Changing the registered capital in China is a complex procedure that involves multiple organizations and a long list of paperwork. Despite the challenges, in some cases, it is beneficial or even necessary for companies to go through this process. We explain these situations and provide a step-by-step guide to changing the registered capital.
In China, registered capital refers to the initial investment committed by shareholders when setting up a foreign-invested enterprise (FIE), whether it is a joint venture or a wholly foreign-owned enterprise (WFOE). It is important to determine sufficient registered capital when setting up a foreign-invested enterprise, as the company needs to be maintained during the initial investment phase, which usually lasts for one to two years or more until enough income is generated to cover expenses.
Changing the amount of registered capital is a complex procedure that requires compliance with certain mandatory agreements and changes in the business register. However, if the company underestimates the required registered capital, resulting in a cash shortage, or overestimates the required registered capital, resulting in idle capital, then changing the registered capital may be the best option. Below, we explain the common reasons for changing the registered capital and the procedures required for the change.
According to the Company Law of the People's Republic of China, the registered capital is recorded in the company's business license, articles of association, and the capital contribution certificate issued to shareholders after the establishment of the company. If there is a change in the content of the company's business license, it must be registered and a new business license shall be issued by the company registration authority.
Moreover, when setting up a company, the company must ensure that the amount of capital contribution subscribed by all shareholders (constituting the registered capital) complies with the registration requirements of the company's articles of association.
The most common reason for increasing registered capital is underestimating the capital required to set up a company, or generating revenue at a slower-than-expected rate, resulting in a liquidity crunch.
For many companies, the amount of registered capital is directly linked to the amount of foreign debt they can afford (under the system of ratio of total assets to registered capital). It may also be necessary to obtain another loan to increase the amount of registered capital for purposes such as ongoing operations, new projects, or expansion.
A company may also change the amount of its registered capital for strategic reasons. A higher registered capital helps to indicate that the company is well-functioning and financially sound. A high registered capital is also one of the key indicators to measure the size of a company. Therefore, increasing the registered capital of the company helps to win the trust of customers and investors and improve the overall image of the company.
Sometimes, a company may be required by law to increase its registered capital, such as when expanding its business scope. Increasing the registered capital may also require meeting certain eligibility requirements, such as meeting project bidding criteria, applying for loans, etc. Many investment projects have a threshold for registered capital, and if the company's registered capital is too low, the company may lose the opportunity to bid for large-scale projects.
One of the most common reasons for reducing registered capital is excess capital. The company may have registered a large amount of capital, but later found that it did not need as much as initially expected, at which point shareholders may seek to reduce their subscription capital.
Another situation where a company can choose to reduce its registered capital is when the shareholder fails to pay the subscribed capital within the prescribed period and the company cannot recover it. This can happen when a shareholder commits to pay the subscribed capital in installments during the incorporation of the company, but is later unable or unwilling to pay the instalments.
When a company needs to repay accumulated debts in a lump sum, it may also need to reduce the registered capital. If the company has accumulated operating losses for many consecutive years and cannot make up for it through profits in the next few years, it needs to reduce the registered capital to make up for the accumulated losses.
Reducing the registered capital also helps to increase dividends as dividends are distributed according to the amount of capital gains. This can occur at the same time as a lump sum repayment of accumulated debt, allowing it to eliminate losses and recover dividends as soon as possible.
In addition, when a company buys back shareholders' equity, it must reduce both the registered capital and the paid-in capital.
Finally, when a company undergoes a split, such as splitting a certain division into a separate entity, the assets will also be separated, which will mean a reduction in the company's registered capital.
The procedures for changing the registered capital of foreign-invested enterprises shall be prescribed by the Foreign Investment Law, the Company Law, the Measures for Reporting Foreign Investment Information, the Regulations on the Administration of Registration of Market Entities, and other relevant laws and regulations.
In general, it is easier to increase the registered capital than to reduce the registered capital, which involves additional procedures.
Below we have provided a step-by-step guide that highlights the additional procedures required to reduce the registered capital.
According to the provisions of the Company Law, the amount of registered capital shall be decided by the general meeting of shareholders. The decision is subject to the consent of shareholders representing more than two-thirds of the voting rights.
The board of directors of the company is responsible for formulating the plan for increasing or decreasing the registered capital of the company.
