Temat: Setting up a Business in China - Alibaba.com Resources

Setting up a Business in China

Easier than it Looks

Foreign entrepreneurs can now, at their discretion determine organizational structure according to the operations of their enterprises. Foreigners intending to invest in China should approach the appropriate government department to understand the legal procedures involved in setting up business in China.

First of all, you may consult the People’s Republic of China’s embassies or consulates stationed in your respective country or region for the right procedures. Or you can directly contact local governments’ Department of Promotion of International Trade, which are in charge of the promotion of foreign trade and foreign investment.

For the manufacturing sector, it is very likely, one of the thousands industrial parks in China will be one of your final choices. Industrial parks typically have Departments of Investment Promotion, and “one stop” services from registration through to first operations are commonly provided.

If you want to visit the place, you may request for an invitation letter by stating the purpose of visiting, proposed dates of stay, and the intended investment projects. Upon receiving a letter of invitation, you can proceed to the nearest embassy or consulate to apply for an entry visa to China.

Finally yet importantly, setting up a business in China involves a lot of paperwork. This tedious procedure might sound intimidating at the first glance. But it could be the easiest part. Currently, there are numerous consulting firms providing such services, which will make your lives much easier. As one of them, China Knowledge Consulting, a subsidiary of China Knowledge Group is poised to provide good services to you. But before you make your decision, you might want to have a quick look at related regulatory issues, such as laws and regulations. Although in fact, you don’t need to bother too much since your agency will do that, you might also want to have a rough idea what the process will be.

Regulatory Environment

Since China opened its doors to the world in the late 1970s, attracting foreign investments have topped its agenda. Besides bringing capital, foreign investments also introduced advanced technology and management skills to China, factors which have been viewed as the most important reasons for China’s economic growth. With the formulation of a series of laws, regulations and policies regarding foreign investments, China ensures foreign investments stay in line with its macroeconomic policies.

Catalog for Guiding Foreign Investment in Industry

The “Catalog for Guiding Foreign Investment in Industry” was revised by State Development Planning Commission (now renamed as National Development and Reform Commission), State Economic and Trade Commission, and the Ministry of Foreign Trade and Economic Cooperation (the two ministries are merged to form Ministry of Commerce) on 11 March 2002 after China’s membership with WTO. The Catalog classified foreign investment projects in China into three categories, namely, encouraged, restricted and prohibited.

In industries that do not fall into these categories, foreign investment is simply considered “permitted”. Foreign investors may invest in those categories that are encouraged, restricted, and permitted. The percentage of investment interest allowed to foreign investors is given in the catalog.

The revisions were aimed at bringing foreign investments in line with China’s WTO commitments. It is obvious that foreign investors should refer to this Catalog before making any investment decisions. It is one of the most important criteria for determining whether the proposed projects will benefit from customs duty and related Value Added Tax (VAT) exemption.

It is apparent in the revisions made for the new Catalog that China is adopting a more open attitude towards foreign investment. The number of encouraged items has increased and prohibited items reduced.
Changes in the Catalog
Service industries experienced the greatest change. Many sectors that were traditionally not encouraged by the government are now new additions to the encouraged category. Examples include wholesale and retail, real estate, public services, health, sports and social welfare services, education, culture etc.

In addition, industries such as telecommunication services and the supply of water, gas and heat in cities have been removed from the prohibited category.

Encouraged Investment Projects
In general, the following investment projects are encouraged:

* Transform traditional agriculture to modern agriculture and promote agricultural industrialization.
* Invest in communications, energy, raw materials, infrastructure and other fundamental industries.

* Invest in information and electronic industries, biological engineering, new materials, aeronautics and astronautics and other high technology industries.
* Use new and advanced technology to help China improve machinery, light industries and textiles so as to upgrade the manufacturing industry.
* Invest in projects for comprehensive utilization of resources, recycling, environmental protection and infrastructure construction.
* Invest in China’s western Region.
* Promote exports of all permitted items.

Restricted Investment Projects
Despite the relaxed regulations, some industries still belong to the restricted category. Generally, the following industries fall into the restricted category:

* Projects that are not technologically advanced.
* Projects that do not facilitate the saving of resources or improve the ecological environment
* Projects involving prospecting and mining of special minerals that have been classified under state protection.

Prohibited Investment Projects
At the same time, there are still some industries falling into the prohibited category. For example, foreign investment is banned in strategic sectors of the economy, including construction and operation of power grids and aviation transport.

Apart from a relaxation of restrictions on investment, the foreign shareholding caps for various industries, for instance, telecommunications, wholesale and retail are being lifted gradually in accordance with the WTO market access schedule.

