New PRC rule on outward investments by FIEs

Recently a new rule has been jointly issued by the Ministry of Foreign Trade and Economic Cooperation (MOFTEC) and State Administration for Industry and Commerce (SAIC) to clarify several issues concerning outward investments made by foreign investment enterprises (FIEs), effective from 1 September, 2000.

Two kinds of investment forms are available to FIEs, to set up a new enterprise or to buy equity interests in an existing enterprise. Three major conditions must be met by FIEs in order to be qualified to make investments. The registered capital must have been fully paid up, the FIE must be making profits and the FIE can have no record of illegal operations.

In addition to limitations imposed on a purely domestic owned enterprise when making outward investments, an FIE also has to be subject to the limitations for foreign investors especially in terms of industry access. According to the new rule, FIEs are forbidden to make investments in areas where foreign investments are prohibited according to the Guideline and Catalogue on foreign investment.

An FIE intending to make investments should go directly to the Company Registry to comply with relevant procedures for setting up a new enterprise. There is no need to follow procedures for setting up an FIE. However, this is only true with FIEs intending to invest in areas falling within the Encouraged and the Permitted category of the Guideline and the Catalogue, while for investments falling within the Restricted category, the FIE has to go to MOFTEC at provincial level (commonly referred to as COFTEC) to obtain their consent first. Only with the approval from COFTEC, can the FIE proceed to go through further formalities with the Company Registry.

Thirty days after the establishment of the investment company, the FIE shall make a filing with its original approval authority in respect of the newly-established investment company.

FJE's investment enterprises cannot enjoy any preferential treatment granted to FIEs. They are treated the same as domestic companies in this respect except as described below.

The new rules provide that where an FIE intends to invest in China's central and western regions and the shareholdings ultimately owned by the foreign party in the investment company reaches no less than 25 per cent, the investment company can enjoy the preferential treatment granted to FIEs. This exception is made to reflect PRC's current key policy – to promote the development of the PRC's less developed central and western regions.

For further information please contact Bao Chen (Beijing office) at [email protected] or on +8610 6590 0389.