Foreign Investment Series | A Comprehensive Analysis of the Common "Domestic-funded to Foreign-funded" Transformation in Domestic Secretarial Services

In the provision of secretarial services for domestic enterprises, one common type of business involves the transformation of a domestic-funded company into a foreign-funded company. This transformation generally falls into two scenarios: equity transfer to foreign shareholders (i.e., foreign investors acquiring existing shares) and capital increase with foreign shareholders subscribing for new shares.

The following article outlines the procedures for converting a domestic-funded company to a foreign-funded company for each scenario:

Scenario 1: Equity Transfer

Negative List Screening

Since foreign-funded companies are subject to the Negative List for Foreign Investment Enterprises, it is necessary to first confirm whether the business scope of the target company involves industries restricted or prohibited for foreign investment. If it does, advance confirmation of the foreign investment shareholding ratio or stripping of the business scope prohibited for foreign investment is required.

Preparatory Work

The transferor and the transferee negotiate to determine the transaction price and sign an Equity Transfer Agreement.

The target company adopts a shareholders’ resolution or board of directors’ resolution.

Prepare the new articles of association or amendments to the articles of association.

Handling Tax Authority Procedures

Both the transferor and the transferee shall declare and pay stamp duty at the tax bureau where the target company is located.

If the transferor is an individual, they must also declare and pay individual income tax (if tax payment is applicable) at the local tax bureau before completing the equity change registration at the market supervision and administration authority.

Note: In accordance with the latest requirements of the market supervision and administration authority, individual shareholders transferring equity must obtain an individual income tax payment code prior to processing the equity change registration.

Handling Market Supervision and Administration Authority Procedures

The target company shall complete the enterprise nature change and equity change registration at the local market supervision and administration authority. Key considerations for this step include:

Submitting the tax payment certificate number;

Notarization and authentication of the transferee’s qualification documents:

• If the transferee is an overseas company: Generally, it is required to provide the company’s registration certificate, list of directors, and a board resolution authorizing the signatory. These three documents must be notarized by a local notary public and authenticated by the Chinese embassy/consulate in the country where the company is located, or authenticated in accordance with the Hague Convention.

• If the transferee is an overseas individual: Generally, notarized and authenticated copies of their passport are required. If the overseas individual is already in China, the original passport (with all pages) and corresponding entry records are usually sufficient. For specific document requirements, consult the local market supervision and administration authority where the target company is located.

Handling Industry Regulatory Change Procedures

If the target company’s business scope includes licensed items, it must complete the change procedures with the relevant industry regulatory authorities after completing the change registration at the market supervision and administration authority.

Handling Foreign Exchange Registration at Banks

The target company shall complete the initial FDI (Foreign Direct Investment) registration at its local bank.

After the initial registration, if the transaction amount is in foreign currency, the transferor must open a capital account. The transferee will then remit the equity transfer payment to the transferor’s capital account, completing the transaction.

Scenario 2: Capital Increase with Subscription for New Shares

Similar to the equity transfer scenario, negative list screening must be conducted first before applying to the market supervision and administration authority for registration procedures. This ensures that the target company’s business scope is not restricted by the Negative List for Foreign Investment.

Preparatory Work

The new shareholder (foreign investor) negotiates with the target company to confirm the investment amount and shareholding ratio, and signs a Capital Increase and Share Expansion Agreement.

Prepare the new articles of association or amendments to the articles of association.

Handling Market Supervision and Administration Authority Procedures

The target company shall complete the enterprise nature change and equity change registration at the local market supervision and administration authority. Consistent with the equity transfer scenario, notarized and authenticated copies of the foreign shareholder’s qualification documents must also be submitted.

Handling Industry Regulatory Change Procedures

If the target company’s business scope includes licensed items, it must complete the change procedures with the relevant industry regulatory authorities after completing the change registration at the market supervision and administration authority.

Foreign Exchange Registration at Banks

The target company shall complete the initial FDI registration for foreign-funded companies at its local bank.

A capital account shall be opened for the target company to receive the overseas investment funds.

The above is an analysis of the procedures for converting a domestic-funded company to a foreign-funded company, provided by Sinobravo.

Sinobravo has provided Foreign Direct Investment (FDI) consulting services to many Fortune 500 companies entering the Chinese market, accumulating rich practical experience. By closely monitoring policy dynamics and maintaining communication with approval authorities, we provide timely consulting services for overseas investors, covering the entire lifecycle from initial site selection, project implementation, compliant operation to project exit. For inquiries related to such businesses, please feel free to contact us.

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