Meanwhile, with the introduction of the concept of “relative Chinese majority shareholding”, more flexibility was accorded to foreign investors. In some industries such as water supply, the aggregate shareholding of foreign investors may exceed the shareholding of Chinese partners, provided the shareholding of Chinese partners is larger than the share of any one foreign investor.

Besides this Catalog, China also issued guidelines for foreign investors who plan to invest in central and western China – the Catalog for Priority Industries for Foreign Investment in Central and Western Regions (C&W Catalog). In this latter Catalog, an additional list of industry sectors where foreign investment is encouraged in the central and western Regions is set out. A new version of the C&W Catalog has been drafted, and will be promulgated soon.

Main Laws and Regulations for Foreign Investment in China

Besides the two Catalogs mentioned above, foreign investments are also subject to a series of laws and regulations.

Main Foreign Investment Laws and Regulations

* Law of Chinese-Foreign Equity Joint Ventures and its implementation regulations;
* Law of Chinese-Foreign Contractual Joint Ventures and its implementation regulations;
* Law of Wholly-Owned Foreign Enterprise and its implementation regulations;
* Law of Foreign-invested enterprises, the income tax and its implementation regulations; and,
* Law on the Protection of Taiwan Compatriots' Investment

General Laws and Regulations

Apart from foreign investment-related laws and regulations, FIEs are also regulated by some general laws and regulations, which are applicable to both FIEs and domestic companies. They include:

* Company Law;
* Contract Law;
* Insurance Law;
* Arbitration Law;
* Labor Law;
* Intellectual Property Law;
* Trademark Law;
* Copyright Law;
* The Provisional Regulations on Value-Added Tax;
* The Provisional Regulations on Consumption Tax;
* The Provisional Regulations on Business Tax; and, other related laws and regulations.

International Treaties

Indeed, FIEs are also subject to some international treaties, such as:

* Bilateral Investment Treaties; and,
* Bilateral Agreement on the Avoidance of Double Taxation.

Setting Up JVs or WOFEs

Before doing business in China, foreign investors are required to produce certain documents in order to go through the process smoothly. The procedures and required documents for direct investment vary in the forms of business entity, such as Joint Ventures (JVs) and Wholly-owned Foreign Enterprises (WOFEs). In general, there are some basic procedures that FIEs have to follow.

Letter of Intent (LOI) or Memorandum of Understanding (MOU)

This stage is only for investors who wish to establish a joint venture in China. They need to reach a preliminary understanding with their Chinese partners in the form of a LOI or MOU. These documents provide a basic description of the project, planned equity distribution among the partners and the amount of proposed capitalization.

The letter determines to which level the project approval application should be directed. Although a LOI or MOU is not legally binding on both parties, it should nevertheless specify provisions concerning exclusivity and confidentiality.

The preliminary agreement is attached to a project proposal to be submitted by the Chinese partner(s) to the local Development and Reform Commission (formerly known as Development and Planning Commission) or local Authority of Commerce, (combination of former Foreign Trade and Economic Cooperation Commission, Economic and Trade Commission).

Project Proposal

For JVs, the next stage is the submission of a project proposal for preliminary scrutiny. Chinese partner(s) should be solely responsible for preparation and submission of the proposal.

For WOFEs, drafting a proposal is the first step to setting up business. It should be prepared by the foreign investors and submitted directly to the local authorities. The foreign investor may appoint a local agent to liaise with the government. The foreign investor should therefore sign an authorization letter stipulating the agent’s scope of services, responsibility and fees.

Generally, the authorities will give an official reply within 20 days upon receipt of the proposal and other relevant documents. The approval or disapproval letter will be issued to the foreign investor, if it is a WOFE, or to the Chinese partner, in the case of a JV. The foreign party in a JV should thus request a copy of this document from the Chinese partner to confirm that the approval is consistent with the agreed terms of the project.

Having received a favorable reply, the Chinese party of a JV or the foreign investor in a WOFE may apply to local Administration for Industrial and Commercial for registration of company name.

Feasibility Study Report

Once the preliminary approval on the project proposal is obtained, a feasibility study is to be prepared. This involves all interested parties. A feasibility study is indeed a more detailed and expanded version of the previous project proposal. However, it must include:

• A general description of the project and the parties involved in the venture;
• Production plans and basic market research;
• Location of the project and reasons for the selection; • Description and explanation of purposes of equipment and technology to be utilized;

Organizational structure of the enterprise;
• Environmental protection, employment, construction plans and timetable;
• Capital sources; and,
• attachments such as certificate of incorporation and business license, financial reports of the investing company, background information of legal representative, etc.

