Capital Contributions by Equity: Available to Foreign Invested Enterprises in China Soon

On May 4th 2011, the Ministry of Commerce (“MOFCOM”) issued a Draft of the Management Measures regarding Capital Contribution by Equity to Foreign Invested Enterprises (“FIEs”) for public comments ("Draft Measures"). The deadline for the submission of comments was May 20th, 2011.

According to the current laws and regulations, the form of capital contribution to the FIE shall only include cash and non-monetary assets which are transferable and can be economically assessed, such as tangible assets, intellectual property, land use right, etc.

On January 14, 2009, the State Administration of Industry and Commence issued Measures on the Registration of Capital Contributions by Equity, which stipulated that capital contributions by equity to Chinese domestic enterprises were allowed. However, capital contributions by equity to the FIEs were excluded in this regulation at that time.

The promulgation of the Draft Measures creates a new method of investment for local and foreign investors, which means that investors are allowed to use equity as the capital contribution to a FIE.

The main points of the Draft Measures are as follows:

1.- The Definition of Contribution by Equity

Capital contribution by equity refers to the act of using investors’ equity in domestic enterprises as the capital contribution in order to establish the FIE.

The FIE establishment includes the following scenarios:

1. Incorporating a FIE by establishing a new legal entity;
2. Changing a domestic enterprise to a FIE by increasing capital of the domestic enterprise;
3. Change the equity structure of a FIE by increasing the capital of the FIE.

2.- Requirements regarding the Equity

Under the following circumstances equity can not be used as the capital contribution to a FIE:

1. The investor’s equity to be contributed to a FIE in the Chinese domestic enterprise has not been fully paid;
2. The investor’s equity has been pledged or is legally frozen;
3. The investor’s equity is nontransferable according to the Article of Association of the Chinese domestic enterprise;
4. The equity of a FIE which didn’t apply for or pass the annual inspection;
5. The equity of Foreign Invested Investment Enterprises or Foreign Invested Equity Investment Enterprises;
6. The equity transfer has not been approved by the authorities;
7. Others.

3.- Equity Value Assessment

The equity to be contributed to a FIE must be assessed by a domestic evaluation agency established in accordance with the PRC law. Based on the value assessment of the equity reported by the domestic evaluation agency, the investors shall fix the final value of the equity and the equity amount to be contributed to a FIE.

The final value of the equity shall not be higher than the assessed amount of the equity.

4.- Proportion of Forms of Contribution

The aggregate value of the contribution by equity and other non-monetary capital contributions made by all shareholders of the FIE shall not exceed 70% of the registered capital of the FIE.

5.- Procedural Regulations

The Draft Measures also stipulate the procedural regulations including the documents to be provided for the registration change with the authorities, the authorities who are in charge of the approval of equity contribution, etc.

Conclusion

Even though the Draft Measures are only a draft for public comments and observations, they show that the Chinese government intends to further promote the development of investment by creating a new mean of capital contribution to the FIE in China. The Draft Measures also stipulate the corresponding requirements and procedures which will certainly facilitate the authorities’ examination and approval. Investors should keep a close eye on the final “Measures” which will probably be issued by the authorities in the following months.

by UBILLA & CIA