China’s new Company Law (the New Company Law) came into effect on 1 July 2024 (the Effective Date). In our previous article, China releases its newly revised Company Law, we summarised some key changes under the New Company Law and the legal implications for companies (including foreign-invested entities) incorporated in China.
Amongst these key changes, shareholders of a limited liability company are now required under the New Company Law to make their contribution to the subscribed registered capital in full within five years of the company’s incorporation. This is a significant change bearing in mind that under the previous Company Law, shareholders of non-regulated companies enjoyed much more flexibility to determine the capital contribution timetable, which could even be set as long as the entire business term (e.g. 30 years) of the company. The market was therefore keen to understand how this new requirement would be implemented.
On the Effective Date, China’s State Council issued the Provisions on the Implementation of the Registered Capital Management System under the Company Law of the People’s Republic of China (in Chinese 国务院关于实施《中华人民共和国公司法》注册资本登记管理制度的规定) (Registered Capital Rules) which provide some clarity on how the capitalisation requirements under the New Company Law are to be implemented. The Registered Capital Rules also took effect on the Effective Date.
In this article, we set out a summary of the major implementation provisions contained in the Registered Capital Rules and highlight certain points of note.1
Section I - A summary of the major provisions of the Registered Capital Rules
1. A three-year transition period to adjust
- Under the Registered Capital Rules, if an existing company’s capitalisation timetable goes beyond 5 years after 1 July 2027, i.e., later than 30 June 2032, then (i) its capitalisation timetable must be adjusted by no later than 30 June 2027 (Adjustment Deadline), and the timetable for the full capitalisation of the company must be within 5 years from the date of such adjustment (Contribution Deadline);
- The requirement outlined above means that:
- for a company (x) established before the Effective Date, and (y) having a capital contribution timetable going beyond 30 June 2032 (for instance a final capital contribution deadline of 31 December 2032):
- — this company’s capitalisation timetable must be adjusted by the Adjustment Deadline - such adjustment will lead to amendments to the articles of association of the company which should be registered with the local Administration for Market Regulation (being China’s company registration authority, the AMR);
- — the company may in theory choose to make the adjustment on the day of the Adjustment Deadline (i.e. 30 June 2027), which means that the Contribution Deadline would be 30 June 2032. This could effectively give shareholder(s) of the company the maximum of eight years from the Effective Date to complete the contribution of their subscribed registered capital of the company (see Section II below regarding potential uncertainties in this regard); and
- — the company may also choose (or otherwise be required by the AMR – see Section I item 2 and Section II below) to make the adjustment before the Adjustment Deadline, for instance on 1 February 2025, in which case the Contribution Deadline should be no later than five years thereafter, e.g. 31 January 2030 in this example;
- for a company (x) established before the Effective Date, and (y) having a capital contribution timetable which extends no later than 30 June 2032, there is no need under the New Company Law to make any adjustment to its capital contribution timetable; and
- for a company established on or after the Effective Date, its capital contribution period must be within 5 years of establishment.
2. Exceptions to the general rules outlined under item 1 above
The Registered Capital Rules allow certain exceptions to the general rules as outlined under item 1 above, in the following circumstances:
- If a company’s business operation involves the national interest or important public interest, based on the opinion of the relevant department of the State Council or of the relevant provincial government, the AMR may allow a company to maintain its current capital contribution timetable without any adjustment otherwise required by the New Company Law; and
- If the capital contribution timetable or registered capital of any company appears to be abnormal, the AMR may require the company to make prompt adjustment after consideration of various factors (e.g., the company’s business scope, business operation status, core business, scale of assets and the capital contribution capability of its shareholder(s)) and reaching the conclusion that the company’s capital contribution timetable or registered capital has violated the principle of truthfulness and reasonableness.
3. Re-emphasis of disclosure requirements
The Registered Capital Rules provide that in case of any change to the shareholder’s subscribed or actual capital contribution amount, method or timetable, the company shall make a disclosure within 20 working days after the occurrence of such change through the National Enterprise Credit Information Publicity System and shall ensure the truthfulness, accuracy and completeness of the information so disclosed.
Section II - Points to note in the relevant practice
As is commonly the case for legislation coming into force in China, how the New Company Law and the Registered Capital Rules will be implemented in practice remains to be seen.
We set out below a few points to note:
- Although the Registered Capital Rules provide for a three-year transition period for companies to adjust to the new capital contribution timetable, local AMRs may adopt different approaches and it is possible that a company may be required by the local AMR to adjust its capital contribution timetable when making other corporate changes (e.g. a change of shareholders or of its corporate governance structure or making other amendments to the articles of association) with the local AMR, ahead of the Adjustment Deadline; and
- Local AMRs may also adopt different approaches in determining the Contribution Deadline. For instance, although the Contribution Deadline should be the last day of the five-year period after the date of adjustment according to the Registered Capital Rules, it is possible that local AMRs may offer greater flexibility and allow the Contribution Deadline to be set on 30 June 2032 even where the adjustment is made before the Adjustment Deadline, in order to avoid a situation where many companies may try to delay implementing the adjustment until the Adjustment Deadline approaches (which may overload the local AMR with last-minute applications).
Given such uncertainties, if a company is currently involved in a transaction or considering a corporate change other than to the capital contribution timetable, it would be prudent to pre-consult with the local AMR and clarify whether adjustment to the capital contribution timetable will be triggered by such transaction or corporate change.
We expect that the central AMR will give more guidance to local AMRs when issues emerge and the practices in this regard will become more aligned gradually but practical uncertainties and inconsistencies may exist for some time.
