If you are curious to know more about how to start a business or invest in China, you may have some unanswered questions. We have created this question & answer section to help you answer some of your most important questions, as well as to start you on your path to doing successful business in China.
1. What are the basic laws and regulations encouraging overseas investors to invest in China?
2. What are the formalities for overseas investment to establish enterprises in China? What departments are involved?
3. What items are encouraged for foreign investment by China, and what are prohibited?
4. What are the preferential policies offered to enterprises with foreign investment?
5. What are the favorable policies for foreign investors to central and western China?
6. What impact may China's accession to the WTO have on foreign investment in China?
7. What are the changes in the new versions of the Law of the People's Republic of China on Chinese-Foreign Equity Joint Ventures, Law on Chinese-Foreign Contractual Joint Ventures?
8. What are the regulations concerning labor management of foreign-invested enterprises?
9. What are the specific regulations concerning the investment within China of foreign-invested enterprises? Will they continue to enjoy the preferential treatment given to foreign-invested enterprises?
10. What are the rules for foreign business people to invest in investment companies?
11. What are the rules for establishing foreign-funded commercial enterprises in China?
1. What are the basic laws and regulations encouraging overseas investors to invest in China?
In order to create a congenial investment environment and to encourage overseas firms to invest in China, China has gradually set up a relatively complete legal system. In 1979 the National People's Congress issued The Law of the People's Republic of China on Chinese-Foreign Equity Joint Ventures. In the following 20-odd years, the Chinese government has promulgated and issued a series of laws and statutes concerning the establishment, operation, termination and liquidation of foreign-invested enterprises. The main laws and regulations include the three basic laws ― The Law of the People's Republic of China on Chinese-Foreign Equity Joint Ventures, The Law of the People's Republic of China on Chinese-Foreign Contractual Joint Ventures, and The Law of the People's Republic of China on Wholly Foreign-Owned Enterprises; detailed rules for the implementation of the three basic laws; The Company Law of the People's Republic of China; The Income Tax Law of the People's Republic of China for Enterprises with Foreign Investment and Foreign Enterprises; Interim Provisions for Guiding Foreign Investment; Industrial Catalogue for Foreign Investment; Interim Provisions Concerning the Investment within China of Foreign-invested Enterprises, Provisions Regarding the Merger and Separation of Foreign-invested Enterprises, and Liquidation Measures for Enterprises with Foreign Investment. These provide legal bases from which to guarantee the independent operation rights of foreign-funded enterprises and to protect the legitimate rights and interest of both domestic and overseas investors.
Currently, the Chinese government is reexamining its existing laws and statutes in accordance with the framework of the WTO. It has abolished certain obsolete laws and regulations, and will gradually revise the laws and regulations that are incompatible with the rules of the WTO. For instance, in 2000 China revised The Law of the People's Republic of China on Chinese-Foreign Contractual Joint Ventures and The Law of the People's Republic of China on Wholly Foreign-Owned Enterprises, and discarded certain restrictions regarding the balance of foreign exchange account and localization of supplies. In 2001 The Law of the People's Republic of China on Chinese-Foreign Equity Joint Ventures was also revised.
2. What are the formalities for overseas investment to establish enterprises in China? What departments are involved?
In accordance with the existing laws of China, the establishment of enterprises with foreign investment is subject to project-by-project examination, approval and registration by the government. In general, the following steps should be followed for the establishment of Chinese-foreign equity joint ventures and Chinese-foreign contractual joint ventures:
l). Submit the project proposal to the relevant department (planning department or technological renovation administration) and get approval before investors can proceed with various jobs centered round the feasibility study of the project.
2). Submit the feasibility study report to the planning department or technological renovation administration and get approval before investors can sign legal documents, such as the contract and articles of corporation of the enterprise.
3). Submit the contract and articles of corporation of the enterprise to the examination and ratification department, who shall issue the Approval Certificate for Enterprises with Foreign Investment after approval by the Ministry of Foreign Trade and Economic Cooperation.
4). With the Approval Certificate issued by the examination and ratification authorities, the investors can go through registration procedures with the administration of industry and commerce.
The procedures for the establishment of enterprises with foreign investment are quite simple. After the initial project application is approved in writing by the examination and ratification authorities, the investors may submit a formal application, with articles of corporation and other required documents. On receipt of the Approval Certificate, they can proceed with the registration formalities by presenting the Approval Certificate.
In accordance with China's existing laws, the state adopts a classification administrative system for foreign investment. The provinces, municipalities, autonomous regions and cities listed as independent units in state plans have the authority to examine and approve investment of less than US $30 million in areas encouraged and permitted by the state. When an investment exceeds this amount, the project application and feasibility study report shall be examined and approved by the State Development Planning Commission or the State Economic and Trade Commission, while the contract and articles of corporation shall be examined and approved by the Ministry of Foreign Trade and Economic Cooperation.
