On June 17, 2014, the Ministry of Commerce (the “MOFCOM”), the major regulator of foreign investment in China, issued the Notice on Improving Foreign Investment Review Administration (商务部关于改进外资审核管理工作的通知) (the “MOFCOM Notice”) to make it clear that registered capital contribution requirements for foreign invested enterprises (“FIEs”)[1] have been relaxed.
Early in 2013, the State Council launched a reform on companies’ business registration (See China Law Update Blog: China Business Registration Reform, dated on March 6, 2014). Under the Notice on Reform Plans of Registration Policies of Registered Capital, GuoFa [2014] No. 7 (国务院关于印发注册资本登记制度改革方案的通知) (the “Notice”) issued by the State Council on February 7, 2014, capital contribution requirements to a company are relaxed and the minimum registered capital requirement is removed. Furthermore, the Decision of the State Council on Repealing and Amending Some Administrative Regulations (2014) (国务院关于废止和修改部分行政法规的决定（2014）) (the “Decision”) effective on March 1, 2014 amended the three foreign investment implementation regulations[2]. Even so, after March 1, 2014, both the Notice and the Decision did not, at least from our then communications with the administration of industry and commerce in some major cities, impact the business registration process of foreign invested enterprise.
However, starting from June 17, 2014, MOFCOM and its local counterparts would improve their foreign investment review in the following six respects:
- Lifting the Initial Contribution Percentage, Cash Contribution Percentage and Timeline Requirements for FIEs.
The MOFCOM Notice states that investors of FIEs, including promoters and shareholders, may decide on their own the amount, manner and timeline of capital contribution. The only remaining requirement is to record the amount, manner and timeline of capital contribution in the contracts of equity / cooperative joint ventures and Articles of Association. Under the old system, shareholders had to make an initial capital contribution of at least 15% of the registered capital within three months of issuance of a company’s business license[3].
2. Lifting Minimum Registered Capital Requirement for FIEs
Under the MOFCOM Notice, minimum registered capital requirements are removed for FIEs except otherwise provided for by laws and regulations. For example, for a foreign invested company limited by shares, the minimum registered capital should be RMB 30 million[4].
3.Registered Capital Contribution Regime
MOFCOM would not review the paid-in status of registered capital of an FIE except for the twenty-seven types of companies listed in the Notice by the State Council (see below chart).
Industries Not Eligible for the System of Registering Subscribed Registered Capital for the Time Being
4. Retroactivity of the MOFCOM Notice
In respect of an application for establishing an FIE submitted before the date of March 1, 2014 (the date when the Decision by the State Council took effect), investors shall fulfill their obligation to make the capital contribution complying with the contract. However, investors can also apply for an amendment of the capital contribution terms in their contracts and follow the new provisions of the MOFCOM Notice.
5. The Proportion of Registered Capital to Total Amount of Investment Still Valid
Notwithstanding the above relaxation of registered capital requirements, the proportion of registered capital to total amount of investment shall continuously follow Provisional Regulations for the Proportion of Registered Capital to Total Amount of Investment of Joint Ventures Using Chinese and Foreign Investment (国家工商行政管理局关于中外合资经营企业注册资本与投资总额比例的暂行规定) (the “Provisional Regulations”). For instance, according to this Provisional Regulations, for an FIE with a total investment amount below USD 3 million, its registered capital shall be at least 7/10 of its total investment amount.
6.Compliance of Local Counterparts with the Decision by the State Council
Under the MOFCOM Notice, MOFCOM requires its local counterparts to follow the Decision by the State Council, which has abolished requirements for the amount, manner and timeline of capital contribution in an FIE[5].
Though with exceptions and limitations, the MOFCOM Notice frees FIEs from burdensome capital registration requirements and subject FIEs to the same review standards as Chinese enterprises in respect of business registration process, which is deemed to be one step forward to free and open market[6].
[1] In China, the three major FIE forms are sino-foreign equity joint venture, sino-foreign cooperative joint venture and wholly foreign owned enterprise. Foreign invested companies limited by shares were the fourth type of FIE to develop.
[2] In the Implementation Regulations of the Law of Sino-Foreign Equity Joint Ventures, Articles of Association shall include the manner and timeline of capital contribution; in the Implementation Regulations of the Law of Sino-Foreign Cooperative Joint Ventures, Articles of Association shall include the amount of capital contribution by each investor; in the Implementation Regulations of the Law of Wholly Foreign Owned Enterprises, Articles of Association shall include the amount and manner of capital contribution, and some restrictions on capital contribution are removed.
[3] Article four of Certain Regulations on the Subscription of Capital by the Parties to Sino-Foreign Joint Equity Enterprises (effective on January 1,1988) provided that if the joint venture contract stipulates that capital is to be paid up in instalments, the first payment by the respective joint venture parties shall be not less than 15% of the respective capital contribution of each party and shall be paid within three months of the day of issue the Business License. Such requirements have been abolished, see Footnote 5.
[4] Article 7 of Provisional Regulations on the Establishment of Foreign Invested Company Limited by Shares (effective on January 10, 1995) provides that registered capital of a company (foreign invested company limited by shares) shall be the total capital stock recorded with registering departments. The registered capital of a company shall be at least RMB 30 million.
[5] The Decision repeals both Certain Regulations on the Subscription of Capital by the Parties to Sino-Foreign Joint Equity Enterprises, effective on January 1,1988 and Supplementary Provisions Regarding Investment Contributions by Parties to a Sino-Foreign Equity Joint Venture, effective on September 2, 1997.
[6] Through our recent consultation with local MOFCOM and administration of industry and commerce in Beijing, Shanghai and Shenzhen, the MOFCOM Notice has been put into practice.