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Under
PRC law, all companies including foreign investment enterprises (FIEs), must
have a minimum registered capital (registered share capital). For FIEs, in
addition to the requirement for minimum registered capital the requirement for
total investment is a unique legal requirement that has implications involving
many aspects of such companies business.
1. Interpretation of Registered
(Share) Capital and Total Investment
According
to the legal definitions, registered capital (share capital) refers to the
total capital contribution of the shareholders that is registered with the
relevant government agency. Total investment refers to the amount (including
registered capital and funds borrowed by the company) that is required for the
planned project as stipulated in the joint venture contract and the articles of
association of the company.
2. Comparison Registered (Share)
Capital and Total Investment
Registered
capital (share capital) contribution is subject to more stringent regulation
and supervision than total investment. Registered capital must be duly
contributed and paid within the time limit stipulated in the company’s articles
of association and/or joint venture contract and and is subject to the relevant
regulations of the Ministry of Foreign Trade and Economic Cooperation (MOFTEC)
that provide mandatory time limits for the contribution of different levels of
registered capital.
In
practice, part of the registered capital could be contributed after
establishment. However, schedule for this shall be expressly prescribed in the
articles of association and/or the joint venture contract. Relevant government
authorities will make joint annual supervisions of every FIE. One aspect of
such supervision is to verify whether the registered capital has been
contributed subject to the prescribed schedule. Total investment, on the other
hand, is not subject to any such contribution time limits or supervision, and
the absence of the contribution of the balance amount between total investment
and registered capital will not affect the validity of a FIE.
The same
follows for the amount of registered capital and total investment. PRC law has
no mandatory requirements for the amount of total investment that shareholders
may stipulate by agreement. There is, however, a regulation (Interim Provisions
of the State Administration for Industry and Commerce Concerning the Proportion
of Registered Capital and Total Amount of Investment of Chinese-foreign Equity
Joint Ventures, promulgated in 1987) that stipulates the required proportion of
registered capital to total investment. The regulation sets out the different
proportions of registered capital contribution to total investment for each
amount of total investment: the lower the amount of total investment, the
higher the proportion of mandatory minimum registered capital contribution of
the total investment.
In
normal cases, it is prohibited to reduce registered capital and total
investment. Especially, this applies in the following cases: (i) where the
amount of registered capital after adjustment is less than the legal minimum
for registered capital; (ii) while the FIE is involved in judicial or
arbitration procedures; (iii) where the amount of total investment after
adjustment is less than the minimum amount regarding production or operation
set out in the joint venture contract or articles of association; or (iv) where
the joint venture contract or articles of association provide that the foreign
party may recover their investment and that the foreign party has already done
so.
3. Implications of Total
Investment
Total
investment amount is the determining factor (as opposed to registered capital
amount) for deciding which government agency has the authority to grant FIE
approval. For setting up a foreign-invested manufacturing enterprise in which
total investment is more than US$30 million, the applicant shall obtain
approval from MOFTEC, while those with total investment less than this amount
can be approved by the government authority at the provincial level.
Notwithstanding the above, when such a FIE belongs to an "encouraged"
industry and is self sustainable, in respect of foreign exchange, approval can
be granted by the government authority at the provincial level if its total
investment is more than US$30 million.
Registered
capital and total investment amounts may have an effect also on FIE term loans.
The State Administration of Foreign Exchange (SAFE) has stipulated that the
cumulative amount of foreign debt under term loans (loans with a term of more
than one year) incurred by a FIE shall not exceed the balance between its total
investment and registered capital. In the case where a FIE has set the
registered capital equal to the total investment, according to this regulation
the FIE would not be allowed to borrow from foreign banks because the difference
between registered capital and total investment would be zero. In practice
however, in such a situation, the FIE might be allowed to base their foreign
debt on a projected total investment amount. In other words, based on their
registered capital and according to the minimum registered capital to total
investment proportion set out in the Tentative Provisions, the new projected
total investment amount could be used to calculate the difference between the
registered capital and total investment and thus the allowed foreign debt
amount.
