The Company Law of the People's Republic of China has undergone a significant revision.
Adopted at the 7th meeting of the Standing Committee of the 14th National People's Congress (NPC) on December 29, 2023, the revised law introduces a new requirement on registered capital. This law will be effective from July 1, 2024.
The State Administration for Market Regulation recently provided explanations on the policy on the period for registered capital contributions for companies established before July 1, 2024. Let’s delve into the details of registered capital.
Core Functions of Registered Capital
- Guarantee: It acts as a safeguard for the company's liabilities.
- Operation: It serves as business capital for the company’s operations, particularly during the initial phase.
- Signal: To third parties, it indicates the of shareholders’ liability for the company’s losses. It also serves as a market indicator for the government to gauge investment levels.
- Organization: It determines the shareholder’s division and voting rights in proportion to their contribution to the company's capital.
Preventing Distortion in Capital Contributions
During the definition of the capital structure, it is important to avoid cases of blind and frivolous contribution amounts, as well as excessively long injection periods, to ensure that the registered capital fulfills its intended roles.
New Measures for Capital Contributions
The new company law will prevent such cases by revising the paid-in registered capital rules as follows:
- For New Companies: A limited liability company established on or after July 1, 2024, must complete its capital contributions within five years of incorporation, e.g., for a limited liability company incorporated on July 10, 2024, the contributions shall made by July 9, 2029 at the latest.
- For Existing Companies: Companies established before July 1, 2024, are granted a three-year transition period, with the option to adjust and complete their contributions by June 30, 2032, e.g., if the company adjusts the contribution period to five years on July 10, 2026, it will complete the contribution no later than July 9, 2031.
- Exemptions: Companies with less than five years remaining in their contribution period as of July 1, 2027, are exempt from adjustments. Joint stock companies must pay the full amount of subscribed shares by June 30, 2027.
- Inspection of Extended Contributions: Companies with a contribution period exceeding 30 years and amounts over 1 billion Yuan will undergo review. Adjustments must be made within six months to bring the contribution period and amount into a reasonable range, subject to approval.
- Special Cases: Certain private, foreign-funded, and state-funded companies engaged in strategic state tasks, national livelihood, security, or public interest, may continue contributions as per original schedules with appropriate approvals.
Actionable Advice for Companies
With the new Company Law coming into force, it’s crucial for existing companies to adapt and align with their existing circumstances promptly. On the other hand, new companies established post-July 1, 2024, should strategically plan their registered capital to align with their operational needs.
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