What Type of Entity Should We Use to Set Up Our Business?

One of the first issues faced by prospective investors in China is choosing the appropriate type of legal structure through which to operate their business. With the new Foreign Investment Law that took effect on January 1, 2020, foreign investors are granted the same legal treatment as domestic investors except for categories of business listed in the “Negative List”, i.e. Special Administrative Measures (Negative List) for Admission of Foreign Investment. The existing joint ventures and Wholly Foreign Owned Enterprises (WFOEs) (the two most common types of limited companies utilized by foreign investors before the Foreign Investment Law), are required to change their organization form, structure and operating rules in accordance with Foreign Investment Law before January 1, 2025.

Limited Liability Company

The limited liability company (also called limited company) in China is similar to a limited liability company (LLC) structure in the US and is the most utilized type of legal entity in China.

Joint Stock Limited Company

Joint stock limited company, also called a company limited by shares, is a limited liability company with its capital divided into shares of equal value. Generally, the primary reason for investors to choose this company form is that they expect the company to be listed on one of China’s stock exchanges, e.g. Shanghai stock exchange or Shenzhen stock exchange, in the near future.

Partnership Enterprise

A partnership enterprise is usually established by at least two partners (natural persons, legal persons and other organizations) based on their partnership agreement. They jointly contribute capital, and share profits and risks. Partnership enterprises can be divided into general partnership enterprises and limited partnership enterprises. A general partnership enterprise refers to an enterprise in which all of its partners are general partners. A limited partnership enterprise refers to an enterprise in which there are both general partners (minimum one) and limited partners. The general partners shall bear unlimited joint and several liability for the debts of the partnership enterprise. The limited partners are liable for the enterprise’s debts within the limit of their capital contribution. Usually, general partners are responsible to execute the enterprise affairs while a limited partner does not have the right to do so.

Branch and Representative Office

Chinese law treats each of these two entities as extensions of the head office overseas, not as separate legal entities. Their activities are the activities of the head office.

Representative Office

Since a representative office is not considered an independent legal entity, but rather an extension of its parent company, it cannot enter into contracts in its own name, issue tax invoices, or hire employees directly. Therefore, all business contracts must be entered into in the name of the parent company, and all local employees must be hired through local staffing companies.

A representative office is not allowed to directly engage in revenue generating activities, unless otherwise permitted by certain bilateral treaties between China and other countries, or by regulations applicable to special industries.

Establishment of a representative office is easier than the establishment of other business presences. Normally, the investor can directly register its representative office with the Administration for Market Regulation Office in the province where the representative office is located. However, if the representative office is to participate in such sectors as banking and insurance, it must first obtain approval from competent government agencies. The usual steps to set up a representative office are:

1. collect relevant incorporation and credit certification documents of the head office and apply for notarization and legalization;
2. obtain prior-approval (if applicable based on the industry sector) from China Banking and Insurance Regulatory Commission or other relevant government agencies depending on the specific industry of the head office;
3. submit required documents to the Administration for Market Regulation office.

Branch

In general, Chinese law allows foreign companies to set up branches in China. In practice, however, the government seldom grants approval for setting up a branch of a foreign company, due to the lack of implementing regulations regarding its establishment. As a result, it is possible for foreign companies to get approval to establish a branch in China only in specific industries, such as banking and insurance.

Capital Required

There are no minimum capital requirements for a limited liability company or a representative office, except for 27 industries which are closely related to the financial industry, but the company needs to make sure that it has sufficient working capital for its business operation.

Official Fees

There are no longer official fees for registration of a limited company, joint stock limited company, partnership enterprise, representative office, and branch.

What are the Legal Issues Associated with the Start-Up of a Company?

For the rules specifically relating to the operation of a foreign invested enterprise (FIE). Company registration can normally be completed within 7 to 20 working days depending upon the particulars of the situation.

1. Company Name

According to applicable law, each company shall have an official name registered in its business license, and the company name shall use Chinese characters which comply with national standards and constitute of four parts, i.e. “administrative region” + “business name” + “industry” + “company organization form”.

