Laws of the People's Republic of China

The Ministry of Foreign Trade and Economic Cooperation, the State Administration of Taxation, the State Administration for Industry and Commerce, the State Administration of Foreign Exchange

Circular of the Ministry of Foreign Trade and Economic Cooperation (MOFTEC), State Administration of Taxation (SAT), State Administration of Industry and Commerce (SAIC), and State Administration of Foreign Exchange (SAFE) on Issues Related to Improving the Administration of Enterprises with Foreign Investment in Terms of Examination and Approval, Registration, Foreign Exchange and Taxation

WaiJingMaoFaFa [2002] No.575

December 30, 2002

Commissions (departments, bureaus) of foreign trade and economic cooperation in all provinces, autonomous regions, municipalities directly under the Central Government, and municipalities separately listed on the State plan; administration bureaus of industry and commerce in all provinces, autonomous regions, municipalities directly under the Central Government, and other authorized bureaus; SAFE, and its branches and exchange administration offices in all provinces, autonomous regions and municipalities directly under the Central Government, and SAFE branches in Shenzhen, Dalian, Qingdao, Xiamen and Ningbo; bureaus of state taxation and of local taxation in all provinces, autonomous regions, municipalities directly under the Central Government, and municipalities separately listed on the State plan:

In order to keep abreast with the new situation of utilizing foreign funds and normalize the administration of enterprises with foreign investment, in view of the new circumstances and problems arising out of the recent utilization of foreign funds, the Circular on Issues Related to Improving the Administration of Enterprises with Foreign Investment in Terms of Examination and Approval, Registration, Foreign Exchange and Taxation (see attachment) has been formulated jointly by the MOFTEC, SAT, SAIC, and SAFE and is hereby distributed to you for implementation.

Attachment:Circular on Issues Related to Improving the Administration of Enterprises with Foreign Investment in Terms of Examination and Approval, Registration, Foreign Exchange and Taxation

Pursuant to the Law of the People's Republic of China (PRC) on Chinese-foreign Equity Joint Ventures, the Law of the PRC on Chinese-foreign Contractual Joint Ventures, the Law of the PRC on Foreign-capital Enterprises, the Company Law of the PRC, the Contract Law of the PRC, the Regulations on the Exchange System of the PRC, and other relevant laws and regulations, a circular on issues related to improving the administration of enterprises with foreign investment in terms of examination and approval, registration, foreign exchange and taxation is given hereunder with a view to keeping abreast of the new situation of absorbing foreign funds, normalizing the administration of enterprises with foreign investment, ensuring the sound development of enterprises with foreign investment, and protecting the lawful rights and interests of Chinese and foreign investors:

1.

The establishment of an enterprise with foreign investment as well as its contract and articles of association (including the modification of the contract and articles of association) shall be examined and approved according to the current approving procedures of enterprises with foreign investment provided by relevant laws and regulations of the State.

2.

According to the current laws and regulations related to foreign investment, the proportion contributed by foreign investors in a Chinese-foreign equity joint venture or a Chinese-foreign contractual joint venture shall in general not be less than 25 percent of its registered capital. In case the proportion of the foreign investment is less than 25 percent, unless otherwise provided in law or administrative regulations, examination and approval as well as registration shall be handled according to the current examining, approving and registering procedures for the establishment of enterprises with foreign investment. A certificate of approval of enterprise with foreign investment marked with the words "Proportion of foreign investment is less than 25 percent" shall be issued to the approved; a business license of enterprise with foreign investment with the words "Proportion of foreign investment is less than 25 percent" marked in the column of "type of enterprise" shall be issued to the registered.

3.

An enterprise with foreign investment in which the proportion of foreign investment is less than 25 percent shall, unless otherwise provided in law or administrative regulations, not enjoy the preferential treatment of tax reduction or exemption for importing self-satisfying equipment and articles under the item of its total investment and other taxation treatment given to enterprises with foreign investment.

A foreign-funded stock limited company that has enjoyed the treatment given to enterprises with foreign investment, after increasing its registered capital and stocks or transferring its stocks to foreign investors, may still enjoy the treatment given to enterprises with foreign investment according to relevant provisions.

4.

