By acquiring the equity or assets of existing foreign-invested enterprises in China, it has become another important form of foreign investment in China. In addition, foreign investors who have already invested in China, due to their needs in production, operation, management, capital and other aspects, reorganize their foreign-invested enterprises set up in China, which has also become a common method for them to achieve new investment plans and goals. This article discusses some common legal practice problems based on practical experience.

1. Acquisition of assets

Foreign businessmen may acquire the assets of existing foreign-invested enterprises and establish another new foreign-invested enterprise, and the existing foreign-invested enterprises shall be dissolved. The advantageous aspect of this way of acquiring assets is that foreign investors, as acquirers, do not have to bear any debts or liabilities of existing foreign-invested enterprises; The disadvantage is that the acquisition of assets generally involves a variety of taxes, such as value-added tax, business tax, land value-added tax, withholding income tax, etc.

2. Acquisition of equity

A foreign investor may also become an investor of an existing foreign-invested enterprise by acquiring the Chinese or foreign equity of the enterprise, and the existing foreign-invested enterprise will continue to operate. The advantage of this method of acquiring equity is that compared with the method of acquiring assets, the tax is much lighter and generally only involves withholding income tax. Therefore, in practice, the method of acquiring equity is adopted in most cases; The disadvantage is that foreign investors, as new investors of existing foreign-invested enterprises, should bear all the debts and responsibilities of existing foreign-invested enterprises in the same proportion as other investors. Therefore, before acquiring the Chinese or foreign equity of an existing foreign-invested enterprise, foreign investors should hire lawyers, accountants, auditors and engineers to conduct a comprehensive and careful investigation on the existing foreign-invested enterprise, so as to avoid falling into a trap.

There are usually two ways to acquire equity:

a 、 Direct acquisition

Direct acquisition refers to the foreign direct acquisition of Chinese or foreign equity of foreign-invested enterprises in China. The advantageous aspect of this acquisition method is that foreign businessmen can more effectively participate in or control the foreign-invested enterprises they have acquired. In addition, if the foreign businessmen use their profits from other foreign-invested enterprises in China to acquire or invest in a new foreign-invested enterprise, they can also enjoy the preferential treatment of 40% of the income tax paid on the reinvestment part; On the negative side, such acquisition must be approved by the board of directors and shareholders of foreign-invested enterprises, as well as the original approval authority, and future retransfer must be approved again, which is inconvenient.

b 、 Indirect acquisition

Indirect acquisition refers to the acquisition by a foreign investor of the equity of a foreign-invested enterprise in a foreign company outside China to indirectly own the equity of a foreign-invested enterprise. The advantage of this acquisition method is that it is purely a transaction outside China and does not need to be approved by any party in China. It is also very convenient to transfer the equity of companies outside China and does not have to pay taxes related to China; On the negative side, it is not easy for foreign businessmen to directly participate in or control the daily operation and management of foreign-invested enterprises.

3. Industrial policy

China has always had an industry orientation problem for foreign-invested enterprises. Some industries do not allow the establishment of foreign-invested enterprises. Some industries can establish Sino foreign joint ventures, Sino foreign cooperation and wholly foreign-owned enterprises. Some industries only allow the establishment of Sino foreign joint ventures, Sino foreign cooperative enterprises, but not wholly foreign-owned enterprises Chinese and foreign contractual joint ventures must be controlled by the Chinese side, such as film services, audio-visual products distribution, insurance and other industries require the Chinese side's equity to be more than 51%; Others stipulate that the foreign equity cannot exceed a certain proportion. For example, the foreign equity of value-added telecommunications enterprises cannot exceed 30%, and the foreign equity of advertising companies cannot exceed 49%. The provisions of these industrial policies have a direct impact on the acquisition or restructuring of foreign-invested enterprises, and foreign-invested enterprises after acquisition or restructuring shall not violate the provisions of relevant industrial policies.

4. 25% lower bound problem

As a basic feature of Sino foreign joint ventures or Sino foreign cooperative enterprises, the proportion of foreign investment accounts for at least 25% of the registered capital of Sino foreign joint ventures or Sino foreign cooperative enterprises. Therefore, Sino foreign joint ventures or Sino foreign cooperative enterprises can enjoy certain tax exemptions and other preferential treatment. If the proportion of foreign investment is less than 25% due to acquisition or restructuring, the original Sino foreign joint venture or Sino foreign cooperative enterprise will be regarded as an ordinary domestic enterprise, and will lose all preferential treatment that can be enjoyed as a Sino foreign joint venture or Sino foreign cooperative enterprise, and may include paying back all the tax preferential treatment previously enjoyed. Therefore, foreign businessmen are generally unwilling to cross this bottom line.

5. Tax burden of domestic enterprises

If the foreign party wants to withdraw its investment completely and transfer all its equity in the Sino foreign joint venture, Sino foreign cooperation or wholly foreign-owned enterprise to the Chinese party or other Chinese companies, the original Sino foreign joint venture, Sino foreign cooperation or wholly foreign-owned enterprise will become a purely domestic Chinese enterprise. As mentioned above, it can no longer enjoy any preferential treatment it previously enjoyed. Moreover, If it is a productive foreign-invested enterprise with an operation period of less than 10 years, it shall also pay the income tax exemption for two (two) years and half reduction for three (three) years and any other tax preference previously enjoyed. This will inevitably make such equity transfer economically uneconomical. It is better to withdraw by liquidation and dissolution of foreign-invested enterprises.

6. Proportion of total investment to registered capital

Every foreign-invested enterprise has a concept of total investment and registered capital. The total amount of investment is the sum of capital construction funds and working capital for production and operation required by a foreign-invested enterprise; The registered capital is the sum of the capital contributions subscribed by the investors, and is also the limit of the liability of the investors to the foreign-invested enterprises. The relationship between registered capital and total investment is simply: total investment=registered capital+borrowing. In order to prevent too little registered capital, too large loan proportion and unreasonable risk sharing, Chinese laws stipulate that the ratio of registered capital to total investment must meet the following standards:

Total investment (USD) Registered capital
Less than 3 million, accounting for 7/10 of the total investment
More than 3 million but less than 10 million, accounting for 1/2 of the total investment
(At least 2.1 million if it is below 4.2 million)
10 million to 30 million, accounting for 2/5 of the total investment
(At least 5 million if below 12.5 million)
More than 30 million yuan accounts for 1/3 of the total investment
(At least 12 million if less than 36 million)

Therefore, in case of any change in the total investment or/and registered capital of foreign-invested enterprises due to acquisition or restructuring, the proportion between them should always be kept in line with the corresponding legal provisions.

7. Capital increase approval

In the acquisition or restructuring of foreign-invested enterprises, if the total investment and/or registered capital of foreign-invested enterprises are increased due to the need to expand production and operation, the approval of the original approval authority must be obtained. If the sum of the newly increased investment and the original total investment exceeds the approval authority of the original approval authority, it must also be reported to the approval authority at the next higher level for approval. It is generally known that for productive foreign-invested enterprises with a total investment of more than US $30 million and belonging to restricted industries, they must be examined and approved by the central level examination and approval authority. It is usually much more difficult to obtain approval at the central level than at the local level, so many foreign-invested enterprises try every means to make the total investment not exceed the limit of 30 million dollars. In practice, we should also pay special attention to the fact that we should never trust the ultra vires approval of some local approval authorities. Such approval is invalid in law, even if the local approval authorities make any promises, it is useless. In the end, it is the foreign businessmen themselves who will be unlucky.

8. Equity and foreign debt ratio

It is common for foreign-funded enterprises to borrow money from financial institutions, companies or individuals outside China in practice, but the question is whether there is a limit on the amount of such borrowing? According to the relevant regulations of the Chinese foreign exchange administration, the relevant foreign exchange administration will require that the cumulative amount of medium - and long-term foreign debt borrowed by foreign-invested enterprises should not exceed the difference between their total investment and registered capital when registering foreign debt for loans. Therefore, when many local banks provide loans to Chinese foreign-invested enterprises, they generally insist on limiting the amount of loans to this difference. If they want to exceed the limit, they usually require the foreign-invested enterprises as borrowers to complete all the approval procedures to increase their total investment before they can provide loans.

9. Shareholder loans

As for the difference between the total investment of foreign-invested enterprises and their registered capital, many foreign-invested enterprises prefer to use the form of shareholder loans, but ignore the legitimacy of Chinese shareholder loans, except for loans from banks inside and outside China. The problem of foreign shareholders' loans is simple. Foreign invested enterprises only need to go through the relevant foreign debt registration procedures; However, loans from Chinese shareholders cannot be directly lent to foreign-invested enterprises, because in China, except banks or other non bank financial institutions that can engage in loan business, no other enterprises can lend to each other. In practice, the Chinese shareholder usually entrusts the bank with the funds to be lent, and the bank handles entrusted loans to foreign-invested enterprises. However, the relevant bank needs to charge a certain management fee, which is generally 1-3% of the total loan amount per year.

10. Capital reduction

In the process of acquisition or restructuring of foreign-invested enterprises, in order to reduce the scale of production and operation, many foreign investors may want to reduce the total investment and/or registered capital of foreign-invested enterprises. According to Chinese laws and regulations, foreign-invested enterprises can apply to the original examination and approval authority to reduce the total investment and/or registered capital if they have a legitimate reason, without affecting the normal operation of the enterprise and without infringing the interests of creditors. However, it may not apply under the following circumstances: a. The existing laws and regulations have lower limits on the registered capital, and the reduced registered capital is lower than the statutory amount; b 、 The enterprise has economic disputes and has entered into judicial or arbitration procedures; c 、 The minimum scale of production and operation is stipulated in the contract or articles of association of the enterprise. The total investment after reduction is less than the minimum scale; d 、 The Chinese foreign contractual joint venture contract stipulates that the foreign party can recover its investment first and that the recovery has been completed.
In practice, it is difficult for a foreign-invested enterprise to reduce its total investment and/or registered capital, and it has to go through complicated procedures such as approval, accounting verification and announcement of creditors. Therefore, such cases are relatively rare in practice.

