This article is intended to provide a general guide to the subject matter. Specific advice should be sought about individual circumstances. Further information or advice may be obtained from Linklaters & Paines, Hong Kong office, 14th Floor, Alexandra House, Chater Road, Hong Kong; telephone: (852) 2842 4888; fax: (852) 2810 8133; contact David Mullarkey or Jeremy Parr.

Wholly foreign owned enterprises

Wholly foreign owned enterprises are the third type of "foreign investment vehicle" which are recognised under PRC law.

The establishment and operation of wholly foreign owned enterprises are governed by the Law of the PRC on Wholly Foreign Owned Enterprises (the "Foreign Enterprise Law") which came into effect in April 1986 and the Detailed Implementing Regulations for the Foreign Enterprise Law ("Detailed Rules") which came into effect in December 1990. In addition, the Ministry of Exchange of Foreign Trade and Economic Cooperation ("MOFTEC") published the Interpretation of Several Provisions of the Detailed Implementing Rules for the Law of the PRC on Wholly Foreign Owned Enterprises ("the Interpretation Rules") in December 1991.

The Foreign Enterprise Law lays down strict pre-conditions for the establishment of a wholly foreign owned enterprises. It must be an enterprise which uses advanced technology and equipment, develops new products, saves energy and raw materials, upgrades or replaces existing products and/or produces import-substituting products; or one which exports more than 50% of its products and can achieve a balance of foreign exchange revenue and expenditure or a surplus of foreign exchange revenue.

A wholly foreign owned enterprise is generally easier to establish than a joint venture because the foreign investor does not need to negotiate matters such as the scope of operation, number of workers and percentage of exports with a PRC partner. However the lack of a PRC partner may lead to wholly foreign owned enterprises encountering more practical and logistical problems than a joint venture which has the PRC partner's network of personal contacts at its disposal.

In addition the Detailed Rules set out a list of industries in which the establishment of wholly foreign owned enterprises is either restricted or prohibited. Restricted industries include public utilities, communication and transportation, real estate, trust and investment and leasing. Prohibited industries include the media, domestic and foreign commerce, insurance, and posts and telecommunications.

Joint stock and limited liability companies

According to the Company Law of the PRC (the "Company Law") which came into effect on 1 July 1994, there are two types of companies which are allowed to be established in the PRC at present: limited liability companies and joint stock companies. A limited liability company is defined as being a company in which each shareholder assumes liability towards the company to the extent of the amount of his capital contribution by him and the company is liable for its debts to the extent of all its assets; and a joint stock company is defined as a company whose capital is divided into equal shares and each shareholder assumes liability towards the company to the extent of the amount of shares held by him.

The minimum registered capital of a limited company varies between RMB100,000 for a company whose main business is the development of science and technology consultancy or the provision of services and RMB500,000 for a company whose main business is production or wholesaling. The minimum registered capital of a joint stock company must be RMB10,000,000 because the shares are to be issued to the public.

In order to establish a joint stock company, there must be more than five promoters and 50% of the promoters must have a residence within the territory of China. Furthermore the promoters must subscribe for at least 35% of the shares of the company and retain their shareholdings for at least 3 years.

A limited company may only be established by between 2 and 50 shareholders.

The Company Law specifically provides for the continued existence of the three types of foreign investment vehicle referred to above and they will no doubt continue to be the preferred medium for foreign investment in China except when the foreign investor places a great emphasis in the ready transferability of his investment.

Holding companies

It will be possible also to establish a holding company under the Interim Provisions on the Establishment of Investment Companies by Foreign Investors issued by MOFTEC in April 1995. Amongst other conditions, the holding company must have a minimum registered capital of US$30 million.

For further details, see the articles headed "Holding company law in the PRC".

Further information or advice may be obtained from Linklaters & Paines, Hong Kong office, 14th Floor, Alexandra House, Chater Road, Hong Kong; telephone: (852) 2842 4888; fax: (852) 2810 8133; contact David Mullarkey or Jeremy Parr.