On May 4, 2011, the Ministry of Commerce (MOFCOM) issued a draft of the Administrative Measures Concerning Equity Contribution of Foreign-invested Enterprises for public comments (the “Draft”). The Draft, formulated in response to the Several Opinions of the State Council on Further Enhancing Utilization of Foreign Capital promulgated by the State Council issued in April of 2010, elaborates upon the approvals and registrations that are required for both Chinese and foreign investors to make equity contributions in foreign-invested enterprises.
Under PRC law, investors are allowed to use non-monetary assets to make capital contributions to a foreigninvested enterprise. PRC Company Law explicitly allows tangible assets, intellectual property and land-use rights as means of non-monetary capital contribution. In 2009, the State Administration of Industry and Commerce, through the Administrative Measures for the Registration of Capital Contribution Made with Equities, made equity interest an available means for investment in PRC domestic companies. The Draft, if adopted, will grant equal opportunities to foreign investors.
Equity contribution, as contemplated by the Draft, is the act of using equity interest in a company incorporated in China (“Equity Investor”) as a means of making a capital contribution for the establishing a foreign-invested enterprise (FIE). Pursuant to the Draft, equity contributions may take two forms: first, establishment of a new foreign-invested company, and second, through the subscription of increased capital. The latter form yields two results. One is the transformation of a domestic company into an FIE, the other is the alteration of ownership structure of a foreign-invested company. The Draft requires that both the Equity Investor and the target company or the latter’s affiliates must comply with the two “market-access” documents: the State Councilpromulgated Provisions on Guiding the Orientation of Foreign Investment and the MOFCOM-issued Catalogue of Industries for Guiding Foreign Investment.
As for the necessary approvals, the Draft authorizes the MOFCOM and its local counterparts to be the approving body of the equity contribution. The authorizing body may be either at the provincial or central level, dependent upon the location of the target company and the total amount of the investment for newly established companies or the total transaction value in cases of subscriptions of increased capital. After acquiring the approval, the target company must go through relevant establishment or modification registrations, and the Equity Investor has to change its registration to replace its original equity holder with the target company.
- Administrative Measures Concerning Equity Contribution of Foreign-invested Enterprises (Draft for Comments before May 20, 2011)
- Issuing Authority: the Ministry of Commerce
- Date of Issuance: May 4, 2011 / Comments due on: May 20, 2011