How can foreign companies acquire Chinese companies
M&A, corporation and holding
Mergers & Acquisitions (M&A)
In 2015, GTAI (Germany Trade and Invest) published a two-volume “Guide to Mergers and Acquisitions in China and Germany”. Volume 1 - M&A in China, relevant for German companies, can be found on the GTAI website at www.gtai.de
Company acquisition is a new trend of rapid market entry in China, for which there is now a reliable framework through various new M&A regulations. By acquiring a company that already has its own organization, the foreign investor can act quickly on the Chinese market. In addition, takeovers involve fewer planning risks than start-ups - provided the investor has carried out a thorough examination of the Chinese company in advance. After M&A transactions initially focused on the acquisition of companies and holdings of other foreign investors, purely Chinese companies are now mostly being bought.
Foreign companies can acquire shares in Chinese state-owned companies, private companies or FIEs (Foreign Invested Enterprises). A general distinction is made in China between taking over the assets of a company (asset deal) and taking over a share of the capital (share deal). Stamp tax is payable on a share deal; on an asset deal, the tax burden depends on the type of assets being transferred. Many acquisitions are carried out by both Chinese state and private companies as asset deals in order to avoid hidden risks.
Mergers within the Chinese market are now also possible. A purely foreign acquisition, in which the shares of a Chinese FIE are acquired indirectly through the purchase of shares in a foreign company, requires approval from a Chinese authority.
Public Companies (FICLS)
The FICLS ("Foreign Invested Company Limited by Shares") is a sub-form of the Chinese stock corporation. This relatively new legal form is becoming more and more important for the activities of international corporations. The greatest advantage is the admissibility of a foreign controlling majority. However, due to the high capital requirements and the complex requirements, this type of company is not advisable in most cases. In the case of a planned IPO, company law requirements and a conversion clause can also be included in the justification for a JV.
The prerequisite for establishing a FICLS is that there must be at least two founders and a maximum of 200 founders, more than half of which must be based in China. The foreign investor must make a registration deposit of at least 25 percent and the total registered capital must be at least 30 million RMB. A similar approval procedure as for an EJV is required for the start-up. Converting an LLC to a FICLS is only possible if the company has made a profit in the past three years.
Holding Company (FIHC)
Holding companies were introduced as a more flexible way of promoting the activity of international corporations in China. You can make acquisitions and invest in projects nationwide without having to be registered in every location in China. FIHC (Foreign Invested Holding Companies) must have a limited liability company and can be set up as a joint venture or as a purely foreign subsidiary. The share capital must be at least $ 30 million and deposited no later than two years after receiving the business license. The foreign investor must have sufficient financial strength and creditworthiness to set up a holding company. In addition, he must have had assets of at least $ 400 million in the previous year and be able to present permits from at least three foreign-invested companies in China. The field of activity of a holding company consists of service, investment and limited sales functions. Holding companies are prohibited from producing in-house. A tax consolidation of profits and losses is not possible at the holding company level.
Sources: Germany Trade and Invest, Guangzhou International, AHK China
Status: June 2020
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