Permitted Business Activities Expand for Foreign Investors

In recent years, these restrictions have been gradually relaxed in the hope that a greater number of international companies will establish their regional headquarters in China.

Relaxing the Restrictions on Activities

The «Establishment of Companies with an Investment Nature by Foreign Investors Tentative Provisions»Supplementary Provisions (2) continues this trend by relaxing restrictions on the business activities of foreign-owned investment companies in four areas.

Technical Training

Foreign-owned investment companies are now permitted to provide relevant technical training to certain Chinese domestic enterprises beyond those in which they have a direct investment. These domestic enterprises include:

(a) distributors or agencies for products of the invested enterprises in which the foreign-owned investment company invests; and

(b) enterprises or companies with which the foreign-owned investment company or its parent companies have entered into technology transfer agreements.

The latter reflects the Chinese government's recent policy of encouraging foreign enterprises to transfer technology to China.

Product Integration

Foreign-owned investment companies are now permitted to purchase and integrate the products of their invested enterprises, and then sell the integrated products inside or outside China. If necessary, the foreign-owned investment company may also procure auxiliary products in domestic or foreign markets, but the value of these auxiliary products may not exceed 50% of the total value of all products used in the integration.

Trial Sales of Products

Subject to approval by the original Examination and Approval Authority, foreign-owned investment companies may, for test-marketing purposes, conduct trial sales of a small amount of the same or similar non-quota products imported from their parent companies before their invested enterprises begin production.

To be eligible to conduct these three kinds of activities, foreign-owned investment companies must amend their Articles of Association or Joint Venture Contracts and then apply to MOFTEC for approval. In addition:

(i) registered capital contributions must have been paid-up in a timely manner in accordance with the Articles of Association or Joint Venture Contracts;

(ii) registered capital contributions paid must not be less than US$30 million; and

(iii) the foreign-owned investment company must have conducted its business legally without any record of violation.

To prevent foreign-owned investment companies from using most of their capital on direct production and operations, as opposed to investment activities, the new regulation requires that they use their cash capital contributions, foreign exchange profits or foreign exchange loans from outside China only, to pay for auxiliary products for systematic integration or products for trial sales. The annual import value of these auxiliary products and products for trial sales must not exceed 20% of cash capital contributions. If the annual import value does not exceed 20% of the cash contribution, the unused amount may not be carried over to subsequent years.

Sponsoring/Investing

Foreign-owned investment companies are now permitted to sponsor companies limited by shares with foreign investment2 and hold shares of those companies. It is important to understand that the shares held by such companies may not be listed on the Chinese stock market (while the shares of a company limited by shares with foreign investment held by other shareholders do not have the same restriction).

Endnotes

1 A foreign-owned investment company limited by shares with foreign investment means an enterprise legal person with capital consisting of shares of equal value, where the shares are held by both Chinese and foreign shareholders and where foreign shareholders hold more than 25% of the outstanding shares.

2 See footnote 1. Previously, foreign-owned investment companies were only permitted to invest in limited liability companies.