FIEs face new regulations for capital contributions in the form of equity

The Measures for the Administration of the Registration of Capital Contributions Made in the Form of Equity, issued in 2009, were the first regulations to govern capital contributions made in the form of equity.

On 22 October, the Provisional Regulations for Capital Contributions Made in the Form of Equity Involving Foreign-Invested Enterprises published by the Ministry of Commerce (MOFCOM) were formally implemented. Pursuant to the regulations, investors inside and outside China can make capital contributions in the form of equity that they hold in limited liability companies or companies limited by shares in China, and the three circumstances under which the regulations apply are: establishment of a foreign-invested enterprise (FIE) in the form of a new company; a capital increase that causes a non-FIE to become an FIE; and a capital increase that causes a change in the equity of an FIE.

General provisions

Like the measures, the regulations require that the total amount of capital contributions made in the form of equity and of other non-monetary property by all shareholders of an investee enterprise not exceed 70% of its registered capital. The regulations further provide that the equity of an FIE that did not participate, or failed, in the joint annual inspection of FIEs for the previous year, or the equity of a real estate enterprise, foreign-invested investment company or foreign-invested venture capital enterprise may not be used to make a capital contribution.

Elvin Ye and Henry Song are associates at Martin Hu & Partners