Capital contribution requirements for foreign investment enterprises (“FIEs”) have been further simplified by China’s Ministry of Commerce (“MOFCOM”). For the moment, however, it remains unclear whether China’s State Administration for Industry and Commerce (“SAIC”) and its local branches will consistently follow MOFCOM’s lead.
In March 2014, MOFCOM issued new rules which substantially relaxed capital contribution and verification requirements for FIEs in an effort to follow the recent amendments to the PRC Company Law. However, some of the requirements that were removed from the PRC Company Law appeared to continue to apply to FIEs. For example, while the requirement for capital verification for a wholly foreign-owned enterprise was specifically removed, the requirement for a Sino-foreign equity joint venture was not. As a result, some uncertainty remained regarding the extent to which the amendments to the PRC Company Law applied to FIEs.
MOFCOM has now made clear that the PRC Company Law amendments apply to all FIEs. The clarifications were made in the Notice on Improving Foreign Investment Review Administration issued and effective on 17 June 2014. Of particular note are the clarifications regarding the simplification of the capital contribution system, investment certificates and capital verification.
1. Simplified capital contribution system
The Notice confirms that the following restrictions on FIEs have been lifted:
- initial payment of capital contribution
- ratio of cash contribution
- timing for capital contribution
- minimum registered capital requirements (unless otherwise provided by law)
These are to be determined by the investors and specified in the joint venture contract or articles of association.
2. Investment certificates
After receiving paid-in capital from its shareholders, an FIE is required to issue investment certificates to its investors. The investment certificates should specify various details, including the name and establishment date of the company, the name of the investor, method of capital contribution and date of actual capital contribution. Within 30 days of issuance of each investment certificate, the FIE should file a stamped copy of the certificate with local commerce bureau.
Issuance of investment certificates to investors has been required by the PRC Company Law since 2005, though many companies have not strictly complied. It now appears that compliance will be enforced given that the registration of capital contribution has been relaxed.
3. Evidence of capital contribution
Capital verification is no longer required for each capital contribution by the investors. Instead, FIEs are now required to provide evidence for the capital contribution to local commerce bureau, along with the stamped copies of investment certificates. Evidence for capital contributions include:
- bank slips and statements of account showing the contribution of foreign currency or cross-border RMB transfers
- for contributions funded by RMB from within China, documents showing the source of the RMB funds from investments in China (such as approval certificates, financial statements, and board resolutions declaring dividends from its China investments)
- for in-kind contributions, title certificates, the pricing mechanism, or evidence of delivery and receipt
- for the contribution of intangible assets, patent certificates, the patent register, trademark registration certificates, asset transfer agreements, valuation reports, or written confirmations by the investors on the value of the contributed intangibles
4. Transitional measures
For foreign investments approved before 1 March 2014, foreign investors should continue to contribute capital in accordance with the existing joint venture contract and articles of association. In order to enjoy the benefits brought about by the new developments, an application to the local commerce bureau to amend the existing joint venture contract or articles of association is required.
While MOFCOM’s clarifications have simplified capital contributions for foreign investors, it remains unclear whether the SAIC will adopt similar rules. Variation between different local branches of the SAIC can be expected.