China: Facilitating Foreign Direct Investment: The Latest Developments And Their Implications

Upon its promulgation, there are discrepancies between China’s new Company Law and the existing foreign investment legal regime. There also lies uncertainty over the application of the new Company Law to foreign invested enterprises (FIEs). On April 24, 2006, State Administration for Industry and Commerce, together with Ministry of Commerce, General Administration of Customs, and State Administration of Foreign Exchanges, issued Suggestions on Implementation of Several Issues regarding Applicable Law of Examination, Approval, Registration and Administration for Foreign invested Enterprises (Suggestions). These suggestions make the applicability of the new Company Law and other recently issued laws and regulations to FIEs more clear. A new FIE legal regime is emerging together with the previously issued Regulations for the Administration of Company Registration of the People’s Republic of China (Regulations) and Provisions for the Administration of Registration of the Registered Capital of Companies (Provisions), among other applicable laws and regulations. This article updates our previously circulated publication, namely China’s New Company Law: What Lies ahead for the WFOEs? and deliberates on the latest developments and their implications.

As we have suggested in the abovementioned publication, there is inconsistency between the new Company Law and the laws regulating FIEs, in regards to the types of capital contributions and their ratios. This disparity is addressed by the Suggestions. Foreign investors are permitted to contribute capital in forms other than cash, tangible assets, intellectual property rights, or land use rights to FIEs provided that such non-monetary contributions are appraised, valued, and certified in accordance with relevant provisions. Another significant development is that cash raised by a FIE’s shareholder in the shareholder’s own name, such as loans, can be treated as this shareholder’s own fund. After verification and issuance of certain certificates by a lawfully established investment verification institution, such cash may serve as the said shareholder’s capital contribution to the FIE.

It is also notable that, for a Chinese foreign equity joint venture, which is always in the form of a limited liability company as required by relevant regulation, the value of the non-monetary contribution which is in a form in accordance with the provisions of PRC Law on Chinese-Foreign equity Joint Ventures can be decided through negotiations among all the parties to the joint venture. This will surely give investors leeway while making investments. But in the case of land use rights contribution, appraisal and valuation of such contribution is not subject to the negotiation.

For contribution ratios, there is also a breakthrough. The restriction imposed by FIEs laws, namely that contributions in the form of intellectual property rights cannot exceed 20% of the total capital subscribed by shareholders has been removed. Non-cash capital contributions subscribed by shareholders can be to a maximum value of 70% of the total registered capital. This is in line with developments brought about by the new Company Law to those domestic companies. Foreign investors may utilize this provision to maximize their superiority over their Chinese counterparts in the area of technology.

In the past, foreign investors were generally permitted to contribute their registered capital over a period of up to three years. Under the Regulations, this period of three years has been reduced to two years, except in the case of a foreign invested investment company the period can be up to five years.

Specifically, investors may opt for a capital contribution in one full lump sum, in which case such capital shall be payable within six months of the establishment of the FIE; or investors may contribute capitals subscribed by them over two years with an initial capital contribution not less than 15% of all the subscribed capital or RMB 30,000, whichever is higher, and payable within three months of establishing the FIE.

Obviously, there are still several differences when comparing this treatment of foreign investors to that received by domestic ones. The initial capital contribution made by foreign investors can be less than that made by shareholders to a non-FIE domestic enterprises, namely 20% of the registered capital. In addition, foreign investors will continue to enjoy the privilege that FIEs are permitted to get business licenses and commence operation before the initial capital contributions are fully made.

After the promulgation of the new PRC company law, the introduction of a single shareholder limited liability company (SSLLC) is receiving more and more attention from foreign investors. This is because a dominant number of FIEs established in recent years are SSLLCs. Among other things, investors are concerned about a requirement that the registered capital of a SSLLC must be contributed in one full lump sum. The applicability of the new Company Law’s provisions which are aimed at SSLLCs to FIEs is now clarified.

The minimum registered capital of a foreign invested SSLLC is RMB 100,000. Meanwhile, it is explicitly stipulated in the Suggestions that the investor of such a FIE is not subject to this one lump sum provision and has the options, in this regard, as those investors to other FIEs do. However, the difference is that when the single shareholder chooses to make contribution in instalments, the initial capital contribution cannot be less than RMB 100,000. It is also suggested that a foreign natural person may invest in and establish several SSLLCs within China provided that all the other requirements for SSLLCs are fulfilled. Nevertheless, such SSLLCs invested in and established by foreign natural persons are forbidden to invest in and establish a new SSLLC.

For those foreign-invested SSLLCs established before January 1, 2006, they can continue to maintain the status quo despite these new requirements which are now in force, although if the foreign investors decide to alter registered capitals or make an external investment then the new requirements will apply.

The Suggestions stipulate that a FIE, while setting up a representative office within a Chinese territory other than where the FIE is registered, is no longer required to apply for registration with the company registration authority at the level of either the municipality or county where the representative office is located. For those already registered representative offices, the company registry will not accept an application for the alteration or extension of the representative office’s business license. Upon the expiry of a representative office’s term, the FIE which is behind such a representative office can apply for the cancellation of the representative office’s registration with the company registry or, as demanded by business operation requirements, apply for the establishment of a branch which will be involved in future business activity. Such existing representative offices may continue to operate without registration when the term expires.

However, it must be remembered that a representative office is forbidden to do business, failing to abide by which will result in an investigation and punishment by a competent company registry. If the parent FIE chooses to do business through such a subsidiary then a branch company is among one of the choices.

Another development which shall be noted is that, for the establishment of a branch company, the FIE can go directly to the company registry within whose jurisdiction the contemplated branch is located. A previously required document which is issued by the registry of the parent company for the purpose of the registration of the branch is no longer needed, thus making the registration process more efficient.

Conclusion

After years of practice, privileges enjoyed by foreign investors for years while doing business in China are beginning to be shared by their Chinese counterparts. A new type of FDI legal framework is evolving, which will certainly not lead to discrimination against foreign investors. Rather, Chinese regulators are becoming more mature and are ready to make foreign direct investment activities more effective and efficient.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.