Change of company address

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All companies established in China must provide a physical address in mainland China that meets the formation requirements. If a business needs to change its established address, there are a number of specific requirements that must be met for a smooth change. A company’s business address is part of its core established information (along with its business scope, established capital and company name), so any changes to this information are a complex process comparable to a newly established company. In addition, there are some restrictions on what constitutes a compliant physical address in China, and violation of these requirements may significantly delay the application process and may even affect company operations.

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The standard requirements to keep in mind when considering a change of address are:

● Different from Europe, America, or Taiwan, only one company can be established at any address in China.

● The address must conform to the business type and purpose of the enterprise, that is, a commercial trading company needs a commercial address, a manufacturing factory needs a production address, etc. Generally speaking, the landlord must provide a copy of the landlord’s certificate of title, which clearly includes the category of “use” or “purpose of use.”

● The use of co-working space as a established address, although gradually accepted in some business jurisdictions, is still practically restricted and may result in abrupt rejection during the application process.

● A minimum 12-month lease period is required when submitting a new change of address application.

These requirements may be confirmed by on-site visits to the company’s established address. Before taking steps to apply for a certificate of relocation, it is important to ensure that the intended new established address fully complies with local government requirements.

Notes on address change:

If the company relocates to the district, it only needs to obtain the relocation certificate from the administration for industry and commerce, and then it can apply for an updated business license in the new district. However, if you want to apply across provinces and regions, you need to issue additional documents from the old industrial and commercial bureau to confirm that the original regional address change has been approved.

In this case, the biggest operational risk a business faces when changing addresses is the approval of the original district. Often, businesses wishing to leave a province are subject to onerous tax investigations and other checks before obtaining a certificate of relocation. This is ostensibly done to ensure that the business is fully compliant and doesn’t owe money, but it also has the effect of delaying the change of address. In this case, the business may choose to deestablish the original company and establish a brand-new company in the new jurisdiction.

Businesses are no longer required to conduct an audit as a condition of changing their established address. There is now an internal inspection between the local industry and commerce bureau and the China Taxation Bureau, and applicants are only notified when they are found to have outstanding tax obligations; this significantly shortens the application time for foreign investors.

However, investors with outstanding tax obligations or penalties can still find their application to change the established business address delayed. In this case, investors can choose to simply close a business in one region and open a brand new business in another. In this case, all existing business contracts must be transferred from the original business, and the debt associated with the original business still exists and must be repaid.

Conclusion

Although the process is getting easier, changing your established address in China can still be complicated. It is suggested that if you want to confirm the change, you need to sign and confirm the relevant documents in advance or entrust an experienced agency that can better understand local differences and potential problems that may arise.

Also because of the uncertainty of the change procedure, in China’s first-tier cities such as Shanghai, Shenzhen, and other places, more and more companies gradually choose to use the established address as a secretarial company and separate the established address from the actual office. Offices may need to be relocated due to factors such as location, traffic, or rental costs, and investors’ established addresses will not need to be changed, avoiding these lengthy and unpredictable change procedures.

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What’s in a Name? Changing the Name of a Company in China

SHANGHAI — The rectification of names  is a central Confucian doctrine based on the idea that using the proper names of things—personal titles, ritual implements, plant species, etc.—has outward repercussions for creating harmony in one’s social relationships and the world at large.

In China, the importance of finding the right name is as true for companies as for individuals, as highlighted by name approval being the first step in establishing a company in China. But what happens when the name originally selected for your business, for one reason or another, needs to be changed?

The procedure for changing the name of a company in China turns out to be quite complex, though it is far simpler, for example, than changing one’s business scope. Because a company’s name is displayed on several types of official documents (such as its business license, company chop and tax certificate), any changes to this information must be filed with each respective governing authority. It is crucial that companies duly prepare for each step in the process prior to filing an initial application, as deadlines at later steps are incurred by the completion of earlier ones.

A name change must be filed with the local State Administration for Industry and Commerce (SAIC) at which the company was originally established, and requires the following:

● A written application for a change to the company’s established information, signed by the legal representative;

● A resolution or decision on the change, made in accordance with the Company Law.

