Speech: Foreign Investment Regulations in China

Foreign Investment Regulations in China
杨春宝 律师
Chambers Yang
Contents
• Basic laws and regulations
• The Foreign Investment Guidance
• Forms of foreign investment
• Establishment of foreign investment enterprises
• Mergers & Acquisitions

Basic laws and regulations
• Basic law: Corp. Law, Contract Law, etc.
• Guidance of foreign investment
• The law on Sino-foreign equity joint venture and its detailed rules and regulations
• The law on Sino-foreign cooperative enterprises and its detailed rules and regulations
• The law on enterprises operated wholly with foreign capitals and its detailed rules
• Income tax law for enterprises with foreign investment and foreign enterprises and its detailed rules and regulations
• Other related laws and regulations

Top ten nations/regions with investment in China (2005)
• Hong Kong (US$17.949b)
• Virgin Island (US$9.022b)
• Japan (US$6.53b)
• South Korea(US$5.168b)
• USA (US$3.061b)
• Singapore (US$2.204b)
• Taiwan Province (US$2.152b)
• Cayman Islands (US$1.948b)
• Germany (US$1.53b)
• West Samoa(US$1.352b)

The Foreign Investment Guidance Catalogue (2004)

• Encouraged
• Restricted
• Prohibited
• If not included, permitted

The Guidance Catalogue - Encouraged
• new agriculture technologies, agriculture comprehensive development, or energy, transportation and important raw material industries
• high and new technologies or advanced application technologies
• meeting the market needs and being able to improve the product level, develop new markets or increase the international competitive capacity of the products
• new technologies and new equipments that can save energy and raw material, comprehensively utilize resources and regenerate resources, and prevent environment pollutions
• capable of bring into the advantages of human power and resources of the mid-west region into full play and being in conformity to the industrial policies of the State
• other situations as provided for by laws and regulations.

The Guidance Catalogue - Restricted
• technology lagged behind
• being adverse to saving resources and improving environment
• engaged in the prospecting and exploitation of the specific type of mineral resources to which the State applies protective exploitation
• falling into the industries that the State opens step by step
• other situations

The Guidance Catalogue - Prohibited
• harming the State safety or impairing the public interests
• polluting the environment, damaging natural resources or harming human health
• occupying too much farmland and being adverse to the protection and development of land resources
• harming the safety and usage of military facilities
• using the particular techniques or technologies of China to produce products
• other situations

The Guidance Catalogue - Permitted
• permitted projects of which the products are all directly exported shall be regarded as the encouraged project
• The restricted projects but more than 70% products will be exported may be regarded as permitted projects upon the approval

Common Investment Vehicles
• Incorporation:
 Joint Venture (JV)
 Wholly Foreign Owned Enterprise (WFOE)
 Holding company
 R&D center
 Representative office
 Branch Office

• Mergers & Acquisitions (M&A)
Statistics of Foreign Investment in 2005

JV
• limited liability company
• Chinese nature person is not allowed
• popular for foreign investors less familiar with investment in China
• popular for investing in certain industries that require the participation of a Chinese partner

Equity Joint Venture (EJV)
• Limited liability company
• Legal person in China
• With both Chinese and foreign investors
• Foreign investor(s) hold(s) at least 25% shares
• Profit and losses shared according to investor’s relative share of the registered capital

Cooperative Joint Venture (CJV)
• Limited liability company or partnership without legal person status
• With both Chinese and foreign investors
• Contribute capital, distribute income or product and bear risks according to contractual arrangement
• Chinese investors generally get fixed benefit
• Can be managed by one party(usually foreigner)

Cooperative Joint Venture (CJV)
• Dissolution: the CJV’s net assets may be transferred to the Chinese party without compensation so long as the foreign party has been able to recoup its capital contribution during the term of the CJV.

upon approval of relevant finance and tax authorities in China, capital recoupment can be made before tax

Company Limited by Shares with Foreign Investment
• a blend between an EJV and a stock company
• minimum paid up capital:RMB30 million
• Can offer shares publicly, even overseas with approval
• can be listed on a recognized PRC stock exchange with approval

Establishment of Joint Venture
• Marketing survey, selection of Chinese partner
• Negotiations
• Feasibility study report, contract and articles of association
• Certificate of approval
• Business license

