The Conditions Of Establishing A Foreign-invested Venture Investment Enterprise

The difficulties in financing are an outstanding issue for the development of small and medium-sized enterprises in China

. Chinas State Council has issued Several Opinions strengthening the decision on further improving the work of utilizing foreign investment and to continuously support foreign investors to set up venture investment enterprises and to actively use private equity funds as well as improve the exit strategies. Such policies show the government will energetically advocate foreign-invested venture investment enterprises and private equity funds in China.

Under the Circular of the State Administration of Taxation on the Issues Concerning Implementation of the Preferential Income Tax of Venture Capital Enterprises released by China's State Administration of Taxation, qualifying where any venture capital enterprise adopts the mode of equity investment in the unlisted small and medium-sized high-tech enterprises for more than two years (24 months), if qualified for the following requirements, it may, based on 70% of its investment in small and medium-sized high-tech enterprises, deduct its amount of taxable income of the year when equity holding has lasted for two years; and any insufficient deduction of the year in question may be passed to the following tax year.

According to The Administration of Foreign-invested Venture Investment Enterprises Provision drafted by Ministry of Foreign Trade and Economic Cooperation and other four ministries and departments in China, the term Foreign-invested Venture Investment Enterprises (hereinafter as Venture Investment Enterprises) shall refer to foreign-invested enterprises that are established in China by Foreign Investors or by Foreign Investors with companies, enterprises or other economic organizations that are registered and established according to Chinese law (Chinese Investors) pursuant to these Provisions to engage in venture investment business activities. Besides, venture investment shall refer to an investment method consisting of equity investment, principally in unlisted high- and new-technology enterprises, and the provision to such enterprises of start-up management services in order to obtain gains in the form of capital appreciation.

In accordance with Chinese law, Venture Investment Enterprises may take the organizational form of a non-legal person entity or a company. The investors of a Venture Investment Enterprise that takes the organizational form of a non-legal person entity (Non-legal Person Venture Investment Enterprises) shall undertake joint and several liabilities for the debts of the Venture Investment Enterprise. The investors of a Non-legal Person Venture Investment Enterprise may agree in the contract for Venture Investment Enterprise that the requisite investors shall undertake joint and several liabilities when the assets of the Non-legal Person Venture Investment Enterprise are insufficient to discharge the debts,and that the liability of other investors shall be limited to the amount of capital contribution to which they subscribed. The liability of each investor of a Venture Investment Enterprise that takes the organizational form of a company (Corporate Venture Investment Enterprises) shall be limited to the amount of capital contribution to which it subscribed. So, what are the legal conditions for establishing a Venture Investment Enterprises?

The establishment of a Venture Investment Enterprise shall satisfy the following conditions

1. The number of investors shall be more than two and less than 50, and there shall be at least one requisite investor.

2. The minimum amount of capital contribution to which the investors of a Non-legal Person Venture Investment Enterprise subscribed shall be US$10 million. The minimum amount of capital contribution to which the investors of a Corporate Venture Investment Enterprise subscribed shall be US$5 million. Except for the requisite investors, the minimum amount of capital contribution to which each other investor subscribed may not be less than US$1 million. Foreign Investors shall make their capital contributions in a freely convertible currency,whereas Chinese Investors shall make their capital contributions in Renminbi.

3.Having a clear organizational form.

4. Having a clear and legitimate investment direction.

5. Except where the Venture Investment Enterprise has entrusted a venture investment management company to manage the business activities of the enterprise, the Venture Investment Enterprises shall have at least three professional management personnel with experience in venture investment business.

6. Other conditions stipulated by laws and administrative regulations.

Requisite investors shall satisfy the following conditions:

1. Having venture investment as its main line of business.

2. Having cumulative capital under its management of not less than US$100 million in the three years before the application, and at least US$50 million of which has been used for venture investment. Where the requisite investor is a Chinese investor, the requirement under this paragraph shall be: having cumulative capital under its management of not less than Rmb 100 million in the three years before the application, and at least Rmb 50 million of which has been used for venture investment.

3. Having at least three professional management personnel with not less than three years experience in venture investment business.

4. If the affiliated entity of one of the investors satisfies the afore-mentioned conditions, that investor may apply to become a requisite investor. For the purposes of this paragraph, the term "affiliated entity" shall refer to an entity controlled by that investor, or an entity that controls that investor, or another entity that is under the common control of an entity as that investor. For the purposes of this paragraph, the term control shall refer to the controlling party owns more than 50% of the voting rights of the controlled party.

5. The requisite investors and the afore-mentioned affiliated entity shall not have been prohibited by the judicial authorities or other relevant regulatory authorities of their own countries from engaging in venture investment or investment and consultancy business, or subjected to penalty for reasons such as fraud.

6. The amount of capital contribution subscribed to and the actual amount of capital contributed by the requisite investors of a Non-legal Person Venture Investment Enterprise shall not be less than 1% of the total capital contribution subscribed to by all investors and 1% of the total actual amount of capital contribution respectively, and the requisite investors shall undertake joint and several liability for the debts of the Venture Investment Enterprise. The amount of capital contribution subscribed to and the actual amount of capital contributed by the requisite investors of a corporate venture investment enterprise shall not be less than 30% of the total capital contribution subscribed to by all investors and 30% of the total actual amount of capital contribution respectively.

It is worthwhile to note that if the ratio of the total capital contribution of the Foreign Investors of the investing Venture Investment Enterprise is no less than 25% of the registered capital, the investing venture investment enterprise shall be entitled to the relevant preferential treatment for foreign-invested enterprises. If the ratio of the capital contribution of the Foreign Investors of the investing Venture Investment Enterprise is less than 25% of the registered capital, such investing venture investment enterprise shall not be entitled to the relevant preferential treatment for foreign-invested enterprises. On the face of that, the government not only encourages the Venture Investment Enterprises to invest in small and medium-sized high-tech enterprises, but also give some preferences to the small and medium-sized high-tech enterprises that the foreign investment takes a certain proportion.

The government actively encourages foreign investors finance in small and medium-sized high-tech enterprises embody our countrys policy at the present stage. The government expresses that they will continuously to improve the exit strategies besides to give some preferences on levying enterprise income tax. For foreign investors, it is a good choice to set up venture investment enterprises in China now.

by: Sino-Link Consulting

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