● Other documents as specified by the local SAIC.

Similar to an initial application for name pre-approval, a written application for a change of company name should contain at least 3 proposed names (including a preferred one) in compliance with “Measures for Implementing the Administration of Enterprise Name Application” effective from June, 2004. If the first proposed name has already been established by another company, then officials will approve one of the other proposed names.

The general structure of a company name is as follows:

[Admin. Division]+[Trade Name]+[Industry]+[Organization Type]

An example naming structure of a WFOE:

[Shanghai]*+[Trade name]+[Consulting]+[Co., Ltd]

*Alternatively, the administrative division can be placed in brackets after the Trade Name or Industry, e.g. XXX Consulting (Shanghai) Co., Ltd. This is permitted for foreign-invested enterprises only.

The structure of a company name is standard for all parts except for the Trade Name. However, specific requirements govern one’s choosing of this component. For instance, the Trade Name must use Chinese characters (it is prohibited to use Latin characters/pinyin or Arabic numerals) and should contain more than one character. Unless approved of by SAIC, the company name may not contain any of the following: (China), (China), (National), (State), (International).

If the change is approved, within 10 days the authorities will issue a notice of approval and a request that the company modify its business license accordingly. A fee of RMB100 applies to any change of established information. In theory, any changes to a company’s name must be filed with the local SAIC within 30 days of the decision to make the change. Failure to file a change in established information can result in a fine of between RMB10,000 and RMB100,000.

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Whether through natural expansion or midlife crises, sometimes it becomes necessary to branch out into something new. In China, a company’s operations are defined by its business scope, a one-sentence description of the industry(s) it is authorized to operate in. Therefore, any significant change to company operations must be preceded by a established change of business scope.

For simplicity, in this article we assume that the foreign-invested enterprise (FIE) in question is a wholly-foreign owned enterprise (WFOE). WFOEs are categorized as one of three types—solution, Trading, or Manufacturing—which differ in terms of their eligible business scope and corporate establishment procedure. Generally, it is much easier to establish a change of business scope within one’s existing WFOE category, rather than expand from a solution WFOE into a Manufacturing WFOE, for example.

For foreign businesses especially, it is imperative that company operations be reflected accurately in their business scope, as this is connected to the “Catalog for the Guidance of Foreign Invested Enterprises” (“Catalog”) governing foreign investment into China. An enterprise’s business scope is administered by two state bodies—MOFCOM and the local Administration of Industry and Commerce (AIC) —and is printed on its business license along with other established information such as its name, established capital, and legal representative. Foreign investors should be advised that any changes to a company’s business scope will be publicly accessible via AIC records.

Moreover, FIEs are only permitted to issue invoices in consistence with their established business scope. If a company provides solutions outside of its defined scope of activities, then it will be unable to issue invoices for the particular solutions. This can cause problems for one’s customers, who might demand the solution be entered into their accounting books.

In some cases, companies may be afforded some wiggle room in how they design their business scope—and use this to influence the likelihood of approval/rejection, as well as various taxation and customs issues. For example, a company may choose to market itself as a solution provider in a given industry, when in fact its business scope is established only for consulting and the actual provision of solutions is outsourced to a local Chinese agent.

Disingenuously fabricating one’s business scope, however, can carry legal consequences including fines or the revocation of one’s business license. Importantly, the business scope of a given enterprise must include or reflect the industry contained in the enterprise name. If the company operates in several industries, then the first item listed in its business scope will be considered its primary industry for naming purposes.

Often, but not always, a change of business scope will require additional investment into the company’s established capital, which can considerably prolong the application process. Additionally, depending on the nature of the proposed change of business scope, the enterprise may be required to obtain additional approval or modify their business premises to engage in the specified industry. Lastly, the enterprise will have to renew its Certificate of Approval granted by MOFCOM, this being the distinguishing factor between FIEs and domestic enterprises. These steps must all be completed prior to applying with the AIC to change the enterprise business scope, which proceeds as follows:

Step 1 — The company should convene a shareholder meeting and obtain a decision to alter the company business scope, including the specific revision(s) to be made. Next, the business scope as appearing in the company’s articles of association should be altered in light of the decision. Within 30 days of this decision, the company should apply at the original AIC using the related application form.

