China’s Company Law recognizes two types of companies.
Limited Liability Company requires a minimum capital of RMB30,000 with less than 50 shareholders in the form of cash, industrial property or land use rights.
Company Limited by Shares is to be set up by promotion or share offer with a minimum share capital of RMB 5 million. For incorporation, no less than two promoters are required. Establishment by share offer is subject to the approval of China’s securities regulator.
Foreign Investment Entities
Foreign investors are allowed to set up the following types of business entities:
1. Cooperative Joint Venture (CJV)
A CJV has the option to register as a legal person with limited liability. The parties in a CJV have the flexibility of choosing whether to operate the enterprise as a limited liability company or to operate it as an unincorporated entity under which partners bear unlimited liability. The profits of a CJV are allowed to be shared by participants as specified in the joint venture contract, and not necessarily in proportion to their capital contribution. As a result, this type of venture is ideal when the foreign investor is only looking for a short-term project. After obtaining a fair or premium return on investment, the foreign investor returns the majority or full ownership of the enterprise to the Chinese partner.
A cooperative venture does not require a new business license if it is arranged in contractual form under the auspices of an existing joint venture enterprise.
There are no expiry periods or limitations on the length of the venture. The contractual terms can be renewed at any time and for any extended period, subject to the approval of the government.
Investment contributions from each party are not limited to financial capital but may also include non-financial assets such as intellectual property rights, buildings, materials or machinery.
Transfer or withdrawal of investments is not subject to the approval of the government. Foreign investors can deploy their registered capital as they see fit.
2. Equity Joint Venture (EJV)
An EJV is the most common and preferred method of doing business in China. It is a limited liability company and is required to be registered as a legal person. The main feature is that the joint venture parties take responsibility for losses and profits according to the ratio of their equity stake.
The minimum level of foreign participation in an EJV is 25% of the registered capital in general. The registered capital is not limited to financial capital but may also encompass non-financial assets such as intellectual property rights, buildings, materials, or machinery if approved by the government.
Where an EJV with less than 25% of capital contributed by foreign investor(s) is approved and registered, the business licence will indicate “foreign investment ratio below 25%” after the entry in the “Enterprise type” column. In such a case, the foreign investor is required to contribute all the investments within three months after obtaining the business licence if the investment is in the form of cash, or six months if the investment is in kind or industrial properties. Meanwhile, such an EJV cannot, when importing equipment or articles for its own use, enjoy tax reduction treatment and the treatment for foreign-funded enterprises in respect of other taxes.
Equity cannot be transferred or withdrawn under any scenario without the approval of the government.
There are registered capital/total investment ratio requirements that need to be fulfilled depending on the investment size of the venture.
3. Wholly Foreign-Owned Enterprise (WFOE)
A WFOE is a 100% wholly foreign-owned subsidiary doing business in China. The foreign company has sole responsibility for its profits and losses. It is required to register as a legal person who is restricted to certain businesses. The enterprise is able to implement strategies that effectively conform to the interests of the parent company abroad. Moreover, technology and know-how are given better protection. One effective use of a WFOE is to replace the foreign enterprise representative office (RO). Whereas foreign enterprises previously involved in a joint venture would establish ROs in China to manage the administrative aspects of the venture, some have resorted to setting up WFOEs to handle the same responsibilities.
The term varies according to the nature of the enterprise; any extension is subject to the approval of the relevant government authority.
There is a minimum capital contribution required, known as registered capital, which varies according to the business.
A WFOE is allowed to acquire land use rights in the form of land use rights certificates.
The establishment of export-oriented or high-tech WFOEs is encouraged.
Effective 11 December 2004, all foreign investors are able to establish WFOEs in commercial sectors, hence the term Foreign Invested Commercial Enterprise (FICE). The development has affected the following types of business activities in China:
- Commission agency
A wholesale FICE may carry out wholesaling, commission agency, import and export, and other auxiliary activities. FICEs may directly establish and operate new stores, and authorise others to open franchise stores. The development has reduced the minimum registered capital previously required, lifted the geographical limitations and also simplified the approval procedures. There are, however, certain restrictions on the products and business activities related to China’s commitments as a member of the World Trade Organisation.
4. Company Limited by Shares with Foreign Investment (CLSFI)
A CLSFI may adopt the promotional method or share float method for its establishment. A CLSFI set up by means of promotion shall have no fewer than two but no more than 200 initiators, of whom half or more shall have a domicile in China. At least one of the promoters has to be a foreign shareholder. An EJV, CJV or WFOE may apply to convert to a CLSFI through a share flotation. Other than the requirements in the preceding paragraph, a CLSFI established by a share flotation will need to have a track record of being profitable in the recent three consecutive years prior to the offer. The minimum registered capital is RMB 30 million. The minimum level of foreign participation in a CLSFI is 25%. A CLSFI can be listed either locally or abroad.
