On April 24, 2006, the State Administration for Industry and Commerce (“SAIC”), the Ministry of Commerce (“MOFCOM”), the General Customs Administration (“Customs”) and the State Administration of Foreign Exchange (“SAFE”) jointly issued the Implementing Opinions on Certain Issues Concerning the Application of Laws Governing the Approval and Registration of Foreign Invested Companies (“Implementing Opinion”).  Subsequently, in order to clarify certain provisions under the Implementing Opinions, SAIC issued a circular (“SAIC Circular”) on May 26, 2006.  Both the Implementing Opinion and the SAIC Circular were issued to deal with the confusions caused by the overlaps or conflicts between China’s foreign investment regime and the newly revised Company Law of the People’s Republic of China (“Company Law”) and the Regulations of the People’s Republic of China on the Administration of Company Registration (“Company Registration Regulations”), both of which became effective on January 1, 2006, and guide the approval and registration of foreign investment enterprises (“FIE”) in China.

 

Below are some major provisions under the Implementing Opinions and the SAIC Circular:

 

Application of Foreign Investment Laws

 

According to the 1^st provision of the Implementing Opinions, the registration of FIEs is generally governed by the Company Law and the Company Registration Regulations.  However, if the laws governing FIEs, which include the Law of the People’s Republic of China on Sino-foreign Equity Joint Ventures (“EJV Law”), the Law of the People’s Republic of China on Sino-foreign Cooperative Joint Ventures (“CJV Law”) and the Law of the People’s Republic of China on Wholly Foreign-owned Enterprises (“WFOE Law”), conflict with the Company Law and the Company Registration Regulations in certain provisions, the laws governing FIEs prevail.  If all the above laws and regulations (i.e., the Company Law, the Company Registration Regulations, the EJV Law, the CJV Law and the WFOE Law) fail to cover certain provisions, the relevant provisions in the administrative regulations, decisions of the State Council and other rules and regulations (as opposed to laws) relating to FIEs shall apply. 

 

This provision attempts to answer the following question: if certain provisions in the FIE laws conflict with those in the Company Law and the Company Registration Regulations, or if neither the FIE laws nor the Company Law and the Company Registration Regulations cover certain provisions, which provisions shall be followed?  Although it really helps solve the problems, companies may still need to make enquiries with MOFCOM or SAIC (or their local branches) for they may hold a different view as to whether a certain conflict exists, or provisions in which administrative regulations, decisions of the State Council or rules and regulations shall apply if more than one of them are concerned in some particular situations.

 

 

Organizational Structure

 

The Implementing Opinions provide more unequivocal rules as to the organizational structures of FIEs of various categories: a EJV or CJV shall establish board of directors as its highest authority according to the EJV Law and the CJV Law, and may set up other internal organizations according to its articles of association, whereas a WFOE or a foreign investment joint stock company (“FJSC”) shall stick to the Company Law to establish the shareholders’ meeting or shareholders’ general meeting as its highest authority.  According to the SAIC Circular, a FIE established before January 1, 2006 may decide at its sole discretion whether to change its articles of association or not.  If it decides to change the articles, the changes require the approval of the original approval authority (i.e., MOFCOM or its local branch) and shall be filed with the registration authority (i.e., SAIC or its local branch).

 

Requirement for Proof of Qualification and Identification

 

When applying to set up a new FIE, the foreign investor is required to provide a “proof of qualification or identification”, which shall be (1) notarized by a notary public in the home country of the foreign investor and (2) “legalized” by the embassy (or consulate) of China in that country.  An investor from Hong Kong, Macao or Taiwan shall provide “proof of qualification or identification” notarized by the local notary public.

 

Investment within China by FIEs

 

According to the Implementing Opinions, upon its establishment, a FIE may make investment in China straight away, and the “qualification certificate” is no longer required for such investment.  The SAIC Circular further clarifies that Article 5 and Article 6 of the Provisional Regulations of the People’s Republic of China on Investment within China by FIEs (“Provisional Regulations”), which were issued jointly by the Ministry of Foreign Trade and Economic Cooperation (the predecessor of MOFCOM) and SAIC on July 25, 2000, are abolished.

This change has been hailed by foreign investors for it has lifted the restrictions imposed on FIEs when investing in China.  With the abolishment of Article 5 of the Provisional Regulations, which provides that a FIE cannot invest in China until its registered capital has been fully paid and it has begun to make profits, a FIE now can make investment in China whenever its sees fit.  Moreover, the aggregated amount of a FIE’s investment within China is no longer subject to a ceiling of 50% of its own net assets.

 

Liaison Offices

The Implementing Opinions confirm statements recently made by SAIC that FIEs may no longer register new liaison offices.  FIEs with existing liaison offices may not amend or renew the registration of their liaison offices, and when the term of operation of an existing liaison office expires, the FIE must apply to deregister this liaison office, or, if the FIE wishes to continue to have a presence in the location of the former liaison office, it may choose to establish a branch company.  The SAIC Circular further clarifies that Chinese law does not forbid the existence of liaison offices; rather, FIEs may directly set up liaison offices without registering them with the registration authorities.  However, SAIC and its local branches will continue to supervise the activities of liaison offices to make sure that they are only engaged in liaison activities, and do not carry out any operational activities.

 

Registered Capital

 

1. Currency

The Implementing Opinions provides that a FIE may denominate its registered capital in either RMB or a freely convertible foreign currency.  If the registered capital is contributed in a currency other than the denominating currency, it shall be converted into the denominating currency based on the middle rate announced by the People’s Bank of China on the date on which the capital contribution is made.

 

2. Time Limit for Capital Contribution

The registered capital of a limited liability FIE may be made in either one lump sum or in several installments.  If the registered capital is made in one lump sum, the investor(s) of the FIE must make their capital contributions to the FIE within six months after the establishment of the FIE; if made in several installments, the first installment must neither be less than 15% of the FIE’s total amount of registered capital nor less than the statutory minimum (i.e., RMB 100,000 for a Single Person WFOE and RMB 30,000 for other types of FIEs), and must be paid within 3 months.

 

3. In-kind Contributions

The registered capital may not be paid in the form of labor, debt, the name of a natural person, goodwill, franchise rights, or collateral assets, among other things.  The value of acceptable forms of in-kind contributions to a FIE’s registered capital must be appraised by an asset appraisal institution registered in China, and, when the in-kind contributions are actually made, they shall be verified by a capital verification institution registered in China.  In accordance with the Company Law, the value of cash contributions must not be less than 30% of the total amount of the registered capital of the FIE.

 

(If you have any questions regarding issues raised in this article, please contact Feng (Sandy) Lin at (86) (10) 8532 1919 or slin@lehmanlaw.com.)