This will require the original and copy of the company business license, the company seal and legal representative seal, proof of the shareholder decision, and the revised articles of association. If the change involves an industry requiring additional approval (such as an industry specific license), this must be applied for with the relevant authorities within 30 days of the initial decision to modify the business scope. Following AIC approval and the payment of related fees, the company will receive the revised business license.

Note: The business scope of a branch company may not exceed that of its parent company; a branch company seeking to operate in an industry requiring approval must gain separate approval from its parent company, following which an application may be submitted for the branch’s change of business scope.

Step 2 — As with any update to a company’s business license, there will be various other forms of documentation that must be updated in light of the revised business scope, including the enterprise’s tax application. Updating tax information is quite complex, but is a crucial step in the overall process, as it affects the company’s ability to issue fapiaos (and thereby allow its customers to deduct input VAT).

Firstly, the company must apply for a change in established information with the original State Administration of Taxation (SAT), within 30 days of the approval to change its business scope. This requires the following:

1. Approval from the local AIC to modify the company established information and the business license (as obtained in Step 1).

2. The company’s original taxation certificate (original and duplicates);.

3. Other relevant materials.

The company will then be asked to fill out an application form for the change in established information, which will be processed by the taxation authorities within 30 days of receipt. If successful, the company will be issued a new taxation certificate. Various punishments apply to a company that fails to establish changes to its established information with the taxation authorities.

Even based on the condensed procedure given above, it should be clear that modifying the business scope of a company in China is no easy task. Given the proper planning, however, it can be done. Depending on the specific revisions to be made to one’s business scope, the overall process can carry on for months, excluding the time required for the company to prepare internal documents. 

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In China, the shareholders in a wholly foreign-owned enterprise (WFOE) are those who make capital contributions and represent the highest authority in the company. According to the Company Law, the functions and powers of shareholders are defined as follows:

● Deciding on the operational policy and investment plan of the company.

● Electing or replacing directors and supervisors who are not representatives of the staff and workers, and deciding on matters concerning the remuneration of directors and supervisors.

● Examining and approving reports from the board of directors, reports from the board of supervisors or the supervisors, as well as the annual financial budget and accounts plan of the company.

● Examining and approving the company’s plans for profit distribution and making up losses.

● Adopting resolutions on the increase or reduction of the company’s established capital, the issuance of corporate bonds, and the merger, division, dissolution, liquidation or transformation of the company.

● Amending the company’s Articles of Association.

● Other functions and powers provided for in the company’s Articles of Association.

However, for a variety of reasons, sometimes it becomes necessary for a company to change its shareholder structure. Generally, a company decides to make such a change upon the entrance of a new shareholder who is to receive an equity transfer from one or more existing shareholders.

Alternatively, it may be necessary to revise the shareholder structure as the result of equity transfers between shareholders or the exit of a shareholder from the company.

Though information on company shareholders is not explicitly listed on a Chinese business license, in most cases, the company will still need to apply for a new business license, considerably complicating the overall application process.

Step 1 — An equity transfer agreement should be signed between the transferor and the new shareholder. The company must issue a capital contribution certificate for the new shareholder (if applicable) and revise the list of shareholders.

Step 2 — The equity transferor or the transferee (the taxpayer) shall file with the competent tax authorities and obtain a tax payment certificate for individual income tax (IIT) or a tax exemption certificate.

Step 3 — The company must apply to the original AIC for a change of company shareholders and obtain a “Notice of Acceptance.” This requires the following (as obtained in Step 1):

● The equity transfer agreement.

● The new capital contribution certificate.

● The revised list of shareholders.

Step 4 — The company should submit the following documents according to the “Notice of Acceptance” as obtained in Step 3 (in both original and duplicate) to the original AIC:

● An application form.

● Proof of the designated representative or agent appointed by all shareholders (if applicable).

● Approval documents obtained from relevant departments.

