Hong Kong: PRC Projects Or Companies In Which Foreign Investors Contribute Or Hold Less Than 25% Of The Equity Given Official Recognition By MOFTEC

Last Updated: 27 January 2003
Article by Elaine Y.M. Lo
Most Read Contributor in Hong Kong, September 2016


A Circular issued by the Ministry Of Foreign Trade And Economic Co-operation ("MOFTEC"), the State Administration of Taxation, the State Administration for Industry and Commerce ("SAIC") and the State Administration of Foreign Exchange ("SAFE") jointly on 30 December 2002 (the "Circular"), requires all PRC companies, in which foreign investors hold or have contributed less than 25% of the registered capital, to be examined, approved and registered in accordance with the relevant laws and regulations governing foreign-invested enterprises ("FIEs"). As from 1 January 2003 (which is the effective date of the Circular), the shareholders' agreement or joint venture contract and articles of association of every such PRC company will have to be submitted to the local branch of MOFTEC for approval. If approved, a certificate of approval will be issued stating that the company has foreign investment of less than 25%. The company should, based on MOFTEC's approval certificate, carry out registration with the local branch of SAIC and will be issued with a business licence stating that it is an enterprise which has less than 25% foreign investment.

A PRC company which has been approved and registered with less than 25% foreign investment will not, however, enjoy the tax concessions and preferential treatments of a FIE, and will not be granted exemptions from or reductions in customs duty when importing equipment, materials and commodities into China.

Full article

1. Scope of Application

The Circular applies to all foreign investment projects, regardless of whether the investment of foreign investors is greater or less than, or equal to, 25% of the registered capital of a project. Prior to the issuance of the Circular, Chinese entities in which foreign investors hold less than 25% of the equity interest were not recognised as foreign investment projects, and MOFTEC had refused to acknowledge any foreign investment or participation in such entities. MOFTEC's previous official attitude was that foreign investors' investment in any PRC project or company, which does not reach 25%, was not made in compliance with the laws and regulations governing foreign investment (comprising principally of the PRC Law on Equity Joint Ventures and PRC Law on Co-operative Joint Ventures, and their Implementation Regulations). Hence, foreign investors run the risk that any investment of less than 25% in a Chinese entity would not be protected by PRC law, and there were also problems with remitting dividends paid on such investment, and proceeds derived from the sale of such investment, in foreign exchange out of China.

2. Registration with SAFE

A PRC company in which foreign investment does not reach 25% is now entitled to carry out foreign exchange registration with SAFE, against presentation to the local branch of SAFE of its certificate of approval and business licence showing that it has foreign investment (although below 25%).

The Circular further requires the government authority that grants approval for the acquisition by foreign investors of equity interest or shares in a PRC company, to send a copy of such approval to the local branch of SAFE in the place where the PRC company is located. SAFE will then monitor the remittance by foreign investors of the purchase price for the acquisition.

Hence, the Circular enables a PRC company which has received foreign investment, but which does not qualify as a FIE, to carry out foreign exchange registration with SAFE, and SAFE will have a record of foreign capital invested in that company. Foreign investors should now be able to receive dividends in foreign exchange, and should also be able to repatriate funds received upon liquidation of such company, or from the sale of its interest in such company, in foreign exchange out of China.

3. Time Limit for Payment of Purchase Price or Contribution of Registered Capital

If a foreign investor's investment in a PRC company is less than 25% of that company's registered capital, then the capital contribution must be made by the foreign investor within 3 months after the amended business licence of the PRC company is issued. If capital is to be contributed by the foreign investor in the form of non-cash assets or industrial property rights, then the contribution may be made within 6 months from the issuance of the amended business licence.

In the case of an acquisition by foreign investors of the equity interest or shares of a PRC enterprise (which will be converted to a FIE following such acquisition), the purchase price should be paid within 3 months from the date of issuance of the FIE's business licence. In special situations and subject to approval from the relevant government authorities, the time period for payment of the purchase price may be extended, with 60% of the purchase price payable within 6 months, and 40% payable within one year, after the issuance of the FIE's business licence. The Circular further provides that prior to the full payment of the purchase price, the foreign investor cannot obtain the management and decision making right of the FIE and is not entitled to consolidate the FIE's assets and liabilities in its own financial statements.

The branch of SAFE in the place where the transferor of equity interest or shares in the PRC company is located, will be in charge of monitoring the payment of the purchase price by the foreign investor, and will issue the foreign exchange registration certificate, which document will serve as evidence of payment of the purchase price by the foreign investor.

4. Natural Persons may become Investors in a Sino-Foreign Joint Venture

Under the PRC Equity Joint Venture Law, the PRC Co-operative Joint Venture Law and their Implementation Regulations, only PRC entities with legal person status may enter into a joint venture contract with foreign investors to establish a Chinese-foreign equity or co-operative joint venture company. The Circular provides one exception to this rule in the situation where a joint venture is formed as a result of foreign investors acquiring equity interest or shares in an existing Chinese enterprise. Paragraph 5 of the Circular states that where the shareholders of a Chinese enterprise are natural persons and they have been shareholders of such enterprise for more than one year, then these natural persons may, subject to obtaining the approval of the relevant government authorities, continue to be the Chinese investors of the FIE established as a result of the purchase of equity interest or shares by the foreign investors in such enterprise. The Circular reiterated the prohibition for natural persons to form joint ventures with foreign companies, economic organisations or individuals except in the above-mentioned situation.

5. Deadline for Examination, Approval and Registration of Chinese Enterprises with Foreign Investment

The Circular emphasizes the legal requirement for all PRC companies with foreign investment to undergo examination and approval by MOFTEC, and registration with SAIC, SAFE and other relevant government authorities, in accordance with the procedures laid down by the Circular. With regard to those Chinese enterprises which have already received foreign investment of less than 25% of their registered capital prior to the issuance of the Circular, the Circular sets a deadline of 6 months (i.e. 30 June 2003) for completing all procedures for examination, approval and registration. SAIC is empowered to punish any such Chinese enterprise which fails to complete the examination, approval and registration procedures before expiry of the deadline, by imposing a fine of between RMB10,000 and RMB100,000 on such enterprise in accordance with Article 63 of the Regulations of the People's Republic of China on Company Registration.

The original email legal update is copyright Johnson Stokes & Master at the date written first above. All rights reserved. This publication provides information and comments on legal issues and developments of interest to our clients and friends. The foregoing is intended to provide a general guide to the subject matter and is not intended to provide legal advice or a substitute for specific advice concerning individual situations. Readers should seek legal advice before taking any action with respect to the matters discussed herein. Please also read the JSM legal publications Disclaimer.

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.

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”

Mondaq Advice Centre (MACs)
Up-coming Events Search
Font Size:
Mondaq on Twitter
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).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement

Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of www.mondaq.com

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at enquiries@mondaq.com.

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.