China Law Library

Rules for Forming Investment Companies

CBL’s Introduction 

These rules translated by CBL into American English provide insight into the specific rules that China’s Ministry of Commerce created to govern investment companies that have participation of foreign investors.  These particular rules are essential reading for investment companies side-by-side with the Foreign Investment Act because they place a number of conditions and restrictions on foreign investor participation in formation of investment companies. The specific process and requirements for forming such a company are also laid out, thus a reading of these rules will empower an investment manager to develop an independent understanding of the formation process.

 

Rules for Formation of Investment Companies Operated by Foreign Investors—Ministry of Commerce

(Issued pursuant to Order No. 22 in 2004 of the PRC Ministry of Commerce on November 17, 2004, as amended by Order No. 2 in 2015“Ministry of Commerce Decision on Amending Certain Regulations and Standards”)

Section 1 To encourage foreign investors to invest in China and to introduce foreign advanced technology and management experience, foreign investors are allowed to form investment companies in China in accordance with applicable laws, regulations, and these rules.

Section 2 Wholly owned or joint venture investment companies formed in China by foreign investors are referred to as Investment Companies in these Rules. The company shall be organized as a limited liability company or corporation.

Section 3 The following requirements must be met in order to apply for the formation of an investment company:

(I) 1.Foreign investors must have a good credit standing and economic capability in order to form an investment company. One year prior to the application, the investor’s total assets must be no less than $400 million USD, and it must have already formed a foreign owned entity in China. 2.  The actual amount of registered capital contribution must be greater than $30 million US if the foreign investor meets the requirements and has more than ten entities in China and has good credit standing and economic capability;

(II) If an investment company is formed as a joint venture, the Chinese investor must have good credit standing and financial capabilities to form an investment company. The investor’s total asset must be no less than ¥100 million RMB.

The foreign investor applying for the formation of an investment company must be a foreign company, business entity, or private sector organization. If there are two or more foreign investors, at least one of the major shareholders must meet the requirements set forth in Section I.

Section 4 Foreign investors may invest and form an investment company in the name of its wholly-owned subsidiary, provided they meet the requirements set forth in Section III (I).

Section 5 If a foreign investor meets the requirements in the first clause of Section 3 (I), it must warrant to the approval agency that the registered capital of its investment company has been paid in, and the technology of foreign investors or affiliated companies has been assigned.

If a wholly-owned subsidiary invests in and forms an investment company, the parent company shall issue a letter of guarantee to the the approval agency guaranteeing the following matters: the subsidiary has paid in registered capital to the investment company as required by the approval agency; and paid-in capital for Mainland China investments has been paid in and technology owned by the parent company and its affiliates has been assigned to the investment company.

Section 6 To apply for the incorporation of an investment company, an investor must submit the following requirements to the jurisdictional commerce agency for review and its subsequent approval (the appropriate jurisdiction is the province, autonomous region, municipality, and the listed cities where the investment company is to be formed).

(1) Application Form, Contracts, and Articles of Association signed by the Parties to the joint venture investment company;

Application Form, Feasibility Study, and Articles of Association signed by foreign investors to the wholly-owned investment company;

(2) Credit Certification documents, Registration Certification documents (photocopy), and statutory representative documents (photocopy) of all Parties involved.

(3) Approval Certificate (photocopy) and Business License (photocopy) of the foreign owned company.

  1. Lawfully Audited Balance Sheets for the past three years of the Investing Parties

(5) The Letter of Guarantee required under Section V of these Rules.

(6) Other documents required by the jurisdictional commerce agency.

Except for those noted as copies, other documents set forth must be official documents.

A statutory representative’s Power of Attorney is necessary if the documents are signed by anybody other than the statutory representatives.

Applications processed on their behalf by a lawfully established brokerage must provide a Power of Attorney signed by the investor’s statutory representative.

Section 7 Foreign investors are required to make the investment company’s registered capital contributions in convertible currency, CNY profits, or any other legal CNY revenues gained from the conversion of shares into stock or from the sale of assets in China. Chinese investors may make capital contributions in CNY. Foreign investors must submit documentation and tax receipts when using legal income in CNY to make registered capital contributions to an investment company.

Section 8 The investment company’s registered capital must it must consist of at least $30 million US dollars that meets one of the following conditions: (i) as capital contributions to the entity that it invests in; (ii) or capital contributions to unpaid contributions in a foreign-invested business entity owned by the parent company or subsidiaries (whose share assignment has been completed); (iii) or increased investments; (iv) or investments for the formation of R&D centers; (v) or investments for the purchase of shares in a Mainland China company (excluding shares formed by capital contribution paid by the parent company of the investment company or its affiliates).

Section 9 The investment company’s loan cannot be more than four times the amount of paid-in registered capital if the registered capital is at least 30 million USD. If the investment company’s paid-in registered capital is at least $100 million USD, its loan cannot be greater than six times the registered capital. Approval from the jurisdictional commerce agency is required if a loan greater the amount specified above is needed because of business requirements.

