Business registration in China

All foreign investment projects in China are subject to some level of government scrutiny during the business registration process. The term “foreign investment project” (外商投资项目) is used by China’s administrative agencies to describe all foreign direct investment, whether the “project” in question involves a more traditional fixed-asset investment such as an infrastructure project or factory or an investment in a modern service industry or technology business. A business established with foreign investment in China is referred to as a foreign-invested enterprise (FIE).

Foreign investment regulators

The rules and procedures vary depending on the industry sector, choice of vehicle and amount invested but normally involve several administrative agencies, or their respective counterparts at the provincial, municipal or district level. The principal agencies involved are:

•          The National Development and Reform Commission (NDRC), which regulates China’s fixed assets and formulates China’s macroeconomic plans (that is, the body with overall responsibility for ensuring that foreign investment aligns with the state’s industrial policy). The local counterparts of the NDRC are referred to as local DRCs.

•          The Ministry of Commerce (MOFCOM), which regulates foreign investment in China. The local counterparts of MOFCOM are referred to as local commerce bureaux.

•          The State Administration for Market Regulation (SAMR) (the successor agency of the disbanded State Administration for Industry and Commerce (SAIC) after China’s massive government institutional reform in 2018), which is China’s business registration and market supervision authority. The local counterparts of the SAMR are referred to as local AMRs.

•          Industry regulators, where the investment is in a regulated industry such as food production, telecommunications or banking.

•          The State-owned Assets Supervision and Administration Commission (SASAC), where the investment involves state-owned assets (SOAs). For an explanation of the implications of SOAs on establishing or acquiring a business in China

Levels of scrutiny

Several different levels of scrutiny may be involved during the business registration procedure:

•          Examination and approval (审批). This involves a rigorous review of the specific investors and their financial capacity, as well as the conditions of a foreign investment project. It is the term used in legislation to describe the substantive review carried out by MOFCOM or a local commerce bureau for FIEs in negative list industries.

•          Verification (核准). Also translated as verification and approval or review and approval. Broadly the same as examination and approval, verification involves a substantive review of the investors and the project. It is the term used in legislation to describe substantive project review carried out by the NDRC or a local DRC.

•          Record-filing (备案). This involves the submission of documents, usually including a completed application form. For most types of record-filings, the recipient authority will only take a pro forma review of the documents (for example, an FIE’s record-filing of a new director with a local AMR). While for some other types, the recipient authority may review the documents and have the discretion to reject the application on substantive grounds (but in general they are not supposed to do so unless the grounds are particularly serious). A typical example of this would be the NDRC project record-filing.

•          Registration (登记). This involves the submission of documents, usually including a completed application form. The recipient authority will review the documents to ensure that they satisfy the formal requirements (that is, all relevant information has been submitted and all requested documents have been provided) but will not conduct a substantive review.

Legalisation and notarisation of foreign documents

Chinese administrative agencies often require that certain documents included in administrative applications are “legalised” (that is, authenticated by the Chinese embassy or consulate in the investor’s home jurisdiction). Legalisation is typically required for documents relating to the existence, good standing and creditworthiness of the foreign investor (that is, they are documents issued by a foreign government or bank that the administrative agency in China is unable to verify by itself).

A Chinese embassy or consulate will not legalise a document unless it has first been notarised according to the local requirements in the investor’s home jurisdiction (usually by the government agency that issued it or by a notary public if it is not issued by the government).

On completion of the legalisation process, the administrative agency in China will rely on the assertion by the embassy or consulate that the document is authentic. The entire process can take from one to several weeks.

Unified foreign investment law

On 15 March 2019, the National People’s Congress (NPC) enacted the Foreign Investment Law 2019 (2019 FIL), which will come into force on 1 January 2020. After the law takes effect, it will become the unified, basic law regulating Chinese foreign investment, repealing and replacing China’s existing three foreign investment laws (Three FIE Laws) that have been in place for decades. The Three FIE Laws refer to:

•          The Sino-Foreign Equity Joint Venture Enterprise Law 2016.

•          The Sino-Foreign Cooperative Joint Venture Enterprise Law 2017.

•          The Wholly Foreign-Owned Enterprise Law 2016.

With the full implementation of the new regime, the existing distinctions between FIEs and the investment vehicles available to domestic investors will be abolished.

FIEs already in existence before 1 January 2020 may retain their existing organisational form for a period of five years. These FIEs should use this grandfathering period to restructure their organisational form and corporate governance framework to comply with the Chinese corporate and business law regime that currently applies to purely domestic-invested entities, which largely includes the Company Law 2018 and the Partnership Enterprise Law 2006, together with their subordinate legislation.

