In addition to the general principle of PRC Legislation Law that "specific laws prevail over general laws"[5], the Company Law, both before and after its recent amendment, also states that its provisions apply to FIEs except where FIE-specific laws provide differently]” (emphasis added).[6]  This statement has always been open to interpretation, in part because, in the FIE legal regime, the line has not always been clear between regulatory requirements, recommended practices and customary practices.[7]

The resulting grey areas often resulted in FIE-related customary practices, even of local government departments, prevailing in practice over the Company Law, in contradiction to the generally applicable rules on resolving differences between different types of laws and regulations.[8]

Those grey areas are now reduced due to the FIE Opinion, which addresses a number of detailed issues after first echoing the relevant Company Law statements, and then stating that “State Council administrative rules, regulations and decisions” governing FIEs shall apply where the amended Company Law and the Amended Company Regulations and the FIE-specific Law are silent.[9]

Documents for FIE Establishment/Expansion Approval & Registration

Both notarisation and consularisation are now required of each foreign investor’s (or later foreign purchaser’s) status documents (a foreign enterprise’s certificate of incorporation, business registration, good standing certificate or equivalent, and a foreign natural person investor’s passport or other photographic identification certificate).[10]

An agent/representative, for receipt of delivery of legal documents (‘service of process’), of each foreign investor (including a foreign purchaser of equity) in an FIE must be appointed through submission[11] of a formal written delegation instrument, often translated as a “power of attorney”,  which is required to be updated to reflect any change in the agent/representative’s name or address.[12]

30 days after approval remains the period within which registration must be completed by for FIEs,[13] whether for new establishment or for later amendments in key documents, in comparison with the 90 day period that domestically owned enterprises now enjoy under the Amended Company Regulations.[14]

There has been reduction of FIE document duplication, between an FIE’s “examination and approval” by the examination and approval authority authorized by MOFCOM and its registration with the local AIC. The latter registration no longer requires submission of joint venture contracts or a foreign investor’s bank credit reference letter.[15]

Organizational Structure

Only EJVs and CJVs remain unaffected by the provisions of the amended Company Law on organizational structure, which now apply to WFOEs -- according to the FIE Opinion.[16] The provisions extended to WFOEs apparently include (i) required appointment of an executive director and (if the WFOE is not very large and only has one or two supervisors,[17] along with (ii) flexibility in the appointment of a company’s “legal representative”, which was previously required to the company’s chairman, but is now permitted to be a company’s [manager, or executive director].[18]  A board of shareholders must be organized for a WFOE unless it has only [one investor].[19] 

FIE Business License Classification

An FIE’s Business License is now required to display more information about the FIE’s type,[20] such as "Sino-foreign Equity Joint Venture", "Sino-foreign Co-operative Joint Venture", "Wholly Owned by Foreign Legal Person", "Wholly Owned by Foreign [Non-legal Person Economic Organization])" and, for a Sino-foreign Equity Joint Venture [or other FIE] that is a "Company Limited by Shares", designation of “Listed” or “Un-Listed” (on a stock exchange).

Capital Contributions

Both a domestically owned enterprise[[21]] and an FIE[22] now can be capitalized by contribution of any non-cash asset that can be monetarily valued and legally transferred, notably including equity ownership of other enterprises. Moreover, a contributor that holds less than an ownership interest in a non-cash item now can contribute a lesser interest, such as a usage right under a license of intellectual property, or a leasehold interest under a lease, rather than the less tax-efficient approach of sub-licensing or sub-leasing that interest. [KW: there is no written provision that usage right can be used for capital contribution, it's purely a TEXTUAL ANALYSIS for the requirement of capital contribution: monetarily valuable and legally transferable.]  Capitalization is still not permitted by means of contributing labour services, credit, a natural person’s (as opposed to an enterprise’s) name, credit standing, a franchising right, or mortgaged property [(both movable and immovable)].[23]

Newly established FIEs’ capital contribution deadlines remain substantially unchanged.[24] But when an increase in registered capital has been approved, 20% of it must be contributed at the time of registration, both for a domestically owned enterprise[25] and for an FIE[26] (other than a foreign-invested company limited by shares that is not established by means of promotion).[27]

The FIE Opinion reaffirms[28] that an investor [(both foreign and domestic)] in an FIE contributing borrowed money holds the same ownership as any other investor.[29]

Equity Pledge-Holder Protection

Holders of pledges over FIE equity now benefit from a right to receive pledge registration certificates from the relevant registration authority (AIC),[30] and from confirmation of the previously implied prohibition against the [“contributed” (subscribed)] capital of an FIE being reduced without the consent of all equity pledge holders.[31]

