December 28, 2012
MOFCOM’s new rules that allow equity contribution to FIEs
By Frankie Qin, David Cheng, and Sophia Cao
In 2005, PRC Company Law began to allow investors to make capital contributions using non-cash
assets to the company. Then Measures for the Administration of the Registration of Capital Contribution in the
Form of Equity allowed capital contributions with equity interests of the domestic company to other
domestic companies in 2009. Recently, the Ministry of Commerce (MOFCOM) issued Tentative
Provisions on Capital Contributions Made in the Form of Equity Involving Foreign-invested Enterprises (“Tentative
Provisions”), which became effective on October 22, 2012. Tentative Provisions made equity contribution
available to foreign-invested enterprises (FIEs).
I. Eligibility requirements
Tentative Provisions clearly state that “[t]hese Provisions shall apply to the formation and
modification of a foreign-invested enterprise (“Investee Enterprise”) by domestic and foreign
investors (“Equity Contributors”) with equities held by them in the enterprise within the territory of
China (“Equity Enterprise”) as capital contribution.” Therefore, Tentative Provisions apply only if the
equity for contribution is from a company incorporated in China, and the Investee Enterprise must
become or still be an FIE after such equity contribution. Any equity contribution should satisfy the
following requirements:
1. The registered capital of the Equity Enterprise has been paid in full;
2. The Equity Contributor has clear and full title to the equity interests;
3. The equity is not subject to a pledge or freezing order imposed by any authority;
4. The equity is transferable as agreed on in the bylaws (contract) of the Equity Enterprise;
5. If the Equity Enterprise is an FIE, it has passed its annual inspection in the previous year;
6. The contribution would not result in a breach of the Foreign Investment Industrial
Guidance Catalogue; and
7. All approvals required for the transfer of the equity interests have been obtained.
II. Approval procedures
The approval authority for equity contribution to FIE is MOFCOM or a competent local commerce
department of the Investee Enterprise. The equity interests being contributed must be appraised by a
lawfully established appraisal institution in China before the transaction, and the sum of the amounts
of the equity contribution and the amounts of other capital contribution made in the form of nonmonetary property may not be greater than 70% of the Investee Enterprise’s registered capital.
Involved parties shall comply with the following main approval procedures when they make capital
contributions with equity interests:
1. The Equity Contributor or Investee Enterprise shall submit an application to the approval
authority of the Investee Enterprise and provide the agreement and other documents related
to making equity contributions for approval1;
2. The approval authority shall decide to approve or disapprove the application according to
law. If the application is approved, the approval authority shall issue or reissue a Certificate
of Approval of FIE (indicating “equity contribution has not been paid” in the remark
column);
3. Once equity contribution has been approved, the Equity Enterprise shall apply to the local
authority for modifying the holder of the equity used for capital contribution into the
Investee Enterprise in accordance with the Tentative Provisions;
4. After completing the aforesaid modification, the Equity Enterprise shall undergo
modification registration formalities at the local administration of industry and commerce,
tax bureau, custom, foreign exchange administration, and other relevant departments.; and
5. The Investee Enterprise applies to the approval authority for reissuance of its Approval
Certificate of FIE (indicating “equity contribution has been paid” in the remark column).
Below is a flow chart of the main approval procedures described above:
Equity Contributor or
Investee Enterprise
Approval Authority of
Investee Enterprise
Approve
Disapprove
Issue or reissue the Approval
Certificate of FIE (indicating
“equity contribution has not been
paid” in the remark column).
Equity Enterprise
is an FIE
Equity Enterprise
is not an FIE
Modify the holder of the
equity used for capital
contribution into Investee
Enterprise.
If the approval authority of Investee Enterprise is
different from the approval authority of Equity
Enterprise, the opinion of Provincial approval
authority of Equity Enterprise is required.
Equity Enterprise has
foreign shareholder(s)
after Equity
Contribution.
Modify the holder of the equity
used for capital contribution into
Investee Enterprise.
Equity Enterprise has
no foreign
shareholder(s) after
Equity Contribution.
Equity Enterprise cancels or
modifies its Approval
Certificate of FIE.
