According to a new notice recently promulgated in China, even if the capital contribution of all foreign investors of an enterprise is lower than 25% of the enterprise's registered capital, the approval and registration procedures of that enterprise will be the same as those of a foreign-invested enterprise (FIE). However, such an enterprise cannot enjoy the preferential tax arrangement that FIEs enjoy. If the investor pays its contribution in cash, it must pay off its capital contribution within three months after the business licence is issued. If the investor makes its contribution in kind, it must pay off its capital contribution within six months.
The Notice on Strengthening Management of Approval, Registration, Foreign Exchange and Taxation of Foreign-invested Enterprises was promulgated by the Ministry of Foreign Trade & Economic Cooperation, State Administration of Taxation, State Administration of Industry and Commerce and State Administration of Foreign Exchange, and took effect from January 1 2003.
Under the Notice, when foreign investors purchase shares of domestic enterprises, those domestic enterprises must be registered as FIEs after receiving the authorities' approval and after approval certificates and FIE business licences are issued. Chinese individuals cannot be shareholders or investors of FIEs unless they have been registered as shareholders of the domestic enterprises for over a year before the domestic enterprises are bought by foreign investors.
When foreign investors purchase shares of domestic enterprises, they must pay off the consideration within three months of the FIE business licences being issued.
Those enterprises whose capital contribution by foreign investors is lower than 25% of the enterprises' registered capital and were established before the execution of the Notice, must apply for supplementary approval and conduct registration procedures within six months of execution of the Notice.