Introduction
For foreign companies establishing subsidiaries or joint ventures in China, the "capital system" is not just a procedure for company formation, but an extremely important issue that affects taxation, accounting, governance, foreign exchange management, and consolidated financial statements.
In particular, in recent years, the new Company Law (New Company Law) that will take effect on July 1, 2024, has significantly revised the traditional "subscription system (underwriting capital system)," and the introduction of the "payment rule within five years of establishment" has forced many foreign companies, including existing foreign-invested enterprises, to reconsider their capital design.
Traditionally, it was common practice to set a large registered capital when establishing a subsidiary in China while postponing the actual payment for a long period. However, after the implementation of the new Company Law, key practical issues have become "when to make the payment," "whether the amount is realistically payable," and "how to manage the unpaid capital."
Additionally, the capital system under Chinese law is based on a statutory capital system that differs from the authorized capital system adopted in the United States, the United Kingdom, and other countries, which can lead to conceptual discrepancies between the consolidated accounting and internal management of foreign corporate groups.
This article systematically explains the basic structure of the capital system in China, key points of the new Company Law amendments, the treatment of consolidated financial statements before capital contribution, and points that foreign companies should pay attention to in practice.
1. The Basic Structure of the Capital System in China
Corporate capital systems are generally categorized into three major types: the legal capital system, the authorized capital system, and hybrid capital systems.
The legal system regarding corporate capital formation is generally categorized into three types: "statutory capital system," "authorized capital system," and "hybrid capital system."
Under the legal capital system, the total amount of capital specified in the articles of incorporation is treated as subscribed capital that shareholders agree to contribute. Any subsequent capital increase generally requires formal shareholder approval and amendments to the articles of incorporation.
By contrast, under the authorized capital system commonly adopted in the United States and the United Kingdom, companies are not required to issue all authorized shares upon incorporation. Instead, boards of directors may issue additional shares within an authorized limit without shareholder amendments each time. This system offers greater flexibility for startups and fundraising activities.
Some jurisdictions also adopt hybrid systems that partially delegate share issuance authority to boards of directors within certain limitations.
China’s Company Law fundamentally continues to adopt the legal capital system. In China, “Registered Capital” does not simply represent an authorized issuance limit; rather, it represents the total amount of capital subscribed by shareholders.
Accordingly, when a Chinese subsidiary increases its capital after incorporation, formal procedures such as shareholder resolutions, amendments to the articles of association, and corporate registration changes are generally required.
Historically, China’s capital system has undergone substantial reforms.
When the original Company Law was enacted in 1993, strict minimum capital requirements and mandatory short-term contribution obligations existed. However, the 2005 reform significantly relaxed minimum capital requirements, and the 2014 reform introduced the “subscribed capital system,” under which contribution deadlines became largely flexible. As a result, some companies adopted extremely long contribution schedules extending decades into the future.
However, concerns regarding excessive nominal capital, insufficient creditor protection, and unrealistic capitalization structures ultimately led to another major reform under the 2024 Company Law.
2. The 2024 Company Law Reform and the “5-Year Contribution Rule”
The new Company Law, effective July 1, 2024, mandates that limited liability companies must pay in their registered capital within "five years from establishment" as a general rule. It is important to note that this system affects not only newly established companies but also existing ones. However, for existing companies, immediate full payment is not required; a transitional period of three years is established starting from July 1, 2024. Each company must align its payment deadline in its articles of incorporation with the new Company Law by June 30, 2027.
Current practical understanding suggests that existing limited liability companies will need to fully pay in their registered capital by June 30, 2032, at the latest. Additionally, for joint-stock companies, stricter payment regulations than those for limited liability companies are adopted, requiring completion of payments within the transitional period. A common misunderstanding is the belief that "the minimum capital system has been revived"; however, for general trading companies, sales companies, consulting firms, etc., the statutory minimum capital system has, in principle, been abolished.
Therefore, when establishing a Chinese subsidiary, it is important to design the capital based on a reasonable assessment of "actual business scale, working capital, and external credit" rather than just the formal minimum amount. Particularly for foreign companies, the amount of capital still holds significant meaning in areas such as opening bank accounts, dealing with tax authorities, obtaining licenses, foreign remittances, and building credit with local partners. Thus, a simplistic notion of "keeping it as low as possible since there is a payment obligation" is not sufficient; a design that balances with the actual business situation is necessary.
3. Issues Related to Unpaid Capital and Consolidated Accounting
When foreign companies hold Chinese subsidiaries, the question of whether they qualify as "consolidated subsidiaries" can arise even if the capital is unpaid.
International Financial Reporting Standards (IFRS) and various national accounting standards generally adopt a "control criterion." This means that not only the simple investment ratio but also voting rights, personnel rights, control of the board of directors, contractual control, and control of funds are comprehensively considered to determine whether "financial and operational policies are controlled."
Chinese accounting standards also fundamentally adopt a similar control criterion. Therefore, even if the registered capital of a Chinese subsidiary is unpaid, if the foreign parent company effectively controls the composition of the board of directors and decision-making authority regarding management policies, it is usually treated as a consolidated entity.
However, since the statutory capital system is still maintained under Chinese law, conceptual differences may arise between foreign corporate groups based on the US or UK-style authorized capital system. Particularly in joint ventures, there are cases where only one investor makes the initial payment, leading to a discrepancy between the investment ratio and the actual payment ratio. In such cases, a comprehensive control assessment, including board control, contractual control, and shareholder agreements, is necessary.
4. Practical Points Foreign Companies Should Be Aware Of
In recent years, Chinese authorities have been strengthening management over "abnormally high unpaid capital" and "registered capital without substance." Therefore, the traditional practice of "setting a large capital for the future" needs to be reconsidered.
Especially under the new Company Law, registered capital is positioned as "an amount that truly carries an obligation to pay in the future," so it needs to be designed within a realistically payable range. Additionally, foreign company headquarters need to establish a management system regarding unpaid capital, including its relationship with auditing, consolidation, taxation, transfer pricing, and foreign exchange management.
Furthermore, in China, capital is closely related to foreign debt regulations, profit remittances, external payments, and bank loans, so it is not simply a matter of "setting the capital low." Additionally, there is still a tendency in China to view the amount of registered capital as an important indicator of corporate creditworthiness. Therefore, when establishing a Chinese subsidiary, a comprehensive capital design that spans legal, tax, accounting, and foreign exchange management is required.
5. Conclusion
China's capital system has been significantly liberalized by the introduction of the "registration system" due to the 2014 amendment, but with the new company law in 2024, the "payment rule within 5 years" has been introduced, marking another major turning point. However, Chinese law still adopts a statutory capital system, and registered capital is positioned not merely as an authorized limit, but as the "total legal responsibility assumed by shareholders."
For foreign companies, the capital of their Chinese subsidiaries is not just a matter of company establishment procedures, but an important management issue that includes consolidated accounting, taxation, foreign currency management, credit management, and governance. In particular, the management of unpaid capital, the review of payment schedules, the consolidation judgment of Chinese subsidiaries, and the balance design between capital and borrowing will become increasingly important in the future.
In entering China, it can be said that designing not only "how much capital to set" but also "when and how to pay it" and "how to manage that capital" is key to stable overseas business operations.