Many provinces, autonomous regions and municipalities directly under the central government have established foreign investment service centers, which offer foreign investors with a one-stop service, ranging from legal consultation to procurement of project approval. With the improvement of China's social services system, intermediary service agents, including consultation companies, lawyers, and accountants, are all expected to provide investors with efficient and qualified services.
3. What items are encouraged for foreign investment by China, and what are prohibited?
To direct foreign investment to go along with the development scenario of Chinese industries, and to avoid blind investment, the Chinese government promulgated in June 1995 the Interim Provisions for Guiding Foreign Investment and the Industrial Catalogue for Foreign Investment. The industrial projects in the catalogue are divided into four categories ― the encouraged, permitted, restricted, and prohibited. In late 1997, the Chinese government revised the above-mentioned catalogue in line with the development of the national economy. The revised catalogue reflects expansion in the investment scope encouraged by the state and highlights priority industries. It embodies the principles of compliance with structural readjustment, of being conducive to the introduction of advanced technology, and encouragement of foreign investment in China's central and western areas.
The items in the catalogue encouraged for foreign investment mainly include: new agriculture technologies, comprehensive development of agriculture, energy resources, communications, important raw materials, new and high technologies, export-oriented and foreign-currency-earning projects, comprehensive utilization and regeneration of resources, prevention of environmental pollution, and those that give play to the advantages of China's mid-west areas. Meanwhile, foreign investment is directed to the technological upgrading of traditional industries and old industrial bases and to the continued development of labor-intensive projects that comply with the state's industrial policies.
Foreign investment is prohibited in projects that endanger the state security and bring damages to public interest; that cause pollution of the environment and damage natural resources and public health; that use large farmland and are unfavorable to the protection and development of land resources; and that endanger the security and normal function of military facilities.
The state will continue to make appropriate revisions to the Industrial Catalogue for Foreign Investment and to the Interim Provisions for Guiding Foreign Investment in accordance with the development need of the national economy and China's commitment on the entry of the WTO.
4. What are the preferential policies offered to enterprises with foreign investment?
The Chinese government levies low tax on enterprises with foreign investment, and preferential tax policies are offered to the sectors and regions where investment is encouraged by the state.
1). Income Tax
a. Rate of income tax: The income tax on enterprises with foreign investment is levied at the rate of 33 percent. The income tax on enterprises with foreign investment located in special economic zones, state new- and hi-tech industrial zones, or economic and technological development zones is levied at the rate of 15 percent. The income tax on production enterprises with foreign investment located in coastal economic open zones, special economic zones, or in the old urban district of cities where economic and technological development zones are located is levied at the rate of 24 percent. And the income tax on enterprises with foreign investment that are engaged in projects such as energy, communications, port and dock is levied at the reduced rate of 15 percent.
b. Tax reduction and exemption: The production enterprises with foreign investment that have an operation period exceeding 10 years shall, from the year they begin to make profit, be exempt from income tax for the first two years and allowed a 50 percent reduction for the following three years. Enterprises with foreign investment engaged in agriculture, forestry and animal husbandry, and enterprises with foreign investment established in remote and underdeveloped areas may, upon approval by the State Bureau of Taxation, be allowed a 15 to 30 percent reduction on the income tax for a period of another 10 years following the expiration of the period of tax exemption and reduction as provided for above. The income tax on enterprises with foreign investment located in mid-west China that are engaged in projects encouraged by the government shall be levied at a reduced rate of 15 percent for a period of another three years following the expiration of the Five-Year period of tax exemption and reduction. The enterprises with foreign investment that adopt advanced technology shall be exempt from income tax for the first two years and allowed a 50 percent reduction for the following six years. In addition to the two-year tax exemption and three-year tax reduction treatment, foreign-invested enterprises producing for export shall be allowed a reduced income tax rate of 50 percent as long as their annual export accounts for 70 percent or more of their sales volume. The foreign investor of an enterprise with foreign investment which reinvests its share of profit obtained from the enterprise in a project with an operation period of no less than 5 years shall, upon approval by the State Bureau of Taxation of an application filed by the investor, be refunded 40 percent of the income tax already paid on the reinvested amount.
