Sept. 2006 – Morrison / Foerster

Clarifying New Registration and Approval Regulations – SAIC’s Circular 81

The Circular for the Application of Laws and Regulations concerning the Approval and Registration of Foreign Invested Companies, Circular Gongshangwaiqizi [2006] No. 81, (《关于外商投资的公司审批登记管理法律适用若干问题的执行意见》; “Circular 81”) was jointly issued by the State Administration for Industry and Commerce (“SAIC”), Ministry of Commerce, General Administration of Customs, and State Administration of Foreign Exchange on May 10, 2006. SAIC also issued a press release and a notice to clarify several issues regarding the implementation of Circular 81 on May 10, 2006, and June 1, 2006, respectively.

Circular 81 was issued to clarify inconsistencies between the new Administrative Rules for Company Registration (《公司登记管理条例》) (“Registration Rules”) and the recently revised Company Law. These inconsistencies affected the approval and registration of foreign invested enterprises (“FIEs”), and created uncertainty on the part of many foreign investors. A number of significant changes are summarized as follows:

FIE Establishment

* Applications to establish FIEs now require additional documents, including:

(i) original attestation documents from foreign notarization authorities and the relevant Chinese Embassy attesting to the identities of the foreign investors, and

(ii) a Power of Attorney on Delivery of Legal Documents (法律文件送达授权委托书) entered into between the foreign investors and their authorized local agent.

* Wholly Foreign-Owned Enterprises (“WFOEs”) and Contractual Joint Ventures are required to register with the local bureau of the SAIC within 30 days of issuance of their Certificate of Approval, while Equity Joint Ventures are required to register within 90 days. Failure to register within the stipulated time frame will require the foreign investor to obtain written confirmation from the approval authorities that the approval is still valid, or else to re-apply for approval.
* The registered capital of an FIE must consist of at least 30% cash, while contributions in-kind and contributions of intangible property may represent no more than 70% of the registered capital.
* If a foreign investor has obtained a loan, those funds will be considered “self-owned” funds of that investor and can be used as capital contributions to an FIE.
* The first installment of an FIE’s registered capital must be at least 15% of the total registered capital and must be injected within three months of issuance of the FIE’s business license. The remainder of the registered capital must be injected within two years of issuance of the business license.
* If a WFOE is established by a single foreign natural person, the registered capital shall be no less than RMB 100,000 and must be contributed in full within six months of issuance of the business license. Such a WFOE would not be permitted to establish a subsidiary in China.

Increasing Registered Capital of an FIE

* When an FIE’s application to increase its registered capital is approved, it can immediately apply to update its foreign exchange registration certificate and foreign exchange capital account without waiting for issuance of the new business license. Once at least 20% of the increased registered capital has been paid-in, the FIE can renew its business license.

Branches and Liaison Offices

* When an FIE applies to establish a branch, it now does not need to obtain a “transmission letter” (核转函) from the local AIC; rather, it will apply directly to the AIC where the branch will be located.
* Upon the establishment or cancellation of a branch, an FIE shall file for the record (备案) such change with the AIC where the FIE’s head office is registered.
* When an FIE establishes a liaison office, it does not need to register such liaison office with the AIC.
* An existing liaison office must either be de-registered or converted to branches when its existing registration certificate expires. After deregistration of an existing liaison office, it is permitted to continue operating and will be monitored by the local AIC. According to the SAIC, a deregistered liaison office may open a special bank account solely to receive operating funds from its parent FIE, but is not permitted to use that bank account for business activities.
* Liaison offices are only permitted to engage in liaison-related activities and cannot engage in direct business activities.

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