For details of the unified law.

Negative list administration

The regulation of foreign direct investment has been undergoing a major transformation to a negative list approach. Under China’s traditional market access system all FIEs and other foreign investment projects were subjected to a higher level of government scrutiny at the formation stage than a company or other investment project with purely domestic investment.

The State Council released the Opinions of the State Council on Implementing the Market Access Negative List System 2015 to initiate the transformation from the old system to a market access negative list system. Under the new system, foreign investment is subject to “national treatment”, that is, the same market access rules that apply to domestic investment, except where an FIE or other foreign investment project is subject to “special administrative measures”.

The revised system employs two lists of special administrative measures, which are commonly referred to as “negative lists”:

•          A negative list for market access. This applies certain special administrative measures equally to foreign and domestic investment. The current version is the Market Access Negative List (2018 Version) (2018 Market Access Negative List), which consolidates and unifies China’s market access policies by applying nationwide for the first time and expressly incorporating prohibited matters and restrictive measures contained in the following catalogues:

•          Industrial Structure Adjustment Guidance Catalogue (产业结构调整指导目录).

•          Government-approved Investment Project Catalogue 2016 (2016 NDRC Investment Catalogue).

•          Internet Industry Market Access Prohibited Licensing Catalogue (互联网市场准入禁止许可目录).

•          For more coverage of the 2018 Market Access Negative List, see Legal update, NDRC and MOFCOM issue nationwide market access negative list.

•          A negative list for foreign investment. This imposes additional special administrative measures to FIEs and other foreign investment projects. The current version is the Special Administrative Measures for Market Access of Foreign Investment (Negative List) (2019 Version), effective from 30 July 2019. A separate negative list is implemented in China’s FTZs.

•          For detailed coverage, see Article, China issues 2019 nationwide and FTZ negative lists.

MOFCOM FIE record-filing regime

As a milestone step to advance and implement the negative list system and foreign investment reform, on 8 October 2016 MOFCOM released the Interim Measures for Record-filing Administration of the Establishment and Change of Foreign-invested Enterprises 2016 (2016 FIE Record-filing Interim Measures). The measures, together with the Decision of the Standing Committee of the National People’s Congress on Revising the Law of the People’s Republic of China on Foreign-invested Enterprises and Other Three Laws 2016 (effective from 1 October 2016), amended the Three FIE Laws that had been in effect in China for decades and ushered in the negative list approach for regulating foreign direct investment in China.

The 2016 FIE Record-filing Interim Measures were subsequently amended by the:

•          Interim Measures for Record-filing Administration of the Establishment and Change of Foreign-invested Enterprises 2017 (2017 FIE Record-filing Interim Measures), together with MOFCOM Bulletin 37/2017.

•          Interim Measures for Record-filing Administration of the Establishment and Change of Foreign-invested Enterprises 2018 (2018 FIE Record-filing Interim Measures).

Under the MOFCOM record-filing regime,

•          Foreign investment projects in a negative list industry are subject to market entry special administrative measures. Foreign investment in these sectors is subject to examination and approval by MOFCOM (or the competent local commerce bureau). For these projects, the existing foreign investment regulatory regime continues to apply.

•          Foreign investment projects in a non-negative list industry only require online record-filing with the competent MOFCOM office, instead of applying for and obtaining an approval (which the MOFCOM office is not obliged to grant).

Initially, the record-filing regime only applied to greenfield FIE establishment (and subsequent amendment) and the following two types of transactions were once specifically carved-out:

•          Inbound M&A. This means any domestic Chinese company’s merger with or acquisition (M&A) by a foreign investor.

•          Foreign strategic investment. This means any strategic investment by a foreign investor in a non-foreign-invested listed company.

This changed with the release of the 2017 FIE Record-filing Interim Measures, which extends the application of the record-filing regime to cover both inbound M&A and foreign strategic investment.

The 2018 FIE Record-filing Interim Measures streamline the record-filing procedure for non-negative list FIEs by providing a one-stop service window for the MOFCOM record-filing and the SAMR’s company registration procedure (in relation to the initial registration of a foreign investment project).

For more information on the record-filing regime.

Investment amount

The investment amount (also known as the total investment amount (or total investment) is the start-up debt and equity capital contributed to the FIE at its establishment. Total investment consists of two parts: registered capital (that is, shareholders’ equity investment) and cross-border financing (that is, loans from foreign shareholders or other offshore lenders). In determining the allocation of funds between registered capital and cross-border financing, the FIE must comply with the following debt-to-equity ratio requirements:

•          Total investment up to and including US$3 million: registered capital must be no less than 70% of total investment.

