China: New companies in China: Amended Company Law lowers the bar

Those who plan to register a company in the new Year of the Horse have good fortune on their side – for example in the amendment to PRC Company Law issued on December 28, 2013, and in effect since March 1, 2014.

The revised paragraphs are all related to registration requirements and procedures, lowering the threshold for newly set-up companies and ultimately making it easier to register new businesses, as shown in Figure 1.

Though it is beneficial to new companies, it should also be clear that this is just a general amendment to Company Law, suggesting that possible further interpretation and implementation of rules may follow in the near future.
Foreign-invested enterprises may not fully enjoy the benefits of the amendment, as they are also subject to the laws and regulations governing incorporation and operation of foreign-invested enterprises. Further details on how to apply these amendments to foreign-invested enterprises are yet to be published.

In addition, exceptions to Company Law will also occur when other PRC laws, administrative regulations and State Council decisions require them regarding registration requirements. Therefore, companies need thorough knowledge of other regulations affecting their specific business. Moreover, when industry-specific laws and regulations stipulate otherwise, the more specific law will prevail. Therefore we recommend that companies first fully understand their industry before looking at the amended Company Law. As a response to the initial Company Law, the Amendment by the State Council of the PRC was issued on February 7, 2014, drastically changing the nature of industry and commerce registration.

These reforms are expected to change the Chinese market, making it more advantageous for creditworthy investments and potentially threatening the survival of the others, with the hope of making the Chinese market more dependable and trustworthy. So what do all these changes mean to us?

1. Streamlining the market access requirement

• All aspects of registered capital, including investment amounts, means and timeframe for contributing investment, can be negotiated among shareholders.
• No minimum amount of registered capital required, unless otherwise stipulated.
• There will be no capital verification or registration regarding injected capital.
• Corporation Annual Inspection will be cancelled.
• Valid documents certifying the right to use an office/domicile, such as a leasing contract, will only be required for address registration.
• Digital Business Licenses may be applied for online, making it more convenient.

2. Reinforcing credit supervision

• The investment amount, means and time frame for the contributing investment and the capital injected shall be disclosed to the public through the Credit Publicity System.
• The submission of annual reports for disclosure will be required. Both companies and individuals can find the credit records concerning their business partner in an online system.
• Companies who conceal facts or commit fraud will be recorded in a governmental blacklist, which can be seen by everyone.

However, certain industries are still under restriction for the sake of market security, especially bank roll management companies and investment companies.

Author
Richard Hoffmann
richard.hoffmann@ecovis.com

TIP
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