Member Article

The State Administration for Industry and Commerce, the Ministry of Commerce, the General Administration of Customs and the State Administration of Foreign Exchange jointly issued the Implementing Opinion on Several Issues in the Laws Applicable to the Examination and Approval, Registration and Administration of Foreign Investment Enterprises on 24 April 2006. The Opinion clarifies, amongst other items, how the recently revised Company Law of the People’s Republic of China relates to the laws and regulations specifically applicable to foreign investment enterprises (“FIEs”). Expanded forms of FIE By applying the provisions of the Company Law to foreign investors, the Opinion permits new forms of foreign investment enterprise (“FIE”) to be created. In addition to the already available Chinese-foreign equity and cooperative joint venture enterprises (“Chinese-foreign JVs), wholly foreign-owned enterprises (“WFOEs) and foreign-invested companies limited by shares (“Foreign-Invested Share Companies”), the Opinion also provides for equity joint venture enterprises between foreign parties (“Foreign-Invested JVs”) and single-person limited liability companies established by foreign natural persons (“Natural Person WFOEs”). Minimum registered capital The Opinion provides that a single-person limited liability company established in the form of a WFOE shall comply with the minimum registered capital requirements for a one-person limited liability company under the Company Law, i.e. its registered capital shall not be less than RMB 100,000. Governance The Opinion clarifies that the highest organ of authority of Chinese-foreign JVs and Share Company FIEs shall be the board of directors and that their organisational structure shall follow the provisions of the relevant laws applicable to Chinese-foreign JVs, the Company Law and their articles of association. WFOEs, Foreign-Invested JVs and Foreign-Invested Share Companies shall have an organisational structure which complies with the Company Law and their articles of association. Establishment procedure The Opinion introduces a new requirement with respect to the documentation required to establish an FIE. The application shall now also include a Legal Document Service Power of Attorney entered into between the applicant and an authorised person inside China. This Power of Attorney shall clearly specify the person authorised to receive service of documents inside China. This authorised person may be a branch organisation established by the foreign investor, the proposed company or another unit or person inside China. An existing FIE that adds a foreign investor is required to submit a Power of Attorney to its examination and approval authority. The Opinion abolishes the requirement to submit the joint venture contract, articles of association and the proof of creditworthiness to the company registration authority when registering a new FIE or an equity assignment in an existing FIE. Capital contributions The capital contribution to an FIE with the status of a limited liability company shall be paid within six months of the establishment date if the capital contribution is paid in one instalment. If the capital contribution is paid in multiple instalments, the first instalment shall be at least 15% of the total capital contribution or the statutory minimum registered capital and shall be paid within three months of establishment. The balance may be paid in accordance with the provisions of the Regulations of the People's Republic of China for the Administration of the Registration of Companies (“Company Registration Regulations”) and the laws on FIEs. The Company Registration Regulations require that shareholders of FIEs pay up the balance of their capital contributions within two years of establishment. If an existing foreign-invested company increases its capital, it shall pay up 20% of the increase on the date on which it applies for the registration of the capital increase. The balance is to be paid in accordance with the provisions of the relevant laws and regulations. The Opinion provides that as long as no specific regulations have been promulgated by the competent authorities, permitted in-kind capital contributions shall be valued by a valuation organisation inside China and verified upon their contribution by a capital verification organisation inside China. An exception to this rule is that the shareholders in a Chinese-foreign equity joint venture may agree between themselves on the value of non-monetary contributions such as capital goods, industrial property rights, etc. Relocation The Opinion clarifies the procedure to be followed when an FIE relocates its legal address. The FIE shall submit an application for the relocation to its original examination and approval authority. If the new location is outside the jurisdiction of the original examination and approval authority, the FIE shall also submit an application to the examination and approval authority in its new location. Once approval has been obtained, the FIE shall submit applications to its original registration authority and the registration authority in its new location. Miscellaneous The Opinion specifies that an existing FIE engaging in investment activities inside China no longer needs to obtain a qualification certificate from the company registration authority.