Registered Capital System Relaxed for Foreign Invested Enterprises

September 2014

Foreign investors in China may enjoy more discretion than previously in determining the amount, form, and schedule of their registered capital (“RC”) contributions into their China-based subsidiaries.

Overview of changes
Statutory requirements regarding the RC of foreign invested enterprises (“FIEs”) have been significantly revised, as confirmed by a notice (the “Notice”) issued by the Ministry of Commerce (“MOFCOM”) earlier this year[1]. Notwithstanding these revisions, relevant approval authorities retain significant discretionary authority to establish additional requirements.

RC minimum amount
There are no longer any statutory requirements for minimum registered capital, unless otherwise required by laws or regulations for specific sectors (e.g., insurance, banking, telecom, publishing). Instead, relevant approval authorities shall mandate the amount of RC required for subscription, which will also be set out in the FIE’s articles of association (and joint venture contract, if applicable).

Other factors continue to have bearing on the appropriate RC amount, including:

• The statutory requirements on the ratio between the RC and the total investment (i.e., RC plus foreign debt financing) of an FIE continue to be effective; thus, the higher the RC the higher the available foreign debt quota.

• We expect the relevant approval authorities to continue to consider various factors in order to approve an RC amount, such as the scale of the business (e.g., a 100 square meter store versus a 10,000 square meter store), the business scope, the authorities’ quota for foreign direct investment in their district, and other factors.

• As we discussed in a previous alert (see here), the legal statutory minimum (if any) is only one factor that investors should consider when identifying the RC amount. The RC covers your FIE’s operating costs until it becomes self-sufficient, and enters the FIE’s account tax free; therefore, consider identifying and then injecting the amount of capital that will be needed until your FIE is self-sufficient. Failure to do so may result in the need for any number of more complex alternatives to funding your FIE’s on-going operations.

RC contribution schedule
Investors of FIEs may choose the schedule of their capital contribution according to their commercial needs, and as agreed to by the investor(s) in the articles of association (and joint venture contract, if applicable), subject to the approval of the relevant authorities. This is different from previously, where the RC contribution schedule was set by statute.

RC form
The requirement that 30 percent of RC needs to be in the form of cash has been removed, meaning that investors may be able to use more non-monetary assets such as property rights and in-kind assets (again, subject to the approval of the relevant authorities). It bears noting, however, that non-cash contributions give rise to a complex valuation process, which is one reason that many investors prefer the simplicity of cash contributions.

RC verification
The authorities will no longer verify the paid-in capital of an FIE (meaning, that capital verification reports issued by PRC-qualified accountants are likely to become a thing of the past), and the paid-in capital will also no longer be registered with the State Administration of Industry and Commerce (“SAIC”).

However, an FIE must still register any RC contribution with MOFCOM, through submitting a sealed copy of the capital contribution certificate (stating the type, amount and currency, and date of contribution) that it issues to the contributing investor, as well as evidence of the capital contribution (e.g., bank receipts for cash contribution, transfer agreements and valuation reports for intangible assets, valuation and title evidence for other in-kind contribution).

Moreover, the FIE’s paid-in capital will continue to be public information through relevant SAIC records.

Comments
Change in statutory requirements; not approval
The referenced changes are changes to statutory requirements only, and do not reflect other important factors that have bearing on an FIE’s RC. Investors should bear in mind that an FIE’s RC continues to be subject to approval of the relevant authorities, who may be guided by various factors (including, the enterprise’s commercial demands, industry-specific factors, jurisdictional needs, and previous norms and trends) to approve the RC specifications (e.g., amount, contribution schedule, cash percentage).

While the authorities’ routine monitoring of the injection of paid-in capital has been abolished, it is not yet clear what non-routine monitoring FIEs may be subject to for adherence to their RC subscription plan.

Conflicting rules
We understand that where there is any conflict between the new provisions of the Notice and existing MOFCOM regulations, then the Notice prevails. However, investors should confirm the approval authorities’ approach on a case by case basis, who may have a strong preference for the existing MOFCOM regulations. It will take some time until all relevant MOFCOM regulations and local practices are harmonized with the Notice.

Key sectors excluded
27 sectors, mostly related to financial services, are not eligible for the changes to the RC system described above and are, instead, required to follow the historic paid-in registered capital system.

Pre-established FIEs
FIEs established before 1 March 2014 shall continue to perform their capital contribution duties pursuant to their respective articles of association (and joint venture contract, if applicable), but their investors may apply to the relevant MOFCOM counterparts to revise these corporate documents. It remains to be seen how responsive local approval authorities are to submissions by enterprises to make revisions that are consistent with the Notice.

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