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, October 2018

Summary

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.

Authors
 
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”

Related Topics
 
Related Articles
 
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
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
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

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 or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq 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 of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions