To establish am enterprise, a certain amount of capital is required as stipulated in the relevant regulations and application for business registration at the industry and commerce administration departments is also necessary.
(a) Forms of Investment
Investors may make contribution to the registered capital of an enterprise in cash, in kind, or in intangible assets. Investors making contribution in kind and in intangible assets must provide proof of ownership and right of disposal, or other proof of their validity as required by law. Investors are not allowed to contribute leased assets or collateral assets.
Investors making contribution in intangible assets (excluding land-use rights) should provide asset appraisal or valuation reports. In general, the value of the contribution may not exceed 20% of the total registered capital of the enterprise. Under special circumstances, the ratio may be allowed to reach a maximum 30% upon asset appraisal done by Chinese CPAs and approval granted by the industry and commerce administration departments.
If foreign investors are making contribution in cash, it should be in foreign currencies. However, profits in renminbi made from investment in other FIEs within the Chinese territory may be used as contribution in cash.
When the full amount of registered capital has been paid up, the FIE should appoint a Chinese CPA to compile a capital verification report.
(b) Investment Recovery
In general, during the operation period of the enterprise, investors are not allowed to withdraw their share capital by any means except through transfer of business as provided by law.
For Sino-foreign contractual joint ventures (JVs) whose contract stipulates that all the fixed assets should be handed over to the Chinese party upon expiry of the JV, provisions can be made in the JV contract that the foreign party may recover its investment during the term of the JV.
However, the foreign party should still be jointly responsible for the JV's liabilities in accordance with the relevant laws and regulations as well as the provisions of the contract. Any pre-tax investment recovery should be reported to the competent financial authority for examination and approval.
(c) Sources and Uses of Capital Reserve
The sources of an enterprise's capital reserve include: the balance from investors' capital contribution in excess of the prescribed amount of registered capital; the balance resulting from the different conversion/exchange rates used in the assets account and the paid-up capital account; income in the form of donations.
The designated uses of an enterprise's capital reserve include: in the event of heavy losses where the un-allocated profits of the previous year, the reserve funds and development funds of the enterprise are inadequate to make up for the shortfall, the board of directors may pass a resolution authorizing the use of such funds in making up for the losses; upon the board of directors' decisions and completion of the relevant procedures, the funds may be used to increase the capitalization of the enterprise.