The
total investment amount may also have tax exemption implications. According to
relevant laws and regulations: (i) FIEs belonging to encouraged or restricted
category B1 under the Foreign Investment Industrial Guidance Catalogue may have
import duty exemption for equipment imported under its total investment for
self-use, if the equipment is not listed in the Catalogue of Imported Goods
Without Tax Exemption for Foreign-invested Projects; (ii) where FIEs purchase
domestic equipment using funds in its total investment, and such kind of
equipment belongs to the Customs department?|s tax exemption category, the full
value-added tax on the purchased equipment should be reimbursed to the FIE, and
furthermore, the FIE may set off their business income tax with the purchase
price; and (iii) for foreign-invested research and development institutions,
the equipment imported for self-use and within its total investment can enjoy
exemption from import duties.
4. Minimum Amounts of Registered
(Share) Capital Required
As
stipulated in China’s Corporate Law, minimum registered capital for limited
liability corporations is based on the nature of the industry. For
manufacturing industries it cannot be less than RMB 500 thousand. The minimum
registered capital for various industries according to current laws is given
below.
(1)
Foreign funded banks, joint venture banks: minimum registered capital of RMB
300 million in a freely convertible currency;
(2)
Foreign funded financial institutions, joint venture financial institutions:
RMB 200 million in a freely convertible currency;
(3)
Joint venture tour operators: not less than RMB5 million;
(4)
Joint venture advertising agencies: not less than USD300 thousand;
(5)
International joint venture freight forwarding enterprises: not less than USD1
million;
(6)
Foreign funded investment oriented enterprises: not less than USD30 million;
(7)
Foreign Limited Liability Joint Stock Companies: not less than RMB30 million.
5. Regulations Concerning the
Ratio of Registered Capital to Total Investment
In the
Interim Measures Concerning the Ratio of Registered Capital to Total Investment
Amount of Sino-Foreign Equity Joint Venture Enterprises, the State
Administration for Industry and Commerce (SAIC) provides the following policies
regulating the ratio of registered capital to total investment for foreign
funded companies (including a Wholly Foreign Owned Enterprise):
(1) If
total investment is equal to or less than USD3 million, registered capital must
be at least 7/10 of the total investment;
(2) If
total investment is above USD3 million but less than or equal to USD 10
million, registered capital must be at least 1/2 of the total investment. If
total investment is less than USD4.2 million, registered capital must be at
least USD 2.1 million;
(3) If
total investment is above USD 10 million but less than or equal to USD 30
million, registered capital must be at least 2/5 of the total investment. If
total investment is less than USD12.5 million, registered capital must be at
least USD 5 million;
(4) If
total investment is above USD30 million, registered capital must be at least
1/3 of the total investment. If total investment is less than USD 36 million,
registered capital must be at least USD12 million;
(5)
Foreign funded companies that for whatever reason cannot meet the guidelines
listed above should report to the Ministry of Commerce, and any corresponding
modifications must be jointly approved by the Ministry of Commerce and the
State Administration of Industry and Commerce.
6. Time Limit for the
Contribution and Payment of Registered (Share) Capital
The
table below details the amounts of registered capital and the time limit for
contribution and payment:
Amount
of Registered (Share) Capital Time Limit
USD0.5
million and less one year
USD0.5
to 1 million one and half a year
USD1 to
3 million 2 years
USD3 to
10 million 3 years
USD10
million and above To be decided by the approving authority
Note: In
accordance with China Compamy Law, at least 20% of the registered capital
should be paid within 3 months from the date of registration.
Immediately
after the remittance of registered capital, the WFOE should arrange a local
accounting firm (public accounting registered for practicing in China) to
verifiy whether the registered capital has been contributed and paid in
accordance with the regulations of the China Company Laws and/or the WFOE’s
Articles of Association (a process known asCapital Verification). The WFOE
could use the registered capital for daily operation after the issuing of
Capital Verification Report.
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