Wholly Foreign Owned Enterprise (WFOE)
• 100% owned by one or more foreign entities (generally is a limited liability company)
• greater flexibility in terms of management and control
 Better intellectual property protection
 Easier to terminate
 more stringent investment restrictions
 Lack of local support

Holding company (Advantages)
• centralized management, employment, marketing and distribution
• balance foreign exchange within the group
• R&D, buy-sell distribution and systems integration, technical training, test marketing and holding shares

Holding Company (Qualifications)
• registered capital of the proposed holding company : at least US$30 million
• applicant:
 total assets: not less than US$400 million
 already established FIEs in China with paid-up capital of more than US$10 million; OR
 established more than 10 FIEs with total paid-up capital of more than US$30 million.

Regional Headquarter (Shanghai)
• applicant:
 total assets: not less than US$400 million
 established FIEs with total paid-up capital of more than US$30 million.
 already established or being authorized to manage no less than 3 FIEs in China
• Regional Headquarter can be a holding company or a management company

R&D Center
• Can be a JV, WFOE or a branch of a JV, WFOE
• R&D investment no less than US$2 million
• Staff：Bachelor degree and above no less than 80%
• Training center not included

Establishment of WFOE
• Marketing survey
• Feasibility study report and articles of association
• Certificate of approval
• Business license
     You need to entrust a law firm to help you go through all the procedures till you get the business license.

Representative Office
• Non-direct-business-operational institution
• Representing its enterprise
• Engage in liaison services, marketing survey, product introduction and technical exchange for its enterprise
• Establishment: to entrust a law firm to help you get the certificate; for special industries, approval is needed.

Branch Office
• not legal person
• Generally in certain industries such as banking and insurance
• have a representative office in China for over 2 years
• the minimum working capital of the branch office must exceed US$10 million

Time needed for establishment
• Name pre-registration: 7 working days
• Approval (If no pre-approval needed)
 In law: within 90 days for EJV and WFOE
within 45 days for CJV
 In Practice: generally no more than 30 days
• Registration: generally 15 days

Cost for establishment
• Generally very small cost for approval
• Registration fee:
 0.08% of the registered capital if the registered capital is no more than RMB10m
 0.04% of the part of the registered capital which is above RMB10m
 RMB44,000 for the registered capital is above RMB100m
• Legal service fee

Mergers & Acquisitions (M&A)
• Acquisition of Equity Share in Existing FIE
• Acquisition of Off-shore Vehicle
• M&A Conversion of Domestic Enterprises
• Strategic acquisition of A-share of listed companies

Acquisition of Equity Share in Existing FIE
• registered capital in an existing FIE held by a domestic or foreign investor
• consent of other party(ies)
• pre-emptive right of other party(ies)
• amendment to the Articles of Association
• approval of the FIEs board of directors and authority

Acquisition of Off-shore Vehicle
• PRC law not directly applicable
• No Consents or approvals needed
• good relationships with other party(ies) are the key to the success for CJVs or EJVs
• Use off-shore vehicle as investor:
 tax-efficient
 Easy exit

M&A Conversion of Domestic Enterprises
• Share Deal
 directly acquire an equity interest in an existing domestic enterprise
 inject investment into an existing domestic enterprise

• Asset Deal
 establish a new FIE to acquire assets of a domestic enterprise
 acquire assets to establish a new FIE

Share Deal
• If foreign ownership share is more than 25%, the target domestic company can be converted into a new FIE
• The price should based on the evaluation and be paid in 3 months after the issuance of the business license of the FIE
• The FIE assume the liabilities of the former domestic company

Asset Deal
• The FIE does assume the liabilities of the domestic company
• the domestic company must notify and announce the deal to creditors and creditors are entitled to be guaranteed
• The price should based on the evaluation and be paid in 3 months after the issuance of the business license of the FIE

Strategic acquisition of A-share of listed companies
• Approval of Ministry of Commerce
• Holds at least 10%
• Cannot transfer within 3 years
• Assets: owns no less than US$100m or manages no less than US$500m

Thank you!
Haworth & Lexon

Address: Rm. 2415, China Merchants Tower
No. 161, Lujiazui Road (E)
Shanghai 200120

Tel:  021-68879799

Fax: 021-68878766

Website: www.hllawyers.com

Haworth & Lexon

(This speech is made at China Tax '06 on 8 March, 2006)