The general meeting of shareholders shall amend the articles of association accordingly to ensure that the amount of registered capital is consistent with the subscribed capital of shareholders.
Note that to increase the registered capital, the company can get the existing shareholders to agree to increase their subscribed capital, or it can absorb the capital contribution of the new shareholders.
When the registered capital is reduced, the amount of deductible capital that can be remitted overseas or reinvested in China is generally limited to the paid-in registered capital of the foreign investor, excluding capital reserves, surplus reserves, undistributed profits and other rights and interests. If the proceeds from capital reduction are used to make up for book losses or reduce the obligation of foreign party to make capital contributions, the amount of proceeds from capital reduction shall be zero unless otherwise specified.
Step 2: Prepare the balance sheet and list of assets and notify creditors (reduction only).
After the company makes a resolution to reduce the registered capital, it must prepare a balance sheet and a list of assets. and shall notify creditors within 10 days from the date of making the resolution, and make an announcement through a special newspaper within 30 days. Enterprises can also log in to the national enterprise credit information publicity system and publish capital reduction announcements through the information bulletin column. The publication period is 45 days.
The creditor has the right to require the company to pay off the debts or provide corresponding guarantees within 30 days from the date of receipt of the notice, and within 45 days from the date of announcement if the notice is not received.
If a company increases or decreases its registered capital, it must apply to the State Administration for Market Regulation to change its registration and obtain a new business license. However, if the registered capital is increased, the company must apply for change of registration within 30 days from the date of the resolutionIf the registered capital is reduced, the company must apply for change of registration after 45 days from the date of announcement.
Enterprises applying for change of registration or renewal of business license shall submit the following documents:
Application form for company registration signed by the local legal representative of the company (required) – original;
Proof of resolution or decision to amend the Articles of Association – Original;
The amended articles of association signed and confirmed by the legal representative of the company - original;
Reduction only): An explanation of the company's repayment of debts or debt guarantees, if the announcement of the reduction of registered capital is only published through the newspaper, a sample of the newspaper of the announcement shall be provided (if the announcement of the reduction of the registered capital is published through the newspaper, the announcement materials of the National Enterprise Credit Information Publicity System are exempted from reporting) - original;
Original and photocopy of the approval documents of the supervisory authority (public issuance of new shares by joint-stock companies to increase the registered capital, and non-public issuance of new shares by listed companies to increase the registered capital);And.
Previous business license - original and photocopy.
If the application materials are complete and conform to the prescribed format, the registration authority shall confirm and register on the spot, issue a registration notice, and issue a business license in a timely manner (within 10 working days). If on-site registration is not permitted, the registration authority shall issue a receipt voucher for the application materials to the applicant, and review the application materials within three working days. If the situation is complicated, it may be extended by another three working days and the applicant shall be notified in writing.
According to the Measures for Reporting Foreign Investment Information, if there is a change in the information in the initial report and it involves a change in the registration of the local SAMR, the foreign-invested enterprise shall submit a report on the change through the enterprise registration system (enterprise registration system). When applying for a change of registration.
In addition to filing with the local State Administration for Market Regulation, an enterprise must also apply to the bank of the place of registration for corresponding changes in the amount of registered capital.
After the bank completes the change of registration, it shall endorse the registration items, registration amount and date, and affix the special seal of the bank to the original tax certificate, and keep a copy of the endorsement and the special seal for business.
If a foreign-invested enterprise increases or decreases its registered capital, it is also required to apply to the State Administration of Foreign Exchange for change of foreign exchange registration.
The following documents must be submitted:
The written application shall be accompanied by the Application Form for Registration of Basic Information of Domestic Direct Investment (1) and the Business Registration Certificate.
Updated business license (copy stamped with the official seal of the unit).
A company that implements the registration system for paid-in registered capital shall also provide approval documents or other supporting materials from the relevant industry authorities.
Changing a company's registered capital in China is a complex procedure that requires interaction with multiple departments and a long list of paperwork. Due to the complexity, it is easy to make mistakes, lengthening the process and further delaying business operations. However, with proper planning and organization, these procedures can be completed smoothly. If you need help planning and applying for a change in registered capital, you can henghuiconsulting@outlook by emailcom to contact our professional accounting, tax and legal advisors.