FIE Onward Investment

FIEs, like domestically owned enterprises, are now much less restricted in the timing and amount of their investments in other enterprises, being free[32] to invest more than the previous[33] limit of 50% of their net asset value, and also being released from the previous requirement that they obtain a "Certificate of Qualification for Domestic Investment"[34].  This means that the previous qualification criteria will no longer apply: (i) completed contribution of all subscribed registered capital, (ii) “beginning to earn a profit”, (generally require to be supported by audited financial reports), along with (iii) operations being conducted without violation of law. [35]

One-Owner Limited Liability Company

One-owner WFOEs have long been permitted,[36] but a one-owner domestic limited liability company has only now become possible under the amended Company Law, subject to certain restrictions, some of which will now be applied to one-owner WFOEs.  The Company Law requires that (i) a “natural” (individual) person can only establish one one-owner LLC, which cannot in turn establish or invest in any other one-person LLC, (ii) a natural person owner LLC must have registered capital of at least RMB 100,000.[37]

The FIE Opinion reconfirms that a foreign-invested one natural person owner LLC-form WFOE is subject to the above registered capital requirements, and is not permitted to establish or invest in another one-owner LLC. It clarifies that these restrictions do not invalidate different arrangements previously approved for this form of WFOE established prior to 1 January 2006, but will apply to any application of an existing WFOE for approval of a change in the amount of registered capital, or for a new investment in another company.[38]  The FIE Opinion also clarifies that this form of WFOE is not covered by the amended Company Law’s requirement that registered capital be contributed in one instalment.[39]

FIE Liaison Offices

Liaison offices are popular vehicles for FIEs to expand their businesses in China due to their simple regulatory structure and efficient tax features. The Implementation Rules on the Administration of the Registration of Legal Entities, issued by the SAIC in 1988 and revised in 1996 and 2000 respectively ("Legal Entities Registration Rules"), established the policy basis for setting up liaison offices to conduct liaison and public relation activities.[40]  The Revised Company Registration Regulations, which abolish Legal Entities Registration Rules, however, do not contain any provisions on liaison offices, and instead detail requirements to set up branches of domestic companies. The SAIC thus holds that the Revised Company Registration Regulations and other relevant rules no longer provide a legal basis for the establishment and maintenance of representative offices. Following the promulgation of the Law of the PRC on Administrative Permits, which took effect 1 July 2004, Chinese administrative authorities have been moving towards only granting administrative permits for which there is a clear legal basis. As such, starting 1 January 2006, local administrations for industry and commerce (AICs) began refusing to carry out liaison office registrations.

The FIE Opinion officially clarify that AICs will no longer approve registrations or extensions for FIE Liaison Offices. Existing registered FIE liaison offices shall be de-registered or converted into company branches upon the expiration of their terms of operation.[41] Although the FIE Opinion confirm that the SAIC will no longer register new FIE representative offices or renew expired liaison office licenses, an SAIC official news release[42] and the SAIC's official answers to reporters[43] indicate that PRC laws do not ban the existence of FIE liaison offices. In fact, FIEs may now directly maintain liaison offices to conduct liaison work without registering them with local AICs. Existing liaison offices must de-register when their current terms of operation expire, but those not engaged in direct "business activities" may continue to operate without an SAIC license.  FIEs may also convert liaison offices into branches based on their own needs. However, the FIE Opinion omit this fact and do not provide guidance for liaison offices on practical tasks, such as how to obtain a lease, perform tax registration, hire local employees and pay their social insurance without a license.

The FIE Opinion further clarify that FIE branches may engage in liaison and consultation businesses within the FIE's business scope, while FIE liaison offices shall not engage in any business activities.

With regard to the above, FIEs will be faced with two options: i) to set up branches, which will coincide with additional tax burdens; or ii) to operate unregistered liaison offices, which will have an unwritten legal basis and face various practical difficulties.

Conclusions

The FIE Opinion are a crucial development in foreign investment in China. Apart from the topics discussed above, the FIE Opinion introduce various measures to simplify procedures for FIE registration changes, customs declaration of bonded capital equipment and foreign exchange registrations. The FIE Opinion also improve corporate governance by requiring the organization structure of an FIE, including its board of directors, to observe relevant provisions of the new Company Law.

The revisions to the PRC Company Law and relevant regulations, together with the FIE Opinion, provide a better regulatory framework for foreign investment in China. By taking advantage of the new developments, new investors can achieve more flexible structures with more efficient tax features, while existing FIEs can also take this opportunity to review their investment structures and see whether any improvements can be made.