On 21 September 2012, the Ministry of Commerce
("MOFCOM") promulgated the Interim
Provisions of the Ministry of Commerce on Capital Contribution in
the Form of Equity Interests Relating to Foreign-Invested
Enterprises ("Interim Provisions").
The Interim Provisions came into force on 22 October 2012.
Under the PRC Company Law, shareholders may make
capital contributions in kind, which is defined as non-monetary
assets such as material goods, intellectual property rights and
land use right that can be valued and legally transferred.
In 2009, the State Administration for Industry and Commerce
(SAIC) promulgated the Measures of
Administration of Registration of Capital Contribution in the Form
of Equity Interests ("Registration
Measures"), which set out the rules for the
registration of capital contributions in the form of equity
interests ("Equity Interest
Contribution"). In the meantime, the Registration
Measures provide that if the transfer of equity interests involved
in the Equity Interest Contribution needs to be otherwise approved
in accordance with Chinese law, then such approval shall be
obtained in advance.
On 18 January 2010, the State Administration of Foreign Exchange
(SAFE) issued the operational rules for its local
offices to handle the foreign exchange formalities in relation to
Equity Interest Contributions made by foreign investors. The prior
approval from the MOFCOM is also required for this foreign exchange
There were no specific rules dealing with the MOFCOM's
approval for Equity Interest Contribution until the promulgation of
the Interim Provisions in September 2012.
Scope of application
If a foreign investor uses its equity interests held in a
company incorporated in China ("Equity Company") as
capital contributions to a foreign invested enterprise
("Invested FIE"), which includes:
a new FIE to be established;
a FIE transformed from an existing non-foreign invested
enterprise by way of capital increase; and
an existing FIE whose shareholding structure is changed due to
the increase of its capital,
then it shall be subject to the Interim Provisions.
All Equity Interest Contribution needs to be approved by the
MOFCOM or its local office at the provincial level which is in
charge of the Invested FIE.
Evaluation requirements and restrictions
Equity interests to be contributed by the foreign investor must
be evaluated by an evaluation institution duly registered in China.
The amount of the Equity Interest Contribution may be negotiated
and agreed by the investors of the Invested FIE but it shall in no
event exceed the value assessed by the evaluation institution.
Equity interests are prohibited from being contributed by
foreign investors in the following circumstances:
the registered capital of the Equity Company has not been fully
the equity interests have been pledged or frozen;
the equity interests are not transferable in accordance with
the Equity Company's Articles of Association or
the Equity Company is a FIE which did not apply for or failed
to pass the annual inspection for the previous year;
the Equity Company is a real estate company, a foreign invested
holding company or a foreign invested venture capital company;
the transfer of the equity interests needs to be otherwise
approved but such approval has not been obtained;
other circumstances where the equity interests are not
transferable in accordance with law.
A legal opinion issued by a law firm in China confirming the
Equity Interest Contribution complies with these restrictions must
be submitted together with other application documents.
The below table sets out the steps to be gone through in
The Interim Provisions clarify the rules to be followed with
respect to the approval from the MOFCOM and will no doubt provide
more flexibility to foreign investors for their business
restructuring in China.
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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