Equity Enterprise shall undergo modification registration formalities at the
local administration of industry and commerce, tax bureau, custom, foreign
exchange administration, and other relevant departments.
Investee Enterprise applies to the approval authority for reissuance of
its Approval Certificate of FIE (indicating “equity contribution has
been paid” in the remark column) with relevant documents.
III. Matters need attention
Tentative Provisions provides FIEs with a new approach to investing in a company in China. To
accomplish equity contribution, involved parties should pay attention to the following matters:
1. The amount of equity contribution
According to Article 6 of Tentative Provisions, the equity interests being contributed must be appraised
by a licensed PRC appraisal institution, but, according to Article 7, the Equity Contributor may hold
consultations with the shareholder(s) or other investor(s) of the Investee Enterprise to determine, on
the basis of equity appraisal, the price of equity and amount of equity contribution. The “price of
equity” means the transaction price of the equity to be used as a capital contribution, jointly
determined by the aforementioned parties on the basis of equity appraisal. And the “amount of
equity contribution” means the part of the equity price included in the registered capital of the
Investee Enterprise. The amount of equity contribution cannot be greater than the appraised price of
the equity.
Although the amount of equity contribution cannot be greater than the appraised price of the equity,
there is no lower limit stipulated in Tentative Provisions and other regulations. The Equity Enterprise
can use a part of the price of the equity as registered capital and the rest as premium capital, which is
allocated to the capital reserve account. Based on the purpose of the transaction (e.g., tax or foreign
exchange consideration), the Equity Contributor and the Investee Enterprise may determine the
amount of equity contribution at a very low price—for example, 1 RMB—and allocate the premium
as the capital reserve of the Investee Enterprise.
2. Restrictions of equity enterprise
The equity of certain enterprises cannot be used to make contributions to FIEs, including a real
property enterprise, a foreign-invested enterprise with an investment nature, or a foreign-invested
venture (equity) investment enterprise.
Meanwhile, after equity contribution, the Investee Enterprise and the Equity Enterprise and any
enterprise in which they directly or indirectly hold equity shall be in compliance with the Provisions for
Guiding the Direction of Foreign Investment, the Foreign Investment Industrial Guidance Catalogue and other
provisions relating to foreign investment. In the event that any of them are not in compliance with
relevant provisions, the relevant assets or business shall be stripped off or an equity transfer shall be
conducted before the application for equity contribution.
3. Issues related to the ratio of registered investment to total investment in the capital increase
Article 9 of Tentative Provisions states that “[i]f the Investee Enterprise is a limited liability company,
the amount of total investment in the enterprise shall, in accordance with State Administration for
Industry and Commerce, Tentative Provisions of the Ratio of the Registered Capital of a Sino-foreign Equity Joint
Venture to Its Total Investment2, be determined on the basis of the registered capital of the enterprise
after equity contribution.” Since capital increase may result in changes of total investment and
registered capital, the aforementioned requirement may influence the distribution of equity price
during the process of capital increase under some circumstances. For example:
Scenario I—The total investment of A, a Sino-foreign equity joint venture, is $1 million and its
registered capital is $700,000. C, a shareholder of Company B, intends to increase capital of A with
the equity interests of B, amounting to $1 million. After capital increase, the total investment of A
reaches $2 million. According to relevant requirements, the registered capital of A must be $1.4
million or more. Therefore, at least $700,000 of the increased contribution of $1 million shall be
contributed to A as registered capital. The remaining contribution of $300,000 could be contributed
to A as either the registered capital or capital reserves.
Scenario II—The total investment of D, a Sino-foreign equity joint venture, is $3 million and its
registered capital is $2.1 million. E, a shareholder of Enterprise F, intends to increase capital of D
with the equity interests of F, amounting to $1 million. After capital increase, the total investment of
D reaches $4 million. Thus, the registered capital of D must reach at least $2 million. However, there
is no need to increase registered capital in this circumstance, since the registered capital of A was $2.1
million.
In conclusion, the ratio of the registered capital to total investment may influence transaction
structure or distribution in the capital increase of a Sino-foreign equity joint venture with equity
interests.