One important issue in drafting the feasibility study is the “scope of business” for the enterprise. The scope of business should be carefully defined, as it is likely to be repeated in the JV contract, articles of association and on the enterprise’s business license. The scope of business on a Chinese business license delineates what activities the company is authorized to conduct; the language is usually narrowly construed.

Therefore, investors must make sure that the scope of business covers all categories of business activities planned for the enterprise. However, Chinese authorities will reject overly broad or vague language and narrowly interpret those broad or ambiguous words. So the scope must be described in precise terms. This might prevent the enterprise from engaging in business activities that the investor might have thought they were authorized to engage in.

Another key issue to be addressed in the feasibility study is capital contributions. Chinese authorities have a series of guidelines that must be followed with respect to the minimum amount of capitalization for each type of FIE. The specific amount should be confirmed with local agencies and it normally involves no less than US$200,000.

" To be addressed in the feasibility study is capital contributions. Chinese authorities have a series of guidelines that must be followed with respect to the minimum amount of capitalization for each type of FIE. The specific amount should be confirmed with local agencies and it normally involves no less than US$200,000."

There is also a timetable. It is based on the size of investment and is meant for the foreign partners to fulfill commitments for capital contributions. In addition, investors should be aware of the maximum ratio of debt to equity allowed for a JV.

There are also regulations requiring audits to confirm the valuation of state-owned assets to be counted as the Chinese partners’ contributions to capitalization. Finally, foreign investors’ contributions in kind require appraisals from Chinese import and export authorities.

The feasibility study is to be approved by local Development and Reform Commission, Authority of Commerce or Ministry of Commerce, Sate Development and Reform Commission, or the State Council, depending on the amount of investment. Usually, investments more than US$30 million require state-level approval. However, due to the recent decentralization, those projects that fall in the “encouraged” category of the industrial catalogue may be approved by the local government itself.

Contracts, Articles of Association

For JVs, the next step is the completion of contract, articles of association and the application for formal approval. While the feasibility study is under review, JV partners can work out the actual contract and articles of association. The contract incorporates all understandings and terms from the preliminary agreement, project proposal and feasibility study, though there may be some modifications.

Chinese law views the joint venture contract as the fundamental document for the establishment of joint venture. The contract must meet the conditions in China’s joint venture law (for equity JVs) or cooperative enterprise law (for cooperative JVs). The feasibility study and preliminary project approval documents are included as appendices when the contract is submitted for formal approval.

As WOFEs involve no contract, the documents include a written application for the establishment of the WOFE, a feasibility study report, the articles of association, a list of board directors, an authorization letter of legal representatives, the foreign investor’s certificate of incorporation and evidence of credit standing, the written approval of the project proposal and other necessary documents.

For both JVs and WOFEs, the articles of association must be drawn up and submitted as part of the formal application. Under Chinese law, the articles of association are viewed as the code of company governance – similar to the company by-laws or memorandum of association in other legal jurisdictions. Chinese law (JV regulations) contains detailed provisions regarding issues that must be addressed in the joint venture contract and articles of association.

It should include basic information about the enterprise: the enterprise’s name and address, scope of business, total capital and organization chart. The JV regulations require that the JV contract and articles of association be written in Chinese. However, a foreign language version of the documents is frequently prepared and the parties may agree that both language versions have equal validity.

Generally, the authority that examines such applications will give a reply within 30 days on receipt of the feasibility study report, contract and the articles of association. After this approval, the Chinese party of a JV or the foreign investor of a WOFE may apply for the approval certificate. Shanghai Foreign Investment Board will issue the approval certificate within three days upon receipt of the application.

Business License

The WOFE or JV will register with the local Administration for Industry and Commerce (AIC) and apply for a business license within 30 days upon receipt of the approval certificate. The local AIC will issue the business license within 10 working days to projects that have passed the examination. The enterprise is deemed as established on the date when the business license is issued.

Having acquired the business license, the enterprise must register with the State Tax Bureau, the Local Tax Bureau and the Customs House within a month, and must seek approval from the People’s Bank of China in order to open a foreign exchange account or an RMB account with a local bank with foreign exchange facilities.

FIEs are also required to register with the local Public Security Bureau to obtain residence permits for foreign personnel and approved family members; and to approach local foreign service companies for the recruitment of local staff.

