The Types of Foreign Investment Enterprises
in the People's Republic of China
Wang Xuanjun is an attorney at law with the Beacon Law Firm in Beijing, People's Republic of China. He graduated from Beijing University with a LL.B. degree and from the University of International Business and Economics with an MBA degree. Mr. Wang worked for China's Court of Railway Transportation, China National Foreign Trade Transportation Corp. ("Sinotrans") and Gong Cheng Law Office, and served as law counsel to a number of international enterprises. For Beacon Law Firm, Admiralty & transportation (all means), corporate & joint venture, merger & acquisition, international investments are his main legal practice areas.
By Wang Xuanjun
HIS IS TO GIVE a summary introduction to the main types of Foreign Investment Enterprises existing in the People's Republic of China ("PRC" or "China") in order to serve the investors who are interested in China. PRC Foreign Investment Enterprises (PRCFIEs) in this article means the enterprises that are those established by Chinese ("PRC's") and foreign or sole foreign investors in accordance with the provisions of Chinese law and that comply with the policy of absorbing foreign direct investment by the PRC as host country (capital import country).
The first type of PRCFIEs is Sino-foreign Joint Equity Enterprises which appeared after opening policy was adopted by Chinese government in 1979, then are followed by Sole Foreign Investment Enterprise and Sino-foreign Co-operative Enterprises. New types of PRCFIEs like Foreign Investment Companies Limited by Shares, Investment-type Companies by Foreign Business Investment, BOT, etc. appeared in recent years.
(1) Sino-foreign Joint Equity Enterprises ("Joint Ventures")
Joint Ventures is one of main types of PRCFIEs. Joint Ventures are enterprises co-established, co-invested, co-operated by foreign enterprises, companies and other economic entities or individuals (foreign participants), within the territory of the PRC, with Chinese companies, enterprises or other economic entities (Chinese participants), in accordance with the principles of equality and mutual benefit and subject to approval by the Chinese government. The foreign and Chinese participants shall share Joint Ventures' profits and bear Joint Ventures' risks and losses. Joint Ventures shall take the form of a limited liability company. The proportion of investment contributed by one or more foreign participant(s) as its share of the registered capital of a Joint Venture shall in general be not less than 25 percent.
(2) Sino-foreign Co-operative Enterprises (Co-operative Enterprises)
Co-operative Enterprises are also named contractual operative enterprises. When Chinese and foreign partners establish a co-operative enterprise, provisions on such items as investment or terms for co-operator, distribution of earnings or products, sharing of risk and losses, method of business management and the ownership of property on the expiration of the contract term shall be prescribed in the co-operative enterprises contract in accordance with the provisions of Chinese law. Convenience and flexibility are the characteristics of this type of PRCFIE, therefore it is easier for co-operative partners to reach an agreement. A co-operative enterprise which complies with the provisions of Chinese law for a legal person shall acquire the status of a Chinese legal person.
General practice of co-operation is that investment or terms of co-operation provided by foreign partners is in the form of cash, equipment and technology and by Chinese partners is in the form of land-use rights, labour and related services.
(3) Sole Foreign Investment Enterprises
Sole Foreign Investment Enterprises are those enterprises established within Chinese territory, in accordance with the relevant Chinese laws, with capital provided totally by foreign investors. It does not include branches in China of foreign enterprises or other economic entities. It is a Chinese entity with registration in the territory of China and is governed and protected by Chinese laws.
Enterprises established exclusively with foreign capital must benefit the development of Chinese national economy and utilize advanced technology and equipment or export all, or the majority of, their products. Sole Foreign Investment Enterprises are prohibited from or restricted in certain business in accordance with the Guideline Catalogue of Foreign Investment Industries which is compiled and updated by the State Planning Commission in conjunction with the relevant departments under the State Council of the PRC.
(4) Foreign Investment Enterprises Limited by Shares
Foreign Investment Enterprises Limited by Shares shall refer to enterprises with corporate status whose total capital is composed of the equivalent value of stock, whose shareholders assume an amount of liability equal to the amount of shares purchased, which offsets its total assets against responsibility assumed for the company debts, and whose company shares are jointly held by Sino-foreign shareholders and shares purchased and held by foreign shareholders constitute more than 25 percent of the company's registered capital.
The company may adopt the promotional method or share float method for its establishment. The registered capital of a company shall be the total amount of paid-up share capital registered by the company with the registration authority. The minimum amount of registered capital of a company shall be RMB 30,000,000.00.
(5) Investment-type Companies (Investment Companies)
Investment-type Companies, which can also be named Holding Companies, shall refer to those companies established in China by sole foreign-funded business or by businesses jointly founded with Chinese investors to engage in direct investment. An investment company shall have registered capital of not less than US$ 30 million. The business scope of an investment company shall be restrictedly limited to the scope provided by the Chinese laws.
BOT, an abbreviation of Built-Operate-Transfer, is one type of private business investment utilized by a government to build infrastructures such as projects for highways, railways, power stations, etc.. Up to now, BOT has been gradually utilized by the Chinese government to encourage foreign investment in the area of infrastructure projects. Commitment by a government is the key point of BOT, but the commitment or security by the Chinese government shall not be obtained easily.
All investors who are to invest in China, are suggested to retain a sound law firm to check and confirm all points related to the legal affairs before material decisions are made.
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1999, Wang Xuanjun
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