Section 10 An investment company may participate in the following business activities in China as needed once its formation is approved by the jurisdictional commerce agency:

(I) Invest in sectors where the State has approved foreign investment;

(II) Provide services to the entities in which the company has investments subject to its written authorization (unanimously approved by the Board of Directors):

  1. Assist or act on behalf of the entities to procure of machinery, office supplies, and the raw materials, components, and parts needed for manufacturing; assist or act in the sale of the goods produced by the entity whether locally and globally.
  2. Maintain a balance of foreign exchanges among the entities, subject to the approval and oversight by the foreign exchange agency;
  3. Provides technical assistance, staff training, and internal human resource management while the entity needed for production, sales, and business development.
  4. Assist the entities in obtaining loans and provide security.

(III) Set up an R&D center or division in Mainland China to research and develop new products and technologies, assign deliverables, and provide technical assistance.

(IV) Provide consulting services to its investors and provide its affiliates marketing and investment consulting for the investment;

(V) Provide outsourcing services for its parent company and affiliates.

Section 11 If The Ministry of Commerce Filing and Registration Procedures for Foreign Trade Operators shall apply to an investment company that imports and exports products and technology:

An investment company’s operations in commission brokerage, wholesale, retail, or franchising must be carried on in accordance with the Administrative Procedures of the Foreign Investment Act.

Section 12 An investment company under these Rules refers to the following entities:

(I) Entities directly invested in by an investment company or jointly invested by foreign investors and/or Chinese investors, and whose converted investment in the investment company by foreign investors alone or in conjunction with other foreign investors accounts for more than 25% of its registered capital;

(II)  Entities in which the converted investment of foreign investors, alone or in combination with other foreign investors, accounts for more than 25% of the investment company’s registered capital, where the investment company has purchased part or all of the shares of its investors, affiliates, other foreign investors, or entities with PRC investments in mainland;

(III) The investment shall be no less than 10% of the registered capital of the entity in which it invests.

Section 13 Investment company may provide financial assistance to its entities, subject to approval by the Chinese Banking Regulatory Commission.

Section 14 The investment entity may either retain the unlisted legal entity shares of the foreign owned corporation or incorporate one as the promoter. The investment company entity may also hold unlisted legal entity shares in other domestic corporations organized pursuant to law. The investment company shall be deemed as the promoter or shareholder of the corporation.

Section 15. An investment company shall operate legally following its formation and shall not have any record of legal violations. Pursuant to the terms of the Articles of Incorporation, the registered capital shall be paid on time and the actual amount shall be no less than the $30 million US Dollars set forth in Section 8 of these Rules. If the investment company applies to the jurisdictional commerce agency and is approved, it may also use it in accordance with the actual business operations it engages in China. This is provided that the investment company has received approval from the jurisdictional agency of commerce of the province, autonomous region, or municipality having jurisdiction over the investment company.

  1. To conduct the following operations with written authorization from the entity receiving investment (unanimously approved by the Board of Directors):
  2. Sell the products of the entity receiving investment through a distributorship both locally and globally;
  3. Provide full service offerings such as transportation and warehousing for a company it owns.
  4. Exporting domestic products through agents, distribution, and the formation of an export procurement agency (including insourcing arrangements). Export tax refunds can be handled in accordance with applicable laws;

III. When an entities receiving investment begins carrying on a business to assemble products into integrated systems, but the entity may not produce enough products to meet requirements to assemble integrated system; in such cases, it is authorized to purchase components either domestically or internationally. The total cost of all components purchased may not exceed 50% of the overall cost of all products required for the integrated system;

  1. Provide technical training to domestic distributors and agents of the products, as well as the investment company, the parent company, and other domestic companies and entities that have signed a technology assignment agreement with its affiliates;
  2. An investment company may create a market for its products by conducting trial sales in China using products imported from the parent company, provided they are related to products that would be manufactured by the entity receiving investment.
  3. Provide the entity with a equipment leasing services for office and industrial equipment or form an equipment leasing company;

VII. Provide after-sale services for imported products;

VIII. Participate in overseas project outsourcing with appropriately permitted domestic Chinese companies;

  1. Non-retail sales of parent company’s products imported by the entity receiving investment.

Section 16 The entity receiving investment shall import products pursuant to the third and fifth provisions of Section XV, but consistent with other state law. The total amount of such imports may not exceed the amount of registered capital paid in to the company each year.

Section 17 the following documents shall be submitted to the commerce agency when the investment company applies to conduct a business operation enumerated under Section XV:

(I) Application Form signed by the statutory representative of the investment company;

(II) Board of Directors’ Resolution of the investment company;

(III) Amended Articles of Incorporation of the investment company;

(IV) Approval certificate (photocopy) and business license (photocopy) of the investment company;

(V) Other documents required by the commerce agency.

