Author:ZHAO HONGRUI

　　The major difference between foreign invested enterprises (FIEs) and domestically invested enterprises is investors in FIEs are allowed to contribute their registered capital in instalments, while the latter may not be allowed to formally operate before their investors have paid their registered capital in full.
　　For instance, a foreign investor who establishes a wholly foreign invested enterprise (WFIE) may, according to relevant laws, pay the registered capital within three years after the business licence is issued.
　　Many legal issues may arise during this period. For instance, can the foreign investor pay the remainder of the registered capital with profit earned from the FIE?
　　Or can the FIE exchange its renminbi (RMB) profits into foreign currencies and remit the money outside China, as does a foreign investor of an FIE with fully paid registered capital?
　　Such issues need to be addressed by referring to China's myriad of laws and government regulations.
　　Needless to say, a foreign investor who has fully paid the registered capital is entitled to use the FIE's profits as he/she deems fit, as long as he/she complies with the laws and procedures regarding foreign investments and foreign exchange regulations.
　　The Chinese Constitution and the laws governing FIEs expressly protect foreign investors' rights to profits.
　　Foreign investors may also remit their profits overseas in accordance with China's foreign exchange regulations.
　　Two situations could arise when a foreign investor makes a partial contribution of registered capital in a FIE.
　　The investor may have breached his/her contractual obligations as to capital contribution, in which case he/she must be held liable by the other investors. His/her use of profits must also be restricted.
　　First, the foreign investor's right to profits will be prohibited and he/she might be prohibited from paying the remainder of the registered capital with the FIE's profits.
　　Article 23 of the Supplementary Rules Concerning the Implementation of the New Enterprise Accounting System by Foreign Invested Enterprises (supplementary rules) issued by the Ministry of Finance in December 1993 stipulates, "The foreign investor may not participate in the profit distribution of the enterprise if he/she breached the conditions regarding capital contribution or other co-operative terms, and has not yet corrected his/her conduct according to relevant State regulations concerning capital contribution and borne his/her liabilities."
　　The article also stipulates, "The profit of the enterprise should not be used to pay the remainder of the capital, which the investor has failed to pay, in accordance with the contract or the Articles of Association."
　　Second, the foreign investor in breach generally may not send the profit outside China.
The Circular concerning the Revision of the Circular on Issues relating to the Handling of Profits, Dividends and Earnings by Designated Banks of Foreign Exchange (circular) issued by the State Administration of Foreign Exchange (SAFE) in 1999 stipulates, "Any FIEs whose registered capital has not been fully contributed in accordance with the contract should not remit the profits and dividends outside the country."
　　However, Article 1 stipulates, "Where the registered capital cannot be paid in full as per the contract in special circumstances, an application should be made to the original approving authorities. With approval of the original approving authorities and other documents required under the circular, the profits and dividends may be remitted overseas pro rata to the capital already paid."
But the circular fails to define the "special circumstances." It may in practice be subject to the discretion of the approving authorities on a case-by-case basis.
　　But another circumstance may also exist.
　　The foreign investor may have rightfully contributed part of the total registered capital, and, therefore, be entitled to profits during the time of partial contribution.
　　There is no special restriction over such an investor remitting the profits overseas in foreign currencies.
　　But it does not necessarily mean the foreign investor may freely use his/her profits in China. For instance, the investor may encounter hurdles if he/she considers paying the remainder of the registered capital with his/her RMB profits earned from the FIE.
　　China's laws governing FIEs require foreign investors' capital contributions, if in cash, be made in freely convertible foreign currencies.
　　A foreign investor may also invest in an FIE with his/her RMB profit earned from other FIEs in China in which he/she has invested.
　　Article 26 of the Detailed Rules for the Implementation of the Law on Wholly Foreign Invested Enterprises (WFIES) stipulates, "Subject to approval from the approving authorities, a foreign investor may also invest RMB dividends obtained from other FIEs it has established in China."
　　In fact, the practice has been extended to other types of FIEs and recognized by a series of rules and regulations issued over the years by relevant ministries.
　　For instance, a circular issued by the Ministry of Finance in 1993 regarding FIEs stipulates if the contract requires the registered capital or other co-operative conditions be in cash, foreign investors must pay in a foreign currency, or with its RMB profits earned from other FIEs he/she established in China.
　　If a foreign investor tends to reinvest with his/her RMB profits, he/she must obtain permits from the original approving authorities (normally the Ministry of Commerce or local government agency in charge of foreign investment) and SAFE, in which case he/she must submit documents proving he/she has the right to the RMB profits, and that he/she has paid income taxes.
　　China's laws do not prohibit an FIE foreign investor from paying the remainder of the registered capital with his/her RMB profits earned from the enterprise, but, in practice, SAFE does not approve such payments as they could be counter to the legislative intentions behind the laws.
　　Generally, a foreign investor, who intends to convert his/her profits into the registered capital of the FIE in which he/she has invested, must exchange his/her RMB profits into a foreign currency and remit the money overseas before he/she can use the money for the payment.
　　Such procedures, which many argue are tedious, could be the result of the legislative intentions in the 1980s when the laws were drafted and implemented. At that time, foreign funds were in short supply in China.
　　It might have been reasonable at that time, but now hinders foreign investors from reinvesting in China.
　　With China's accession into the World Trade Organization, it is most likely such restrictions will be lifted in the future.
　　The author is a partner in Beijing-based Zhong Sheng Law Firm.

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