2). Circulation-stage Tax:
Since January 1st, 1994, the Chinese government has levied unified value-added tax, consumption tax and business tax on enterprises with foreign investment and domestic enterprises. Technology transfer and technological development by foreign enterprises and enterprises with foreign investment are exempted from value-added tax, as a measure to expand domestic demand and to encourage technological renovation in foreign-invested enterprises. For foreign-invested enterprises engaged in projects in the encouraged or restricted-B categories, the value-added tax on China-made equipment purchased by the enterprises within their total amount of investment shall be fully refunded if the equipment is listed under the catalogue offered with income tariff exemption.
3). Import-stage Value-added Tax
a. Tariff rate: Since 1992 the Chinese government has reduced nine times the tariff rate for imported commodities. The present average tariff rate is 12 percent.
b. Tax exemption for imported equipment: Equipment imported for foreign-invested or domestic-invested projects that are encouraged and supported by the state shall enjoy tariff and import-stage value-added tax exemption
5. What are the favorable policies for foreign investors to central and western China?
In order to coordinate economic development in different areas, the Chinese government is encouraging foreign investment in central and western China. Key measures being taken are as follows.
1). The state has approved and issued the Catalogue of Advantageous Sectors for Foreign investment in Central and Western Regions. Projects included in this catalogue enjoy the same policy as offered to projects of encouraged category in the Industrial Catalogue for Foreign Investment, and favorable tax policy applies to the import of necessary equipment, parts, spares and technology used in such projects.
2). There will be fewer restrictions in investment fields, and on the conditions for establishment of foreign-invested enterprises in central and western China, as well as on the proportion of shares owned by the foreign contingent of the foreign-invested enterprises in these areas.
3). Encouraged Projects in central and western China shall pay income tax at the reduced rate of 15 percent for three years on expiry of the current favorable tax period.
4). If foreign-invested enterprises reinvest in central and western China with foreign capital accounting for 25 percent or more of the project, the new project will enjoy policies offered to enterprises with foreign investment.
5). Trial projects approved by the central government should, in principle, be carried out simultaneously in eastern, central and western China. On approval from the state government, provincial and autonomous regional capitals and municipalities may open the fields of commerce, foreign trade and banking to foreign investment on a trial basis. Foreign-funded banks in western China may embark on RMB business gradually. Foreign investors may invest in telecommunications and tourism insurance in accordance with relevant regulations, and set up Sino-foreign joint venture accounting firms, engineering design companies, railway and highway freight transport and public utility companies, and other fields open to foreign investment.
6). Provinces, municipalities and autonomous regions in central and western China may select a built-up development area in the provincial or regional capital and apply for the status of a national economic and technological development zone.
7). Enterprises with foreign investment engaged in energy and transportation infrastructure will pay income tax at the reduced rate of 15 percent with approval from the State Bureau of Taxation.
8). In the interests of protecting the ecological environment, income from special products reverting cultivated land to forestry and grassland is exempt from special agricultural product tax for a period of ten years.
9). There are also preferential policies for land use and mineral resource exploration, promoting forest farming and grass planting on barren mountain slopes and fields, and the reverting of cultivated land to forest and grassland. Those who revert cultivated land to forest and grassland enjoy land use rights, as well as rights of ownership of forest or grassland. Economic entities and individuals may apply to utilize barren mountain slopes and fields according to legal procedures, plant trees and grass, and practice ecological environmental protection. Alternatively, they can be granted the land use rights directly from the state, in which case the land utilization fee will be either exempted or reduced. Land use rights will remain unchanged for a period of 50 years. On expiration of this period, application may be made for renewal of these rights. The granted rights of land use may be inherited, or transferred on payment of a transfer fee. The government supports activities involving mineral resource exploration, evaluation, rational utilization and protection.
10). Foreign investment is encouraged in agriculture, water conservancy, transportation, energy, ecological and environmental protection, tourism, mining, municipal engineering and other infrastructure projects in western China. The establishment of foreign-invested research and development centers are also encouraged, and will be given support in terms of funding for accessory projects and pertinent policies.
11). Trials in western China to utilize foreign capital through BOT and TOT methods are encouraged. The state supports enterprises in the encouraged and permitted categories in the west to attract foreign investment through assignment of operation right, offering equity interests and enterprise merger and reorganization.
6. What impact may China's accession to the WTO have on foreign investment in China?
After joining the WTO, China will adapt its laws and regulations to conform to the WTO's fundamental rules, improve and develop China's socialist market economy, and create suitable conditions for fair competition between domestic and foreign enterprises. The Chinese government has committed itself to continuing opening its commodities market to the outside world, while simultaneously pushing forward the opening of its service industries. Technological innovation and the Western Development strategy provide a solid foundation for further improvement of foreign-invested industries and regional industrial structures. The policy series issued by the state government in 1999 to encourage foreign investment and increase export will also bring obvious results in foreign capital utilization. China's WTO access will provide more market opportunities and greater stability for foreign investment in China and a larger scope of economic and trade cooperation, as well as exerting a positive influence on future exploration and absorption of foreign capital.
