Investing in China

Setting-up Business in China

Setting up Business

Easier Than It Looks	General Laws and Regulations	International Treaties
Examination and Approval Procedure	Setting up JVs	Setting up WOFEs
Setting up representative offices	Intellectual Property	Patent
Protection of Intellectual Property Rights	Environment Protection

Easier Than It Looks

Foreign investors can now determine an organizational structure according to the operations of their enterprises at their own discretion. Such potential investors should approach the appropriate government departments for a better understanding of the legal procedures involved in setting up a business in China.

Firstly, investors may consult the People’s Republic of China’s embassies or consultants stationed in their respective countries or regions. Alternatively, they can contact the local governments’ Department of Promotion of International Trade - the department in charge of the promotion of foreign trade and foreign investment.

When it comes to the manufacturing sector, the industrial parks are highly sought after in terms of investment potential and are likely choices for interested foreign investors. Typically, these parks have a Department of Investment Promotion, which provides one-stop services from registration to first operations.

Potential investors can also opt to do an on-site visit. They may request an invitation letter, stating the purpose of visiting, proposed period of stay and the intended investment projects. Upon receiving a letter of invitation, investors can proceed to the nearest embassy or consulate to apply for an entry visa to China.

Lastly, setting up a business in China involves a lot of paperwork. This tedious process can be tided over by approaching one of the many firms that provide the relevant services. Nevertheless, before making any investment decisions, investors should be well acquainted with the related regulatory issues. While investors may choose to let the agencies or consulting firms take care of the decision-making processes, it is advisable for them to understand the procedures themselves.

Main Laws and Regulations for Foreign Investment in China

Foreign investments in China are 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

Law on the Protection of Taiwan Compatriots’ Investment

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General Laws and Regulations

Apart from foreign investment-related laws and regulations, FIEs and domestic companies are also regulated by some general laws and regulations. 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

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International Treaties

FIEs are subject to some international treaties as well, such as

- Bilateral Investment Treaties

- Bilateral Agreement on the Avoidance of Double Taxation

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Examination and Approval Procedure

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 depending on the form of business entities - that is, whether they are Joint Ventures (JVs) or Wholly-owned Foreign Enterprises (WOFEs) and so on. In general, there are some basic procedures that all FIEs have to follow.

For projects under the encouraged and permitted categories with an investment exceeding US$100 million (including US$100 million) and projects under the restricted category with an investment exceeding US$50 million (including US$50 million), the report must be examined by the State Development and Reform Commission before submission to the Ministry of Commerce of the PRC for approval.

For projects under the encouraged and permitted categories with an investment exceeding US$500 million (including US$500 million) and projects under the restricted category with an investment exceeding US$100 million (including US$100 million), the report must be examined by both the State Development and Reform Commission and Ministry of Commerce before submission to the State Council for approval.

For projects not included in the aforementioned categories, the report has to be examined and subject to approval by provincial, autonomous region or municipalities authorities.

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Setting up JVs

Stage 1: Preliminary approval - Project Proposal

Upon reaching a mutual agreement, the Chinese partner will be solely responsible for the preparation and submission of the project proposal for preliminary scrutiny.

Generally, the authority will give an official reply within 20 days upon receipt of the proposal and other relevant documents. An approval or rejection letter will be issued to the applicant. The foreign party in a JV should request a copy of this document from the Chinese partner to ensure that the approval is consistent with the agreed terms of the project.

Upon receiving approval, the Chinese partner will proceed to register the name of the enterprise with the local Administration for Industry and Commerce (AIC).

The application will require basic facts about the project, information about the technological and technical processes, demand on energy and other resources, an assessment on possible environmental impact, prices of public goods or services involved, the means of capital contribution and financing, and a list of the equipment to be imported and the amounts required.

The relevant documents for submission include enterprise registration certificates of the Chinese and foreign investors, credit certificates, letter of investment intent, and an environmental impact assessment report issued by the environmental protection administration.

Stage 2: Formal approval - Contracts, Articles of Association

The contract, articles of association and other relevant legal documents for establishing the JV will be signed by both parties and submitted by the Chinese partner to the provincial or municipal Ministry of Commerce for approval. After the contract and articles of association are approved, the same partner would proceed to apply to the provincial or municipal Ministry of Commerce for an approval certificate.

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

The documents required include the application letter for establishing the JVs, a feasibility study report (if any) and approval documents for the project, an application for registration of the name of the enterprise with approval from the provincial or municipal AIC, written comments on the project by various government departments such as environmental protection, fire services, health and land administration, business licenses of the parties concerned and certificates of their legal representatives, contract and articles of association duly signed by the legal representatives of the JV parties, and the list of Board of Directors.

Stage 3: Business License

JVs should register with the local AIC and apply for a business license within 30 days upon receipt of the approval certificate. The local AIC will then issue the business license within 10 working days to projects that have passed the examination. The date the business license is issued will be considered the official date of the enterprise’s establishment.

