The Qianhai Shenzhen-Hong Kong Modern Service Industry Co-operation Zone has implemented more favourable pioneering and pilot projects than special economic zones, including: (1) launching a pilot project for cross-border renminbi loans and supporting enterprises in Qianhai borrowing renminbi at low cost from Hong Kong banks, with the loan term and interest rate determined at their discretion; (2) permitting cross-border bidirectional fund pools within groups and multinational corporations to have foreign exchange fund pools; and (3) launching a pilot project for the conversion of foreign exchange at will, with the foreign exchange capital of foreign-invested enterprises (FIE) convertible entirely at will and the option of retaining the renminbi proceeds derived from it in a dedicated account, and using the same at the enterprise’s discretion within its scope of business, and permitting FIEs whose main business is investment to use renminbi derived from the conversion of foreign exchange to engage in equity investment.
Qianhai also offers enterprises that take up residence in the zone reductions or exemptions of enterprise income tax and subsidies for individual income tax.
Common business models for foreign-invested investment enterprises. In addition to direct investment and acquisitions, foreign investors commonly establish foreign-invested investment companies (FICs), foreign-invested venture capital enterprises (FIVCs) and foreign-invested equity investment enterprises (mainly qualified foreign limited partners [QFLPs]). The scope of business of an FIC is broad, but the qualification requirements for foreign investors are stringent; the organizational form of an FIVC is more flexible, but it is subject to stringent regulation and narrow business scope. Foreign investors who are unable to set up FICs and FIVCs will seek to establish QFLPs, and in Shenzhen this model is available as a pilot project only in Qianhai.
Requirements and procedures for establishing an FIC. Of the foreign investors, at least one that has a major equity holding is required to satisfy at least one of the following qualifications: (1) having total assets of not less than US$400 million in the year prior to the application, and having established an FIE in China, with its paid-in contribution to the registered capital exceeding US$10 million; or (2) having established at least 10 FIEs in China and its paid-in contributions to the registered capital exceeding US$30 million. A foreign investor that satisfies either of the above-mentioned qualifications may establish an investment company in the name of a wholly owned subsidiary and is permitted to add the commercial structure design as of a Hong Kong holding company. If established in the form of an equity joint venture (EJV), the total assets of the Chinese investor in the year before the application must not be less than RMB100 million.
The model of administration by way of a foreign investment negative list was implemented on a nationwide basis from 1 October 2016. An FIE not subject to special administrative measures for access is now subject to the recordal system, and once the handling officer of an investor has completed enterprise name pre-approval procedures and procedures for linking the address to Qianhai, commercial recordal may be carried out through the comprehensive foreign investment management information system. Once the recordal has been secured, online applications for business registration can be carried out and a feasibility report, credit rating certificate, balance sheet, proof of the qualifications of the investor, letter of guarantee, etc., can be submitted. A joint stock limited company is also required to submit a capital verification report issued by an accounting firm or a bank confirmation. However, in Qianhai, consulting on the handling of matters, submission of documentation and collection of certificates can all be completed at the acceptance window.
Requirements and procedures for establishing an FIVC. Pursuant to article 4 of the Administrative Provisions for Foreign-Invested Venture Capital Enterprises, an FIVC can take the form of a company, enterprise or other economic organizational form, and its funding threshold is relatively low. At least one requisite investor (whose main business must be venture capital) is required to have had capital totalling not less than US$100 million (if the investor is Chinese, RMB100 million) under its management during the three years prior to the application, and at least US$50 million (if the investor is Chinese, RMB50 million) has to have been used for venture capital investment.
However, requirements for the number of investors, the form of the currency contributed as capital, the investment orientation, etc., when establishing a venture capital enterprise are also specified. In Qianhai, the procedures for establishing an FIVC are essentially the same as those for an FIC, and submitted documents are required to include a legal opinion, an account of the requisite investor’s venture capital business, an account of the capital under its management during the three years prior to the application, an account of the capital already invested by it, and the résumés of the management personnel responsible for venture capital investment.
Requirements and procedures for establishing a QFLP. A foreign investor establishing a QFLP in Qianhai is required to satisfy at least one of the following conditions: (1) having assets of not less that US$100 million or assets under its management of not less than US$200 million during the previous fiscal year; (2) having an asset management licence issued by the Securities & Futures Commission of Hong Kong (or a foreign financial regulator); or (3) being ranked by an authoritative entity among the world’s top 100 in terms of assets under management. Pursuant to article 8 of the Interim Measures for the Launching in Shenzhen of a Pilot Project for Foreign-Invested Equity Investment Enterprises, a foreign investor or its affiliate is also required to have investment experience, sound governance structure and internal control systems, to have not been subjected to penalties in the past two years and to be, in the main, a foreign sovereign fund, pension fund, endowment fund, charitable foundation, fund of funds, insurance company, bank, securities company or other recognized institution.
The capital contribution subscribed for by the investor may not be less than the equivalent of US$15 million and, other than general partners, the capital contribution of each limited partner may not be less than the equivalent of US$1 million. Notwithstanding the relatively low funding threshold, the establishment of such a QFLP is subject to the prior approval of the Shenzhen Municipal Financial Development Services Office, and the review policy is trending towards greater stringency. The application procedures after an enterprise secures approval are not substantially different from that for the other two types of enterprises mentioned above.
Jack Lai is a partner and Tina Lan is an associate at Zhong Lun Law Firm in Shenzhen
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