1. Company Address

In principle, companies in China are required to have a physical address, i.e. to own or lease an office or plant to be registered as the company’s address and shall have only one registered address.

1. Business Scope and Business License

The business license is the legal certificate for establishment of a company, and a company is considered as legally established only after it obtains the business license. The business license is a very important registration document of the company, as it also sets forth the company’s organization number, taxation registration, social insurance registry and corporate statistics registration.

1. Registered Capital and Total Investment

Under Chinese laws, registered capital is the total amount of capital committed for the establishment of a company. With the exception of a few special industries such as banking, China has adopted a registered capital subscription system for most companies, under which there is:

1. no minimum requirement of registered capital, and the company can determine the amount of registered capital on its own;
2. no minimum requirement on amount of paid-in capital;
3. no requirement on capital contribution period, and it can be agreed by the shareholders in the company’s AOA.

5. Articles of Association

Under Chinese laws, the Articles of Association (AOA) is the basic corporate document of a company which sets forth information concerning notice requirements for board of director and shareholder meetings, composition of board of directors, etc. AOA must be formulated in accordance with the laws, and filed with company registration authorities.

1. Legal Representative

The legal representative may be a foreign or Chinese national who represents the company in conducting business activities according to the provisions of the laws and the AOA of the company and is the most powerful position in the company because this person can legally bind the company with his or her signature (even without approval from the company’s board of directors). When the legal representative engages in business operation in the name of the company, the legal consequences shall be borne by the company.

7. Shareholders

As of 2020 the shareholders of a foreign-invested company may be either foreign or Chinese individuals or entities.

Shareholders’ meeting has the power to decide on important matters of company including but not limited to deciding on the business direction and investment plans, electing and removing directors and supervisors, reviewing and approving the annual financial budget and financial accounting plan, reviewing and approving the profit distribution plan and loss recovery plan, resolving on increase or reduction of registered capital of the company, resolving on issue of corporate bonds, resolving on merger, division, dissolution, liquidation or change of company structure, amending the articles of association of the company.

8. Directors

A board of directors or an executive director (in the case of smaller companies without a board of directors) are elected by shareholders. The directors shall be accountable to the board of shareholders and exercise the following duties and power under Chinese Company Law:

1. convene shareholders’ meetings and report to the board of shareholders;
2.  carry out resolutions passed by shareholders’ meetings;
3. decide on the business plans and investment schemes of the company;
4. formulate the annual financial budget and financial accounting plan of the company;
5. formulate the profit distribution plan and loss recovery plan of the company;
6. formulate the plan for increase or reduction of registered capital and issue of corporate bonds;
7. formulate the plan for merger, division, dissolution or change of company structure;
8. decide on the set-up of internal management organization of the company;
9. decide on appointment or dismissal of company managers and their  remuneration, and decide on appointment or dismissal of deputy managers and finance controller of the company based on the nomination by the managers;
10. formulate the basic management system of the company; and
11. other duties and powers stipulated by the articles of association of the company.

9. Supervisors

A board of supervisors or a supervisor (in the case of smaller companies without a board of supervisors) is the supervisory authority in the company. The board of supervisors is usually composed of shareholder representatives and employee representatives, who shall not concurrently serve as directors or managers. The board of supervisors is responsible for monitoring the company’s financial situation, the performance of the company’s senior management personnel, and other supervisory duties prescribed in the company’s articles of association.

10. Company Seals

In China, each company must engrave a number of company seals, which are widely and routinely used instead of signatures on company documents, banking paperwork, regulatory filings, and other business activities.

What are the Legal Issues Associated with Operating as a Foreign-Held Company?

1. Access Control on Foreign Investment

China has recently made substantial reforms to its legal rules governing foreign investment and start-up of a foreign-invested company since Jan 1, 2020. National treatment and negative list policies have been adopted to regulate foreign investment activities. Foreign investors and their investment shall be granted treatment no less favorable than that granted to domestic investors except for the industries listed in the Negative List. The Negative List actually consists of two lists: National Negative List, which applies to the whole country, and Free Trade Zone Negative List, which only applies to enterprises located in Free Trade Zones. Usually the Negative List is updated annually and the Chinese government has been trying to shorten the Negative List each year.