● Proof of a decision in accordance with laws and regulations.

● The revised Articles of Association signed by the legal representative.

● The equity transfer agreement.

● The approval of other investors for transferring equity.

● Qualification certificate for the equity transferee.

● Power of attorney for the solution of legal documents.

● Other relevant materials.

● A copy of the previous business license

All English materials should be translated into Chinese and affixed with the seal of a translation company. A decision on the change of established information will be made by the AIC within five days from the date of acceptance of the application.

Furthermore, the company will also need to file with relevant departments such as Customs, the State Administration of Foreign Exchange (SAFE) and the local Commission of Commerce. As with other changes to company established information, the business license and the tax certificate will need to be updated as well.

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Foreign investors may decide to close their business for multiple reasons. To legally close a business, investors need to go through a series of procedures to liquidate and deestablish the company, which involves dealing with multiple government agencies, including the respective market regulatory bureaus, foreign exchange administrations, customs, tax departments, and banking authorities, etc.

Failing to follow the prescribed procedures will lead to serious consequences for the legal representatives and the company’s future.  

Reasons for closure

The most common reasons an enterprise may choose to deestablish are voluntary liquidation, a declaration of bankruptcy, the expiration of time-bound business activity defined in the company’s articles of association, merger and subsequent disbandment and dissolution, or relocation.  

Procedure

Investors are strongly advised not to "walk away" without following the prescribed procedures. Simply walking away has severe repercussions for the legal representatives and the company's future in China. This includes attracting civil liability due to credit owed or even criminal culpability, difficulty during immigration, loss of property and assets, or inability to make future investments due to damage to reputation and financial status.

Close a WFOE: Step-by-Step

Timeframe: Typically, between six to 14 months.

A WFOE company structure is subject to special attention during its closure procedure, involving more steps and authority involvement than that of its representative office and Chinese company counterparts.

The cancellation process can vary depending on the nature of the WFOE (manufacturing, trading, or solution WFOE), its associated business scope, the size and health of the company, and the duration of company operations.  

There are some general steps that each WFOE must follow.

Form a liquidation committee and prepare an internal plan

The liquidation committee of a limited liability company should comprise of company’s shareholder(s). In practice, the shareholder(s) always designated several people to act on its/their behalf. All the legal documents for the liquidation shall be signed by the person-in-charge of the liquidation committee.

Throughout the liquidation process, the committee will handle several matters directly concerning the cancellation process, including – notifying the creditors of the business closure, preparing the liquidation report to submit to authorities, as well as more administrative tasks, such as preparing the balance sheet and recording a detailed list of all assets and evaluating properties, conduct the company cancellation formalities with different competent authorities.

Liquidate the assets

The liquidation committee should also begin liquidating the company’s assets and allocate the returns from the sale in the following order:

● Liquidation expenses;

● Outstanding employee salary or social security payments;

● Outstanding tax liabilities; and

● Any other outstanding debts owed by the WFOE.

The company should refrain from settling creditors’ claims until the liquidation plan in step one has been made and approved by the board of shareholders. After the debts have been discharged, the liquidation committee can distribute the remaining returns among the shareholders. If the company’s assets are unable to settle the debts, it will file a bankruptcy declaration with the court.

File the liquidation committee with SAMR while notify creditors through SAMR’s official website

After the liquidation committee is formed, the WFOE must file a record with the State Administration for Market Regulation (SAMR) notifying SAMR of its intent to close the WFOE. This can be completed by submitting a shareholder resolution, which reflects the shareholder(s)’ decision to close the business and announces the names of the members that have been appointed to form the liquidation committee. Meanwhile, WFOE shall make a public announcement on SAMR’s official website to notify its creditors. The notification period is 45 days. If the WFOE is qualified for a simplified cancellation process with SAMR, the notification period is 20 days.  

Begin terminating employees

Businesses are advised to begin terminating employees as early as possible as many adjoining issues may arise once this process is initiated. The WFOE is obliged to pay statutory severance to each employee due to closing of WFOE.