•          Total investment from US$3 million to and including US$10 million: registered capital must be no less than 50% of total investment or US$2.1 million, whichever is larger.

•          Total investment from US$10 million to and including US$30 million: registered capital must be no less than 40% of total investment or US$5 million, whichever is larger.

•          Total investment greater than US$30 million: registered capital must be no less than one-third of total investment or US$12 million, whichever is larger.

(Interim Provisions of the State Administration for Industry and Commerce on the Ratio of the Registered Capital to the Total Investment of a Sino-Foreign Equity Joint Venture Enterprise 1987.)

An FIE may opt into a different system managed by the People’s Bank of China (PBOC) for calculating the FIE’s applicable cross-border financing cap, a regime introduced in 2017 and universally applied to all types of corporations incorporated in China.

It is expected that the implementation of the 2019 FIL ultimately will apply this PBOC cross-border financing cap regime to all FIEs and that the debt-to-equity ratio requirements mandated by the Three FIE Laws will then be abolished.

Company names

Business names in China commonly contain four components:

•          Location (for example, Beijing)

•          Trade name (for example, ACME)

•          Industry sector (for example, Widget Manufacturing)

•          Organizational form (for example Company, Limited)

The official name must be in Chinese and will be rejected if the phonetic pronunciation of its trade name component conflicts with an existing name with the same industry category in the enterprise name registry.

When advising on the establishment of a company, check on the trade name’s registrability as a trade mark, in China and elsewhere, in English and Chinese. One should also consider checking with colleagues from other parts of the Chinese-speaking world, such as Hong Kong, Singapore and Taiwan, whether the preferred choices carry unintended meanings in other Chinese dialects.

For more information on the process of choosing a Chinese company name.

Business licence

The SAMR offices are responsible for company registration and the issuance of business licences.

Issuance of the business licence normally takes about five to ten days. The business licence is the equivalent of a certificate of incorporation in most western jurisdictions. An FIE is deemed officially incorporated on the issuance date of its business licence.

Upon issuance, the business licence also contains information that was contained in the registration certificates previously issued by several other government departments, such as the organisation code certificate, tax registration certificate, social insurance registration certificate and statistics registration certificate. This reduces the number of ancillary registrations that an FIE is required to obtain after completion of the government’s vetting process.

Industry approvals

Where the foreign investment is in certain industries (such as telecommunications, mining, banking and insurance, public utilities, domestic transportation), additional industry-specific approvals from the applicable ministry or its local counterpart are required. Since 2015, most industry-specific approvals can be obtained after the issuance of the business licence.

The table below provides examples of industry-specific approvals.

Reducing pre-incorporation approvals

In 2014, the State Council launched a programme to reform the business registration system. This reform was aimed at reducing the number of pre-incorporation approvals required by the SAIC offices (now SAMR offices) before they could issue business licences.

Under the Notice of the State Administration for Industry and Commerce regarding Strictly Enforcing the Permits after Business Licences Reform and Strictly Implementing Preliminary Approval Items for Industry and Commerce Registration 2015 (国家工商行政管理总局关于严格落实先照后证改革严格执行工商登记前置审批事项的通知):

•          The SAMR formulates the catalogue of pre-incorporation approvals for business registration (工商登记前置审批事项目录). The SAMR offices only require pre-incorporation approval for the items mentioned in the catalogue and update the list from time to time. The current effective catalogue is attached to the Notice of the State Administration for Industry and Commerce on Adjusting the List of Items Subject to Prior Examination and Approval for Industrial and Commercial Registration 2018.

•          Where a company obtains its industry-specific approval after business registration, the company must upload the approval to the SAMR enterprise information disclosure system within 20 business days of issuance. If there is any discrepancy between the business scope in the industry-specific approval and the business scope in the business licence, the company must apply to the SAMR office to amend its business scope in the business licence.

NDRC project verification or record-filing

Investment in and construction of fixed asset investment projects are subject to a project approval or record-filing procedure with the NDRC (or a local DRC) (Article 2, Rules on the Administration of the Verification and Record-filing of Enterprise Investment Projects (2016 NDRC Project Approval Rules)).

Except for projects involving state secrets, the verification and record-filing processes are carried out on a national online project supervision platform under a unified project code.

The specific scope of and authority for the verification and record-filing process is determined by reference to an investment catalogue (that is, the 2016 NDRC Investment Catalogue).

The project approval step often can be skipped for projects involving service industries and smaller wholly-foreign owned investments because the MOFCOM and SAMR offices may not require evidence of project approval for these projects. It is usually possible to rectify an approval problem after the fact, but this can be time consuming and expensive. It is better to obtain project approval and retain the approval document in case it becomes useful at a later date.

Projects subject to verification

For projects subject to verification, the following rules apply:

•          Foreign investment projects that are restricted in the foreign investment negative list and have a total investment (including capital increase) of US$300 million or more are subject to verification by the NDRC. If the total investment is over US$2 billion, a further record-filing with the State Council is required.

•          Foreign investment projects that are restricted in the foreign investment negative list and have a total investment (including capital increase) of less than US$300 million are subject to verification by a local DRC.

•          Foreign investment projects that are not restricted in the foreign investment negative list but are otherwise listed in Articles 1 to 10 of the 2016 NDRC Investment Catalogue are subject to verification in accordance with the provisions set forth in that catalogue.

(Article 11, 2016 NDRC Investment Catalogue.)

For an investment project subject to verification, the investor must submit a project application form that contains the following content:

•          Basic information on the enterprise and the project.

•          An analysis of the resources utilisation and environmental impact of the project.

•          An analysis of the economic and social impact of the project.

•          A document to prove completion of formalities, where such formalities are prerequisite for verification under laws or administrative regulations.

(Article 6, 2016 NDRC Project Approval Rules.)

The verification decision is determined by whether the investment project:

•          Endangers national economic, social or environmental security.

•          Complies with development and construction plans, technical standards and industrial policies.

•          Reasonably exploits and efficiently utilises resources.

•          Adversely impacts a significant public interest.

(Article 9, 2016 NDRC Project Approval Rules.)

Generally, the verification authority must issue its decision within 20 business days after acceptance of the project application form, though this period can be extended up to 40 business days in certain situations. These time periods do not include the time required to obtain the appraisal of experts, which may take up to 30 business days. (Articles 9-10, 2016 NDRC Project Approval Rules.)

The enterprise must commence construction within two years from issuance of the verification, or it must apply for a single extension and commence construction within one additional year (Article 12, 2016 NDRC Project Approval Rules).

Projects subject to record-filing

All foreign investment projects that do not meet the criteria for verification require only record-filing with the local DRC (Notice on Properly Performing Relevant Foreign Investment Work for the Effective Implementation of the Catalogue of Investment Projects Subject to Government Verification and Approval (2016 Version) 2017).

For record-filing, the investor must submit the following information through the online platform before commencing the construction:

•          Basic information on the enterprise and the project.

•          The total amount of investment.

•          A declaration of compliance with industrial regulation and policies.

(Article 13, 2016 NDRC Project Approval Rules.)

Enterprises that violate these rules are subject to sanctions (Articles 18-20, 2016 NDRC Project Approval Rules), as well as public shaming through the national enterprise credit information system (Article 17, 2016 NDRC Project Approval Rules).

MOFCOM establishment approval or record-filing

Where a proposed FIE or other foreign investment project is subject to the negative list for foreign investment, the investors still must obtain establishment approval through an examination and approval procedure. Where a proposed FIE or other foreign investment project is not subject to the negative list, it can instead carry out a record-filing procedure. To determine which procedure applies, see Negative list administration and MOFCOM FIE record-filing regime.

Successfully passing through the examination and approval procedure will result in MOFCOM or the local commerce bureau issuing a Certificate of Approval for Enterprises with Foreign Investment (approval certificate).

In contrast, after the completion of the record-filing procedure, the applicant will receive a Record-filing Receipt for FIE incorporation.

Central or local MOFCOM approval?

Where approval is required, foreign investors typically prefer to seek approval from a local commerce bureau rather than from MOFCOM where the option is available. MOFCOM has a high caseload and, due to its national prominence, is generally regarded as being more conservative in its approach to approvals. As a result, approval from MOFCOM generally takes much longer to obtain and requires much more information disclosure than approval from a local commerce bureau. Provincial-level and other local government authorities are usually more approachable and have more scope to accommodate requests from foreign investors due to their predominant mandate of creating job opportunities and generating tax revenues for the local economy.

Approval authority is delegated to the local commerce bureau where the total investment is US$1 billion or less (Article 2(5), Notice of the State Council on Several Measures for Actively and Effectively Utilizing Foreign Investment to Promote Quality Economic Development 2018). Otherwise approval authority is exercised by MOFCOM in Beijing.

The monetary thresholds set out above are general; specific industries or regions may have higher or lower thresholds. If you are in doubt, local counsel in the relevant jurisdiction should be able to confirm the currently applicable thresholds for an FIE’s proposed business lines. In practice, it is often desirable to keep the total investment under the relevant approval threshold to avoid triggering a requirement for central MOFCOM approval.