Preparation of Documents

Apart from the key documents like project proposal, feasibility study report, contract (if any) and articles of association, a number of forms and documents have to be prepared. In the case of a WOFE registration, documents to be submitted include:
• Company registration application form;
• Application for company name;
• Appointment letter of directors;
• Name list of directors;
• Registration form of the legal representative (chairman of Board);
• Environment Impact Report;
• Letter of authorization in case the investor wishes to appoint a representative to handle the registration matters relating to the company in Shanghai;
• Lease agreement with local landlord (foreign investor should enter into a tenancy agreement before processing the registration);
• Certificate of incorporation of the investing company; • Board resolution that approved the investment in Shanghai;
• Original copies of bank reference;
• Brief resumes and photocopies of passports of directors, general manager and assistant general manager.

Employment Permit, Expert Certificate and Residence Certificate

A foreign invested enterprise, which is intending to employ foreigners, is required to apply for employment permits for foreigners at the local Labor and Social Security Administration with the following documents:

• Business license,

• Approval certificate for setting up enterprise,

• Application letter,

• The employees’ personal information.

After receiving the employment permit, the enterprise may apply for professional visa notification at local authority, which is authorized by the Ministry of Foreign Affairs. Alternatively, the foreign employee can apply for a professional visa to enter China at a local Chinese embassy or consulate with a faxed copy of professional visa notification.

After entering China, and within 15 days, the foreign employee can apply for employment certificates at local Labor and Social Security Administration with the following documents: professional visa, employment permit, employment contract, health certificate and photos of the foreign employees. With the employment certificate, the foreign employees can apply for residence certificate at the Exit and Entry Division of the Local Public Security Administration office.

The appointed local agent of a foreign company can apply for professional visa notification on behalf of the chief representative and representatives. After receiving professional visa notification, the chief representative and representatives may apply for professional visas at a local Chinese embassy or consulate. Upon entering China, they can apply for employment permit certificates at the local AIC.

Foreign Exchange

The Chinese currency - yuan or RMB has so far not been freely convertible (details see Limited Convertibility). China regulates the flow of foreign exchange in and out of the country. Although in July 2005, China abandoned its decade long peg system to the U.S. dollar. The exchange rate of RMB against foreign currency remains highly regulated.

To better control the flow, almost all Chinese enterprise and agencies are required to exchange their foreign currency earnings with the banks for RMB (large exporters have been allowed, since late 1997, to retain up to 15% of their earnings). When foreign exchange is required for import and other authorized transactions, they would then apply to designated banks that are members of the interbank foreign exchange market.

Opening a Foreign Exchange Account

FIEs are permitted to keep foreign exchange in foreign currency accounts at commercial banks by following specific procedures.

For FIES whose establishment has been approved by the relevant authorities i.e. they have obtained the business license issued by the authorities for Industry and Commerce, they are required to contact local authorities to have their foreign exchange account registered.

The local authorities will examine and check the basic conditions of the FIEs, including their investment forms and ratios, sources of funds, sources of revenue and expenditure of operating foreign exchange, proportions of products for domestic sale and export, forms of sharing foreign exchange profits and so on. After examining and approving all these conditions, the local authorities will register and issue the certificate on foreign exchange registration to the FIEs.

With the certificate, FIEs may open their foreign exchange accounts directly with a Chinese bank designated by the authorities or a foreign-funded bank in China. According to the relevant regulations, all activities of foreign exchange receipts and disbursements of a FIE must be conducted through its foreign exchange account with a bank in China, except for those otherwise approved by related authorities.

The State Administration for Foreign Exchange, or SAFE, inspects the foreign exchange registration certificate annually. Upon passing the inspections, the certificates are valid for another year.

Payment and Remittance of Foreign Exchange

According to regulations governing the remittance of profits, dividends, and bonuses abroad, companies must submit the following documents to the designated foreign exchange bank.

* Tax payment certificate and tax return (or evidence of tax exemption);
* Auditor’s report on the profits, dividends or bonuses for the current year, issued by an accounting firm;

* Board of directors’ resolution concerning distribution of profits, dividends and bonuses;
* Foreign exchange certificate;
* Capital verification report issued by an accounting firm; and
* Other documents requested by SAFE.

If a company intends to remit the profits, dividends and bonuses of previous years abroad, it must, in addition to these documents, present to the designated foreign exchange bank an accounting firm’s audit report of the company’s financial situation for the relevant years. Only enterprises with registered capital that is completely paid up in accordance with the contract terms will be permitted to make such remittances.

With relevant certificates and documents, current payment of foreign exchange within the business scope of the FIEs can be directly remitted through the bank. The remittance of foreign exchange under the capital account, such as the capital transfer of FIEs, recovery of investment, and the remittance of outlay of the enterprises’ branches outside China, must be approved by SAFE.

