FIEs, 25% or Less!

On December 30 2002, the Ministry of Foreign Trade and Economic Cooperation (MOFTEC), the State Administration of Tax (SAT), the State Administration of Industry and Commerce (SAIC) and the State Administration of Foreign Exchange (SAFE) jointly issued Issues Relevant to Strengthening the Administration of the Examination, Approval, Registration, Foreign Exchange Issues and Taxation of Foreign-invested Enterprises Circular  (关于加强外商投资企业审批、登记、外汇及税收管理有关问题的通知) (the Circular). The Circular became effective on January 1 2003. As its name suggests, the Circular is designed to tighten the regulation of foreign-invested enterprises (FIEs).

Regular FIEs vs Special FIEs

It has been understood that the PRC Sino-foreign Equity Join Venture Law (EJV Law) applies to enterprises with foreign equity of 25% or more (Regular FIEs). With respect to enterprises with less than 25% foreign equity (Special FIEs), there have been inconsistent practices. Sometimes Special FIEs were registered as domestically invested enterprises, and sometimes MOFTEC and SAIC agencies declined to accept application for setting up Special FIEs. The Circular requires an enterprise with any foreign equity at all to comply with the EJV Law with respect to examination, approval and registration unless other laws or regulations provide otherwise. The law provides that the approval certificate and the business licence of a FIE with less than 25% foreign equity shall specify it has "less than 25% foreign equity". For those investors who want to form Special FIEs, the Circular lays out the ground rules for this.