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Doing Business in China from Legal Perspective
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Sibo Qing is a senior partner at Shanghai Co-Effort Law Firm and practices mainly in the areas of foreign investment, outbound investment, M&A, equity fund investment, and corporate law.
In foreign investment and outbound investment area, Mr. Qing has been providing legal services for foreign enterprise or individual in the whole process of investing in China and doing business in China, including but limited to legal entity establishment, equity structuring design up, IP protection, labor regulation establishment, compliance management, capital raising, daily contract reviewing, etc.
China Legal Set-up 101
01 | Starting from the relevant departments
The following authorities can be used as a gateway with a single business license application. They are formed as a union, so they can redirect the applicants with respect to the approvals needed by other authorities. Since these bodies are fairly efficient, the establishment process takes only 1-2 months.
State Administration for Market Regulation (SAMR)
SAMR and its local counterparts are in charge of company registration and filing. The SAMR is one of China's main authorities that regulates broad areas of the economy including market competition, monopolies, intellectual property, and drug safety. Business sectors requiring special operational licenses or permits will also need to interact with the relevant authority in charge of such specific industry sectors.
National Development and Reform Commission (NDRC)
NDRC is a specialized authority with its role related to approving and maintaining record filing of foreign investment projects in specific industries. For example, they provide ICP licenses in the telecommunication industry. This authority will be most relevant to manufacturing factories with pollution risks.
Ministry of Commerce (MOFCOM)
Under the recent revisions to the regulations, MOFCOM, in charge of a complicated process of analyzing investment filings and granting approvals, is now to take a back seat. This means no approval or record-filing will be required from MOFCOM for incorporation of or any change related to foreign investment. They will only be required to submit information regarding the initial reports, change or dissolution reports and annual reports through an online information reporting system with MOFCOM assuming a monitoring role.
State-owned Assets Supervision and Administration Commission (SASAC)
Additional regulatory approvals will be required in sensitive/restricted sectors or those involving state-owned enterprises (SOEs). So, if an SOE's assets are involved, a formal valuation by a licensed appraiser of the relevant assets and approvals or filings will be needed from the SASAC.
02 | Types of business entities
Foreign investment in China typically occurs through the establishment of a new entity on a stand-alone basis, formation of a joint venture, or through a merger or acquisition of an existing business. Where foreign investment is restricted, parties may consider contractual options instead, or a variable interest entity (VIE) structure. Often the level of complexity of the business operation and the depth of integration of the business in China will dictate the type of investment vehicle and strategy.
Joint Venture (JV):
JV involves foreign and Chinese parties to form a venture to varying degrees of ownership. There is no foreign to Chinese shareholding ratio required by the law, unless the business is in the restricted sector for which special licenses are required. So, JV is most suitable for businesses in restricted sectors to get the relevant licenses and for businesses planning to approach the Chinese market with a reliable local partner.
Wholly Foreign-Owned Enterprise (WFOE)
A limited liability company with 100% foreign ownership. It is the go-to entity type for foreign businesses to tap into the Chinese market. Having founded a WFOE, businesses can make local connections to pave the way for a JV such that routine operations can be conducted via JV, while the WFOE can be used for intellectual property ownership and profit distribution.
Representative Office (RO)
RO provides a basic market entry entity without formal legal establishment. RO cannot be used to make profits. It cannot be established on a virtual address as opposed to a JV or WFOE. Before establishing a RO, investment capital needs to be brought upfront. Reasons like these make it an unattractive option for foreign investment.
Foreign Invested Partnership (FIP)
Established by two or more foreign entities or individuals with or without a Chinese partner. Profits and losses are distributed according to a partnership agreement. Income tax is assessable on each partner, and not on the partnership. Given the complicated and tricky legal nature of partnerships, this is not a recommended entity type.