5. Build-Operate-Transfer Project (BOT)
BOT projects provide enterprises with concessions to key industrial or infrastructure projects in China, such as bridges, railways, industrial parks, power plants, airports, subways and expressways. After financing and building the project, the enterprise either immediately transfers the project to another party or continues to operate it for a number of years.
When the agreed-upon equitable return on investment is achieved, the enterprise is required to transfer full ownership and control to the government. The terms, limitations, rules and regulations pertaining to BOT projects are often established on an ad-hoc basis.
The enterprise undertaking the project must take the form of a limited liability company.
The registered capital should be at least 25% of the project’s total investment.
The projects are usually established through conditional franchise agreements which cannot exceed 30 years.
6. Holding Company
The number of approved holding companies in China is increasing. A holding company is an umbrella-structure arrangement which enables a foreign company to hold together its joint venture and WFOE investments in China. A holding company can be either an EJV or a WFOE. Generally, the government allows a foreign company to set up a wholly foreign-owned holding company in China if it has a good reputation, financial strength, high technology, and the projects it undertakes are in line with the state production plan.
- The total assets of the foreign company should be more than US$400 million and its capital contribution in China should exceed US$10 million, or the foreign company must have set up at least
- 10 FIEs in China with an aggregate capital contribution of more than US$30 million.
- The registered capital of a holding company in China should not be less than US$30 million.
- A holding company has the right to import and sell products, and provide maintenance services.
Representative Office (RO)
Before actually investing in China, many foreign investors choose to set up representative offices (ROs) to engage in market research and to learn more about the country. An RO is optional before making an actual investment in China and is not an independent legal entity. It must confine its activities to promotion or acting as a liaison office on behalf of its parent company. An RO is not allowed to generate revenue, solicit business, engage in warehousing or sign contracts with customers. It can hire local staff through approved employment agencies. It should engage in activities that service the head office directly.
All companies in China, including Foreign Investment Enterprises, must appoint a China-registered Certified Public Accountant (CPA) firm to audit their financial statements at the end of the accounting year and to issue an auditor’s report. Audits are required under the company laws, accounting regulations and income tax laws in China. Audited financial statements are also used for tax reporting purposes. The annual financial statements should be submitted together with an auditors’ report issued by a CPA registered in China within four months of the end of the fiscal year. (However, local authorities may impose earlier deadlines in certain cases.) The independent Chinese auditor appointed by a foreign investment company should be qualified and registered with the Chinese Institute of Certified Public Accountants to practise in China.
Incorporation of Business Entities
Approval and Registration Procedure
The approval of a foreign investment enterprise (FIE) in China depends on the nature of the proposed project. In 2007, the National Development and Reform Commission and Ministry of Commerce in China released the updated “Catalogue for the Guidance of Foreign Investment Industries” circular, which took effect on 1 December 2007. Under the Catalogue, foreign investment projects come under four categories:
- Encouraged Projects
- Restricted Projects
- Prohibited Projects
- Permitted Projects
Investment projects that do not fall under the first three categories would be regarded as permitted projects. Different policies will apply to different categories of projects. Generally, it would be easier to set up an FIE within the Encouraged Projects or Permitted Projects category and the FIE could enjoy more preferential treatment from the business and tax perspectives.
Otherwise, there could be restrictions on the form of investment (e.g. requirements on the amount of investment coming from the Chinese party) for some of the restricted projects.
The Ministry of Commerce (MOFCOM) has overall responsibility for approving the formation of FIEs and for issuing approval certificates. The local MOFCOM authorities generally undertake the examination and approval procedures. Under normal circumstances, the following documents should be submitted to support the application: Project Proposal, Letter of Intent, Feasibility Study Report, Articles of Association, Joint Venture Contract etc. However, the list of documents required for submission may vary depending on the location and the type of operation.
After obtaining the approval certificate from the MOFCOM, the FIE has one month to register with the State Administration for Industry and Commerce(SAIC) in the relevant location to obtain a business license. Within 30 days of the issuance of the business license, the FIE must register with the local tax authorities.
Other authorities that the FIE would need to seek approval from including the Organisation Code Bureau, the Foreign Exchange Supervision Bureau, the Finance Bureau, the Statistics Bureau and the Customs Bureau.