Over the past few months, a number of new laws and regulations relating to foreign direct investment (FDI) in China became effective. Two notable developments are the reform of the corporate registered capital system for company registration in China and the relaxation on the approval requirements for FDI projects in China. These changes reflect the general trend of creating a more relaxed review and approval process for the establishment of enterprises, whether domestic or foreign invested, in China.
REFORM OF REGISTERED CAPITAL SYSTEM
The amended Company Law of the PRC came into effect on March 1, 2014. Most of the revisions relate to the reform of the registered capital system, which aims to facilitate and simplify the company registration process in China. The State Administration for Industry and Commerce also amended the Regulations on Administration of Corporate Registrations and other relevant regulations accordingly to effect the reform of corporate registered capital system. The new regime on registered capital system generally applies to all companies, including foreign-invested enterprises (FIEs), but with certain exceptions in 27 prescribed industries.
Under the new regime, unless otherwise required by law, the mandatory restrictions on minimum capitalization, the cash ratio in registered capital and the time limits for capital contribution are eliminated.
In practice, however, the removal of the minimum capitalization requirements has limited impact on FIEs, as the statutory ratio between registered capital and total investment remains binding on FIEs and their investors. In China, the total investment in an FIE is the total amount of funding, including registered capital (i.e., equity) and debt, required to enable the FIE to conduct its proposed business operations, and at least a specified portion of the total investment must be contributed in the form of registered capital depending on the size of the total investment. Given that any increase in the registered capital or total investment of an FIE is subject to government approval, the foreign investor still needs to budget for its investment project from the beginning and ensure that it has sufficient funds to maintain its business, otherwise the investor will have to go back to the regulators for further approval in the future if the FIE runs out of funds to carry out its operation.
The changes to the cash ratio in registered capital and the time limits for contribution are aimed at bringing foreign investors greater flexibility in structuring their investment projects in China, as investors may decide the form of capital and the timing of contribution into the FIEs. Needless to say, the removal of the cash ratio requirement brings more investment opportunities to those Canadian companies with more non-monetary assets (including equipment and intellectual property) and less cash on hand.
RELAXATION ON APPROVAL FOR FDI PROJECTS
The National Development and Reform Commission (NDRC) recently promulgated the Administrative Measures on the Approval and Filing of Foreign-Funded Projects (the New Measures), which became effective as of June 17, 2014, and replaced the Interim Measures on the Administration of Approval for Foreign- Funded Projects issued in 2004.
The New Measures generally apply to all types of FDI projects in China and regulate them in two different methods, namely, approval and filing.
According to the New Measures, the following FDI projects will be subject to the approval of the NDRC or local governments:
- Projects in the encouraged category under the Catalogue of Industries for Guiding Foreign Investment (the Catalogue) with a total investment (including capital increase) of at least US$300-million and with a requirement that a Chinese party is the controlling shareholder will be approved by the NDRC).
- Non-real-estate projects in the restricted category under the Catalogue with a total investment (including capital increase) of at least US$50-million will be approved by the NDRC.
- Real estate projects in the restricted category under the Catalogue will be approved by provincial governments.
- Non-real-estate projects in the restricted category under the Catalogue with a total investment (including capital increase) of less than US$50-million will be approved by provincial governments.
- Projects in the encouraged category under the Catalogue with a total investment of less than US$300-million and with a requirement that a Chinese party is the controlling shareholder will be approved by local (city or lower level) governments.
- Projects that are not covered by items one to five above but are engaged in the industries listed in items (1) through (11) of the Catalogue of Investment Projects Subject to the Approval of Government (2013 Version) will be approved pursuant to the requirements provided therein.
Other projects that do not fall into any of the above categories shall be subject only to filing with local governments. These include projects in the encouraged category without the Chinese controlling shareholder requirement and those in the permissive category (those not listed in the Catalogue as encouraged, restricted or prohibited). In this regard, the New Measures have significantly narrowed the scope of FDI projects that require NDRC or local government approval, thus streamlining the process of and the timeframe for implementation of FDI projects in China.
While China is still a long way from granting “national treatment” to foreign investors in the establishment of their enterprises in China, the above changes not only simplify the review and approval processes entailed, but also ensure that FIEs are, at least as far as capital requirements, treated more like their domestic counterparts.