China consistently encourages and welcomes foreign investment. In recent years, the Chinese government has introduced a series of laws and regulations to further ease restrictions on foreign investment and standardize its management. It is worth noting that China has recently amended the ‘Company Law of the People’s Republic of China’. This revised Company Law known as the ‘New Company Law’ will come into effect on July 1, 2024. Foreign investors should proactively consider the New Company Law.
Forms of Foreign-Invested Enterprises
According to the ‘Foreign Investment Law of the People’s Republic of China’ (‘Foreign Investment Law’), which came into effect on 1 January 2020, a foreign investor may establish a foreign-invested enterprises within China either individually or jointly with other investors(including natural person in China). The forms available for foreign-invested enterprises are as follows:
Companies
Foreign investors can establish two types of companies in China: Limited Liability Companies and Joint-Stock Companies. Both types of companies are economic organizations where shareholders bear limited liability to the extent of their subscribed contributions and the company bears limited liability to the extent of its total assets for company debts. Among them, a Limited Liability Company is established by one to fifty shareholders; a Joint-Stock Company is established by two to two hundred initiators through initiation or solicitation, where over half of the initiators should have a domicile within China. The registered capital of a Joint-Stock Company consists of equal shares and is raised by issuing shares (or equity certificates). The New Company Law has revised the number of initiators of Joint-Stock Companies to be “one to two hundred”, legally recognizing the status of single-person Joint-Stock Companies for the first time.
Partnership Enterprises
Foreign investors can establish partnership enterprises in China in two forms: General partnership and Limited Partnership. The former is composed of two or more General Partners while the latter is composed of two to fifty partners (including General Partners and Limited Partners), with at least one General Partner. General Partners bear unlimited joint and several liabilities for the partnership’s debts, while Limited Partners bear liability only limited to their subscribed contribution.
Branches of Foreign Companies
The foreign company’s branch should indicate the nationality and liability form of the foreign company in its name. The branch does not have Chinese legal person status. The foreign company allocates the funds necessary for its operations within China and assumes civil responsibility for the branch’s business activities conducted within the country.
Permanent Representative Offices of Foreign Enterprises
A permanent representative office of a foreign enterprise is an office established by a foreign enterprise in China to engage in non-profit activities related to the business of the foreign enterprise and does not have the status of a legal person.
Registration of a Limited Liability Company
In practice, the preferred organizational form for foreign-invested enterprises is a limited liability company. However, due to certain changes in the New Company Law, establishing a joint-stock limited company is also a viable option for companies with financing plans. In the following, we will use the limited liability company as an example to illustrate the registration process.
Registered Capital
Shareholders may contribute capital in the form of currency and physical goods, intellectual property rights, land use rights, and other non-monetary assets that can be monetarily evaluated and legally transferred, except prohibited by laws and regulations from being used as contributions. It should be noted that the ‘New Company Law’ has introduced equity and debt rights as forms of non-cash assets for contributions and requires the subscribed capital by all shareholders of the limited liability company be fully paid up by within five years from the date of the company’s establishment.
Organizational Structure
The organizational structure of the Limited Company includes the Shareholders’ Meeting, the Board of Directors (composed of three to thirteen members or only an executive director), the Board of Supervisory (generally no fewer than three members, or no board of supervisors with one to two supervisors), and a Manager (appointed or dismissed by the Board of Directors). Take note that the ‘New Company Law’ allows for the establishment of an audit committee within the Board of Directors, in lieu of a supervisory board or supervisors, given unanimous consent from all shareholders. This committee would exercise the powers vested in the supervisory board or supervisors.
Materials Required for Registration
– Company Registration (Filing) Application Form.
– Articles of association of the company.
– Shareholders’ & Management Qualification Docs
Foreign investors and their designated foreign managers’ qualification documents or identity proofs should be notarized by the notary office in their home country and certified by the Chinese embassy (consulate) in that country. The notarized and certified documents need to be fully translated into Chinese. After the Hague Convention took effect in Saudi Arabia in December 2022, and in China in November 2023, relevant documents only need to undergo Hague certification (APOSTILLE).
– Certificate for the use of the business premises
– Approval documents (permits)
If laws and regulations require approval before registration, relevant approval documents or permits should be submitted when registering.
-Power of attorney for legal document delivery and the authorized representative.
-Other documents required by the authority.
The registration (i.e. obtaining the business certificate) typically takes up to three working days with all necessary materials. If the case is complex, it may extend to another three working days.
Foreign Exchange Registration and Information Reporting
China implements foreign exchange controls, and foreign investors are subject to foreign exchange registration for direct investment in the country. After a foreign-invested enterprise is legally established, it should go to the bank at the local foreign exchange sub-bureau (foreign exchange management department) within its jurisdiction to register direct investment foreign exchange. Only after completing such registration, the subsequent direct investment related account opening, fund remittance, and other business (including profit, dividend remittance, or remittance back) can be handled.
After the establishment of a foreign-invested enterprise, it should submit investment information to the competent department of commerce through the enterprise registration system and the national enterprise credit information publicity system by submitting initial reports, change reports, cancellation reports, annual reports, etc. The initial report is submitted by foreign investors to the competent department of commerce through the enterprise registration system when registering the establishment of a foreign-invested enterprise.
Foreign Investment Law and Market Access
The Foreign Investment Law and its implementation regulations established the “Pre-entry National Treatment plus Negative List Management System” for foreign investment. The current valid negative list was issued by the National Development and Reform Commission and the Ministry of Commerce on December 27, 2021, and includes two parts: First, the “Special Management Measures (Negative List) for Foreign Investment Access (2021 Edition)” applicable nationwide; Second, the “Special Management Measures (Negative List) for Foreign Investment Access in Free Trade Pilot Zones (2021 Edition)” applicable only in Free Trade Pilot Zones. If a foreign investor intends to invest in sectors within the Negative List but does not meet the requirements of the Negative List, the relevant authorities will be denied relevant permissions, including permits and enterprise registration
Foreign investors also need to pay attention to the “Market Access Negative List” applicable to domestic and foreign-funded enterprises, and the national security review related to investment in defense and defense supporting industries, as well as important agricultural products, important energy and resource sectors related to national security, and the business concentration review. Generally, China is further relaxing its restrictions on foreign investment. There are also possibilities to make investments through adjusting structure in the legal practice within the “Negative List” area.
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