Author: Wang Jihong He Shuailing

Chinese property has become a hot sector for foreign investment. However, there are several key legal issues encountered by foreign investors (including foreign enterprises, institu­tions and individuals) when investing in China’s property sector, such as the indus­trial policy, the principle of commercial presence, registered capital requirements and a prohibition on fixed-return arrange­ments.
 
Industrial guidance catalogue
 
On 31 October 2007 the National De­velopment and Reform Commission and the Ministry of Commerce jointly issued the amended Foreign Investment Indus­trial Guidance Catalogue. Compared to the previous version of the Catalogue, which dated from 2004, the 2007 version imposes more restrictions on foreign in­vestment in the property sector.
 
Foreign investment in property projects is restricted to the following categories and scope:
 
·           development of an entire piece of land (limited to equity joint ventures and cooperation);
·           construction and operation of high-grade hotels, villas, office buildings and international exhibition centres; and
·           transactions in the secondary property market and property intermediaries or brokerage firms.
 
The 2007 version of the Catalogue also imposes restrictions on other indus­tries related to property development. For instance, in the culture, sports and enter­tainment sectors, foreign investment is banned in the “construction and operation of golf courses” and is still restricted in the “construction and operation of major theme parks”.
 
Two basic principles
 
The principle of commercial presence
 
The Access by and Management of Foreign Investment in the Real Property Market Opinion (Jian Zhu Fang [2006] No. 171), published by six ministries including the Ministry of Construction and the Ministry of Commerce, clearly states that “if a foreign institution or individu­al invests in China by purchasing a real property project for non-personal use, it/he should abide by the principle of com­mercial presence by applying to set up a foreign investment enterprise in accor­dance with the relevant rules on foreign investment in the real property sector”.
 
The project company principle
 
Pursuant to the Further Strengthening and Governing the Approval and Regula­tion of Foreign Direct Investment in the Real Property Sector Notice (Shang Zi Han [2007] No. 50), published by the Ministry of Commerce and the State Ad­ministration for Foreign Exchange, if a foreign party invests in the real property sector in China, it must set up a real property project company in China. To apply for the establishment of a real property company, it must have acquired land use rights or ownership of buildings, or must have entered into an agreement with the land administration or a land developer, or the owner of a building, on the reserved grant or purchase of land use rights or building ownership rights. If an established foreign investment enterprise sets up a new property business or if an established real property project company has a new property project, it should also complete the relevant procedures to expand the scope or scale of its business.
 
Registered capital requirements
 
Pursuant to the Urban Real Property Development and Operation Adminis­trative Regulations, the minimum reg­istered capital for setting up a property development company is RMB1 million (US$150,000). The people’s governments of provinces, autonomous regions and municipalities directly under the central government may, according to their local conditions, set higher registered capital requirements. Many have done so in light of their own local conditions.
 
Foreign-invested property companies must comply with special provisions, in addition to the above registered capital requirements. Pursuant to Article 3 of the Implementation of the Notice Governing the Access by and Management of Foreign Investment in the Real Property Market Notice (Shang Zi Zi [2006] No. 192) published by the Ministry of Commerce, “if a foreign party makes an investment by forming a real property enterprise with a total investment of US$10 million (including US$10 million) or more, its registered capital must not be less than 50% of the total investment; if the total investment is between US$3 million and US$10 million, the registered capital must not be less than 50% of the total investment; and if the total investment is US$3 million (including US$3 million) or less, the registered capital must not be less than 70% of the total investment.”
 
Fixed-returns prohibited
 
Item 8 of Article 1 of the Jian Zhu Fang [2006] Document 171 provides that “the Chinese and foreign investing parties in a foreign-invested real estate enter­prise may not conclude, in any way, any clause in the contract, articles of asso­ciation, share transfer agreement or other document to provide a guarantee that any of the investing parties has a fixed return or a fixed return in disguised form”. Both the Chinese investors and foreign investors in a foreign-invested real estate enterprise are thus not allowed to agree on any clause to ensure that any party (including foreign investors) can receive a fixed return or a fixed return in disguised form. However, Article 35 of the PRC Company Law states that “the investing parties may agree to not receive dividends in proportion to the amount of their capital contributions”. This may, nonetheless, be accepted as an effective way for investing parties to gain a reason­able return.
 
Purchases by foreigners restricted
 
Following the publication of an order by the central government and local governments on restricted housing purchases, on 4 November the Ministry of Housing and Urban-Rural Development and the State Administration for Foreign Exchange jointly issued the Further Regu­lating of Property Purchases by Foreign Institutions and Individuals Notice (Jian Fang [2010] No. 186), which stipulates that a foreign individual may only make one housing purchase for self-occupation in China; an overseas institution with branches or rep­resentative offices established in China can only purchase non-residential units to be used as their offices in the cities where they are reg­istered. This notice can be viewed as a re­stricted purchase order directed at foreign investors as part of wider measures for regulating the real estate sector.