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China: Amendments to the Company Law, Simplification of Company Start-up Procedures

On 28 December 2013 the Standing Committee of the National People's Congress of the People's Republic of China adopted the latest company law amendments - with far-reaching changes. The amendment, which will enter into force on 1 March 2014, simplifies the administrative procedures for company start-ups in China, as well as implementing changes in respect of the share capital contributions to be made.

The changes brought about by the amendment already apply in Shanghai's new free trade zone. This confirms China's general approach to initially test any reforms in a clearly defined area and only to roll same out nationwide, if and once the test-phase is successful.

The amendment essentially implements the following changes:

1.    The current legal provisions regarding the minimum share capital amounts required for limited liability companies and stock corporations have been scrapped. These minimum amounts currently still equate to 30,000 CNY for limited liability companies, 100,000 CNY for limited liability companies with only one member, and 5,000,000 CNY for stock corporations.

2.    Changes have also been introduced regarding the due date on which the share capital of a newly incorporated company has to be paid in. Currently, at least 20% (15% in the case of companies with foreign investors) of the share capital has to be paid in within three months of the granting of the relevant business licence, with the remainder having to be paid in within the following two years (five years in the case of companies with foreign investors). The amendment abolishes these due dates. According to the information provided by the competent authorities, the shareholders of the company should, however, lay down a timetable for the making of the payments in the articles of association of the company.

3.    Following the coming into effect of the amendment, it will no longer be necessary to register the amount of the share capital with the local authority for industry and commerce. Likewise, it will no longer be necessary to obtain an auditor's report certifying that the share capital has been paid in (stock corporations constituting an exception to this rule), and for at least 30% of the share capital to consist of money.

In theory, the company law applies to all companies incorporated in China. Special legislation does, however, apply to companies with foreign shareholders, e.g. the Law of the People's Republic of China on Chinese-Foreign Equity Joint Ventures, and the Law on Wholly Foreign-Owned Enterprises. Some of the provisions laid down in this legislation contradict the provisions of the amendment. It remains to be seen how the authorities will deal with these contradictions. Usually, internal policies adapting the relevant processes / procedures are issued. In the present case, it is highly probable that the amendment will prevail over any other legislation, not least because the amendment is part of Beijing's government plans to revive currently stagnating economic growth.

The Chinese Ministry of Industry and Trade has already announced that it will adapt its processes applicable to company registrations prior to March 2014. In order to be absolutely certain, foreign investors should speak with the relevant local registration authorities and enquire whether the changes implemented in terms of the amendment also apply in their district in relation to companies having foreign investors.

In summary it can be said that the amendment brings about significant changes to the Chinese company law and offers further incentives as regards the incorporation of companies in China. The administrative processes involved in the incorporation process have been simplified, and, for the first time ever, a nationwide registration procedure has been introduced. The Chinese government has followed-up on its promises to make trade in China easier and more profitable - also for foreign investors.

Stefan Peters, Tian Yuan Law Firm / Barbara Mayer

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