Setting Up a Business in China - Part I Major Corporate Forms

Setting up a Business in China

With the continuous reform and opening-up efforts, foreign investment into China remains strong.  It is reported that “FDI to the Chinese mainland jumped 8 percent year on year in the first six months, settling at US$68.41 billion”.  However, it is important to follow Chinese laws and regulations when investing in China.  Foreign investors can check encouraged, restricted, prohibited and permitted industries to invest in China in the “Foreign Investment Industrial Guidance Catalogue (Revised 2015) (The latest version of the Guidance Catalog was released on 10 March 2015 by the National Development and Reform Commission (NDRC) and Ministry of Commerce (MOFCOM), which took effect from 10 April 2015).  It serves as the basis of applying relevant policies to foreign investment projects.  Being one of the “encouraged” industries obviously can “safeguard the interests of China”, and will bring a number of advantages since the company’s goals align with Chinese government interests.

 

Section 1

Major Corporate Forms

There are five major corporate forms of enterprises for foreign investors to invest and operate in the People’s Republic of China according to Chinese laws and regulations. 

They are listed below, sorted in chronological order.

n  Sino-foreign Equity Joint Ventures (Law on Sino-Foreign Equity Joint Ventures issued in 1979)

n  Wholly Foreign Owned Enterprises (Law on Wholly Foreign-Owned Enterprises issued in 1986)

n  Sino-foreign Cooperative Joint Ventures (Law on Sino-foreign Cooperative Joint Ventures issued in 1988)

n  Foreign Invested Company Limited by Shares (Company Law of the People's Republic of China revised in 2004)

n  Foreign Investment Partnership Enterprises (Measures for Administration of the Establishment of Partnership Enterprises Within the Territory of China by Foreign Enterprises or Individuals issued in 2009)

 

Sino-foreign Equity Joint Ventures (EJVs)

EJVs are a joint venture model which takes the form of a limited liability company.  According to Law on Sino-Foreign Equity Joint Ventures Article 4, “The proportion of investment contributed by a foreign partner as its share of the registered capital of an equity joint venture shall in general be no less than 25 percent. Equity joint venture partners shall share profits and bear risks and losses in proportion to their contribution to the registered capital of an equity joint venture.”

Wholly Foreign-Owned Enterprises (WFOEs)

WFOEs are the most common investment forms for mainland China-based business  foreign parties.  It takes the form of a limited liability enterprise, established with their capital provided totally by a foreign investor within Chinese territory, in accordance with the relevant Chinese laws.  Minimum registered capital is not required for WFOEs with scope of business of consulting, trading, retailing, information technology etc. but required for some industries such as Banking, Logistics etc.  It is especially important for foreign investors to check the restrictions on foreign ownership in the Catalogue for the Guidance of Foreign Investment Industries and other relevant regulations before determining the industry WFOEs set up in. 

Sino-foreign Cooperative Joint Ventures (CJVs)

CJVs refer to a joint venture between a Chinese and a foreign company within the territory of China. It can take the form of legal person CJVs as well as non-legal person CJVs (the definition of “legal person” is provided in Article 36 of General Principles of the Civil Law of the People’s Republic of China).  According to Law on Sino-foreign Cooperative Joint Ventures Article 2, “When Chinese and foreign partners establish a cooperative enterprise, provisions on such items as investment or terms for cooperation, distribution of earnings or products, sharing of risks and losses, method of business management and the ownership of property on the expiry of the contract term shall be prescribed in the cooperative enterprise contract in accordance with the provisions of this Law.  

Foreign Invested Company Limited by Shares (FICLS)

FICLS refers to a limited company which at least one foreign investor, established by legal approval of the Ministry of Commerce according to relevant national regulations.  According to Provisional Regulations of the Ministry of Foreign Trade and Economic Cooperation on Certain Issues Concerning the Establishment of Companies Limited by Shares with Foreign Investment Article 7, “The minimum amount of the registered capital of the company shall be RMB 30 million, with the shares subscribed and held by foreign shareholders being no less than twenty-five percent of the registered capital.”

Foreign Investment Partnership Enterprises (FIP)

FIPs are an easier and more desirable option that foreign investors could choose.  It is an unlimited liability flexible-capitalization enterprise.  It is not required MOFCOM approval to establish a FIP, but only required NDRC and industry-specific approvals if foreign investment is made through a partnership.  According to Administrative Provisions on the Registration of Foreign Invested Partnership Enterprises Article 6, “A state-funded company, state-owned company, listed company, public welfare-oriented public institution or social organization may not become a general partner of a limited partnership”.  No minimum capital required for FIP.

 

Related Readings:

Regulations for the Implementation of the Law on Sino-foreign Equity Joint Ventures

Detailed Rules for The Implementation of The Law on Wholly Foreign-Owned Enterprises

Detailed Rules for The Implementation of The Law on Sino-Foreign Cooperative Joint Ventures

Registered Capital Registration System Reform

Notice of the Ministry of Commerce on Improving the Verification and Administration of Foreign Investment

Circular of Nullified and Modified Documents on the Registered Capital Registration System

By Jing Zhang

International Development Advisor - FDI Strategies