CHINESE UPDATE – Simpler Rules for Domestic Investment Procedures for Foreign-funded Investment Companies
[stextbox id=”custom”]Editors’ Note: This article is authored by Ms. Fang He and Ms. Qiushuang Zou of Jun He Law Offices. Ms. He, a partner at Jun He, has more than 10 years of experience practicing PRC law, specializing in FDI, M&A and IP. Ms. Zou, an associate at Jun He, has more than 4 years of experience practicing PRC law, specializing in FDI and M&A.[/stextbox]
Highlights:
In the past, when a foreign-funded investment company (“FIC”)[1] established in China[2] intends to invest its RMB income into another Chinese company, it would increase the registered capital by using such RMB income[3], and then use such newly converted registered capital to invest in other companies. In contrast, the new measures have simplified the procedures so that a FIC can make investment in other Chinese companies directly without having to convert the RMB income to its registered capital first.
MAIN ARTICLE
Pursuant to the Supplementary Regulations on Establishment of Foreign-funded Investment Company (Decree No. 3 [2006]) issued by the Ministry of Commerce of the PRC (the “MofCom”) and the Notice on Operational Guidelines for Issues Concerning Capital Verification Inquiry on FICs’ Reinvestment (Decree No. 7 [2011] of the SAFE) issued by the State Administration of Foreign Exchange (“SAFE”), where a FIC makes investment into Chinese companies with its lawful RMB income such as its operational profits and investment proceeds derived from capital decrease, liquidation, and transfer of equity interests, of its subsidiaries, it shall obtain an approval from the local counterpart of SAFE and MofCom to increase its registered capital by converting such RMB income into its registered capital (“Capital Increase Approval”). Subsequent to obtaining the Capital Increase Approval, the FIC is allowed to use the increased capital to make investments. In other words, a FIC must convert its lawful RMB income into its registered capital first and then use such increased capital to invest in other Chinese companies.
However, in accordance with the Notice on Further Improving the Administrative Measures for FICs (Decree No. 1078 [2011]) jointly issued by MofCom and SAFE on December 8, 2011, the above described procedures have been simplified. A FIC may directly use its legitimate RMB income to invest in other Chinese companies upon an approval from local SAFE. The FIC does not have to convert its RMB income into its registered capital to increase its registered capital first.
Capital increase of a FIC requires approvals from both local SAFE and MofCom, as well as registration with the company registration authority, which may take at least one month. The new measures certainly have saved operational cost and shortened the time for FICs to make investment in China by trimming the capital increase step.
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[1] A FIC means a foreign-invested company whose main business is to make direct investment in other Chinese companies. FIC may be able to provide value-added services to the companies it has invested, such as to purchase equipment, materials, parts and components and distribute products for, to balance the foreign exchange among, and to provide financing for, such invested companies. The foreign investor to a FIC must satisfy rather stringent requirements. For example, its total assets shall no less than USD 400 million and it has contributed more than USD 10 million to enterprises established in China; or it has set up more than 10 manufacturing or infrastructure companies in China with actually contributed capital being more than USD 30 million.
