FIE Status and the 25% Rule

For a foreign natural person or legal entity interested in investing in the PRC, legally foreign participation in an investment vehicle must exceed a certain percentage of the total registered capital. What is the nature of such requirements and what recent changes have we seen?

FIE Laws and the 25% Rule

As most readers know, foreign investment enterprises in the PRC usually take the form of equity joint ventures (EJVs), cooperative joint ventures (CJVs) or wholly foreign-owned enterprises (collectively, FIEs). According to Article 4 of the EJV Law, foreign investor(s) shall hold at least 25% of the registered capital of such a joint venture. In practice, the approving authorities also require that foreign investment in a CJV account for not less than 25% of the registered capital, though this is not clearly stipulated in the CJV Law. This 25% minimum foreign investment rule has been in effect for about 20 years, and has been confirmed repeatedly by the Ministry of Foreign Trade and Economic Cooperation (MOFTEC) and other PRC government departments through subsequent laws and regulations. On August 28 2001, MOFTEC, the Ministry of Science and Technology and the State Administration for Industry and Commerce (SAIC) jointly issued the Establishment of Foreign-funded Venture Investment Enterprises Tentative Provisions, which restated the rule and required that foreign investors' capital contributions to a venture investment enterprise must be at least 25% of all capital contributions.