January 11, 2016
A few months ago, the Ministry of Commerce of China (“MOFCOM”) released the Decision of Revising Certain Regulations and Regulated Documents (“Order No. 2”) with immediate effect. This will have a positive impact on foreign direct investments in China.
This commentary will consider the changes to foreign direct investment rules brought by Order No. 2 and its impacts on business arrangements for the foreign investors and foreign invested enterprises (“FIEs”).
Foreign investors are advised to keep a closer eye on changes to the foreign direct investment legal regime brought by Order No. 2 in order to find the most suitable and efficient way to proceed with their direct investments in China.
On 28 October 2015, the MOFCOM published Order No. 2 with immediate effect, which serves two major purposes: to further promote registered capital reform policy and simplify procedures and requirements for foreign direct investments in China. Order No. 2 removes several restrictions and requirements for foreign investments in certain industries, such as the requirements of minimum registered capital and statutory capital contribution time limit.
Order No. 2 is essentially an echo to the earlier registered capital reform in respect of the PRC Companies’ Act by Notice on Reform Plans of Registration Policies on Registered Capital (“Notice No. 7”), which was issued by the State Council of China on 7 February 2014. However, as a reform on a general basis, the Notice No. 7 has limited influence on specific MOFCOM rules related to FIEs.
In order to further promote registered capital reform in China, Order No. 2 makes reforms by focusing on the revision of specific MOFCOM rules related to FIEs. Nevertheless, the reforms are still taking place in three major aspects which are (a) removing minimum registered capital requirements in certain industries; (b) removing requirements about timeline and amount of registered capital to be injected and (c) replacing the annual inspection with an online annual report publication.
Below is an extract of some new changes in respect of foreign direct investments or FIEs brought by the promulgation of Order No. 2.
|Before Order No. 2
|After Order No. 2
|Foreign-funded Investment Company
||(1) Registered capital of a foreign-funded investment company shall be no less than US$30 million.
||(1) There is no minimum amount of registered capital for a foreign-funded investment company.
||(2) Within two years after the issuance of business licence to the foreign-funded investment company, investors shall make a capital contribution at least US$30 million and the balance amount of the registered capital shall be fully paid up within five years after the issuance of business licence.
||(2) There is no time limit for capital contribution. Investors are entitled to decide the timeline of capital contribution in their own discretion.
||(3) A foreign-funded investment company shall only be in the form of a limited liability company.
||(3) A foreign-funded investment company can be in the form of a limited liability company or a company limited by shares.
||(4) Capital verification reports of existing FIEs that have been invested by the foreign investors shall be submitted to MOFCOM as one of the must-have application documents for the establishment of a new foreign investment company.
||(4) Such capital verification report is no longer required. In other words, the MOFCOM now will not examine the capital contribution status of the existing FIEs.
||(5) If a foreign-funded investment company applies to broaden its business scope to include other permitted business in addition to the business of investment, capital verification reports of the existing FIEs that have been invested by the foreign investment company shall be submitted to MOFCOM as one of the application documents.
||(5) Such capital verification report is no longer required. In other words, the MOFCOM will no longer examine the capital contribution status of the existing FIEs.
|Foreign Invested Merchandising Enterprise
||A foreign invested merchandising enterprise may open additional stores upon satisfaction of the requirements including (a) having participated and passed the annual inspection, (b) having fully paid up the registered capital, and (c) complying with the regulations in respect of city development.
||The requirements (a) and (b) are no longer applicable.
|Merger and Division of FIEs
||A FIE shall not proceed with a merger or division before its investor(s) has fully paid up its subscribed capital or provided cooperation conditions and the actual production and operation of such FIE has begun.
||A FIE is able to conduct a merger or division before its investor(s) has fully paid up its subscribed capital or provided cooperation conditions and the actual production and operation of such FIE has begun.
|Capital Contribution by way of equity
||(1) If the registered capital of a company has not been fully paid up, the equity of such company shall not be contributed as capital of a FIE.
||(1) Such requirement is no longer applicable.
||(2) If an FIE has not participated or passed the annual inspection of the previous year, equity of such FIE shall not be contributed as capital of a FIE.
||(2) Such requirement is no longer applicable.
||(3) The aggregate amount of capital contribution by way of equity and other non-monetary assets shall not exceed 70% of the registered capital of a FIE.
||(3) Such requirement is no longer applicable.
With the promulgation of Order No. 2 this year, the restrictions on foreign direct investments have been further loosened by MOFCOM. As a major adjustment in MOFCOM rules in respect of foreign direct investments, it shall be noted that there is a profound impact on the foreign direct investments in China by foreign investors or FIEs as a result of the effect of Order No. 2.
Without any doubt, the promulgation of Order No. 2 is good news for foreign investors and FIEs. It is advisable to consider the differences between the old rules before the promulgation of Order No. 2 and the new rules afterwards during the early stage of designing foreign direct investment structure as well as the operation stage of established FIEs.
Foreign investors and FIEs shall keep in mind that several severe restrictions in the old legal regime in relation to foreign direct investment have been removed and therefore there is no need for them to make special business arrangements to satisfy such restrictions anymore. For instance, foreign investors are able to arrange the amount and timeline of capital contribution for establishment a new foreign-funded investment company in China on a more free level.
However, Order No. 2 still leaves some uncertainties as to the foreign direct investment legal regime as the MOFCOM may still implement the previous rules/requirements in practice. In this regard, whether foreign investors or FIEs can actually benefit from Order No. 2 depends on the implementing details.