Section 18 The investment company’s operating term shall be determined based on the nature of its planned projects, in accordance with the national laws on the operation period of foreign owned entities.

Section 19 Formation of entities must comply with the approval guidelines mandated by the approval agency and approval guidelines for foreign owned entities.

Section 20 Foreign investors’ converted investment, alone or in combination with other foreign investors, shall generally not be less than 25% of the registered capital of the entity receiving investment. The invested entity is treated as a foreign owned entity and is issued an approval certificate and a business license; if the proportion is less than 25%, the entity shall go through approval and registration procedures, unless otherwise provided by laws and administrative regulations.

Section 21 The formation of a local office by the investment company requires approval from the commerce agency. To register a local office, the investment company shall meet the following requirements:

  1. The investment company has paid in registered capital as required by the Contract and Articles of Association, and the amount of contribution for investment is no less than $30 million US dollars, or the investment company has invested in and formed or owns more than ten entities;
  2. The local office shall be located in the same region as the investment company’s investment and sales operations.

Section 22 Eligible companies may submit an application to be designated as multinational corporate headquarters (the “Regional Headquarters”); they must also complete the necessary legal procedures.

  1. Investment companies must satisfy the following requirements to request designation as a Regional Headquarters:
  2. The paid in registered capital shall not be less than one hundred US dollars. Or in the alternative, a minimum of fifty million dollars may be used under the following conditions: the total assets of the investment firm are greater than 3 billion CNY, with total profits in excess of 100 million CNY (using the approach of consolidating of accounting statement);
  3. Rules provided in Section VIII in these Rules;
  4. R&D centers have been formed as required by the rules.
  5. An investment company designated as a regional headquarters may carry on the following business as needed for their China operations:
  6. Business provided by Sections X and XV in these Rules;
  7. Import and sell (but not retail) in China products of the multinational company or its affiliates;
  8. Import the raw materials, components, and spare parts needed for the maintenance of products made by multinational corporations and investment entities;
  9. Engage in the business of domestic and foreign business entities outsourcing services;
  10. Operate a logistics and delivery business, as required by applicable law;
  11. An investment company may provide financial assistance to the entity receiving its investment, subject to approval by the Chinese Banking Regulatory Commission.
  12. Provide outsourcing services for international projects and overseas investment, form an equipment leasing company and provide the relevant services; these activities are subject to approval by the jurisdictional commerce agency;
  13. Authorize domestic business entities to manufacture/process its or its parent company’s products and sell them internationally.
  14. Other business operations that obtain approvals.

III. Application procedures:

  1. Applications shall be submitted to the jurisdictional commerce agency in the province, autonomous region, municipality, and cities under separate planning by the investment company, and with approval file it with the Commerce Ministry;
  2. The jurisdictional commerce agency shall must respond and issue approval certification (the “regional headquarters”) for foreign owned entities that have been designated as regional headquarters, within thirty days after receipt of complete application materials.
  3. The investment company must apply to the commerce agency to go through the processes for change registration within thirty days of receipt of its approval documents.
  4. Application documents:
  5. Application signed by the statutory representative of the investment company;
  6. Board of Directors or the Shareholders’ Resolution regarding the meeting of the investment company and its multinational company;
  7. The amended Articles of Incorporation/Contract of the investment company;
  8. The investment company’s Approval Certificate (photocopy), Business Certificate (photocopy), and Capital Verification Certificate issued by a Chinese Certified Public Accountant;
  9. Approval Certificate (photocopy) and Business Certificate (photocopy) of the company it owns;
  10. Capital Verification Certificate of the entity receiving investment, issued by a Chinese Certified Public Accountant;
  11. Major Financial Statement of the Investment company audited by a Chinese Certified Public Accountant;
  12. Other documents required by the jurisdictional commerce agency.

The documents set forth shall be official except those noted as photocopies.

A multinational corporation in these Rules refers to the parent company of the group to which foreign investors that engage in the investment company belong.

Section 23 An investment company’s business operations in China are not limited to its registration jurisdiction.

Section 24 Taxation of the investment company shall be governed by Chinese law.

Section 25 An investment company shall implement its project investment plan and submit the first year’s investment and operation to the jurisdictional commerce agency for filing with the appropriate content and format within the first three months of the following year.

Section 26 The investment company and the entity it owns shall be two different entities. Their transactions will be regarded as though they were independent businesses.

Section 27 The investment company and such company shall abide by the Chinese laws, rules, and regulations and shall not evade administration and paying taxes in any means.

Section 28 Investment company shall not directly carry on manufacturing operations.

Section 29 These Rules shall be applicable to investors from Taiwan, Hong Kong and Macau who invested and formed investment companies in the Mainland China.

Section 30 These rules shall be interpreted by the jurisdictional commerce agency.

Section 31 These Rules shall take effect thirty days after publication.

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