Going back to basics

The State Council Scheme requires that any pre-registration approvals under the current Chinese laws, regulations and State Council decrees shall be lifted as pre-conditions for issuing the business licence, except those concerning national security and safety of the people and property.

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The consequences for FIEs

The State Council Scheme does not touch on MOFCOM approval for FIEs. Considering the existing Foreign Investment Industrial Guidance Catalogue (外商投资产业指导目录), which is the first step for Chinese authorities when deciding whether to permit an FDI application, MOFCOM's review of the projects is still necessary and critical. It is not surprising that the pilot regulations in Shenzhen and Zhuhai still maintain MOFCOM approval as a pre-condition for AIC registration. Subsequently, no progressive measures are expected in the near future regarding MOFCOM prior approval for FDI. In the long run and from a legal point of view, MOFCOM approval for FDI could be maintained, but not necessarily as a pre-condition for AIC registration, which may simplify the establishment process of an FIE. A foreign investor may carry out the MOFCOM approval and AIC registration in parallel.

However, it is expected that the widely adopted requirement that manufacturing FIEs should obtain EIA approval before the initial business licence will be changed. The AIC may no longer review the EIA report and approval during the AIC registration process, although from the environmental law perspective, manufacturing companies are strictly prohibited from starting operation before all required environmental protection procedures are properly carried out. This may help to optimise the green field investment process of foreign investors, in particular when industrial land acquisition is involved and a local company is first established to acquire land.

For FDI in special industries, it is still difficult to predict the lobbying effect of different interest groups. Some voices are calling for general restrictions on the language used in the business scope, like those subject to administrative licensing should be carried out on the strength of licences, but keeping the AIC out of the review process. However, there are also other voices asking for the implementation of firmer restrictions on new market players in terms of special licences. From a legal point view and based on the State Council Scheme, many of the special operational licences should be lifted as pre-conditions for AIC registration.

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Capital requirements

Chinese law requires sufficient capital in a company for creditor protection. Before the 2006 amendment to the PRC Company Law (中华人民共和国公司法), domestic companies could not be registered without the full registered capital paid in and the capital verification report in place. Under the latest revised Company Law, shareholders of a limited liability company are required to fully pay in the registered capital within a two-year grace period from when the initial business licence is granted. Upon each capital contribution, the company shall register these changes with the AIC to have the respective paid-in capital figure reflected on the business licence. The State Council Scheme has made it clear that such paid-in capital rules should be replaced by subscription of registered capital by shareholders.

Both the pilot regulations in Shenzhen and Zhuhai and the SAIC Proposal have clearly mentioned revising the current mandatory requirement of capital contribution within two years and to remove the paid-in capital as one of the company registration items. This means that shareholders of a Chinese company, including an FIE, might be able to agree on more flexible capital contribution schedules in the articles of association. It is not yet clear how flexible this will be in the new AIC registration rules. Based on the SAIC Proposal, it could be an extension of the time limit for capital contribution from two years to five years, or alternatively, shareholders could be permitted to pay in the subscribed capital at any time during the permitted business tenure.

There are other noteworthy points in the SAIC Proposal. For example, the required minimum registered capital might be removed, except for those otherwise stipulated in the laws and regulations. The minimum 30% cash contribution in the total registered capital may also be taken out. However, the recent meeting held by the Shanghai AIC signalled disagreement across different interest groups. It is expected that state-owned enterprises and industry monopolies are likely to lobby for more restrictive rules to maintain market control.

There are still two outstanding issues. In terms of legislation, the envisaged capital subscription rules are in conflict with the existing Company Law and the PRC Regulations for the Administration of Company Registration (中华人民共和国公司登记管理条例), which are superior to any SAIC rules in terms of legislative hierarchy. The State Council and SAIC still need to convince the Standing Committee of the National People's Congress of the need to amend the Company Law.

In practice, as a legacy of the aging paid-in capital and capital verification system, registered capital and paid-in capital have been regarded as a critical indicator of corporate credibility for Chinese companies. In the FDI area, there is a long established local practice of off-paper minimum registered capital for FIEs, for example $140,000 in Shanghai. There are also the legal concepts of total amount of investment and registered capital for FIEs, as well as the regulatory control on offshore financing of FIEs up to the gap between the total amount of investment and registered capital. There is still a long way to go to achieve synergy with the other ministerial authorities and regulators like MOFCOM, the State Administration of Foreign Exchange, the General Administration of Customs and the General Administration of Taxation, before such AIC registration reform can really benefit FIEs in China.

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The AIC shifts roles

In practice, many FIEs and law firms often face the problem of inconsistency between MOFCOM and the AIC over FIE corporate setup application documents. In particular, the articles of association and language of business scope. After the entire corporate setup package has been reviewed and accepted by MOFCOM, the AIC may still insist on revising the wordings in such documents. The SAIC reiterated in an official interpretation to the AIC under the revised Company Law that the AIC is legally empowered by the Company Law and the Company Registration Regulations to review the authenticity and legitimacy of corporate application documents. This has created inconvenience and increased costs when launching an FIE in China.

It has been clearly stipulated in the Shenzhen and Zhuhai pilot rules that the function and responsibility of the AIC in reviewing the corporate application documents shall be shifted to the first review and the applicant shall be responsible for the authenticity and legitimacy of the application documents.

However, there are conservative views among the AIC officials. One Shanghai AIC official holds the view of the head of the Administrative Cases Division of the Supreme People's Court that, in administrative cases where AIC is a respondent, the judicial view is that AIC shall be responsible for reviewing the authenticity and legitimacy of registration documents.

It is worth noting that the SAIC Proposal raises the principle of easy registration and strict regulatory control for AIC registration. Essentially this is intended to liberalise the stringent administrative review in the corporate setup process, but also to strengthen regulatory control of companies via measures like annual review, corporate filing and disclosure of information. This appears to be in line with the spirit of an earlier speech made by Li Keqiang, the newly elected Premier, in a high-level officials meeting organised by the State Council. Considering the lobbying power of various interest groups, the ultimate statutory function and responsibility of AIC in the area of AIC registration still remains at large.

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Increasing transparency

Based on the SAIC Proposal, other possible measures in liberalising the AIC registration rules are reduced restrictions on registration and control of company names, more flexible rules on registered address and operation premises, more efficiency in business scope wordings, removal of the restriction that the business scope of a branch company shall not be broader than that of its head office company and permitting Chinese individuals to establish joint ventures with foreign investors.

The SAIC Proposal mentions the establishment of a unified AIC registration database, which is to be used as a platform for regulatory control, public supervision and public information search. This will be a key improvement to increase transparency in the area of AIC registration.

Cody Chen and Rachel Yao, Taylor Wessing, Shanghai