2. Foreign Exchange Control

China exercises comprehensive foreign exchange control. Overseas organizations and individuals making direct investments in China shall, upon approval by the relevant authorities in charge, process registration formalities with the foreign exchange control authorities, i.e. State Administration of Foreign Exchange.

What is the Process to Obtain a Work Permit?

In general, all foreigners are required to obtain a work permit and residence permit in order to legally work and live in mainland China (China). The work permit is the permission to work in China. The residence permit is the permission to reside in China. The applicant must obtain both in order to work and live in China. The work permit and residence permit are normally valid for a period of one year and both must be renewed before expiration.

The application process consists of two applications:

1. An application to receive a work permit from the designated Administration of Foreigner Experts Affairs; and
2. An application for a residence permit from the designated Exit-Entry Administration Division of the Public Security Bureau office.

Employee Categories

Foreign employees are divided into three categories: Class A (foreign top talents), Class B (foreign professionals) and Class C (other foreign employees). Keep in mind that the application and procedure to obtain a work permit and residence permit may vary depending upon the province in China where the applications are submitted and the category the foreign employee falls into. The information set forth in this chapter is mainly based on the practice in Shanghai and the requirements for applying for a work permit for more than 90 days. The requirements for applying for a work permit for no more than 90 days will be simpler.

Qualifications of Foreign Employees

The following are the general requirements applicable to foreign individuals seeking to work and reside in China:

1. Must be at least 18 years of age and in good health;
2. Engage in urgently needed jobs in China and can make contribution to China’s economic and social development;
3. Possess the requisite professional skills and work experience needed for the position;
4. Have no criminal record;
5. Have a confirmed employer in China; and
6. Possess a valid passport or equivalent international travel document.

Restricted Professions

Employers in China may only employ foreigners for those positions in which special skills are required and the position cannot be filled by domestic Chinese employees, and such employment shall not violate any other relevant regulations.

1. Online Registration of Employer

In order for the foreign employee to receive a Notification Letter of Foreigner’s Work Permit, his/her Chinese employer shall register at Service System for Foreigners Working in China (http://fwp.safea.gov.cn/) (“Service System”) and submit relevant supporting documents.

2. Applying for and Obtaining Notification Letter of Foreigner’s Work Permit Before Entering China

After the online registration is completed, the employee shall apply for the Notification Letter of Foreigner’s Work Permit through the Service System and submit relevant supporting documents

3. Applying for and Obtaining the Employment Visa (Z visa)

The foreign employee is required to send the Notification Letter of Foreigner’s Work Permit, the application for the Z visa, and other relevant documents to the appropriate Chinese embassy or consulate in the foreigner’s home country before the expiration of the Letter.

If the foreign employee’s dependents’ information is included in the Letter, those dependents may apply for the S1 Visa (Foreigners who intend to go to China to visit the foreigners working or studying in China to whom they are spouses, parents, sons or daughters under the age of 18 or parents-in-law, or to those who intend to go to China for other private affairs and intended duration of stay in China exceeds 180 days).

4. Temporary Residence Certificate

After the foreign employee and dependents (if any) arrive in China, they are required to obtain a temporary residence certificate within twenty-four hours of their arrival.

The temporary residence certificate may be issued by the hotel (if the foreign employee and dependents stay in a hotel) or the competent local police station (if the foreign employee and dependents are accommodated in a rented flat or house).

This temporary resident certificate will be a necessary supporting document for the residence permit application.

5.Health Certificate

The foreign employee and dependents (if any) are required to have a medical examination at the designated hospital (in Shanghai, it is Shanghai International Travel Healthcare Center) and obtain the health certificate after their arrival in China. This document will be a necessary supporting document when applying for the work permit.

6. Work Permit

Within fifteen days after the entry of the foreign employee with a Z visa, the foreign employee is required to apply for the Foreigner Work Permit through the Service System. Documents required are:

1. Application Form;
2. Valid Visa or residence permit;
3. Employment contract;
4. Health certificate issued by the Chinese inspection and quarantine institution. (if the Applicant has not provided a health certificate when applying for the Notification Letter of Foreigner’s Work Permit). The health certificate shall be issued within 6 months.

