Other BriefingsIncreasing and Decreasing Registered Capital in China – A Guide for FIEs [2024 Update]
Changing registered capital in China is a complex procedure that involves several government agencies and a long list of paperwork. Despite the difficulties, there are several scenarios in which it is beneficial or even necessary for companies to go through the process. We explain these scenarios and provide a step-by-step guide for changing registered capital.
UPDATE (January 11, 2024): January 11, 2023: China’s legislature has adopted an amendment to the country’s Company Law, which makes a few changes to the rules on decreasing registered capital. The amendments to the Company Law will come into effect on July 1, 2023. The following article has been updated to include the changes passed in the amended Company Law.
Registered capital in China is the initial investment committed by shareholders when incorporating a foreign-invested enterprise (FIE), be it a joint venture or a wholly foreign-owned enterprise (WFOE). Determining an adequate amount of registered capital when establishing an FIE is important as it is needed to sustain the company’s operations during the initial investment phase, typically lasting one to two years or longer, until it generates enough revenue to cover expenses.
Changing the amount of registered capital is a complex procedure that requires compliance with certain mandatory protocols and changes in business registration. However, where a company has either underestimated the registered capital needed, leading to a cash crunch, or overestimated it, leading to idle capital, changing the registered capital may nonetheless be the best choice. Below, we explain the common reasons for changing the registered capital and the procedures required to do it.
For more information on what registered capital is and how to determine an adequate amount, see our Comprehensive Guide to Registered Capital in China for Foreign Businesses.
What does it mean to change registered capital?
Under China’s Company Law, the registered capital is written on a company’s business license, articles of association (AoA), and the capital contribution certificate issued to shareholders after the company’s establishment.
Any changes to the information included on the company’s business license must be registered and a new business license must be issued by the company registration authorities.
Moreover, when establishing a company, the company must ensure that the amount of capital contributions subscribed by all shareholders (which constitutes the registered capital) complies with the registered provisions of the company’s AoA.
When to increase registered capital
The most common reason to increase registered capital is an underestimation of the capital needed when establishing the company, or slower-than-expected revenue generation, leading to a liquidity crunch.
For many companies, the amount of registered capital is directly linked to the amount of foreign debt they can take on (under the total assets to registered capital ratio system). Increasing the registered capital amount may also become necessary to secure another loan for purposes, such as ongoing operations, new projects, or expansion.
Companies may also have strategic reasons for changing their registered capital amount. A higher registered capital can help to show that the company is operating well and is financially healthy. A higher registered capital base is also one of the key indicators of a company’s size. Increasing the company’s registered capital can therefore help to win the trust of customers and investors and improve the company’s overall image.
Companies may sometimes be legally required to increase their registered capital, such as when expanding their business scope. Increasing the registered capital may also be required to meet certain qualification needs, such as meeting criteria to bid on a project, applying for a loan, and so on. Many investment projects have threshold requirements for registered capital, and if a company’s registered capital is too low, the company may lose the opportunity to bid for large projects.
When to decrease registered capital
One of the most common reasons for reducing registered capital is having an excess of capital. A company may have registered and paid a large amount of capital and only later discovered that it does not need as much as initially anticipated, at which time shareholders may seek to reduce the registered capital so as to get the idle capital moving.
Another scenario in which a company may choose to reduce registered capital is when shareholders fail to pay their subscribed capital within the prescribed time limit, and the company has no way of retrieving it. This may occur when a shareholder commits to installments of subscribed capital during the company’s establishment but later is either unable or unwilling to pay the installments. This scenario will be less likely in Limited Liability Companies (LLCs) following the implementation of the amended Company Law from July 1, 2024, which requires shareholders to pay their subscribed capital in full within five years of the company’s establishment.
A company may also need to reduce registered capital when it needs to make a lump sum payment for accumulated debt. If a company accumulates operating losses over a number of years, which also cannot be made good from profits over the next few years, then it will need to reduce the registered capital to make up for the accumulated losses.
The amended Company Law adopted on December 29, 2023, provides further clarification on this mechanism. It states that companies are permitted to reduce their registered capital to make up for losses only if the company is still experiencing losses after having utilized its discretionary public reserve fund and statutory public reserve fund to make up for losses (which must be used first per the provisions of Paragraph 2 of Article 214 of the Company Law).
However, if the registered capital is reduced to make up for losses, the company may not distribute the capital to shareholders or exempt shareholders from their obligation to pay capital contributions or share payments.
In addition, amid business difficulties, when shareholders do not want to take on too many liabilities, they may propose to reduce registered capital to reduce their debt exposure.
Moreover, when a company repurchases its shareholders’ equity, such as when one or more shareholders of a joint venture company decide to exit, the company must simultaneously reduce its registered capital and paid-in capital.
Finally, when a company undergoes a de-merger, such as when a certain department is spun off as a separate entity, the assets are also separated, which will translate as a reduction in registered capital for the company.
When a company reduces its registered capital, the corresponding reduction in the contribution amount or shares should be made according to the proportion of shareholders’ contributions or holdings. Exceptions are made in the following cases: where the law stipulates otherwise; if there are specific agreements among all shareholders of an LLC; or the AoA of a joint-stock company specify otherwise.
Note that after a company reduces its registered capital, it cannot distribute profits until the cumulative amount of the statutory reserve fund and discretionary reserve fund reaches 50 percent of the company’s registered capital.
How to change registered capital
Procedures for changing the registered capital of FIEs are stipulated in the Foreign Investment Law, the Company Law, the Measures on Reporting of Foreign Investment Information, the Administrative Regulation on the Registration of Market Entities, and other relevant laws and regulations.
Generally, increasing registered capital is easier than decreasing registered capital, the latter of which involves additional procedures.
