise Credit Information Publicity System within 30 days. A creditor may require payment or appropriate security within 30 days after receiving notice, or within 45 days after the announcement if no notice was received. The company must then amend its articles of association and complete the required registration or filing formalities with the competent market regulation authority.
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.