11. State owned assets evaluation

The acquisition or restructuring of foreign-funded enterprises will in many cases involve the sub acquisition, transfer or change of Chinese equity invested in state-owned assets, which leads to the question of how to determine the equity transfer price. Can the parties concerned agree on their own? According to the relevant laws and regulations of China, where the transfer of state-owned assets' equity is involved, the value of the equity to be transferred must be evaluated by a qualified state-owned assets evaluation institution and confirmed by the state-owned assets management department. The confirmed appraisal results shall be used as the basis for pricing the transferred equity. In practice, foreign businessmen generally do not trust the evaluation of Chinese accounting firms, and prefer to spend more money to hire qualified international well-known accounting firms that have established institutions in China.

12. Technical investment

Many foreign-invested enterprises have technology investment in their registered capital, and some plan to join technology investment in the process of acquisition or restructuring. But the question is how much of the registered capital can be accounted for by technology investment? In this regard, Chinese law is limited. In general, the technology investment shall not exceed 20% of the registered capital, and the investment of high-tech achievements (as defined by the state) may exceed 20% of the registered capital, but shall not exceed 35% at most. The technology invested for shares shall be evaluated and valued by a qualified evaluation institution. If the value exceeds 20% of the registered capital, relevant documents shall be submitted to the science and technology management department at or above the provincial level for confirmation. If the contribution is made with high-tech achievements, it shall be paid in one time according to the prescribed time limit for contribution.

13. Investment in place

The contribution of all parties to a foreign-invested enterprise shall be timely made in accordance with the provisions of laws and contracts, including the capital required for acquisition or restructuring. Otherwise, foreign investors can only distribute the income according to the proportion of their actually paid capital contribution before their actually paid capital contribution has not reached the full amount of their subscribed capital contribution. Moreover, if the capital invested by foreign investors has not reached 25% of the paid in capital of the enterprise's investors, foreign-invested enterprises will not enjoy the preferential treatment of income tax for foreign-invested enterprises.

14. Equity pledge

In the process of acquisition or restructuring, the Chinese or foreign party of a foreign-invested enterprise often pledges its equity in the foreign-invested enterprise to the lender for the purpose of financing and borrowing. Here, it should be noted that: a. The equity pledged by either party must be the equity of the part of its capital contribution that has been paid, and it is not allowed to pledge the equity of the part of its capital contribution that has not been paid; b 、 The equity pledge shall be approved by other investors and the Board of Directors of the enterprise, and the equity pledge contract shall be signed; c 、 The equity pledge can take effect only after it is approved by the original examination and approval authority of the enterprise and filed by the original industrial and commercial registration authority of the enterprise. d 、 If the equity is pledged to a foreign lender and is set for the debt of a third person, it must also be approved by the relevant foreign exchange management department (except for wholly foreign-owned enterprises) and go through foreign guarantee registration.

15. Contracted operation or entrusted operation management

Some foreign-invested enterprises plan to hand over the foreign-invested enterprises to Chinese or foreign parties or other third parties for operation or entrust them to foreign enterprises for operation and management after acquisition or reorganization. But it is not clear how to do it. Although some foreign-invested enterprises claim that they have adopted the way of contracting or entrusted operation and management, their actual practices do not conform to the relevant laws and regulations of China, or even are completely invalid. Contracted operation refers to that a foreign-invested enterprise, by concluding a contract with a contractor (which can be an investor or a third party), gives all or part of the operation and management rights of the foreign-invested enterprise to the contractor within a certain period of time (generally 1-3 years, up to a maximum of 5 years), and the contractor contracts for the after tax profits of the foreign-invested enterprise. During the contracted operation period, the contractor shall bear the operation risk and obtain some profits from the enterprise. Entrusted operation and management means that a foreign-funded enterprise employs a foreign management company to be responsible for all or part of its operation and management. The foreign management company engages in various business activities in the name of a foreign-funded enterprise and collects a certain management fee in a fixed amount or according to economic and management benefits. The relevant laws of China have specific provisions on contract operation and entrusted operation and management. I will not repeat them here for the time being, but only emphasize the most easily overlooked point for foreign businessmen, that is, whether it is contract operation or entrusted operation and management, foreign invested enterprises must sign contract operation or entrusted operation and management contracts with contractors or foreign management companies, It shall be valid only after being approved by the original examination and approval authority of the foreign-invested enterprise and registering with the original registration authority to obtain the business license of the illegal person. Otherwise, relevant examination and approval authorities and industrial and commercial administration authorities may punish foreign-invested enterprises and contractors or foreign management companies according to law, including confiscating the business license of foreign-invested enterprises, imposing fines or confiscating illegal income.