Today, China’s increasingly open economic system, combined with an ever-growing middle-class, has paved the road to vast opportunities for foreign investors.
Against the backdrop of a reform and economic transformation turned into a sustainable and innovative driven model, China inbound investment has entered a new era. Specifically, in China’s 13th 5-year plan the drive towards a more sustainable and balanced Chinese population has created opportunities in environmental, infrastructure, health and services industries and new sectors of related to elderly care and green technology across China. What’s more, regulation reforms are transforming corporate administration from a paper-based to an online system that connects local and national government bureaus, allowing smoother corporate administration. Therefore, a knowledge-based understanding of corporate regulation is essential for executing a successful investment in China, while avoiding unwelcome liabilities.
In the initial planning phase, investors are advised to carefully select appropriate corporate structure, as the wrong structure can limit market expansion and subject investors to legal liabilities. Corporate structure can be selected accordingly to China’s 2017 Foreign Investment Industrial Guidance Catalogue. The guidance catalogue divides China’s economy into three categories where foreign investment is: (1) encouraged, (2) restricted and (3) prohibited. Projects in these categories are subject to differing registration, filing or approval and examination.
Three-fourths of the catalogue is dedicated to encouraged foreign investments that:
- Relate to new agricultural technology, construction and the operation of energy sources, transportation and the exploitation of raw materials for certain industries;
- use new or advanced technology, including those that can improve product quality, save energy and raw materials, increase economic efficiency and alleviate shortages in the domestic market;
- meet international market demand to improve or add value to the industry;
- involve the integrated use of China’s resources or renewable resources, new technology or equipment for preventing and controlling environmental pollution;
- relate to certain modern services; and
- can develop the manpower and resources of central and western China.
Those not listed in the catalogue generally are classified as permitted.
Restricted foreign investments include projects of out-of-date technology, unfavourable to resources and environment, involve exploitation of protected mineral or classified industries of development.
Prohibited foreign investments include projects harmful to state security, impair state security, pollute the environment, are destructive to natural resources and detrimental to human health or occupy excessive farmland.
Preferential policies are provisioned for encouraged sectors and investors may establish a wholly owned foreign entity, whilst in restricted and some encouraged sectors, the equity ratio of the foreign shareholder is restricted, thus an equity joint venture structure is required.
Generally, the following corporate structures are utilised:
A representative office provides basic market entry without legal establishment. The representative office may engage in marketing activities and client liaison. Profit-generation and labour employment is prohibited, and other restrictions stipulated by local government may apply.
Wholly Foreign-owned Enterprise
A Wholly Foreign-owned Enterprise (WOFE) is a Limited Liability Company and the predominant choice for foreign investors. There is no requirement for a Chinese shareholder and it offers foreign investors 100% management control.
Equity Joint Venture
Equity Joint Venture (EJV) is a Limited Liability Company established by one or more foreign investor and one or more Chinese investors. Chinese investors are required to be companies, enterprises or other commercial organisation; natural persons are prohibited. The percentage of the foreign ownership shall be at least 25%. Ownership, profit shares and losses are determined according to the ratio of registered capital contributions.
Cooperative Joint Venture
Cooperative Joint Venture (CJV) may operate as a Limited Liability Company or non-legal entity. The ownership, profit shares and losses are based on contractual agreement.
Executing a new business in foreign lands without proper compliance planning may result in difficult, unwelcome situations. It is important to consult the most up-to-date laws and regulations surrounding entity set-ups and their requirements. What’s more, applying due diligence related potential partners and service providers is essential. As a general practise, one should enlist professional help to ensure both compliance and a smooth process to embark on business operations.
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