7. What are the changes in the new versions of the Law of the People's Republic of China on Chinese-Foreign Equity Joint Ventures, and Law on Chinese-Foreign Contractual Joint Ventures?
The Law of the People's Republic of China on Chinese-Foreign Equity Joint Ventures was adopted and promulgated by the second session of the Fifth NPC on July 1,1979. It was revised by the third session of the Seventh NPC in April 1990. The Law of the People's Republic of China on Chinese-Foreign Contractual Joint Ventures was adopted and promulgated by the first session of the Seventh NPC on April 13,1988. The Law of the People's Republic of China on Wholly Foreign-Owned Enterprises was adopted and promulgated by the fourth session of the Sixth NPC on April 12,1986. The three laws have played a significant role in implementing the opening policy, attracting foreign investment, and expanding economic cooperation and technology exchanges with foreign countries since they were issued.
In view of the continued reform and opening up and steady development of the national economy, and in order to adapt to the process of China's entry into the WTO, to make the three laws more in conformity with China's reform and opening up, and to establish a socialist market economy legal system within the framework of international practices and rules, after examination and approval by the NPC Standing Committee in 2000, the following revisions were made to the Law of the People's Republic of China on Chinese-Foreign Contractual Joint Ventures and the Law of the People's Republic of China on Wholly Foreign-Owned Enterprises:
1). Articles about the balance of foreign exchange account
a. Article 20 of the Law of the People's Republic of China on Chinese-Foreign Contractual Joint Ventures was deleted, which says: "A contractual joint venture shall keep balance between its foreign exchange income and expenses. It may apply to the relevant authorities for assistance in accordance with the state provisions if it has difficulty in balancing its foreign exchange account."
b. Section 3, Article 18 of the Law of the People's Republic of China on Wholly Foreign-Owned Enterprises was deleted, which says: "Wholly foreign-owned enterprises shall reach by themselves the balance of foreign exchange receipts and disbursements. In case that the relevant authority in charge approved the sale in China of the products of the enterprises which results in an imbalance of foreign exchange receipts and disbursements of such enterprises, the authority that has approved of the sale shall be responsible for resolving such imbalance."
2). Article about "localization of supplies"
Article 15 of the Law of the People's Republic of China on Wholly Foreign-Owned Enterprises is changed to: "Supplies, such as raw materials and fuel, required by wholly foreign-owned enterprise within the approved scope of operation may be purchased, according to the principal of fairness and justice, on the domestic or the international market." The previous stipulation, "may be purchased in China to the extent possible," is deleted.
3). Requirement on export achievement
Section 1, Article 3 of the Law of the People's Republic of China on Wholly Foreign-Owned Enterprises is changed to: "The establishment of wholly foreign-owned enterprises must be beneficial to the development of the Chinese national economy. The state encourages the establishment of export-oriented and technologically advanced wholly foreign-owned enterprises." The stipulation on the establishment of wholly foreign-owned enterprises which must "use advanced technology and equipment and export all or a greater portion of their products" is deleted.
4). Articles on recordation of enterprises' production plans
Section 1, Article 11 of the Law of the People's Republic of China on Wholly Foreign-Owned Enterprises is deleted, which says: "A wholly foreign-owned enterprise shall report their production and operation plans to the department in charge for record."
The Law of the People's Republic of China on Chinese-Foreign Equity Joint Ventures was revised in March 2001. Changes are made to eight places. In one revision, the original stipulation said, "In its purchase of required raw and semi-processed materials, fuels, auxiliary equipment, etc., an equity joint venture shall give first priority to Chinese sources, but may also acquire them directly from the international market with its own foreign exchange funds." The new stipulation says, "Supplies, such as raw materials and fuel, required by an equity joint venture within the approved scope of operation may be purchased, according to the principal of fairness and justice, on the domestic or the international market."
8. What are the regulations concerning labor management of foreign-invested enterprises?
In order to guarantee the legitimate rights and interests of foreign-invested enterprises and their employees, the Chinese government has formulated the Regulations of the Labor Management in Foreign-Invested Enterprises, making stipulations concerning employee recruitment and training, vacation and leave, and salaries, etc.
1). Protecting the Legitimate Rights and Interests of Foreign-invested Enterprises
According to relevant state laws and administrative regulations, these enterprises can make autonomous decisions regarding the timing, conditions, methods and size of employment. These enterprises can recruit their employees from employment service centers recognized by local labor authorities where the enterprises are located, or, with the approval of local labor authorities, may recruit employees directly or from other regions.
