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China reforms company law

China reforms company law

CHANGES TO China’s company law, which came into effect at the start of this year, will deliver commercial and governance improvements but are likely to create added complexities for foreign…

CHANGES TO China’s company law, which came into effect at the start of this year, will deliver commercial and governance improvements but are likely to create added complexities for foreign investors.

Georgette Leader, a senior lawyer in Deacons’ China group said companies looking to invest in China would have to be vigilant in determining the expectations on them, and how these might differ between authorities. Although in most cases the domestic company law would be overridden by the foreign investment rules, there is room for different interpretations by authorities across China.

One of the most important changes was to the incorporation threshold, she said. Under the old company law, the level of minimum registered capital varied depending on the business being carried out.

“The new law has abolished that and now there is just one standard minimum registered capital for a limited liability company,” she said. Also, the rates had been reduced to RMB30,000 for a limited liability company and to RMB500,000 for a company limited by shares.

Another change to this law will allow a single legal entity or citizen to set up a one member company, and the reduced threshold will assist domestic nationals who want to take that path, Leader said.

However, when it comes to foreign investors, she said, there was room for the government to impose thresholds higher than was stated in the company law. “Any foreign company looking to invest in China will still need to look at the relevant authority.”

Foreign investment enterprises such as equity joint ventures, cooperative joint ventures and wholly foreign owned enterprises were already able to contribute their registered capital in instalments, but under the old domestic company law, other companies were not. The changes allow contribution of registered capital to be made in instalments as long as the first instalment is not less than 20 per cent and the balance is paid within two years of the company’s incorporation.

Leader recently worked on a matter where the firm assisted a company that was setting up a joint venture in China, prior to the introduction of this rule, and advised that it would have to pay a 15 per cent instalment, and could pay the balance over three years, as set out by the joint venture laws. After the changes to the company law, they were advised that its new specifications would apply.

Enquiries revealed that most of the authorities in China were interpreting the company law to mean that this rule would also apply to foreign investors, which was inconsistent with legislation that said foreign investment rules would take precedence.

Also significant were the changes to inter-company investment laws that allow companies to freely invest in other companies. This change is likely to see an influx in the establishment of subsidiary companies.

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