Contribution of capital

Corporation law - Contribution of capital

Requirement for capital contribution

Foreign investor may contribute their capital in the form of foreign currency, goods, industrial property rights, non-patented technology, land use rights. Cash contributions are used as working capital. Capital contribution other than cash should be subject to value appraisals, and the transfer of the legal ownership in accordance with the law. In respect of industrial property rights and non-patented technology, the amount should not exceed 20% of the whole amount of the registered capital, subject to special provisions of the State on high-technological achievements. All forms of capital contributions should be examined by statutory examining bodies, which have the authority to issue capital examination reports.

If the investor transfers its own trading stock to the new company in consideration for the share in the company, such transfers are taxable transactions. The investor should pay VAT in accordance with the legal requirements.

 

Provisions on the capital contribution for Foreign Invested Enterprises

According to the "Certain provisions on the contribution of capital by the parties to the Sino-foreign equity joint venture enterprises", the amount of the registered capital should be paid up within 6 months upon the issue of the business license if the joint venture contract provides that capital amount is to be paid in one lump sum. If the capital is to be paid by installments, the first installment, being no less than 15% of the total amount of the registered capital, should be paid up within 3 months upon the issue of business license. The maximum period allowed to contribute capital is 2 years upon the issue of business license.

The provisions for the capital contribution also apply to parties to the Sino-foreign cooperative joint venture and wholly foreign owned enterprises.

 

Minimum amount of registered capital

Type of comapny	Industrial sectors	Registered capital
Limited company	Manufacturing Wholesaling Retailing Provision of service	RMB 500,000 RMB 500,000 RMB 300,000 RMB 100,000
Joint stock limited company	non-listed listed	RMB 10,000,000 RMB 50,000,000
Foreign invested joint stock limited company	non-listed listed	RMB 30,000,000 RMB 50,000,000

Subject to provisions for specially regulated industry sectors, foreign invested enterprises are not required to have a minimum amount of registered capital. Instead, the law imposes a ratio between the amount of registered capital and the amount of total investment (also applying to the increase in capital), to prevent any arrangement for thin-capitalization. 

Total amount of investment to total investment	Ratio of regisered capital
Less Than USD 3 million	7/10
Between USD 3 million to less than 10 USD million  (within which total investment below USD 4.2 million, the registered capital being no less than USD 2.1 million)	1/2
Between USD 10 million to less than USD 30 million  (within which total investment below USD 12.5 million, the registered capital being no less than USD 5 million)	2/5
Over USD 30 million  (within which total investment below USD 36 million, the registered capital being no less than USD 12 million)	1/3

Some specially regulated industry sectors have different legal requirement for minimum registered capital. For example: 

Industry	Domestic Company	FIE under WTO	FIE under CEPA
Printing works for books & magazines	RMB 2 million	RMB 10 million	Same as left
Retail distribution of books, newspaper, and magazines	RMB 300,000	RMB 5 million	Same as left
Import & export trading *(National treatment will be given to Foreign investors in December 2004)	RMB 1 million	RMB 50 million*	RMB 20 million*
Freight forwarding agent	RMB 5 million	USD 1 million	RMB 5 million

 

Is it possible for the related parties of the foreign investor to contribute capital?

No. Foreign investors must produce evidence of directly remitting cash into China. Otherwise, it cannot fulfill the requirement for capital examination.

 

State Assets as capital contribution

According to the Provisions on the Administrative Method for the Appraisal of State Assets, if the assets to be transferred to the FIE belong to state assets, the following requirements must be complied with: -

A. A written consent to the proposed transfer from the competent supervising department of the Chinese party, who is one of the shareholders of the FIE;

B. An asset appraisal report issued by authorized institutions who are appointed to conduct the asset appraisals;

C. A confirming report given by the State Assets Administration in respect of the appraisal report issued by the authorized institutions.

Where the procedures for state asset appraisal in accordance with the law are not followed, the transfer of assets to the FIE will be unlawful.

 

Foreign ownership in FIE

In case that the total foreign ownership in the FIE falls below 25%, the Chinese government will still approve its registration. However, the FIE so formed shall not enjoy the preferential tax concessions available to the FIE in general. If the FIE operates in a sector where foreign majority ownership is not permitted, the percentage foreign ownership in that FIE shall be limited in accordance with the Chinese law. The law on the relative foreign ownership will be amended in accordance with the commitment the Chinese government made to the WTO members.

 

Capacity of Investors

The capacity of the foreign party in the FIE can be companies, enterprises, or individuals. The capacity of the Chinese party in the FIE can only be companies or enterprises to the exclusion of individuals, subject to the provision of the law to the contrary. The Chinese party in the FIE for certain particular industry sectors must be state owned enterprises.

 

Can foreign investors use Reminbi as capital contribution ?

The Circular No. 30 (2003) issued by the State Administration of Foreign Exchange provides that if the capital contribution is in the form of cash, the foreign investor may contribute freely convertible foreign currency to the foreign investment enterprise, or the after-tax profits received from FIE's. Upon approval, the capital contribution may take the following forms: -

1. The capitalization of the development funds, the saving funds (or the capital reserve, surplus reserve) of the FIE;

2. The transfer to the capital account of the unappropriated profits, dividends payable, and the interest payable on outstanding dividends;

3. The principle of the duly registered foreign currency loans, and the interest payable for current period on the loans;

4. The re-invested amounts from the return of capital prior to the termination of the foreign investment enterprise, and the amount realized from the liquidation, the transfer of equity interests, and the reduction of capital in the foreign investment enterprise within the Chinese territories.