Changing the registered capital in China can be a complex process with numerous legal and financial considerations. Whether you are looking to increase or decrease the registered capital of your foreign-invested enterprise (“FIE”), it is important to adhere to the various rules and regulations.
Passed on 29 December 2023, the latest revision to Chinese Company Law comes into force on 1 July 2024. Besides heralding major changes in capital contribution rules, the amended Company Law introduces a simplified procedure for the reduction of registered capital. Further, it exposes senior company officers, including directors and supervisors, to potential liabilities in the event of improper capital reduction. It is, therefore, imperative for you to familiarise yourself with the latest requirements should you decide to adjust your FIE’s capital structure.
In this guide, we will explore the intricacies of changing your registered capital in China., highlighting the legal consequences that may arise from unlawful capital reduction. In addition, we will provide practical insights into the procedural requirements to help you stay compliant with the newly revised Company Law.
Overview: What is registered capital?
Registered capital in China represents the cumulative capital commitment made by shareholders, either in renminbi or a foreign currency. In other words, it is the total amount of capital that investors pledge to contribute at the company’s inception. This figure serves as a benchmark for authorities to assess the company’s operational scope.
The figure to be set should by no means be a mere ballpark figure. Rather, it should be as accurate and precise as possible based on cashflow projections and other financial analyses. Even though China no longer enforces a minimum registered capital requirement, it is still advisable to set an amount that covers your costs and expenses during the first 6 to 12 months of operation.
The importance of your registered capital cannot be overstated. It ensures the availability of funds to sustain the daily operations of your FIE. These crucial funds can cover essential expenses, such as rent and salaries, until the FIE can generate cash reserves and achieve financial self-sufficiency.
To gain a detailed understanding of registered capital in China, consult our guide here.
Increasing your registered capital
Increasing your registered capital entails careful planning, as it can be a time-consuming and protracted process. Meticulous monitoring of your cash flow and implementing strong control mechanisms are imperative. If you are in the midst of liquidity constraints, relying on a capital injection is ill advised. The entire procedure from registration to being able to use the funds can span several months.
Companies often find strategic value in increasing their registered capital. That is, a higher registered capital could signify a well-operating and financially robust company. It can serve as a positive marker of the company’s size. An additional capital injection can help instil confidence in customers and investors, enhancing the company’s standing. Moreover, an expansion in business operations often necessitates an increase in registered capital. Certain investment ventures stipulate a minimum registered capital threshold. Falling below the threshold may preclude a company from bidding on promising and lucrative projects. Therefore, adjusting your capital structure can be pivotal for both strategic positioning and serving practical capital needs.
Decreasing your registered capital
Capital reduction is generally restricted to specific circumstances. Once capital contributions have been made, retrieving them is challenging unless you adhere to the proper procedural requirements.
In light of the newly prescribed five-year capital contribution deadline, some companies may undergo a capital reduction to circumvent the obligation of paying up the outstanding registered capital. This is especially the case where an excessively high registered capital has been set prior to the revision of Company Law, with the intention of being contributed over an extended period.
Another situation where a company might opt to decrease its registered capital is in the event of a defaulting shareholder. When a shareholder neglects to fulfil their payment obligations within the stipulated timeframe, they shall forfeit their rights in respect of the unpaid registered capital. In this case, the forfeited equity interests can be deregistered through capital reduction within six months of the forfeiture notice being issued.
The revised Company Law provides that shareholders shall reduce their capital contributions in proportion to their respective shareholding ratios, unless specified otherwise in other relevant legislation. The common practice by which a shareholder exits a company through disproportionate capital reduction will be deemed unlawful.
Usually, a capital reduction can be achieved by buying back shares from shareholders, returning the already issued share capital, or absolving shareholders of their payment liabilities. These methods result in the redistribution of the company’s assets to shareholders. Such a move can, however, potentially compromise the company’s solvency and thereby injuring creditors’ interests. It is precisely for this reason that a company undergoing a capital reduction in this manner must inform its creditors and make a public announcement in a local newspaper. Creditors have the right to demand debt settlement or request suitable collateral from the company.
