On 4 May 2011, the Ministry of Commerce
("MOFCOM") issued a public consultation draft of the
Administrative Measures concerning Capital Contributions Made with
Equities by Enterprises with Foreign Investment ("Draft
Measures"). The proposed deadline for submissions is 20 May
If the Draft Measures come into effect in its current state,
they will formally allow investors to use equity interests as an
additional non-monetary means for making capital contributions to a
foreign-invested enterprise. Under the current PRC laws and
regulations, only tangible assets, intellectual property and
land-use rights are allowed to be used as non-monetary capital
The Draft Measures are similar to the State Administration of
Industry and Commerce's Administrative Measures for the
Registration of Capital Contributions Made with Equities,
promulgated in 14 January 2009, which made "capital
contribution made with equity interests" ("Equity
Contribution") available for investment in Chinese
What is Equity Contribution?
Equity Contribution is the act of using equity interests in a
limited liability company or joint stock limited company
incorporated in China to make a capital contribution for
"establishment" of foreign-invested enterprises
("FIE"). The term
"establishment", in this sense, includes the following
forming a FIE by way of establishing a new legal corporate
injecting capital to change a domestic enterprise into a FIE;
injecting capital to change the equity structure of a FIE.
What types of equity interests are allowed for Equity
The Draft Measures stipulates that equity interests to be
contributed must have clear title and full equity rights. Hence
equity interests must not subject to any encumbrances, such as a
pledge. In addition, Equity Contributions are not permitted to
supplement a company's partially paid registered capital, and
should not be equity interested held by a foreign-invested
investment company or a venture capital.
Further requirements for Equity Interests
The equity interests to be contributed must be appraised by a
domestic evaluation agency established in accordance with the PRC
law. The aggregate value of the equity interests and other
non-monetary capital contributions made by all equity interest
holders must not exceed 70% of the registered capital of the
company receiving the Equity Contribution.
The Investor Companies, Equity Companies and Investee companies
must still comply with the Provisions on Guiding the Orientation of
Foreign Investment promulgated by the State Council on 11 February
2002, the Catalogue of Industries for Guiding Foreign Investment by
MOFCOM on 31 October 2007 and other related relevant foreign
investment laws and regulations.
Currently, MOFCOM (usually at the provincial level) only
approves the use of Equity Contribution on a case-by-case basis.
Once the Draft Measures come into force, it is expected that the
approval process for Equity Contributions will become more
standardised and streamlined. Foreign investors will also find
greater flexibility in restructuring their assets in China if
Equity Contribution is made available as an additional means for
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.
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