Having acquired the business license, the JV has to finish up with procedures such as applying for an official seal and enterprise code, opening a bank account, and registering for tax payment and customs declaration with the local public security, technical supervision, taxation, customs, finance, foreign exchange administration, banking, insurance and commodity inspection departments.

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Setting up WOFEs

Stage 1: Preliminary approval - Project Proposal

The application procedure for setting up a WOFE is simpler. The project proposal will be prepared by the foreign investors and submitted directly to local authorities. The foreign investor may appoint a local agent to liaise with the government. To do so, he has to sign an authorization letter stipulating the agent’s scope of services, responsibility and fees.

Generally, the authority will give an official reply within 30 days upon receipt of the proposal and other relevant documents. The approval or rejection letter will be issued to the foreign investor. If a favorable reply is received, the foreign investor can proceed to register the company’s name at the local AIC.

The report must contain information regarding the objectives of the WOFE, business scope, scale of operation, products to be produced, technology and equipment to be used, land area required, conditions and quantities of water, electricity, gas and other forms of energy resources required, and requirements for public facilities.

Stage 2: Formal approval - Articles of Association

After the foreign investor receives a written reply from the relevant government authorities, a formal application supported by all the required documents should be filed with the local Ministry of Commerce at a county, municipal or provincial level. After receiving the formal approval, the foreign investor should apply to the Ministry of Commerce again for an approval certificate by presenting all the necessary documents.

The required documents include the application letter for establishing the WOFE; a feasibility study report (if any), articles of association, list of legal representatives (or Board of Directors), the foreign investor’s legal papers and credit report, a list of materials to be imported, written replies from the local approval authorities at county level or above, application for registration of the name of the enterprise approved by the provincial or municipal administration AIC, comments on the project by various government departments such as environmental protection, fire services, health and land administration. In the case where two or more foreign investors are involved, copies of the contracts signed by them should be submitted to the approval authority for their records.

Stage 3: Business License

Upon collection of the approval certificate, an application for a business license has to be filed with the provincial or municipal AIC within 30 days. The local AIC will issue the business license within 10 working days to projects that have passed the examination. Likewise, the date the business license is issued will be considered the official date of the establishment of the enterprise.

Having acquired the business license, the WOFE has to finish up with procedures such as applying for an official seal and enterprise code, opening a bank account, and registering for tax payment and customs declaration with the local public security, technical supervision, taxation, customs, finance, foreign exchange administration, banking, insurance and commodity inspection departments.

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Setting up representative offices

A representative office may only engage in non-profit making activities. Accordingly, it may engage in any of the following functions: conducting research and providing data and promotion materials to potential clients and partners, conducting research and surveying for its parent company in the local market, liaising with local and foreign contacts in China on behalf of it’s parent company, acting as a coordinator for the parent company’s activities in China, making travel arrangements for parent company representatives and potential Chinese clients and other non-profit making business activities.

Stage 1: Appoint an Agent

The applicant appoints an agent, which must be a Foreign Enterprises Service Company or “FESCO” in Mainland China. The local agent must be authorized by Ministry of Commerce of the PRC to handle representative office applications.

Stage 2: Submission of Applications

On behalf of the applicant, the Chinese agent will submit all the required documents to the provincial Ministry of Commerce for the handling of application procedures.

The relevant documents include the application letter signed by the Chairman of the Board or General Manager; incorporation documents of the company, the previous year’s financial statement; an original bank reference letter attesting to the company’s financial status, a letter of appointment of the chief representative signed by the Chairman of Board or the General Manager with the company’s stamp and the chief representative’s resume, copies of his or her identification, passport and photos, and a copy of the leasing agreement for the representative office and other documents that are requested by the authorities.

Stage 3: Business Certificate

After obtaining an approval permit from the provincial or municipal Ministry of Commerce, the foreign investor should proceed promptly to the provincial or municipal AIC for registration and acquire a business certificate.

Stage 4: Post-registration formalities

Other formalities to be handled by the resident representative:

Complete residence application procedures with local public security bureau by presenting the registration certificate, representative certificate and approval certificate

Apply to open a bank account by presenting registration certificate and approval certificate to local foreign exchange administration

Apply to Customs for permission to import office equipment, daily necessities and transport vehicles for use by the representative office and its personnel

Complete tax payment registration procedure at local tax office

Appoint Foreign Enterprises Service Company or “FESCO” to recruit local staff

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Intellectual Property

Application to Trademark Registration

Applications for trademark registration are handled in accordance with China’s Trademark Law and the Implementing Regulations of the Trademark Law.

