Are WFOEs Torn About Whether to Reduce Registered Capital? Don't worry and wait!

 

After the implementation of the new Company Law in 2024, on the one hand, numerous foreign enterprises are contemplating reducing their capital due to not having fully paid-in their registered capital. On the other hand, headquarters are also concerned about the adverse effects that capital reduction might bring. Consequently, many foreign enterprises are stuck in a dilemma over whether to proceed with capital reduction.

In the face of such anxiety, Dongjin steps in with an in-depth analysis to help you grasp the situation from a single article!

I. The Strict Requirements for Paid-In Registered Capital Under the New Law and Legal Liabilities for Non-Compliance

Administrative Penalties: If shareholders fail to pay in their contributions on time, the company registration authority may impose a fine of 50,000 - 200,000 yuan on the defaulting shareholders; in severe cases, a fine of 5% - 15% of the fake investment amount will be imposed.

Executive Accountability: Directly responsible executives who neglect their duties may face a fine of 10,000 - 100,000 yuan.

Credit Punishment: Enterprises that do not adjust their contribution deadlines will be listed in the BLACK LIST and marked on the "National Enterprise Credit Information Publicity System," which can affect the enterprise's credit.

Joint Risk: If the company cannot repay its debts due to capital contribution issues, shareholders will bear supplementary compensation liability within the scope of unpaid capital.

II. Avoid These Common Misconceptions Among Most Foreign Investors!

Many foreign investors believe that there are still several years until the deadline specified in the new Company Law. If they really lack funds and cannot fulfill their capital contribution obligations by then, they think it will still be in time to reduce capital. However, based on Dongjin's practical experience of over 25 years, this idea can run into practical difficulties.

Firstly, the capital reduction process is complex and restricted, with strict legal procedures: it is necessary to prepare a balance sheet, notify creditors (within 10 days), publish announcements in newspapers three times (within 30 days), and after a 45-day creditor objection period, approval can be processed.

Moreover, if unexpected and uncontrollable issues arise in individual stages of the capital reduction declaration, it can delay or even hinder the process, ultimately leading to the failure of paid-in registered capital on time and resulting in penalties.

For example:

1.Creditors object to the capital reduction, making it impossible to resolve in the short term.

2.There are labor disputes filed but not yet settled.

3.There are administrative penalties from the Administration for Industry and Commerce, tax authorities, customs, or industry regulators that have been filed but not yet settled.

4.The enterprise has other economic disputes that have entered judicial/arbitration procedures.

5.There are related agreements with the local investment promotion department that have not been fulfilled.

III. The Solution: Foreign Headquarters Should Act Early on Capital Reduction Without Hesitation!

Firstly, foreign enterprises should not worry that capital reduction will have a substantive impact on their operations. When participating in bidding, business development, bank loans, or applying for various licenses, the focus of review is on the actual paid-in registered capital of the foreign enterprise, not the nominal registered capital. An inflated registered capital will not gain extra trust from relevant institutions but may instead raise doubts about the shareholders' capital contribution ability.

Secondly, after capital reduction, if future business development indeed requires funds, foreign enterprises can flexibly choose to borrow external debt from the headquarters or apply for capital increase in batches according to actual needs.

Finally, it is crucial to note that capital increase has become very convenient in practice and is also welcomed by local government departments, with almost no obstacles.

Therefore, Dongjin advises foreign enterprise headquarters to stop hesitating and apply for capital reduction as soon as possible, with the option to increase capital at any time in the future.

The following scenarios apply, allowing enterprise shareholders to "match their situations":

1.The current registered capital of the enterprise is significantly higher than the actual business needs.

2.Shareholders have other better investment channels.

3.Shareholders are experiencing financial strain.

IV. Risk Avoidance and Precautions

1.It is recommended that foreign enterprises first conduct an internal assessment of the feasibility of capital reduction to determine the reduction amount and application timing.

2.Address potential capital reduction obstacles, such as reaching written agreements with creditors in advance.

3.Publicize capital reduction information truthfully: update capital information on the "National Enterprise Credit Information Publicity System" within 20 working days after capital reduction; otherwise, face a fine of 10,000 - 200,000 yuan.

4.Reducing capital for unpaid registered capital is relatively easy; however, reducing capital for paid-in registered capital is more challenging and requires case-by-case discussion.

 

Mike Chang

Partner

mikechang@shanghaiinivest.com