Friday, August 18, 2006

New law regulating FDI in China and setting limits to the amount of investments

The government of China has worked out regulations about acquisition of Chinese enterprises by foreign investors. They will come into effect on September, 8. According to these new regulations, domestic enterprises with foreign direct investments making more than 25% of the total share capital, can enjoy preferential treatment as foreign-funded enterprises. Those domestic companies having less than 25% foreign investment share in their total capital, won't have such an advantage.

Another incentive implemented by the regulations sets an upper limit for investors. For companies with registered capital not exceeding 2.1 million US dollars, total investment amount should not exceed 143% of the registered capital. For companies whose registered capital is between 2.1 million and 5 million US dollars, total investment amount should not exceed 200% the amount of the registered capital. For companies with registered capital between 5 million and 12 million US dollars, the investment amount should not exceed 250% the amount of the registered capital. At last, the investment amount for those companies whose registered capital is over 12 million US dollars, should not exceed 300% the amount of registered capital.

The regulations are to certain extent connected with the problem that not all foreign investors in China are really foreign-owned. This issue was already addressed in Offshore Capital coming back & Direct Foreign Investments, and it has not lost its actuality. There was a common practice that many domestic companies registered their names in the British Virgin Islands or some other jurisdiction with favourable legislation for overseas invsetment companies; then they bought their own domestic company in the name of a foreign enterprise and received all the advantages of foreign enterprises.

The BVI companies as well as other foreign companies registered in such a way won't get this preferential treatment. According to the new regulations, the domestic companies under the name of their legal foreign company overseas that have close business relationship or are controlled by the domestic company, will not enjoy the preferential policies for foreign-owned enterprises.

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