Third Revised Draft of PRC Company Law has been released – Registered Capital May Have to be Paid Up Within 5 Years
On the evening of 1 September, the website of China National People’s Congress has published the Company Law of the People’s Republic of China (Third Revised Draft) for public consultation, and the period of consultation is from 1 September 2023 to 30 September 2023.
The Third Revised Draft of the Company Law mainly amends and improves the corporate system, such as the registration of contribution of registered capital, democratic management of companies, strengthening the protection of the rights of small and medium-sized shareholders, and strengthening the regulation of controlling shareholders and de facto controllers.
From the perspective of finance and taxation, one of the most noteworthy changes is that the Third Revised Draft of the Company Law further improves the registration system of registered capital contribution, and explicitly requires that the capital contribution made by the shareholders of a limited liability company shall be paid in full within five years from the date of establishment of the company.
It is undeniable that the cancellation of the capital contribution period, the latest registered capital, and the proportion of the first capital contribution have largely stimulated the establishment of companies, but under such provisions, they have also created hidden dangers in terms of the security of transactions and the protection of the rights and interests of creditors.
Now through the amendment to improve this aspect of the system, to protect the security of transactions, the rights and interests of creditors is naturally very beneficial, but some people also raised new concerns about this: there will be a large number of company cancellation, or reduce the registered capital.
Impact on newly registered companies under the New Company Law
For newly registered companies, due attention should now be paid to the amount of registered capital to avoid the dilemma of not being able to pay the full amount of capital contribution within 5 years.
Impact on existing companies under the New Company Law
For the existing companies, although the implementation of the new regulations may give a certain transition time, but should also plan and plan ahead.
As to how the new law will converge after its implementation, the following are some of the possible response options in our view:
Maintaining the actual status:
The law is not usually retroactive, so the originally set contribution period may still be valid.
Setting a transition period:
A company may complete the procedures to change the registered capital contribution period within a certain transition period, reducing the period to five years. During the transition period, the procedures for reducing capital may be relaxed, for example, by not requiring early repayment of debts. This requires special provisions of the Company Law and the issuance of corresponding implementation rules for practical operation.
Direct application of the new law:
After the implementation of the new law, the provisions of the new law will prevail in case of inconsistency between the contribution period and the new law.
With the imminent introduction of the new law, it is recommended that enterprises with large amounts of contributed capital adjust their strategies in a timely manner and complete procedures such as capital reduction in accordance with the law in order to avoid the pressure of contribution and potential disputes that may arise after the period is shortened.
If company cancellation, is it obliged to realize the total of registered capital?
This mainly depends on whether the company’s debts can be paid in full.
For no debt, or debt can be paid off before the cancellation of the company, there is no need to pay off the total of registered capital before the application of cancellation.
For companies with debts that cannot be settled, shareholders are required to make up the registered capital for repayment of external debts.
From this point can also be seen, even if the current subscription system reduces the threshold for registration of the company, but the shareholders are also based on the amount of capital contributed to bear the relevant responsibilities, so, the registered capital to fill in how much, or have to do according to their ability.
We will continue to keep an eye on the advancement of the new draft company law and its eventual implementation.
Please contact us if you have further questions.