Limited Convertibility

China distinguishes between current account items and capital account items. China’s RMB is fully convertible only in the current account.

Current account items are ordinary transaction items involving international receipts and payments. They include payments and receipts in respect of trade, labor services and unilateral remittances. For such items, conversion can usually be made on the strength of the relevant documents and after the relevant transaction has been verified.

Capital account items are items where debt or equity changes as a result of the inflow and outflow of capital involving international receipts and payments. They include direct investment and all types of loans and investment in securities. For such items, specific approval from SAFE is required before conversion.

An example of how the distinction works is foreign currency loan payments. The payment of interest is treated as a current account item, and borrowers can convert RMB into foreign exchange at the bank after the transaction has been verified by SAFE. The payment of principal, however, is treated as a capital account item, and conversion for this purpose requires SAFE approval.

Import and Export

In line with Chinese laws and regulations, FIEs have the right to import and export from the date of their establishment. They are eligible to import machines, equipment, raw materials, fuel, spare parts and components, auxiliary equipment and other items needed for their operations independently within their approved scope of business. They are also eligible to export their products independently. They may also commission other foreign trade enterprises to import and export the supplies and products on their behalf.

Previously, China did not allow FIEs to import goods that are not needed by themselves or export products which are not produced by them. Foreign-funded commercial retail enterprises may purchase parts of products produced in China and export them to make profit upon approval from related authorities. But according to WTO agreement, China has gradually granted the full foreign trade rights to FIEs. By the end of 2004, WOFE should enjoy this right as well.

As for trading commodities restricted by the State, FIEs should apply for quotas and obtain import and export licenses. This restriction is also relaxed. In December 2004, in compliance with its WTO agreements, China started to abandon the practice of granting foreign trade rights for certain products to designated enterprises, such as steel, natural rubber, wools, acrylic and plywood, which means they can now be traded by any domestic or foreign enterprise or individual.

Land Use Rights

For FIEs, particularly those engaged in manufacturing or processing businesses, it is important to consider land use rights when they choose their locations. There are certain key points a foreign investor should be aware of. Three types of land use rights are available: collectively owned rights, allocated rights, and granted land use rights.

• Collectively owned rights are related to land owned by townships or rural collectives. Most of the land is farmland. It cannot be used for industrial purposes without special approval. Collectively owned land must first be converted into state-owned land to be convertible to granted land use.

• Allocated rights are those given by the state to users, usually state-owned enterprises, the army, schools etc. There is no time limit attached to these rights, but the land may be repossessed by the State at any time. Allocated rights are non-transferable. Typically, allocated rights are not available to FIEs.

• Granted land use rights involve land which the state allows to be used for a specific purpose in a fixed term, for which a fee must be paid to the government. Granted rights are freely transferable on the open market and may not be repossessed by the government within the term, except in exceptional circumstances for which compensation must be paid. The term for granted rights is generally a maximum of 70 years for residential use, 50 years for industrial use, and 40 years for commercial use. The term may be extended upon expiry.

Foreign investors seeking to obtain land use rights in a suburban area should check if it is collectively owned land. Rights pertaining to such land must be transferred from the relevant township to the central government before it can be transferred to a third party.

Foreign investors can obtain land use rights in several ways:

• by transfer from a joint partner;
• by direct transfer or lease from domestic parties, development zones or authorities;
• directly from government by auction, tender or agreement with government.

If existing land use rights are acquired, the term is the remainder of the original term granted to the original grantee. Land use fees are payable to the government for all granted land and a premium is also payable for new grants of land.

Foreign investors should check that the land they propose to obtain land use rights for is designated for their intended purpose. Land is categorized into agricultural, construction or unused land. The State Council is the only body which can change land use designations and it rarely approves using agricultural land for industrial purposes.

Local provincial/municipal land bureaus are permitted to grant land use rights on behalf of the State, and to receive fees and premiums pertaining to the use and grant of land. They are also responsible for approving transfers of land use rights and conversion of allocated rights into granted rights.

The misuse of farmland for industrial use has been rampant and millions of Chinese farmers were victimized by illegal land development projects. According to a report released by the Ministry of Land and Resources (MOLR), out of China’s several thousand development zones, only 1,251 were approved by the State Council and provincial governments. Authorities are tightening approval on land use rights, and many development zones are now defunct. Investors should be aware that not every industrial park is legitimate. Precautions are necessary when choosing the most suitable industrial park.

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Source:
http://resources.alibaba.com/book/guidestochina/30822/...