Tax clearance and cancellation 

A general tax cancellation process will usually take around four to eight months. During this process, the tax authority will collect a series of relevant documents including:  

● The signed board resolution; 

● Evidence of lease termination; 

● Tax filing records for the previous three years.  

All outstanding tax liabilities will be identified and required to be settled before deestablishing the business from its value-added tax (VAT), corporate income tax (CIT), individual income tax (IIT), and stamp tax obligations. 

Businesses that have been operating for more than one year will then be required to complete an audit with a local certified public accountant (CPA) firm to obtain a liquidation report. This liquidation report, along with the unissued invoices, VAT invoices, and equipment, can then be brought to the tax bureau for review. In some instances, the tax bureau may visit the office in person to learn more of the company’s intentions and reasons. 

If the review is successful, the tax clearance certificate will be issued, in which case the business will have successfully deestablished from all its tax obligations. The business will incur ongoing tax liabilities throughout the business closure process. 

SAMR cancellation application 

Once the official tax clearance certificate has been obtained, the SAMR cancellation processes can begin. To do this, the liquidation committee must submit the liquidation report, signed by the shareholder (or its authorized representative), which needs to confirm the following – the completion of tax clearances, the termination of all employees, and that all creditor claims have been settled. A shareholder resolution on liquidation of the WFOE also needs to be submitted at this stage. 

Deestablish with other departments 

At the same time, the business must deestablish at the following departments (where relevant): 

● State Administration of Foreign Exchange (SAFE): This needs to be completed through the bank rather than SAFE. The WFOE must make an application at the bank in which their capital account was opened. 

● Foreign Capital Account and RMB general account(s): This shall be conducted together with SAFE cancellation. The balance in foreign capital account and RMB general account(s) shall be transferred to RMB basic account. 

● Social insurance bureau: The SAMR cancellation notice needs to be brought to the HR bureau for cancellation. 

● Customs bureau: An application letter stamped by the company, along with the original custom certificates needs to be submitted to the customs bureau for cancellation. If the WFOE never obtained a certificate from the customs, only application letter is required. 

● Other licenses: Production licenses, food distribution licenses, and others need to be deestablished with the relevant authorities. 

Obtain Cancellation Notification from SAMR

RMB basic and RMB general account closure 

When closing an RMB general account, its balance can only be remitted to its RMB basic account and is not allowed to be returned to its overseas shareholder/investor or its local affiliates.

All bank accounts of a company shall be “prohibited to conduct any operation” within seven days upon its cancellation of business license. Neither payment nor receiving money is allowed.

The RMB basic account must always be the final account to close as it is the WFOE’s primary account and is most closely monitored by PBOC. Here, few options are there:  

● In principle, the balance must directly transferred to shareholder; 

● The balance in the account shall not exceed the liquidation income indicated in the liquidation report. 

The individual bank branches may have their own policies. 

Cancel company chops 

Once all the other steps are completed, the WFOE can cancel WFOE's chops by itself or by the public security bureau, mainly depends on local policy.

Close a RO: Step by Step 

Timeframe: Typically, between six months to one year, or longer if irregularities are found. 

For a variety of reasons, there may come a time when foreign headquarters need to close their ROs. For example, when a foreign headquarter looks to transform its RO to a WFOE to expand for-profit businesses, it will need to deestablish its RO first. 

From a legal perspective, China’s regulations stipulate that a foreign enterprise must, within 60 days, apply to the SAMR to deestablish the RO when any of the following circumstances occur: 

● The RO is required to shut down in accordance with the law; 

● The RO no longer engages in business activities upon the expiration of residency; 

● The foreign enterprise terminates its RO; 

● The foreign enterprise terminates its business (meaning the parent company is being closed). 

The processes of closing an RO and closing a WFOE share similarities, but the set up is much simpler, as there are no complex liquidation procedures or large-scale employee terminations. 

Employee termination 

When preparing the documents for the RO’s cancellation, the foreign enterprise can start dismissing the RO’s employees. An RO typically employs fewer people, making the dismissal process a little easier than for a WFOE. 