These enterprises shall recruit Chinese employees within the territory of China. In case where employment of foreign nationals or residents from Taiwan, Hong Kong and Macao is necessary, approval from the local labor administration shall be obtained, and formalities, including an employment certificate, shall be completed in accordance with the relevant state regulations.
The enterprises should establish the labor contract in a written form with individual employees. The enterprises may terminate the labor contract if an employee does not meet the job qualifications during the probation period, or fails to execute the labor contract, or severely violates labor disciplines or other bylaws of the enterprises, or receives sentences for imprisonment or labor education.
2). Protecting the Legitimate Rights and Interests of the Employees of Foreign-invested Enterprises
These enterprises must participate in social insurance scenarios for pension, unemployment, health care, work-related injuries, and maternal leave in accordance with relevant state regulations. They must pay the full amount of social insurance premiums to social insurance agencies in time. The accounting of expenses on social insurance shall follow relevant state regulations. Individual employees are required to pay pension premium accordingly.
These enterprises should establish the Employment and Pension Manuals to record their employees' length of employment, salary, and premium and insurance payment on pension, unemployment, work-related injuries, and health care.
These enterprises should set up a professional training scenario for their employees. Employees cannot start on a technical job, or a job requiring special skills unless properly trained and holding a certificate.
The trade union (or employees' representatives in the absence of the former) may establish a collective contract with the enterprise through consultation and negotiation on such matters as work remuneration, work hours, vacations, workplace safety and hygiene, and insurance and welfare on behalf of the employees. The contents of labor contracts and collective contracts shall not contradict the state's laws and regulations. The enterprise shall pay a one-time subsistence allowance to an employee whose labor contract is terminated, and provide medical subsidies in addition to the one-time allowance in certain special circumstances.
In the following conditions, an enterprise cannot terminate the labor contract of an employee: (a) the employee is confirmed of loss or partial loss of working ability due to an occupational disease or work-related injury; (b) the employee's specified treatment period has not expired; or (c) a female employee is in pregnancy, maternal leave or breast-feeding period. In case the employee intends to terminate the contract due to an occupational disease or work-related injury, the enterprise shall pay the social insurance agency an employment rearrangement fee for work-related disabilities according to local regulations.
When an enterprise terminates a labor contract according to relevant regulations or when the two parties agree to cancel the labor contract through negotiation, the enterprise should, in accordance with relevant regulations of the local people's government, pay in a lump sum to the social security agencies living and social security expenses for the following cases: (1) the employee who suffers from a work-related injury or occupational disease, or, as verified by a letter from a hospital, is receiving medical or recuperation treatment; (2) the employee who has been determined by the labor appraisal committee as being partially or completely disabled after the end of medical treatment; (3) pension-receiving dependents of an employee who has died on duty; (4) a female employee who is in the pregnant, lying-in or lactation period; and (5) an employee who has not participated in any type of social insurance.
An employee is entitled to vacations, public and general holidays, home leave and wedding, bereavement and maternity leave as stipulated by the state.
Welfare treatment of an employee during his/her active term of employment shall follow relevant regulations of the state. The enterprise shall utilize housing funds for Chinese employees in accordance with the regulations of the local people's government.
For working compensation of its employees, an enterprise shall follow the principle of equal pay for equal work. Salary level of the enterprise shall increase gradually on the basis of its profit growth. The minimum salary for legal work hour shall not be lower than the local minimum salary level.
9. What are the specific regulations concerning the investment within China of foreign-invested enterprises? Will they continue to enjoy the preferential treatment given to foreign-invested enterprises?
According to the Interim Provisions Concerning the Investment within China of Foreign-invested Enterprises jointly issued by the Ministry of Foreign Trade and Economic Cooperation and the State Administration for Industry and Commerce, investment within China of foreign-invested enterprises refers to Sino-foreign equity joint ventures, Sino-foreign contractual joint ventures and wholly foreign-owned enterprises which are established within China according to law in the form of a limited liability company, as well as the establishment of enterprises in their own name, or purchase of equity shares from other enterprises (hereinafter referred to as "invested companies") within China by foreign-invested joint stock companies limited.
1). Conditions for a foreign-invested enterprise to make investment in China
a. Its registered capital has been paid off;
b. It has started to make profits;
c. It has been conducting business operations according to law and has no track record of illegal business operations.
d. The cumulative amount of investment within China made by a foreign-invested enterprise shall not exceed 50 percent of its net assets; in the wake of investment, the amount of the capital increase from the profits of the invested company is not included here.
e. For investment within China, foreign-invested enterprises should, for reference, consult the Interim Provisions for Guiding Foreign Investment and the Industrial Catalogue for Foreign Investment. Foreign-invested enterprises shall not make investments in the fields in which foreign investment is prohibited.
