Changes in PRC Company Law

Since China made alternations in its Company law, there has been a multitude of articles informing and speculating the change.

Half a year later, as the dust settles down, what does it mean practically?

As of March 1st, 2014, various requirements were abolished from the PRC Company Law in an aim to simplify company set up procedure, and more or less, imitating the company set up system in Hong Kong.

The two major changes is the cancellation of minimum capital and capital injection requirement. Prior to the change, the required minimum registered capital was based on a standardized method in evaluating how much capital different natures of WFOE should have. As an example, a manufacturing company has a higher minimum registered capital requirement as it needs more capital for machinery purchase and factory space rental compared to a consulting company where only merely an office is required to function. These statutory requirement helped to eliminate insufficiently funded companies from registering their companies in China, which naturally enhanced the business environment, leaving only financially equipped investors with registered companies. With the cancellation of minimum capital requirement, in plain legal interpretation, anyone, even with only 2RMB, could set up a company – and the registered capital is no longer shown on the business license. In a practical sense, this means that information regarding the financial status or credibility of these companies are no longer visible to the public, which would subsequently affect business decisions by other stakeholders. Further, the abolished requirement to inject capital within a set period of time means that companies could technically operate on an empty bank account. All in all, whilst the ease of setup may sound like great news for foreign companies, it also makes it very risky for foreign companies dealing with Chinese companies.

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Fortunately, the Chinese government has considered many practical measures to prevent these loopholes from deteriorating the business environment. Firstly, even though minimum registered capital has been cancelled and is no longer shown on the business license, the bureau of industry and commerce would only approve registration applications where the stated registered capital is reasonable and in alignment with the prescribed business activities. That is, it is impossible to set up a manufacturing company if you put 2RMB as the registered capital. Secondly, companies would still need to inject capital accordingly to operate, as without capital injection, no capital verification report will be issued. Without a capital verification report, many basic business needs cannot be met, such as to retrieve bank loans, enjoy tax incentives, nor to engage in government projects.

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In conclusion, even though the new law brings about a lot of uncertainties in viewing a company’s information, it does enhance and simplify a lot of company requirements and procedures that once seemed outdated and bureaucratic. In adjusting ourselves to the new legal environment, companies should carefully understand the implication of the new law and how it affects information transparency as it could ultimately influence business decisions.

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