Below we provide a step-by-step guide, with the additional procedures required for decreasing registered capital highlighted.
Step 1: Resolution to increase or decrease registered capital
Under the Company Law, the decision to change the amount of registered capital falls under the purview of the shareholders’ meeting. This decision must be approved by shareholders representing more than two-thirds of the voting rights.
The company’s board of directors is then responsible for formulating plans for the company to increase or reduce its registered capital.
The shareholders’ meeting should then revise the AoA accordingly to ensure the registered capital amount is consistent with the shareholders’ subscribed capital.
Note that to increase the registered capital, a company can either have existing shareholders agree to increase their subscribed capital, or bring on new shareholders to contribute capital.
When reducing the registered capital, the amount of deducted capital that can be remitted overseas or reinvested domestically is generally limited to the paid-in registered capital of foreign investors, excluding equity such as capital reserves, surplus reserves, undistributed profits, and so on. If the capital reduction proceeds are used to make up losses on the book or to reduce the foreign party’s contribution obligations, the amount of capital reduction proceeds shall be set at zero, unless otherwise stipulated.
Step 2: Preparing balance sheet and inventory of assets and notifying creditors (for decrease only)
After making a resolution to reduce the registered capital, the company must prepare the balance sheet and inventory of assets.
It must also notify its creditors within 10 days from the date of making the resolution and make this public in a dedicated newspaper within 30 days. Alternatively, companies can log in to the National Enterprise Credit Information Publicity System (国家企业信用信息公示系统) and publish capital reduction announcements through the information announcement section. The publication period is 45 days.
Creditors have the right to require the company to pay off debts or provide corresponding guarantees within 30 days of receiving the notice, or within 45 days from the date of the public announcement if they don’t receive a notice.
Under the new Company Law, if a company chooses to reduce its registered capital to make up for losses, it does not need to notify creditors within 10 days of the resolution to reduce the registered capital. However, it must still announce the reduction in a newspaper or through the National Enterprise Credit Information Publicity System within 30 days of the resolution.
Step 3: Change of registration and application for a new business license
For both increasing and decreasing the registered capital, companies must apply for a change of registration and apply for a new business license at the local branch of the State Administration for Market Regulation (SAMR). However, to increase registered capital, the company must apply for the change of registration within 30 days of the resolution, while to decrease registered capital, the company can only apply for the change of registration after 45 days from the date of the public announcement.
To apply for the change of registration and apply for an updated business license, companies must submit the following documents:
- A Company Registration Application Form signed by the company’s local legal representatives (mandatory) – original copy;
- Proof of the resolution or decision to amend the company’s AoA – original copy;
- The revised AoA signed and confirmed by the company’s legal representative – original copy;
- (For decrease only): An explanation of the company’s debt repayment or debt guarantee situation, and, if the registered capital reduction announcement is only published through a newspaper, a newspaper sample of the announcement (those who have announced the reduction of registered capital through the National Enterprise Credit Information Publicity System are exempted from submitting the announcement materials) – original copy;
- Approval documents from the securities regulatory authority of the State Council (for a joint-stock company increasing its registered capital through public issuance of new shares or a listed company increasing its registered capital through a non-public issuance of new shares) – original and photocopy; and
- The previous business license – original and photocopy.
If the application materials are complete and comply with the required formats, the registration authority will confirm and register the application on the spot, issue a registration notice, and issue a business license in a timely manner (within 10 working days). If on-the-spot registration is not granted, the registration authority shall issue a voucher for receipt of the application materials to the applicant and review the application materials within three working days. In complex situations, this may be extended for another three working days, in which case the applicant will be notified of the extension in writing.
Step 4: Foreign investment information reporting
According to the Measures on Reporting of Foreign Investment Information, where there is a change in the information in the initial report and the change involves a change of registration with the local SAMR, the FIE shall submit a change report through the enterprise registration system (企业登记系统) when applying for a change of registration.
Step 5: Updates with the bank
In addition to filing the changes to the registered capital amount with the local SAMR, companies must also apply for the corresponding changes in the bank at the place of registration.
After the bank completes the change registration, it should endorse the registration items, registration amount, and date, stamp the special banking business seal on the original tax voucher, and keep a copy with the endorsement and special business seal.
Step 6: Changing foreign exchange registration
FIEs that increase or decrease their registered capital also need to apply to the local branch of the State Administration of Foreign Exchange (SAFE) for a change of foreign exchange registration.
The following materials must be submitted:
- The written application attached with the Application Form for Basic Information Registration of Domestic Direct Investment (I) and the business registration certificate.
- The updated business license (copy stamped with the official seal of the unit).
- Companies subject to the paid-in registered capital registration system shall also provide approval documents or other certification materials from relevant industry authorities.
Changing the registered capital of a company in China is a complicated procedure that requires interaction with several government bureaus and the completion of a long list of paperwork. Due to the complexity, it is easy to make errors that can lengthen the process and further delay business operations. However, with proper planning and organization, the procedures can be completed without setbacks. For help with planning and application for a change in registered capital, companies can reach out to our professional accounting, tax, and legal advisors by emailing china@dezshira.com.
This article was first published on October 24, 2023, and last updated on January 11, 2024.
The information provided is for general purposes only and may not account for local variations. No liability is assumed for the completeness or accuracy of the information. For personalized advice on specific business queries, consult our experts at Dezan Shira & Associates by emailing China@dezshira.com.
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China Briefing is written and produced by Dezan Shira & Associates. The practice assists foreign investors into China and has done so since 1992 through offices in Beijing, Tianjin, Dalian, Qingdao, Shanghai, Hangzhou, Ningbo, Suzhou, Guangzhou, Dongguan, Zhongshan, Shenzhen, and Hong Kong. Please contact the firm for assistance in China at china@dezshira.com.
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