2). Examination and Approval Procedures
a. To establish a company in the encouraged or permitted categories, a foreign-invested enterprise shall file an application with the company registration authorities in the locality where the invested company is to be located. The company registration authorities shall, in accordance with the relevant stipulations of the Company Law and the Rules for the Administration of Company Registration of the People's Republic of China, decide whether to grant registration or not. Should registration be granted, a Business License of the Enterprise Legal Person is issued, and the note of "investment by foreign-invested enterprise" is added in the column of enterprise classification [hereinafter abbreviated as (annotated) Business License].
b. To establish a company in the restricted category, a foreign-invested enterprise shall file an application with the authorities for foreign trade and economic cooperation at the provincial level in the locality where the invested company is to be located. Upon receipt of the above-mentioned application, the examination and ratification department at the provincial level shall, in line with the invested company's scope of business operations, consult the opinion of the regulatory authorities at the same level or at the national level.
If the examination and ratification department at the provincial level gives permit to a foreign-invested enterprise, the enterprise shall, upon presentation of the permit, file an application for registration with the company registration department in the locality where the invested company is to be located.
The company registration department shall, in accordance with the relevant stipulations of the Rules for the Administration of Company Registration, decide whether to grant registration or not. Should registration be granted, a (annotated) Business License will be issued.
c. In cases where a foreign-invested enterprise purchases equity shares from the invested company whose scope of business falls into the encouraged or permitted categories, the invested company shall file an application for registration alteration with the previous registration department.
In cases where the invested company's scope of business involves fields in the restricted category, the foreign-invested company shall go through the procedures specified in Item b. The invested company shall, upon presentation of the permit by the examination and ratification department at the provincial level, file an application with the previous company registration department for registration alteration.
The company registration department shall, in compliance with the relevant stipulations in the Rules for the Administration of Company Registration, decide to grant registration or not. In cases where registration is granted, a (annotated) Business License will be issued.
d. Should the invested company be a foreign-invested enterprise, procedures should follow the Provisions on the Alteration of Investors Equity of Foreign-invested Enterprises.
e. Investment within China made by investment companies established with foreign investment shall follow the state laws and regulations concerning foreign investment as well as the Provisional Regulations Concerning the Establishment of Foreign-funded Investment Companies.
f. Investment within China made jointly by foreign investors and foreign-invested enterprises shall follow the state laws and regulations concerning foreign investment. In such an investment project, the percentage of investment contributions by foreign investors shall generally not be lower than 25 percent of the registered capital of the invested enterprise.
3). Treatments for Foreign-invested Enterprises Which Make Investment in China
The state encourages foreign-invested enterprises to invest in the central and western regions. If the percentage of foreign investment in the registered capital of the invested company is not lower than 25 percent, the invested company can enjoy the treatment available for foreign- invested enterprises.
An invested company in the central and western regions shall, upon presentation of the Approval Certificate for Enterprises with Foreign Investment and the (annotated) Business License, enjoy the treatment available for foreign-invested enterprises as provided for by laws and regulations.
10. What are the rules for foreign business people to invest in investment companies?
To encourage transnational companies to invest in China and attract advanced foreign technology and management experience, the Ministry of Foreign Trade and Economic Cooperation promulgated in April 1995 Provincial Regulations Concerning Establishment of Foreign-funded Investment Companies (hereafter referred to as the Provisional Regulations), permitting foreign investors to establish investment companies in China. In August 1999, the Ministry of Foreign Trade and Economic Cooperation made amendments to the Provisional Regulations in order to expand the functions of such investment companies.
1). Conditions for Establishing Investment Companies
a. An applicant foreign investor should have sound credit and economic strength required for the establishment of an investment company. Its total assets in the year prior to the application should be no less than US$400 million. In addition, the foreign investor should have already established a foreign-funded enterprise within the territory of China, have paid in a minimum of US$10 million in registered capital, and receive approval for a minimum of three of its investment project proposals.
Or, the applicant foreign investor, with sound credit and economic strength required for the establishment of an investment company, has already established a minimum of 10 foreign-funded enterprises engaged in manufacturing or infrastructure construction within the territory of China and has paid in a minimum of US$30 million in registered capital.
b. For a joint venture investment company, the Chinese investor should have sound credit and economic strength required for the establishment of an investment company. Its total assets should be no less than 100 million yuan.
c. The registered capital of an investment company should be no less than US$30 million.
