• Professional News
  • 24 May 2013

MOFCOM issues requirements to new factoring companies

China’s Ministry of Commerce (MOFCOM) has set out detailed requirements to the establishment of commercial factoring companies in Shanghai.

Effective December 11, 2012, China’s Ministry of Commerce (MOFCOM) has outlined detailed requirements to the establishment of commercial factoring companies in Shanghai in the so-called MOFCOM circular 2, also known as the Implementing Measures.

The Implementing Measures is an extension of MOFCOM’s circular 1 issued in June 2012, encouraging experienced domestic and foreign investors in the factoring business to establish specialised commercial factoring companies in the Tianjin Binhai New Area and the Shanghai Pudong New Area.  

The key features of the Implementing Measures are:

Legal form of commercial factors

  • A "commercial factoring company" must be a limited liability company established by domestic and/or foreign investors in the form of a wholly-owned company, an equity joint venture or a cooperative joint venture.

General setup requirements

  • At least one of the investors in the commercial factoring company or an affiliate thereof must have a track record in the factoring business or a related business (this may include global trade, finance leasing, financing guarantee or small-scale lending).
  • A commercial factoring company must have at least two senior management officers with three or more years of management experience in the finance industry.
  • The investors must contribute a minimum registered capital amount of 50 million RMB to set up the factoring company. The contribution of registered capital must be made in cash, and a minimum of 20 per cent of the registered capital must be paid upon the establishment of the commercial factoring company. The remaining 80 per cent of the registered capital must be paid within two years from the establishment date. A foreign investor may make capital contributions using cash in any freely convertible currency or RMB obtained offshore, or by way of onshore RMB profits and income.
  • The commercial factoring company cannot commingle its factoring business with any of its other businesses.
  • The commercial factoring company must have sound internal control systems, including, without limitation, risk evaluation procedures, business operation guidelines and other relevant monitoring systems.
  • To set up a foreign-invested commercial factoring company, the investor(s) must obtain regulatory approval from Pudong Commission of Foreign Trade and Economic Cooperation (COFTEC) and must register the company with the Shanghai Automotive Industry Corporation (SAIC) Pudong Branch.

Scope of business
A commercial factoring company may engage in the following business activities: 

  • Export factoring (with the debtor of the assigned accounts receivable being outside China)
  • Domestic factoring for domestic trade
  • Consulting services with respect to commercial factoring
  • Development of credit risk management systems
  • Other related businesses approved by the relevant Chinese authority

Prohibited activities
A commercial factoring company is not permitted to engage in the following business activities: 

  • Taking deposits
  • Granting loans
    • Specialising in or, upon entrustment, carrying out debt collection or any related business which is not directly relevant to commercial factoring
    • Making investments under an entrustment structure
    • Other related activities prohibited by the relevant authorities

Regulatory requirements

  • The risk assets (i.e. the total assets of the company, excluding cash, bank deposits and debt) of the commercial factoring company cannot amount to more than ten times the total amount of its net assets.
  • A commercial factoring company must engage a custodian bank which is a member of the global factoring organisation.
  • A commercial factoring company must register the assignment of accounts receivable with the Credit Information Center of the People's Bank of China.
  • A commercial factoring company must file monthly reports to Pudong COFTEC and cause its custodian bank to file reports regarding the operation of the custodian funds once every six months with Pudong COFTEC.

Possible government subsidies
The Pudong New Area Government is in the process of formulating rules on government subsidies to commercial factors, which may include tax rebates and tax subsidies for office rent and senior management personnel.

For further information, please contact Partner Søren Meisling or Head of Chinese Desk Rachel Cao.

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