However, there are a few points that need to be taken care of: 

RO’s local employees: RO’s local employees are dispatched by a labor dispatch agency, such as the Foreign Enterprise Human Resources solution Company (FESCO). 

The local employees have to sign labor contracts with the dispatching company instead of with the RO and the RO does not have any direct employment relationships with its local employees. As a result, the RO needs to work together with the labor dispatch agency to deal with employee termination process when laying off a local employee. 

The severance shall be paid to each employee due to the closing of RO by the labor dispatch agency, but such money is ultimately paid by RO or its HQ. 

RO’s foreign employees including one chief representative and one to three general representatives of the RO – their dismissal must be handled by the RO’s headquarters. 

Tax audit 

The formal cancellation of an RO starts with the application to the relevant tax bureau for tax clearance and tax cancellation. This step is often considered the longest – around six months – and perhaps the most difficult part of the entire cancellation process, as the tax bureau will ensure that the RO properly and fully paid all the taxes. 

As part of the tax cancellation process, the RO must hire a local Chinese certified public accountant (CPA) firm to audit its accounts for the last three years. The latter will then generate a three-year tax clearance audit report for submission to the tax bureau. 

During this phase, it is important to note that the monthly tax filing of the RO shall still be carried as an on-going activity until all tax closures are completed with the tax bureau. 

Tax cancellation 

The RO will then need to submit the three-year tax clearance audit report (up to the current month), the tax cancellation application form, the tax certificate, vouchers, tax filing records, and other tax-related documents to the tax bureau for review. 

If all the taxes are proved cleared, the tax bureau will issue a tax cancellation certificate to the RO. However, if any unpaid taxes or irregularities are found, the tax bureau may conduct tax clearance for outstanding tax issues or possible on-site inspection of the RO. 

The RO may then be required to settle the unpaid taxes, submit additional documentation, or pay penalties. 

Cancellation with SAFE and customs 

After the tax cancellation is done, the RO will also need to deestablish the foreign exchange certificate with the SAFE and deestablish the customs certificate with the customs authority. If RO has a general foreign exchange bank account, this account shall be closed together with the SAFE cancellation, the balance in the account must be transferred to RO’s RMB basic bank account. 

Obtaining the cancellation certificates from both the SAFE and the customs authorities is a mandatory step of the RO cancellation process, irrespective of whether the RO has ever obtained a certificate from either of these two authorities. 

Cancellation with SAMR 

The next big step is to officially deestablish the RO with the local branch of the SAMR with the following documents: 

● The cancellation application letter; 

● The tax cancellation certificate; 

● Proofs issued by the customs authority and SAFE proving that the RO has deestablished the customs and foreign exchange or has never gone through any formation procedures; 

● Other documents as the SAMR prescribed. 

After review, the local SAMR will then issue the ‘notice of cancellation’ stating the official formation and termination of the RO. An announcement of the RO’s cancellation will be listed on SAMR’s official website. At this point, all the formation certificates will be cancelled, as well as the chief representative’s work certificate.  

Bank account closure 

Last, the RO will need to close its RMB basic bank accounts. Unissued checks and deposit slips should be returned to the bank and money in the account must be transferred to RO’s headquarter. 

After the cancellation 

After the RO has completed the cancellation, it is important that the parent company requests the return of and keeps all accounting records and business documents to safeguard the interest of the parent company. 

Finally, the RO’s chops must be destroyed by RO or its HQ.

Simplified procedures for company cancellation 

The SAT has issued the Notice on Further Optimizing the Procedures for Dealing with Enterprise Tax Cancellation (henceforth Notice) to ease the difficulties of enterprise cancellation. The Notice takes measures to reduce enterprises’ repeated errands and to issue tax clearance certificates on the spot even when some enterprises submit incomplete documents. 

In particular, the newly introduced commitment system presumes the integrity of the enterprise, which may be reflected in a positive inspections record, high tax credit ratings, and no tax or fines owed. In such situations, the tax clearance time will be unaffected, and only a commitment is needed from the legal representative deestablishing the company to provide all tax-related information within a stipulated time period. 

New government reforms will follow three directions. 