The Trademark Office under the State Administration for Industry and Commerce (SAIC) is the government authority for the registration of trademarks in China. Trademark Affairs Offices set up in various major cities are trademark agents designated by the state and under the supervision of SAIC. The Trademark Review and Adjudication Board, also under SAIC, is responsible for handling trademark-related disputes.
Foreign-invested enterprises (FIEs) may apply for trademark registration in China either directly or through trademark agents. Foreign enterprises who wish to do the same should appoint agents designated by the state to handle trademark registration for foreign parties.

The period of validity of a registered trademark is 10 years, with effect from the date of approval of the registration. The period of validity of a renewal is 10 years, starting from the day immediately following the expiration date of the preceding validity period.

Documents required for trademark registration include the application for Trademark Registration, power of attorney (if any), five copies of the reproductions of the trademark (if color is claimed, five copies of the color reproductions of the trademark), and one copy of the black and white design thereof. The reproductions of the trademark must be clear and easy to mount, and should be printed on smooth and clear durable paper or substituted by photographs of length and width between 5 to 10 cm.

Application for Assignment of Registered Trademark and Transfer of Trademark

When applying for the assignment of a trademark, both the assignor and assignee must submit an Application for Assignment of Registered Trademark to the Trademark Office, and the application procedures are to be completed by the assignee. Upon approval granted by the Trademark Office, a certificate will be issued to the assignee and the assignment.

To apply for the transfer of trademark, the transferee has to complete the procedures for the transfer of such rights with the Trademark Office and present the relevant supporting documents or legal documentation. When transferring the exclusive right to use a registered trademark, the applicant has to simultaneously transfer the trademarks registered by him for similar goods.

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Patent

Applications for patent registration are handled in accordance with China’s Patent Law and the Implementing Regulations of the Patent.

For patents on inventions, early announcement of the application can be made upon request. For utility model and design patents, examination is only carried out as a form of formality.

The State Intellectual Property Office is responsible for handling and examining patent applications and granting patent rights in accordance with the law nationwide.

FIEs applying for patents can either submit their applications directly or appoint designated patent agents. Due to the technical complexity involved in patent application, FIEs are advised to appoint agents in order to better protect their rights. Foreign enterprises applying for patents in China are encouraged to choose agents authorized by the State Intellectual Property Office to deal with foreign applications.

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Protection of Intellectual Property Rights

To provide effective protection for foreign investors, Chinese government has come up with new regulations to improve its intellectual property system over the past few years.

China’s intellectual property legislation stipulates that infringement of intellectual property rights (IPRs) will be dealt with by administrative procedures and legal proceedings.

In terms of civil liabilities, the infringer may be ordered to stop the act, eradicate the damage done, make public apologies or compensate for damages. In terms of administrative measures and criminal liabilities, warnings and orders to stop the infringing act will be issued. There is possible confiscation of unlawful gains, fines, and demands for damage compensation.

When an IPR infringement dispute arises, the parties may choose to opt for mediation. If mediation is not preferred or fails, or if one of the parties involved refuses to abide by the outcome of mediation, legal proceedings may be instituted with the people’s court. The persons may also request for the relevant administrative authorities to take action.

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Environment Protection

In recent years, the Chinese government has been according greater importance to the country’s environmental protection. They have announced plans to move the factory clusters, which are major polluters, to rural areas outside the city. To improve environmental quality, the government has imposed strict requirements on enterprises that make investments in the city.
Foreign invested enterprises have to abide by the regulations on environmental protection – the Law of Environmental Protection of the People’s Republic of China, the Stipulation of Environmental Protection for Construction Projects, and the Notification on Strengthening Environmental Protection for Foreign Invested Enterprises – which were promulgated by the State Environmental Protection Agency and the MOFTEC.

The regulations can be summarized as follows:

Foreign investment in China must abide by the laws, regulations and stipulations for environmental protection of the country. They must prevent and alleviate pollution, and adhere to the management and supervision of the environmental protection departments. Foreign invested projects must follow technology policies and relevant requirements for the environmental protection of the country.

Imports of polluting raw materials, products, manufacturing techniques and equipment will be strictly supervised. Transfer of pollutant-generating sources to the country will be prohibited.

All foreign-invested projects with environmental impact must abide by the country’s regulations for construction projects and obtain ratification during environmental impact assessments. The department of Foreign Trade and Economic Cooperation and other governmental agencies will not allow the establishment of foreign invested enterprises with projects that do not meet the mark.

Foreign invested projects must proceed by following the ratified environmental impact assessment and the “Guideline for Environmental Protection Designs for Construction Projects”. A system of “same-time designing, same-time construction and same-time utilization” for environmental protection facilities will be strictly enforced. After the completion of the project, waste discharge procedures must meet the national waste discharge standard, and in regions where “total quantity” control for waste discharge is practised, the requirement for waste discharge rationing must also be followed.

Before manufacturing can commence officially, the enterprises must abide by the stipulated procedure for examination and inspection by the environmental agencies. Only projects graded as satisfactory by the national standard can begin production or utilization.

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