Standard procedure for changing your registered capital
Pass a relevant shareholder resolution
The resolution to change your registered capital requires the approval from shareholders representing more than two-thirds of the voting rights. The resolution is typically passed during a shareholders’ meeting. The board of directors then devises the plan for the capital adjustment. Afterwards, the articles of association are revised to ensure that the registered capital aligns with the subscribed capital.
Register with authorities and apply for business licence to be amended
To update your business licence, you need to register the change with the local State Administration for Market Regulation (“SAMR”). If you are increasing your registered capital, apply within 30 days of passing the resolution. If you are decreasing your registered capital, apply only after 45 days from the publication of the announcement in a local newspaper.
Documents required to be submitted may include the following:
- Application form duly signed by your legal representative
- Relevant shareholder resolution to amend the articles of association
- Amended articles of association
- Balance sheet
- Inventory of assets
- Statement concerning the repayment of debts and the provision of security for said debts
Submit a report on the enterprise registration system
Where there is a modification in the details originally submitted on the foreign investment made, and this alteration entails a change in registration with the local SAMR, you are required to submit a report on the enterprise registration system.
Update details with your bank and the local State Administration of Foreign Exchange (“SAFE”).
You are also obligated to register the relevant changes with your bank and the local SAFE. Banks have now taken on specific roles that were previously carried out by the SAFE. Consequently, it is common for banks to proceed cautiously when handling requests for fund repatriation resulting from a capital reduction.
Simplified procedure for capital reduction under amended Company Law
Article 225 of the amended Company Law introduces a simplified procedure for capital reduction. If a company is unable to offset its losses after resorting to the statutory reserve, discretionary reserve, and capital reserve, it can address those losses by way of capital reduction. For the simplified procedure to apply, the following three conditions must be met:
- There are no outstanding debts, or the amount of debt is considerably lower than the company’s paid-in capital;
- All shareholders agree to be jointly and severally liable for the company’s debts prior to the capital reduction – up to the amount of their initially subscribed capital contributions; and
- All directors commit to safeguarding the company’s capacity to settle its debts and sustain its operations as a viable entity.
The optimised procedure allows companies to reduce their registered capital by simply issuing an announcement on the National Enterprise Credit Information Publicity System. This eliminates the requirement under the standard capital reduction procedure to notify creditors and publish an announcement in a newspaper. During the 20-day notification period, creditors retain the right to raise objections against the capital reduction. If no objections are raised, the company may proceed with registering the capital reduction in accordance with the application and commitment letter.
However, if a capital reduction is conducted in this way, the company is prohibited from distributing any profits until the cumulative value of the statutory reserve and discretionary reserve equals at least half of the registered capital. Additionally, shareholders are still obligated to fulfil their payment obligations.
What are the legal consequences of unlawful capital reduction?
Shareholders are prohibited from withdrawing their paid-in capital contributions unless the prescribed protocols have been followed. In the event of a violation, the offending shareholder must repay the principal and interest of the withdrawn capital contributions. Furthermore, remaining shareholders, directors, supervisors, and other senior company officers – responsible for such unauthorised withdrawals – will be held jointly and severally liable for any resulting detriment to the company. Additionally, the competent authority may mete out punitive fines, ranging from RMB 30,000 to RMB 300,000.
The revised Company Law underscores the accountability of the other key players in the corporate governance structure. It takes into account the fact that capital contributions cannot be withdrawn without a certain degree of collusion with senior management.
How CW can help you
The significance of registered capital should not be underestimated. It can have far-reaching implications not only for the establishment but the subsequent success of your company in China.
With over 30 years’ experience in helping foreign investors from all over the world establish corporate presence in China, our China Consulting seasoned professionals can assist in adjusting your registered capital in full compliance with the revised Company Law. In addition, we can devise a tailored capital contribution strategy to help you attain your business objectives in China. Whether it is optimising your financial resources for expansion or ensuring compliance with the raft of regulations, our comprehensive approach aims to align your capital structure with your long-term strategic goals.
Contact us to find out how we can help you.