Special FIEs
Investment in certain industries requires special kinds of FIEs. For example, wholesale and retail entities use foreign-invested commercial enterprises (FICE), companies wishing to invest in real estate projects use Foreign-Invested Real State Enterprise (FIRSE), and for private equity funding, Foreign-Invested Venture Capital Enterprises (FIVCE) are used. This type of entity is mostly used by big corporations.
China Holding Company (CHC)
A foreign investor with substantial operations in China may be eligible to set up a CHC to hold its equity in investments in China. Since there are certain capital investment requirements, this type of entity is also established by big firms, for example, Tesla.
Merger and Acquisition (M&A)
The acquisition of private companies (i.e. not listed on a stock exchange in China) is comparatively straightforward. There is no substantial review of transaction documents or restrictions on onshore equity investment using foreign currency in capital accounts. Other than relevant taxes, there are no laws requiring the transaction value related to the acquisition to be a certain amount as long as parties involved in the transactions agree to it. Acquisition of listed companies is, however, more complicated and subject to stricter scrutiny and procedures.
Contractual Options:
Contractual arrangements appointing Chinese partners to act as distributors or trading and sourcing agents may be appropriate where a foreign party wants to distribute and sell its products in China, or source input material for manufacturing or assembly overseas without having to establish a permanent presence onshore.
Variable Interest Enterprise (VIE) Structures
A VIE refers to a structure where a wholly or partially foreign-owned entity enters into contracts with a Chinese operating company that has the approved business scope and holds the necessary licenses to operate in a foreign investment restricted or prohibited sector. Instead of equity acquisition of Chinese firms, contracts ar
Given the various forms of entities and transactions, let's dive into the procedure of forming a WFOE or JV:
03 | Before you decide on setting up the entity
M&A or Incorporations:
To incorporate a new company, considerable time and effort will need to be spent. Seeing that a company is newly established, a local Chinese company might judge it to be short-termed and may not conduct with it. On the other hand, acquiring or merging with a local firm also comes with its risks. The local company might have operational problems or accumulated debt. It is essential to do proper due diligence before making a decision.
Structuring:
You can make a direct investment from your home country or through third-party tax havens like that of the British Virgin Islands. Countries like Singapore have treaties with China to facilitate investment which should be looked into.
Capital and Dividend Repatriation:
With the new reforms to the regulations, it has become fairly easy to repatriate dividends and profits back to the home country. Only a resolution detailing the situation will be needed to be passed in a shareholder meeting to be able to move the money out of China.
Anti-trust filing:
According to the Anti-Monopoly Law and relevant regulations, if businesses enter into certain mergers and acquisitions transactions (or any other transactions involving a change of control for instance a greenfield project) and the filing tests (i.e., global and China turnover) are triggered, they need to obtain the anti-trust clearance before closing.
National security review:
Foreign investment in domestic enterprises falling within certain sensitive sectors (such as finance, resources, and energy, food safety) requires a review to ensure the transaction will not harm national security. As long as there is no data transmission outside of China and the company is operating by the laws and regulations of the PRC, the national security review will not be initiated by the authorities.
Extraterritorial Foreign Legislations:
PRC also has laws in place to protect foreign businesses from unjustified extraterritorial foreign legislations in case a firm faces barriers from their home country in conducting business in China. The authorities will provide the necessary support, guidance, and services.
Q: How to determine the registered capital amount?
A: It should depend on the actual area of business you want to carry out.
Too little: the company may not have enough money to operate
Too much: more monetary investment burden for shareholders.
Q: When shall I pay the registered capital?
A: For most companies, shareholders can pay at any time during the business term, as long as:
1) the company has sufficient money to operate;
2) the company does not default in debt payment.
In some special areas, the registered capital needs to be paid at the registration, such as banks, insurance companies, labor dispatch companies, etc.
Q: How many shareholders required for a company?
A: One or more.
Q: How many persons in different positions needed for registration?
A: Usually 3: legal representative, supervisor, and financial person.
Q: How long do I need to establish a company?
A: To get the business license: about one month (when no pre-registration approval required)
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