Direct Contributions of Equity Interests as Registered Capital: Now Available to Foreign-Invested Enterprises in China

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On September 21, 2012, the Ministry of Commerce (“MOFCOM”) promulgated the Interim Provisions of the Ministry of Commerce for Equity Contribution in Relation to Foreign-Invested Enterprises (the “Provisions”), effective as of October 22, 2012. The Provisions explicitly permit a foreign or domestic investor to contribute equity interests held by such investor in another PRC domestic company or foreign-invested enterprise (an “Equity Source Company”) to a targeted foreign-invested enterprise (a “Target FIE”) as such Target FIE’s registered capital.

BACKGROUND -

Traditionally, only cash, tangible assets such as equipment, intangible assets such as intellectual property rights, and land use rights could be contributed as capital with respect to a foreign-invested enterprise (an “FIE”). The PRC government has generally been conservative in accepting any non-cash assets as a source of capital, mainly because of the difficulty involved in ascertaining the value of non-cash assets, particularly shares or equity interests, whose prices fluctuate from time to time. Due to this concern, the PRC Company Law (“Company Law”) sets forth a cap for any non-cash capital contribution that the aggregate amount of any such contributions in a limited liability company cannot exceed 70% of its registered capital. It was not until 2005 that the Company Law was amended to permit shares or equity interests as a possible source for capital contribution purposes, and then in 2009 the State Administration for Industry and Commerce (“SAIC”) adopted a set of rules (the “SAIC Measures”) purported to provide an administrative registration guidance in connection with the contribution by an investor of equity interests to a company as its registered capital. However, pursuant to PRC FIE laws and regulations, matters relating to capital contributions in FIEs are subject to MOFCOM’s approval. Absent MOFCOM’s acceptance of equity interests as a source of capital contributions with respect to FIEs, it would be difficult to apply the SAIC Measures to FIEs, as a practical matter.

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