2). Regulations on Registered Capital
The foreign investor should make its investment in convertible currency for registered capital. The Chinese investor can use Renminbi yuan. The investors should pay off the registered capital within two years beginning from the issuance date of the business license.
3). Business Scope
An investment company can embark on the following operations, entirely or partially, upon approval:
a. Make investment in industry, agriculture, infrastructure and energy encouraged and permitted by the state for foreign investment;
b. Assist or act as an agent of its invested enterprises to purchase domestically or internationally machines and office equipment for use by the invested enterprises, and raw materials, components and parts needed in the production activities of the invested enterprises;
c. Sell, as agents or distributors, domestically or internationally, products produced by the invested enterprises, and provide after-sale services;
d. Purchase and export commodities from within Chinese territory that are not subject to export quotas or the export permits;
e. Provide comprehensive services, such as transportation and storage, for the invested enterprises, and assist them in recruiting personnel, providing technical training, market development and consultation;
f. Set up research and development centers or offices in China to develop new products and high and new technologies, transfer its research and development achievements, and provide related technological services;
g. Balance foreign exchange among its invested enterprises under the permit and supervision of the foreign exchange administration;
h. Assist its invested enterprises in finding loans and provide guarantee, and the amount of loans to an investment company should not exceed four times the registered capital the company has paid in;
i. Provide consultation for its investors; and
j. Provide financial support to its invested enterprises with the approval of the People's Bank of China.
4). Examination and Ratification Procedures and Documents Required
The investor applying for the establishment of an investment company should submit required documents to the foreign trade and economic cooperation department of the locale province, autonomous region, municipality directly under the central government, or the city listed as an independent unit in the state plan. Upon approval, the said foreign trade and economic cooperation department will forward the documents to the Ministry of Foreign Trade and Economic Cooperation for final examination and approval. The documents required include:
a. Project proposal for the establishment of the investment company, and feasibility study report, contract and articles of corporation signed by all the parties involved;
In the case of a wholly owned investment company, the documents required include a project proposal for the establishment of an investment company signed by the foreign investor, application form for foreign-invested enterprises, feasibility study report, and articles of corporation;
b. Credit status, registration and legal person documents of various parties;
c. Approval Certificate, business license, credit status report from a Chinese certified public accountant for the enterprises that the foreign investor has already established in China;
d. Balance sheets for the latest three years of various parties; and
e. Other documents required by Ministry of Foreign Trade and Economic Cooperation.
11. What are the rules for establishing foreign-funded commercial enterprises in China?
To expand the opening-up drive, to promote the reform and development of Chinese commercial enterprises and construction of the domestic market, and to facilitate the experiments with the utilization of foreign investment in the commercial sector, the State Economic and Trade Commission and the Ministry of Foreign Trade and Economic Cooperation have worked out and promulgated Experimental Measures for Foreign-funded Commercial Enterprises. Currently, the Measures only permit foreign companies and enterprises to set up with Chinese companies and enterprises Chinese-foreign equity and contractual joint venture commercial enterprises in China. Wholly foreign-invested commercial enterprises are not allowed yet. Major stipulations are as follows:
1). The equity and contractual joint venture commercial enterprises to be established must comply with the commercial development plan of the locale city and should have the capacity to introduce world-advanced marketing techniques and management experience, advance local commercial modernization, propel exportation of domestic products and produce good economic and social results.
2). As stipulated by the State Council, the areas where equity and contractual joint venture commercial enterprises may be established are limited temporarily to provincial capital cities, capitals of autonomous regions, municipalities directly tender the jurisdiction of the central government, cities listed as independent units in the state plan, and special economic zones (hereafter referred to as pilot areas).
3). Investors in commercial joint ventures should meet the following requirements:
a. Foreign joint ventures or main foreign joint ventures (hereafter referred to as foreign joint ventures) should have comparatively high economic strength, advanced management experience and marketing techniques in commercial operations, broad international distribution channels, sound credit and good performance. In addition, they should help promote Chinese exports through the establishment of their joint ventures.
Foreign joint ventures applying foe' the establishment of joint ventures operating retail business should record all average annual sales volume of US$2.0 billion or more in the three years prior to the year of the application and should have assets of no less than US$200 million in the year prior to the year of the application.
Foreign joint ventures applying for the establishment of joint ventures operating wholesale business should record an average annual wholesale volume of US$2.5 billion or more in the three years prior to the year of the application and should have assets of no less than US$300 million in the year prior to the year of the application.
b. Chinese joint ventures or main Chinese joint ventures (hereafter referred to as Chinese joint ventures) should be distribution enterprises with comparatively high economic strength and operation capacities. The amount of their assets in the year prior to the application should be more than 50 million yuan (30 million yuan for central and western regions). For Chinese joint ventures who are commercial enterprises, the average annual sales volume in the three years prior to the application should be no less than 300 million yuan (200 million yuan for central and western regions). For foreign trade enterprises, the average annual self-operated export and import volume should be no less than US$50 million (exports should amount to no less than US$30 million).
