Until recently it was not possible for shareholders of Foreign
Invested Enterprises ("FIEs") (such as
Sino-Foreign Joint-Ventures and WFOEs) to contribute equity
interest in other PRC companies to the FIE. Regulators were
unwilling to approve this as no formal guidance existed.
This is addressed by recently issued interim provisions from
MOFCOM that took effect on 22 October 2012. Pursuant to these new
interim provisions, a shareholder of a FIE can make or increase
capital contributions in an FIE by means of contributing an equity
interest in another PRC company (the "EquityCompany"). The Equity Company can be either a
fully domestic PRC company or an FIE. These new interim provisions
provide foreign investors with more flexibility on structuring
their investments in China.
The new procedure can be used not only when incorporating an FIE
but also when increasing the amount of registered capital of an
existing FIE. In addition, the procedure can be used when
increasing the registered capital of a domestic company when
converting it into an FIE.
There are several requirements that need to be met. Most
importantly, the Equity Company cannot be a real estate company or
certain types of investment vehicles. The equity that will be
contributed also needs to be valuated by a valuator duly qualified
in the PRC and may, together with any other non-monetary
contributions, not exceed 70% of the total registered capital of
The capital contributions to the FIE need to be approved by the
central or local MOFCOM at the place of incorporation of the FIE.
In certain cases central or local MOFCOM approval at the place of
incorporation of the Equity Company is also required.
Unfortunately, it is still unclear how long it will take to obtain
The value of contributed equity from an Equity Company in an FIE
is not included when calculating the FIE's total investment
amount. This limits the ability of the FIE to borrow foreign
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.
To print this article, all you need is to be registered on Mondaq.com.
Click to Login as an existing user or Register so you can print this article.
Anyone with standard form contracts who deals with small business must review the contracts for potential unfair terms.
Some comments from our readers… “The articles are extremely timely and highly applicable” “I often find critical information not available elsewhere” “As in-house counsel, Mondaq’s service is of great value”
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).