The government is moving in a direction to make the corporate formation and supervision process more user-friendly.  Two key changes are expected to happen in the near future.  The first is the abolishment of the registered capital requirement which has been a source of frustration for foreign investors and especially small-to-medium sized enterprises that seek to capture the market opportunities.  Secondly, the government plans to reform the current annual inspection process, which requires that all enterprises in China go through a detailed review process every year and at the risk of losing a business license, to become an annual reporting process.  These changes are intended to make life easier for enterprises, including foreign investors.

On October 25, 2013, Premier Li Keqiang presided over an executive meeting of the State Council, launching the reform of the registration system and specifically the registered capital requirements for the purpose of reducing start-up costs and to support small-to-medium sized enterprises. According to the discussion at the meeting, the anticipated reform includes (1) a relaxation of registered capital registration conditions; (2) change of enterprise’s annual inspection system to an annual reporting system and the establishment of a fair and uniform inspection system; and (3) relaxing market player residence (place of business) registration requirements on the basis of facilitating registration as well as standardization and systematization, which shall be specified by the local governments. Separately, the State Council will promote the development of an enterprise credit system to replace the registered capital requirements which were initially adopted to force investors to inject the required capital to protect creditor rights.  The anticipated reform will also promote the use of a subscribed capital registration system for versus a paid-up registered capital system, to reduce the cost of starting a business.  The results of the meeting are published on the PRC government’s official website by there are no specific rules or regulations adopted at this time. Li Keqiang encouraged the various agencies and departments to revise the laws or regulations to implement the reform.  No specific timetable for the anticipated revisions has been reported.

As background, the registered capital of a foreign invested enterprise (FIE) is the total amount of capital registered required for the establishment of the enterprise; namely, the total amount of investment subscribed by the foreign investor. The amount of registered capital of a FIE is currently required to be sufficient to support its scale of operations and the ratio of registered capital and total investment shall comply with China’s relevant current regulations. The investment contributed by the foreign party to establish a FIE may include convertible foreign currency, machinery and equipment, industrial property rights, or proprietary technology. If the applicant intends to use machinery or equipment as its registered capital, the machinery or equipment must be appraised and be essential for use in production by the enterprise and unavailable for purchase within China. Machinery and equipment imported for a FIE are required to undergo inspection by the commodity inspection authorities prior to clearance from China Customs. If a foreign investor proposes to use industrial property rights or proprietary technology as its investment, the foreign investor is required to demonstrate that it has ownership or title to the rights or technology. The value of the industrial property rights or proprietary technology shall not exceed 20 percent of the enterprise’s registered capital. The applicant is required to provide detailed information concerning the technology, including a copy of the certificate of title, technical specifications, practical value of the technology, and information concerning the calculation of value and methods of valuation. The government has the right to inspect the industrial property rights and proprietary technology, as well as to reject any technology that fails to meet the applicant’s representations. The current regulations prohibit a FIE from reducing its registered capital during the duration of its operations. A foreign party is required to obtain the approval of the government to increase, assign, or mortgage its registered capital.

Given that the current rules on registered capital and the annual inspection process are challenging and a burden to foreign investors, the State Council’s initiative to reform the system is a welcome relief.  It’s left for observation how quickly the government will move to reform the system, and whether the changes will have retroactive application.