As to an enterprise with foreign investment in which the proportion of foreign investment is less than 25 percent, if the investor contributes in cash, the full contribution shall be made within three months after receiving the business license; if the investor contributes in kind, industrial property rights and etc, the full contribution shall be made within six months after receiving the business license.

5.

In case a foreign investor purchases the stock of a domestic enterprise of any nature and any type, the said domestic enterprise shall, according to the provisions of relevant laws and regulations of the State and the current examining and approving procedure for enterprises with foreign investment, be altered into an enterprise with foreign investment upon the approval of the approving agency concerned and follow the industrial policy on foreign investment. After the approval, the approving agency shall issue a certificate of approval of enterprise with foreign investment, and the administration agency of industry and commerce shall issue a business license of enterprise with foreign investment.

A Chinese natural person shareholder in the said domestic enterprise who has owned its stock for more than one year may, if approved, still be the Chinese investor of the enterprise with foreign investment established after the alteration.

A domestic Chinese natural person shall not, for the time being, establish an enterprise with foreign investment with a foreign company, enterprise, other economic organization, or individual in the form of new establishment or purchase.

6.

A foreign investor that has purchased the stock of a domestic enterprise shall make full payment of the purchase within three months after the issuance of the business license of enterprise with foreign investment. If deferred payment is necessary due to special reasons, with the approval of the approving agency concerned, no less than 60 percent of the total amount shall be paid within six months after the issuance of the business license of enterprise with foreign investment, and the total amount shall be fully paid within one year, and the net profit shall be distributed in proportion to the actual contributions to the registered capital. Before making full payment for the purchase, the controlling investor shall not obtain the decision-making power of the enterprise, and may not incorporate his/her equity and assets in the said enterprise into his/her own financial statements in the form of a consolidated statement. The certificate of foreign exchange registration of foreign funds issued by the SAFE office in the locality where the stock transferor resides shall be the valid document verifying the payment for the purchase by the foreign investor.

In case a foreign investor purchases the stock of a domestic enterprise, the two parties of the stock transfer shall set a deadline for the payment for the purchase of stock by the foreign investor in the agreement of stock transfer. In case the said deadline is not prescribed in the agreement, the approving agency shall not approve the transfer.

7.

An enterprise with foreign investment shall apply to the SAFE office in its place of registration for foreign exchange registration with the certificate of approval of enterprise with foreign investment and the business license of enterprise with foreign investment.

When allowing a foreign investor to purchase the stock of a domestic enterprise, the approving agency shall send a duplicate of the approval to the SAFE offices in the localities where the said domestic enterprise is located and where the transferor of the stock resides. The SAFE office in the locality where the transferor of the stock resides shall supervise the collection of foreign exchange.

8.

Approving agencies, agencies of industrial and commercial registration, and SAFE offices in all localities shall strictly implement the provisions of this Circular. As from the day when this Circular is put into effect, approval, industrial and commercial registration, and foreign exchange registration shall not be handled for those that fail to go through the procedure of approval according to this Circular.

An enterprise established before the implementation of this Circular with the proportion of foreign investment below 25 percent shall make up the procedure of approval and registration within half a year after the day when this Circular is put into effect. For those that fail to make up the procedure, the relevant agency of industrial and commercial registration shall order them to do so in a prescribed time limit. Anyone that does not make up the procedure beyond the time limit shall be punished by the relevant agency of industrial and commercial registration according to article 63 of the Regulations on the Administration of the Registration of Company. An enterprise that does not go through the relevant procedures after being punished shall not be let pass the annual inspection for the current year.

The administration agencies of industrial and commercial registration in all localities shall, according to the provisions of this Circular, count up the number of enterprises concerned, adjust the jurisdiction of registration, and do a good job in the transfer of enterprises' files. The registration alteration for enterprises that have made up the procedure of approval shall be exclusively under the jurisdiction of the agencies of registration with the authority to register enterprises with foreign investment in the localities where the said enterprises reside.

9.

In the case of conflict with previous provisions, this Circular shall prevail.

10.

This Circular shall apply to the establishment of enterprises with foreign investment in the mainland by investors from the regions of Taiwan, Hong Kong and Macao.

11.

This Circular shall enter into force as of January 1, 2003.