Green light on equity as capital contribution in FIEs Green light on equity as capital contribution in FIEs

by Sheppard Mullin Richter & Hampton LLP

[authors: Carol Xu]

Recently, MOFCOM issued the regulation permitting the use equity interest as capital contribution in FIEs (“the Provisions”).

According to PRC’s Company Law (amended in 2005), investors are only allowed to make capital contributions in cash, in kind or in such intangible property rights as intellectual property rights, land use rights or other transferable non-cash property with appraisable value. A pilot scheme permitting equity interest as capital contribution was launched in 2009 by the State Administration of Industry and Commerce (“SAIC”)[1], which stipulated that equity interest contributed as capital shall be registered with SAIC or its local counterparts. However, such measures fell short on giving a clear guidance on how equity interest can be contributed as capital in FIEs. Therefore, the issuance of the Provisions filled the gap and provided clearer guidance in this area.

As per the Provisions, domestic or foreign investors (“investors”) are allowed to contribute their equity interests in PRC domestic enterprises in connection with: (1) establishment of new FIEs; (2) conversion of domestic companies into FIEs through capital increase; and (3) change the equity of an FIE through capital increase. The Provisions also set forth several requirements on the equity to be used as capital contributions. The equity interest shall be free and clear from encumbrance, fully paid in, and transferrable. No equity interests in real property enterprises, foreign-invested holding companies or foreign-invested venture capital enterprises can be contributed as capital. Furthermore, both investor and investee continue to be subject to the requirements of foreign investment catalogue and other relevant rules and regulations on foreign investment.

The equity interests to be contributed shall be appraised by a PRC domestic appraisal institution, and the booked value of the equity interest shall be no higher than the appraised value. In addition, the Provisions limit non-cash capital contribution to a maximum of 70% of registered capital of an investee, which is in line with the current PRC Company Law.

Additionally, an investor making capital contribution in an investee using its equity interests may benefit from a deferred corporate income tax if certain criteria are met in accordance with Circular 59.

Capital contributions using equity interests are subject to approval by MOFCOM or provincial level counterparts where the investee is registered. However, the Provisions do not stipulate a time frame for approval. Furthermore, the time needed for appraisal also adds to the degree of uncertainties.

Despite the uncertainties, the Provisions open up new ways for foreign investors to structure their investments in China. The move to a more flexible foreign investment regulatory regime reflects a positive signal on the PRC government’s welcoming attitude on foreign investment.

[1] Order No.39 of the State Administration for Industry and Commerce, “Measures for Registration Administration of Capital Contribution with Equity Interests”. Issued on 14 January 2009, effective on 1 March 2009.


DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© Sheppard Mullin Richter & Hampton LLP | Attorney Advertising

Written by:

Sheppard Mullin Richter & Hampton LLP

Sheppard Mullin Richter & Hampton LLP on:

Readers' Choice 2017
Reporters on Deadline

"My best business intelligence, in one easy email…"

Your first step to building a free, personalized, morning email brief covering pertinent authors and topics on JD Supra:
Sign up using*

Already signed up? Log in here

*By using the service, you signify your acceptance of JD Supra's Privacy Policy.
Custom Email Digest
Privacy Policy (Updated: October 8, 2015):

JD Supra provides users with access to its legal industry publishing services (the "Service") through its website (the "Website") as well as through other sources. Our policies with regard to data collection and use of personal information of users of the Service, regardless of the manner in which users access the Service, and visitors to the Website are set forth in this statement ("Policy"). By using the Service, you signify your acceptance of this Policy.

Information Collection and Use by JD Supra

JD Supra collects users' names, companies, titles, e-mail address and industry. JD Supra also tracks the pages that users visit, logs IP addresses and aggregates non-personally identifiable user data and browser type. This data is gathered using cookies and other technologies.

The information and data collected is used to authenticate users and to send notifications relating to the Service, including email alerts to which users have subscribed; to manage the Service and Website, to improve the Service and to customize the user's experience. This information is also provided to the authors of the content to give them insight into their readership and help them to improve their content, so that it is most useful for our users.

JD Supra does not sell, rent or otherwise provide your details to third parties, other than to the authors of the content on JD Supra.

If you prefer not to enable cookies, you may change your browser settings to disable cookies; however, please note that rejecting cookies while visiting the Website may result in certain parts of the Website not operating correctly or as efficiently as if cookies were allowed.

Email Choice/Opt-out

Users who opt in to receive emails may choose to no longer receive e-mail updates and newsletters by selecting the "opt-out of future email" option in the email they receive from JD Supra or in their JD Supra account management screen.


JD Supra takes reasonable precautions to insure that user information is kept private. We restrict access to user information to those individuals who reasonably need access to perform their job functions, such as our third party email service, customer service personnel and technical staff. However, please note that no method of transmitting or storing data is completely secure and we cannot guarantee the security of user information. Unauthorized entry or use, hardware or software failure, and other factors may compromise the security of user information at any time.

If you have reason to believe that your interaction with us is no longer secure, you must immediately notify us of the problem by contacting us at In the unlikely event that we believe that the security of your user information in our possession or control may have been compromised, we may seek to notify you of that development and, if so, will endeavor to do so as promptly as practicable under the circumstances.

Sharing and Disclosure of Information JD Supra Collects

Except as otherwise described in this privacy statement, JD Supra will not disclose personal information to any third party unless we believe that disclosure is necessary to: (1) comply with applicable laws; (2) respond to governmental inquiries or requests; (3) comply with valid legal process; (4) protect the rights, privacy, safety or property of JD Supra, users of the Service, Website visitors or the public; (5) permit us to pursue available remedies or limit the damages that we may sustain; and (6) enforce our Terms & Conditions of Use.

In the event there is a change in the corporate structure of JD Supra such as, but not limited to, merger, consolidation, sale, liquidation or transfer of substantial assets, JD Supra may, in its sole discretion, transfer, sell or assign information collected on and through the Service to one or more affiliated or unaffiliated third parties.

Links to Other Websites

This Website and the Service may contain links to other websites. The operator of such other websites may collect information about you, including through cookies or other technologies. If you are using the Service through the Website and link to another site, you will leave the Website and this Policy will not apply to your use of and activity on those other sites. We encourage you to read the legal notices posted on those sites, including their privacy policies. We shall have no responsibility or liability for your visitation to, and the data collection and use practices of, such other sites. This Policy applies solely to the information collected in connection with your use of this Website and does not apply to any practices conducted offline or in connection with any other websites.

Changes in Our Privacy Policy

We reserve the right to change this Policy at any time. Please refer to the date at the top of this page to determine when this Policy was last revised. Any changes to our privacy policy will become effective upon posting of the revised policy on the Website. By continuing to use the Service or Website following such changes, you will be deemed to have agreed to such changes. If you do not agree with the terms of this Policy, as it may be amended from time to time, in whole or part, please do not continue using the Service or the Website.

Contacting JD Supra

If you have any questions about this privacy statement, the practices of this site, your dealings with this Web site, or if you would like to change any of the information you have provided to us, please contact us at:

- hide
*With LinkedIn, you don't need to create a separate login to manage your free JD Supra account, and we can make suggestions based on your needs and interests. We will not post anything on LinkedIn in your name. Or, sign up using your email address.