Issues Relevant to Strengthening the Administration of the Examination, Approval, Registration, Foreign Exchange Issues and Taxation of Foreign-invested Enterprises Circular

(Issued by the Ministry of Foreign Trade and Economic Cooperation, the State Administration of Taxation, the State Administration for Industry and Commerce and the State Administration of Foreign Exchange on December 30 2002 and effective as of January 1 2003.)

Pursuant to the Sino-foreign Equity Joint Venture Law, the Sino-foreign Cooperative Joint Venture Law, the Wholly Foreign-owned Enterprise Law, the Company Law, the Contract Law, Foreign Exchange Control Regulations and other relevant laws and regulations, we hereby notify you concerning issues relevant to strengthening the administration of the examination, approval, registration, foreign exchange issues and taxation of foreign-invested enterprises, in order to adapt to the changing circumstances encountered in the effort to attract foreign investment, ensure legal compliance in the administration of foreign-invested enterprises, safeguard the healthy development of foreign-invested enterprises and protect the lawful rights and interests of domestic and foreign investors.

1. The examination and approval of the establishment of foreign-invested enterprises and their contracts and articles of association (including amendments thereto) shall be carried out in conformity with the current procedures for the examination and approval of foreign-invested enterprises in accordance with relevant State laws and regulations.

2. In accordance with relevant current laws and regulations on foreign investment, the capital contribution of the foreign investor in a Sino-foreign equity or cooperative joint venture shall in general not account for less than 25% of the registered capital of such venture. Unless otherwise specified in laws or administrative regulations, where the ratio of the foreign investor's capital contribution accounts for less than 25%, examination, approval and registration shall be carried out in accordance with current procedures for the examination, approval and registration of the establishment of foreign-invested enterprises; if the joint venture is approved, a foreign-invested enterprise approval certificate bearing the phrase "foreign investment ratio below 25%" shall be issued and, if successfully registered, the joint venture shall be issued with a foreign-invested enterprise business licence bearing the phrase "foreign investment ratio below 25%" after the entry in the "Enterprise type" column.

3. Unless otherwise specified in laws or administrative regulations, foreign-invested enterprises in which the foreign investor's capital contribution accounts for less than 25% shall be eligible neither for reduction/exemption of duties and tax on their self-used equipment and articles imported under their total amount of investment, nor for treatment as foreign-invested enterprises in respect of other taxes.

Foreign-invested companies limited by shares that already enjoy treatment as foreign-invested enterprises may continue to enjoy such treatment in accordance with relevant provisions after a capital and share increase or after a transfer of equity to a foreign investor.

4. If the investors in a foreign-invested enterprise in which the capital contribution of the foreign investor accounts for less than 25% contribute capital in the form of cash, such capital shall be fully paid in within three months after the date the enterprise obtains its business licence. If the investors contribute capital in kind or in the form of industrial property rights, etc., such capital shall be fully paid in within six months after the date the enterprise obtains its business licence.

5. Where foreign investors acquire equity interests in domestic enterprises of any nature or type, such enterprises shall be converted into newly established foreign-invested enterprises in conformity with current procedures for the examination and approval of foreign-invested enterprises in accordance with relevant State laws and regulations after approval by the examination and approval authority. Such foreign-invested enterprises shall be in compliance with policies on foreign-invested enterprises. After approval, such foreign-invested enterprises shall be issued with a foreign-invested enterprise approval certificate by the examination and approval authority and a foreign-invested enterprise business licence by the administration for industry and commerce.

Chinese natural persons who have held the status of shareholder in the original domestic company for one year or more may continue as Chinese investors in the foreign-invested enterprise established after conversion, subject to approval.

For the time being, Chinese natural persons in China are not permitted to establish a foreign-invested enterprise with a foreign company, enterprise, other economic organization or individual by way of new establishment or takeover.

6. Where a foreign investor acquires an equity interest in a domestic enterprise, it shall pay the full takeover price within three months after the date of the issuance of the foreign-invested enterprise business licence. Where special circumstances require deferment of the payment and such deferment is approved by the examination and approval authority, 60% or more of the total amount of the takeover price shall be paid within six months after the date of issuance of the business licence and the entire takeover price shall be fully paid within one year. Under such circumstances, benefits shall be distributed in proportion to the part of the capital contribution actually paid in. The investor with the controlling interest may neither obtain the decision making power in the enterprise nor consolidate its interest and assets in the enterprise into its financial statement until it has paid the takeover price in full. The foreign-investment-related foreign exchange registration certificate issued by the administration of foreign exchange of the place where the transferor of the equity interest is located is the valid document certifying that the foreign investor has fully paid in the takeover price.

When a foreign investor acquires an equity interest in a domestic enterprise, the parties to the equity transfer shall specify the time limit for the payment of the equity takeover price by the foreign investor in the equity transfer agreement executed by them. If the relevant time limit is not specified, the examination and approval authority shall not approve the agreement.

7. A foreign-invested enterprise shall apply to the administration of foreign exchange of the place where it is registered to carry out foreign exchange registration procedures on the strength of its foreign-invested enterprise approval certificate and its foreign-invested enterprise business licence.

When the examination and approval authority approves the takeover of an equity interest in a domestic enterprise by a foreign investor, it shall forward copies of the official reply concerning the equity transfer to the administrations of foreign exchange of the place where the domestic enterprise is located and of the place where the transferor of the equity interest is located. The administration of foreign exchange of the place where the transferor of the equity interest is located shall supervise the receipt of the foreign exchange.

8. All examination and approval authorities, administrations for industry and commerce and administrations of foreign exchange shall strictly enforce the provisions hereof. No approval, business registration or foreign exchange registration shall be granted after the implementation date hereof unless examination and approval procedures have been carried out in accordance herewith.

Enterprises with a foreign investment ratio of less than 25% established prior to the implementation hereof shall carry out examination, approval and registration procedures ex post facto within half a year after the implementation date hereof. If an enterprise fails to carry out such procedures in accordance with provisions, the business registration authority shall order it to carry out the same within a specified period of time. If it still fails to do so within the time limit, the business registration authority shall punish it in accordance with Article 63 of the Administration of Company Registration Regulations. If the enterprise still fails to carry out the relevant procedures after being punished, it shall be failed in the annual inspection for the year concerned.

All business registration authorities shall duly compile the relevant enterprise statistics, adjust registration jurisdiction and transfer enterprise dossiers in accordance herewith. The amendment of the registration of all enterprises that have carried out examination and approval procedures ex post facto shall fall within the jurisdiction of registration authorities authorized to register foreign-invested enterprises.

9. In the event of a conflict between provisions issued prior hereto and this Circular, this Circular shall prevail.

10. This Circular may be applied to the investment in and establishment of foreign-invested enterprises in mainland China by investors from Taiwan, Hong Kong and Macao.

11. This Circular shall be implemented as of January 1 2003.