One month following the promulgation of the Opinion of the State Council Concerning Further Improving the Work of Utilizing Foreign Investment (the “State Council Opinions”) by the PRC State Council on April 6, 2010, the PRC State Administration for Industry & Commerce (AIC) issued its Several Opinions on Performing Administration Functions of AIC and Providing Assistance in the Development of Foreign Invested Enterprises (the “AIC Opinions”). The AIC Opinions echos the State Council’s policies of encouraging foreign investments by giving more flexibilities to foreign invested enterprises (FIEs) in their registration and approval procedures.
In particular, the AIC Opinions consists of 26 provisions contained in five sections directed toward:
- further encouraging additional investment by FIEs,
- optimizing the use of the foreign investment framework,
- improving the quality of services to FIEs,
- improving the market environment, and
- institutional mechanisms for enhancing the optimization of services to FIEs.
Among the provisions, the following may have greater impact on foreign investors’ future strategic planning:
- Supporting the Consolidation of Affiliated FIEs
The AIC Opinions provides that the AIC will support “group management” of FIEs and specifically encourages foreign investment holding companies to apply for the formation of a “corporate group.” Under current laws, a corporate group may be formed if:
- the holding company’s registered capital is more than RMB 50 million and it has five wholly owned subsidiaries or more;
- the aggregate registered capital of the holding company and its subsidiaries is more than RMB 100 million; and
- all of the affiliates are legal entities.
A holding company satisfying the above criteria may include “Group” or “(Group)” in its name. In addition, subsidiaries may include the group’s name or a shortened version thereof in their own names. This measure potentially benefits FIEs by better allowing foreign enterprises to create a more unified corporate identity thereby enhancing name recognition.
- Capital Increases Via Debt Instruments
The AIC Opinions voices support for foreign investors using debt instruments as a means of effectuating an FIE’s capital increase. While implementing measures are subject to finalization by the AIC, as an authority undertaking registration duties only, the AIC must first be presented with approvals from the PRC State Administration of Foreign Exchange and the PRC Ministry of Commerce before registering capital increases in the form of debt. The only current legislation in relation to an FIE’s ability to use debt instruments to fulfill registered capital contribution obligations is a pilot measure jointly issued by Shanghai AIC and Shanghai Municipal Commission of Commerce at the end of 2009. It is expected that further regulations to implement this provision of the AIC Opinions will be released soon.
- Need-based Extensions to Capital Contribution Timelines
In what is perhaps a recognition of the financial burdens currently faced by certain FIEs or their investors, the AIC Opinions provides that foreign investors who have contributed their initial capital contributions, have not violated laws, and are facing temporary capital shortages may apply for extensions to their capital contribution timelines.
- Supporting FIEs’ Relocation into Western and Interior Regions
In the AIC Opinions, the AIC promises to support FIEs’ relocation to the western and interior regions of China, which is in line with China’s western development drive. The AIC will adopt a “primary desk clerk responsibility system,” which literally means that the AIC officer who initially handled the relocation application should oversee and be primarily responsible for the FIE’s relocation application from initiation to completion. This can be seen as an AIC effort to hold administrative personnel more accountable and should result in more timely and efficient relocation application processes.
- Support for Functional Centers and Certain Industries
In echoing the State Council Opinions, the AIC Opinions reiterates the policy of supporting foreign investors in establishing regional headquarters, research and development centers, procurement hubs, financial management and accounting centers, and other functional centers in China. As originally indicated in the State Council Opinions and as an incentive for setting up research and development centers, items used for technological development may be imported by foreign investors free of import duties, VAT and consumption taxes if imported prior to December 31, 2010. In addition, the AIC Opinions singles out certain industries where administrative support to FIEs is to be enhanced, such as the advertising and automotive sales industries.
- Permitting FIEs to Include ‘China’ in Their Company Names
Under the previous regulatory regime, only FIEs with a registered capital greater than RMB 50 million (or equivalent in foreign currency) may use “(China)” in their corporate names. According to the AIC Opinions, however, FIEs engaging in the modern services and technology industries may use “(China)” in their corporate names if their minimum registered capital is greater than RMB 30 million. By making this provision applicable to advanced services and technology industries only, the AIC has indirectly voiced its support for those industries. Note, however, that this preferential policy applies only to wholly foreign-owned enterprises or joint ventures controlled by foreign investors who adopt the foreign investor’s trade name.