In addition, the foreign debt registration and import duty-free quota of an FIE cannot exceed the gap
between registered capital and total investment. According to Article 18 of Tentative Provisions, when
foreign debt registration and import duty-free quota are handled for the Investee Enterprise,
assessment shall be conducted on the basis of the total investment, determined according to how the
registered capital of the Investee Enterprise deducts equity contribution. For instance, in Scenario I,
if the registered capital is $1.4 million (including equity contribution of $700,000)after capital increase
and A wants to carry out foreign debt registration or import duty-free quota, the identified registered
capital shall exclude the equity contribution, i.e., the identified registered capital of A is $700,000
($1.4 million minus $700,000). Based on the identified registered capital, the total investment of A
cannot exceed $1 million. The maximum gap between total investment and registered capital is
$300,000 ($1 million minus $700,000). In other words, A can carry foreign debt registration or
import duty-free quota within the limit of the $300,000 gap.
4. Capital contribution with equity interests exemption from business tax
Ministry of Finance, State Administration of Taxation, Notice of Business Tax in Equity Interests Transformation
stipulates that the action of contributing with an intangible asset, participating in receiving the profit
distribution of the investor, and taking joint investment ventures are free from business tax; business
tax shall not be levied when the equity interests are transferred. Thereby, business tax shall not be
paid during capital contribution with equity interests.
Since Tentative Provisions is quite new, the relevant authorities have not yet made
unified interpretations or provided clear guidance on certain articles and detailed procedures. The
procedures and interpretations above are subject to interpretation in the future and when
implemented in practice.
For more information on the content of this alert, please contact your Nixon Peabody attorney or:

David K. Cheng at dcheng@nixonpeabody.com or +852 9307 3900

Frankie Qin at fqin@nixonpeabody.com or +86 21 6137 5509
Article 10 of Tentative Provisions on Capital Contributions Made in the Form of Equity involving Foreign-invested
Enterprises: If an investor is to make a capital contribution in the form of equity, it or the Investee Enterprise
shall submit an application and the following documents to the approval authority:
(1) an application for making a capital contribution in the form of equity and the agreement for making a
capital contribution in the form of equity;
(2) proof that the Equity Contributor lawfully holds the equity that is to be used to make the capital
contribution;
(3) (a photocopy of) the Business License of an Enterprise with Legal Personality of the Equity Enterprise;
(4) if the Equity Enterprise is a foreign-invested enterprise, the Approval Certificate of a Foreign-invested
Enterprise and a photocopy thereof and relevant proof that it has passed the joint annual inspection of
foreign-invested enterprises;
(5) the equity appraisal report of the appraisal institution;
(6) a legal opinion issued in respect of the provisions of Articles 4 and 5 hereof by a law firm and the names
of the lawyers assigned by it;
(7) other documents concerning the establishment or change of a foreign-invested enterprise that are
required to be submitted in accordance with laws, administrative regulations, and rules on foreign
investment;
(8) if a law, a set of administrative regulations or a State Council decision specifies that the transfer
of equity by a shareholder of the Equity Enterprise requires approval, the relevant approval
document; and
(9) other documents required by the approval authority.
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Article 3 of State Administration for Industry and Commerce, Tentative Provisions of the Ratio of the Registered Capital of
a Sino-foreign Equity Joint Venture to Its Total Investment: The ratio of registered capital to total investment of Sinoforeign equity joint ventures shall comply with the following stipulations:
(1) Where the total investment of a Sino-foreign equity joint venture is less than or equal to US$3 million,
its registered capital shall be at least seven-tenths of the total amount of investment.
(2) Where the total investment of an equity joint venture is greater than US$10 million, its registered capital
shall be at least one-half of the total investment. Where the total investment is US$4.2 million or less,
the registered capital may not be less than US$2.1 million.
(3) Where the total investment of an equity joint venture is greater than US$10 million and less than or
equal to US$30 million, its registered capital shall be at least two-fifths of the total investment. Where
the total investment is US$12.5 million or less, the registered capital may not be less than US$5 million.
(4) Where the total investment of an equity joint venture is greater than US$30 million, its registered capital
shall be at least one-third of the total investment. Where the total investment is US$36 million or less,
the registered capital may not be less than US$12 million.
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