4). Equity and contractual joint venture commercial enterprises should meet the following requirements:
a. Compliance with the relevant Chinese laws, statutes and regulations;
b. Compliance with the commercial development plan of the locale city;
c. The registered capital of the joint ventures engaged in retail business should be no less than 50 million yuan, and for central and western regions, no less than 30 million yuan. The registered capital of the joint ventures engaged in wholesale business should be no less than 80 million yuan, and for central and western regions, no less than 60 million yuan.
d. For equity and contractual joint venture commercial enterprises operating in the form of more than three chain stores (excluding neighborhood, specialized and exclusive-right stores), the proportion of the Chinese parties' investment should reach a minimum of 51 percent. For chain equity and contractual joint venture commercial enterprises which record a good performance, whose foreign joint ventures have purchased Chinese products in large quantities, and which can help expand the export of Chinese products through the international distribution channels of their foreign joint ventures, the foreign joint ventures involved are allowed to hold a controlling share upon approval by the State Council.
For equity and contractual joint venture commercial enterprises with three or fewer chain stores and neighborhood, specialized and exclusive-right chain stores, the Chinese joint ventures should own no less than 35 percent of the total investment.
For wholesale equity and contractual joint venture commercial enterprises (including concurrent retail and wholesale businesses), the Chinese joint ventures should own more than 51 percent of the total investment.
e. Branches of equity and contractual joint venture commercial enterprises are confined to the form of chain stores directly invested and operated by the Chinese and foreign parties. Other forms, such as free and franchised chain operations, are not allowed for the time being.
f. The period of operation must be less than 30 years, and for central and western regions, less than 40 years.
g. Foreign joint ventures who sign contracts with equity and contractual joint venture commercial enterprises on the use of trademarks and names or technology transfer, the total mount of relevant charges drawn by the foreign joint ventures cannot exceed 0.3 percent of the current year sales value (excluding value-added tax) of the commercial enterprises, and the withdrawal period cannot exceed 10 years.
5). Business Scope
Retail
a. Retail operations (including commissioned and postal retail);
b. Organization of domestic products for export;
c. Self-initiated commodity export and import; and
d. Pertinent supporting services.
Wholesale
Wholesale of domestic products, domestic wholesale of self-initiated imports and organization of domestic products for export.
Equity and contractual joint venture commercial enterprises that are engaged in retail business can handle wholesale upon approval, but cannot conduct agent business for import and export.
6). Examination and Approval Procedures
a. The Chinese joint venture should submit the feasibility study report (in place of project proposal) and relevant documents to the economic and trade commission of the locale pilot area, which will handle the report in cooperation with the responsible domestic trade department and forward it to the State Economic and Trade Commission in accordance with stipulated procedures. On receipt, the State Economic and Trade Commission will examine the report and decide whether to approve it or not after consultation with the Ministry of Foreign Trade and Economic Cooperation.
b. After the feasibility study report (in place of project proposal) is approved, the foreign trade and economy department of the locale pilot area will submit, in accordance with stipulated procedures, the contract and articles of corporation of the applicant joint venture to the Ministry of Foreign Trade and Economic Cooperation for approval.
c. The approved joint venture should go through registration formalities with the State Administration for Industry and Commerce within a month of the issuance of the Approval Certificate.
d. For existent equity and contractual joint venture commercial enterprises that apply for concurrent wholesale business, opening of branches, or change of partners, the Ministry of Foreign Trade and Economic Cooperation will examine such applications and decide whether to approve or not after consultation with the State Economic and Trade Commission. Other alterations should be examined and sanctioned by the previous examination and ratification authorities, in accordance with existent laws and regulations concerning foreign investment.
7). Others
a. State-owned commercial enterprises in equity and contractual joint venture commercial projects shall put their physical and non-physical assets to scientific and just assessment by an evaluation agency recognized by the state assets management authorities in accordance with Administrative Measures on the Evaluation of State-owned Assets. The result of an evaluation confirmed by the state assets management authorities at the provincial level or higher may be used as the basis for the pricing of the state assets to be invested.
b. The equity and contractual joint venture commercial enterprises that deal in commodities subject to special state regulations, or in import and export commodities subject to quotas or permit requirements should go through examination and approval procedures in accordance with relevant regulations.
c. The total value of import commodities of an equity or a contractual joint venture commercial enterprise cannot exceed 30 percent of its current year sales value
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