The new 《Corporation Law》 came to force since March 01, 2014. There are significant amendments on share capital which simplified the procedure of company registration. The new regulation only requires “the Articles of Association indicates the capital subscription from all shareholders”. But all the below requirements have been removed from the new 《Corporation Law》:

1. The initial 20% paid-in capital
   2. The minimum share capital of RMB30,000
   3. All registered capital shall be paid-in in 2 years
   4. Capital Verification report
   5. The monetary funds should not be less than 30%

Regarding foreign owned companies, the changes mainly are:
1. Paid-in capital changed to subscribed capital
2.Abolished the article of “The ministry of Commerce has right to cancel the certificate of approval, and the Administration of Industry and Commerce bureau (AIC) has right to cancel business license if foreign owned companies failed to pay-in capital in due time”
3. Annual inspection by AIC changed to record and publicity announcement

So, how shall foreign owned companies cope with the new 《Corporation Law》? Is register capital still required? How about the capital verification report?

No minimum registered capital required, it does not mean that we can register a company without capital. The Memorandum and Articles of Association should still indicate the amount of invested capital and the subscribed capital from all shareholders. But there is no deadline for pay-in time. In that case, the registered capital is more of working capital for the company. As for foreign owned company, it is the most efficient way to obtain fund for operation through share capital unless they can borrow private loan or fund from financial facilities in China. That is because:

Firstly, if holding company remits the fund as sales or service fee from overseas, this will incur VAT and corporation tax. Although we can apply for VAT exemption for off-shore income, but we may not catch the deadline, or we may not get approval from Tax Bureau.

Secondly, if we apply for treating the remittance as short term loan from overseas company at State administration for foreign Exchange (SAFE), as per our experience, it is very unlikely that we would get the approval. Even if we could, it will take a long time.

Lastly, there are potential problems if the holding company pays the subsidiary expense from overseas:

1. The payee may be reluctant to receive overseas remittance although RMB account could receive foreign currency transfer. That is because some companies misunderstand that only the company who has import/export license can receive overseas income, or they just do not want to be bothered to make conversion at the bank.

2. There is hardly any normal way to repay the holding company via SAFE or bank system. Besides, before remittance to overseas, withholding tax for VAT and corporation income tax must be paid. If it comes to short term loan, the SAFE approval must be provided as supporting.

3. If the payable to holding company stays on subsidiary’s balance sheet for too long (for years), or if it has not been cleared before the subsidiary goes into liquidation, the balance due to the holding company has to be adjusted to non-operating income and will be subject to corporation tax. This is our Inland Revenue compulsory requirement and the theory behind this is that the overdue creditors are seen to have abandoned their right to claim it. In that case corporate income tax is inevitable.

According to the above, foreign owned companies shall predict how long they can maintain with the capital fund and how much money they need before they can fully operate relying on their own income, so that frequent capital re-injection can be avoided. Capital re-injection is a time consuming and painful procedure. They should not do it too often.

Talking about the capital verification report, it won’t be necessary for Chinese-funded enterprises. But for foreign owned companies, it is still required because the bank requires it for capital conversion.

One more kind reminder – do remember to order stamp duty once the capital verification report has been done. Immediately!!! With implementation of the latest regulation of local tax office, stamp duty which amounts to more than RMB500 must be stamped on the original capital verification report from tax office instead of paper stamp. Late penalty for failure to do so is 3-5 times of the duty with NO exemption. The question is: how does the local tax office stamp if there is no capital verification report available for Chinese-funded enterprises?