7. Residence Permit

After the foreign employee obtains a work permit, he is required to apply for a residence permit for himself and his dependents (if any, including children under 18 years old) with the Exit-Entry Administration Division of the Public Security Bureau within thirty days of his arrival in China.

8. Applicable Government Fees

Applicable government fees payable during the process to obtain a work permit and other authorizations required may vary among areas in China. The following is the list of fees for Shanghai:

1. Fee for Notification Letter of Foreigner’s Work Permit: free.
2. Fee for employment visa: depends on the stipulation by the Chinese embassy.
3. Fee for work permit: free.
4. Fee for residence permit: RMB 800/person/year (Resident Permit for 1-3 years).

9. Extension of Work Permit and Residence Permit

The employer must apply for an extension of the work permit thirty days prior to the expiration of his/her work permit. Supporting documents required for the work permit renewal application are:

1. Application form for the extension;
2. Employment contract or other employment certificate;
3. Passport or international travel certificate;
4. Visa resident permit;

What Incentives are Available to Foreign Investors by the Government?

There are various types of investment incentives offered to foreign investors and foreign investment enterprises (FIE) with qualifying projects in China such as tax incentives, land grants and government subsidiaries. One of the most important incentives is corporate income tax exemption or reduction. China has eliminated nationwide tax holidays for FIEs, however, China still offers preferential tax incentives for FIEs and foreign investors in order to encourage foreign investment in hi-tech and other promoted sectors. This chapter discusses the tax incentives available to FIEs and foreign investors in China.

1. Tax Exemptions and Reductions

The standard corporate income tax rate is 25%, but the tax rate may be reduced to 15% for qualifying projects engaging in activities promoted by the China government. The following industries and activities are potentially eligible for tax incentives:

1. Research and Development Activities
2. Industry of Agriculture, Forestry, Husbandry and Fishery
3. Investment In and Operation of Key Public Infrastructure Projects
4. Qualified Environmental Protection, Energy Conservation and Water Conservation Projects
5. Qualified Technology Transfer Projects
6. Integrated Circuit and Software Industry
7. High-tech Industry
8. Manufacturing Industry
9. Advanced Technology Service Industry

1. Other Tax Incentives

1. Catalogue of Encouraged Foreign Investment Industries
2. Tax Incentives for Reinvestment

1. Government Subsidies

Beijing: To encourage multinational corporations to establish or relocate regional headquarters in Beijing, Beijing government grants subsidies for regional headquarters newly registered and established in Beijing or newly relocated to Beijing after 1 January 2009 based on their paid-in capital. Also, rent subsidy for the office space leased will be provided for three consecutive years. Regional headquarters with annual operating income exceeding RMB 100 million for the first time will be rewarded based on their operating income.

Shanghai: To encourage multinational corporations to establish or relocate Regional Headquarters in Shanghai, any regional headquarters established in the form of an investment company in Shanghai after July 7, 2008 with paid in registered capital of over USD 30 million and ten or more employees, may enjoy a subsidy of five million yuan. Also, rental subsidy will be granted to qualified regional headquarters. Besides, if the annual turnover exceeds 500 million yuan, the regional headquarters may get reward from the government.

Guangzhou:

Guangdong Province also provides local incentives to foreign investment. Foreign investors investing in non-financial economic projects, and establishing headquarters or regional headquarters in Guangdong to a certain scale will be rewarded according to the investment amount up to RMB100 million.

What are the Legal Issues Associated with Foreign Ownership of Land?

Chinese law does, however, allow qualifying foreign individuals and foreign companies to acquire a right to use (not own) land for a period of time specified in the law and even transfer that right of use to third parties in some situations. This right is comparable in many respects to a leasehold. Also, qualifying foreign individuals and foreign companies are legally allowed to purchase and own buildings, houses, condominiums, and other immovable property during the period of land use, subject to certain conditions described below.