China to Make a Major Amend its Company Law
During the last week of 2013, while all of us were greeting each other for the coming New Year, China was making a very substantial amendment to its Company Law which will undoubtedly have a great effect on the Chinese economy. The revised law will come into effect on March 1, 2014 so please read below.
The goal of the new amendment of the PRC Company Law is to remove several major hurdles which deterred foreign and domestic investors from establishing their new businesses. The current Chinese Company Law imposes minimum statutory requirements such as a minimum registered capital in which an investor has to inject into the company.
For example, while in most Western countries there is no minimal registered capital that an investor must invest, current Chinese law requires an investor to invest at least RMB 100,000. In practice, many districts in Shanghai require a foreign investor to invest at least $150,000 in order to establish a simple consulting company. Current law requires the investor to invest such an amount within two years, which caused a concern to many investors, who simply opted not to invest.
The revised law will lift such restrictions for a large number of companies, which will likely reduce the initial cost for establishing.
| Issue | Current Version of Chinese Company Law | Revised Version of Chinese Company Law |
| Minimum Registered Capital | Single shareholder: RMB 100,000 (approximately$ 16,520)More than one shareholder: RMB 30,000(approximately$ 5,000) Company limited by shares: In practice, many districts in Shanghai currently require a foreign investor to invest at least USD 150,000 for a standard consulting company. |
No minimum registered capital unless provided otherwise by laws and regulations. Shareholders or promoters may decide the amount of capital to be subscribed. |
| Minimum Ratio of Cash Contribution | Current law recognized investment by equipment, machines and intellectual property but requires that at least 20% of the investment will be in cash. | No minimum cash contribution |
| Minimum Amount to be Invested within 3 months of establishment | 20% of registered capital | No minimum contribution (subject to the shareholders’ discretion) |
The notion of the amendment is to move from a minimum registered capital that has to be injected within two years of investment to a subscribed capital mechanism in which the investors will have the freedom to decide when to invest according to their actual business needs.
The PRC Company Law applies to foreign invested companies and domestic companies alike. However, since the foreign companies are also regulated via specific regulations governing foreign direct investment, it remains to be seen how the Chinese government will implement the new revision of the company law.
This new amendment of the Chinese Company Law and the recent opening of the Shanghai Free Trade Zone (discussed in previous China Law Alerts) illustrates China’s eagerness to attract foreign investors and to reform its economy.
Amit Ben-Yehoshua is a dual citizen of the United States and Israel and is licensed to practice law in California and Israel. Amit holds a Master Degree in Chinese law from Tsinghua University of Beijing and serves as a Senior Counsel at Da Cheng Law Offices, Asia’s largest law firm. Amit is also the Vice Chair of the China Committee of the American Bar Association and can be reached at amit.ben-yehoshua@dachenglaw.com or +86-137-6136-0176 .
This article is provided for general information purpose and should not be relied upon as a comprehensive analysis of the issues discussed above.
January 10, 2014
Foreign Direct Investment in China