● Simplifying the SAMR cancellation. This aims to see improvement in the general cancellation system for enterprises; 

● Simplifying tax, social security, business, customs, and other cancellation procedures as well as document submission requirements; 

● Setting up online solution platforms for enterprise cancellation and carrying out “one-stop” online solutions (or “one website”) to facilitate this.

Through the above measures, the cancellation time of enterprises can be reduced by at least one-third. At the same time, the government will strictly investigate business entities indulging in the evasion of debt. The names and information on enterprises that have lost credibility due to non-compliance or debt evasion will be jointly published by the respective government agencies. 

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Changing established 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 established capital.

When to increase established capital

The most common reason to increase established 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 established capital is directly linked to the amount of foreign debt they can take on (under the total assets to established capital ratio system). Increasing the established 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 established capital amount. A higher established capital can help to show that the company is operating well and is financially healthy. A higher established capital base is also one of the key indicators of a company’s size. Increasing the company’s established 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 established capital, such as when expanding their business scope. Increasing the established 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 established capital, and if a company’s established capital is too low, the company may lose the opportunity to bid for large projects.

When to decrease established capital

One of the most common reasons for reducing established capital is having an excess of capital. A company may have established 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 established capital so as to get the idle capital moving.

Another scenario in which a company may choose to reduce established 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 established 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 established 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 established 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 established 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 established 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 established 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 established capital for the company.

When a company reduces its established 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; etc..

Note that after a company reduces its established 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 established capital.

 

How to change established capital

Procedures for changing the established 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 formation of Market Entities, and other relevant laws and regulations.

Generally, increasing established capital is easier than decreasing established capital, the latter of which involves additional procedures. 

Below we provide a step-by-step guide, with the additional procedures required for decreasing established capital highlighted.

Step 1: Resolution to increase or decrease established capital

Under the Company Law, the decision to change the amount of established 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 established capital.

The shareholders’ meeting should then revise the AoA accordingly to ensure the established capital amount is consistent with the shareholders’ subscribed capital.

Note that to increase the established 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 established capital, the amount of deducted capital that can be remitted overseas or reinvested domestically is generally limited to the paid-in established 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 established 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 Systemand 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 established capital to make up for losses, it does not need to notify creditors within 10 days of the resolution to reduce the established 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 formation and application for a new business license

For both increasing and decreasing the established capital, companies must apply for a change of company information and apply for a new business license at the local branch of the State Administration for Market Regulation (SAMR). However, to increase established capital, the company must apply for the change of compaby information within 30 days of the resolution, while to decrease established capital, the company can only apply for the change of company information after 45 days from the date of the public announcement.

To apply for the change of company information and apply for an updated business license, companies must submit the following documents:

● A Company 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 established capital reduction announcement is only published through a newspaper, a newspaper sample of the announcement (those who have announced the reduction of established 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 established capital through public issuance of new shares or a listed company increasing its established capital through a non-public issuance of new shares) – original and photocopy;

● The previous business license – original and photocopy.

If the application materials are complete and comply with the required formats, the establishment authority will confirm and establish the application on the spot, issue a formation notice, and issue a business license in a timely manner (within 10 working days). If on-the-spot formation is not granted, the establishment 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 company information with the local SAMR, the FIE shall submit a change report through the enterprise establishment system when applying for a change of company information.

Step 5: Updates with the bank

In addition to filing the changes to the established capital amount with the local SAMR, companies must also apply for the corresponding changes in the bank at the place of founded.

After the bank completes the change of information, it should endorse the items, 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 information

FIEs that increase or decrease their established capital also need to apply to the local branch of the State Administration of Foreign Exchange (SAFE) for a change of foreign exchange information.

The following materials must be submitted:

● The written application attached with the Application Form for Basic Information of Domestic Direct Investment (I) and the business certificate.

● The updated business license (copy stamped with the official seal of the unit).

● Companies subject to the paid-in established capital formation system shall also provide approval documents or other certification materials from relevant industry authorities.

Changing the established 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 established capital, companies can reach out to our professional accounting, tax, and legal advisors.