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When setting up a FIE, the financing structure shall be carefully planned ahead. Two options are available for foreign investors: equity financing and debt financing.  

The registered capital is the total amount of equity subscribed by investors.

Under PRC FIE legal regime, debt financing shall be subject to an upper limit which is allowed to borrow under the PRC laws.

Equity financing

Equity financing is still the most used method of financing a FIE.

Unless in holding companies, contributions can be made:

  • In cash, since 2013 there is no mandatory minimum amount for cash contributions to the registered capital required by the law. However, in order to obtain MOFCOM’s approval it is advised to contribute at least 30% in cash to the registered capital;
  • “In kind”: Equipment, machinery, plant, buildings, land use rights, intellectual property rights and/or technology licenses, franchise rights.

Debt financing

Due to recent legal reform, in-kind contributions are not mandatorily required to be evaluated as qualified asset appraisal firm in the PRC. However, some local authorities may reject certain types of in-kind contributions, such as trademark license, technology license, etc.

Due to foreign exchange control, there are restrictions on the amount that FIEs may borrow from foreign entities (i.e. foreign banks, foreign shareholder, etc.).

Technically, FIEs cannot borrow more than the amount exceeding an upper limit, which is also known as the quota of foreign debt (“Foreign Debt Quota”).

Foreign exchange control

The State Administration of Foreign Exchange (SAFE) strictly controls foreign exchange in China. Due to recent legal reform, SAFE has authorized banks to conduct certain formalities in terms of foreign exchange. For exemple, foreign exchange registration for newly incorporated FIE, capital increase, and others. However, some foreign exchange involved matters are still under control by SAFE. For exemple, borrowing of foreign loan, benefiting from foreign securities, etc.

An FIE shall complete foreign exchange registration with the bank before opening foreign currency capital account to receive registered capital from the foreign shareholder.

Offshore loans and securities are qualified as “foreign debt” and are subject to the SAFE supervision. Before incurring foreign debt within the legitimate capacity, FIEs shall file a registration with the SAFE.

-> This article may also be of interest to you : Determine the Foreign Debt Quota – Financing the structure

To know more, download our legal handbook related to setting up a business structure in China …

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