MOFCOM record-filing mechanism

Where record-filing applies, the MOFCOM record-filing procedure greatly simplifies the business registration process by:

•          Requiring applicants to submit their MOFCOM FIE record-filing information to the SAMR office together with their company registration applications.

•          Adopting an online application and information sharing platform easily accessible to all investors.

•          Requiring local commerce bureaux to complete each filing within three business days.

For details of the record-filling mechanism.

Establishing other forms of investment vehicle

Under the Three FIE Laws regime, the most commonly encountered forms of FIE are the three types of limited liability companies, that is:

•          Wholly foreign-owned enterprises (WFOEs).

•          Sino-foreign equity joint venture companies (EJVs).

•          Sino-foreign co-operative joint venture companies (CJVs).

These investment vehicles will be phased out with the full implementation of the 2019 FIL.

There are other ways in which foreign investors can enter the China market. Investors may wish to set up:

•          A representative office.

•          A partnership enterprise.

•          A branch company.

Registering a representative office

The registration of a resident representative office (RO) does not require establishment approval except in a small number of highly-regulated industries (such as finance, banking, law and accounting). Instead, the head office of an RO must register with the relevant local AMR. In addition, the RO must carry out certain formalities to register the RO’s chief representative (who is equivalent to the legal representative of an FIE) and other representatives (that is, the foreign employees of the head office located in China), and engage a labour dispatch organisation to hire and dispatch any Chinese nationals required to staff the RO, as an RO may not employ domestic staff directly in China. For more information on the requirement for ROs to use labour dispatch organisations.

The application to register an RO must be submitted through a “sponsor” organisation, which is essentially an agent with ties to the local AMR. The process can take several months, most of which is spent preparing the application documents. Upon acceptance of a complete application, the local AMR is required to issue a registration certificate (or written rejection) within 30 days and the ancillary registrations must be completed within 30 days after the issuance of the registration certificate.

Registering a partnership enterprise

MOFCOM establishment approval or record-filing is not required to register a foreign-invested partnership (FIP), although project approval and industry regulatory approval may be required depending on the nature of the foreign investment project and proposed scope of business.

Instead, the investors in an FIP are required to apply, either through a representative appointed by all the partners, or a “sponsor” agency, directly to the relevant local AMR, which will notify the local commerce bureau of the application. Similarly, amendments to FIP registration and dissolution procedures are handled directly with the local AMR (Articles 5-7, Measures for the Administration of the Establishment of Partnership Enterprises in the Territory of China by Foreign Enterprises or Individuals 2009). The local AMR is required to issue a business licence or a written rejection within 20 days of formal acceptance of an application to register an FIP (Article 16, Measures for Administration of Partnership Enterprise Registration 2007 (2007 Partnership Registration Measures)).

An FIP is not required to have a fixed term of operation, but if it has one, the specific operating term must be stipulated (Article 6, 2007 Partnership Registration Measures).

Registering a branch company

A company that already has a presence in China may set up branch companies in other parts of the country.

To register a branch company it is not necessary to obtain establishment approval, though project approval and industry approval may be required depending upon the nature of the foreign investment project and proposed scope of business. To register a branch, an FIE is required to file an application with the local AMR in the jurisdiction where the branch will be located. Upon completion of the registration procedure, the local AMR will issue a business licence to the branch company, and the FIE is required to record-file the branch with the relevant AMR of the FIE.

Acquiring a domestic company in China

Foreign investors acquiring a domestic company in China are subject to the Provisions on Foreign Investors’ Merger with and Acquisition of Domestic Enterprises 2009, which apply only to acquisitions of a Chinese domestic enterprise by a foreign investor (Article 2). They do not apply to a foreign investor’s investment in a company that is already an FIE. This has been confirmed in an internal approval manual circulated by MOFCOM on the administration of foreign investment in 2008 (Notice of the Foreign Investment Department of the Ministry of Commerce on Issuing the “Guiding Handbook on Assess Administration of Foreign Investment” 2008).

What constitutes a foreign acquisition?

A foreign investor can acquire a domestic Chinese enterprise via equity or asset purchase.

An equity purchase occurs when a foreign investor purchases an equity interest from a shareholder of a domestic enterprise or subscribes to the capital increase of a domestic enterprise, which in either case causes the domestic enterprise to become an FIE.

An asset purchase occurs when a foreign investor establishes an FIE through which it purchases and operates the assets of a domestic enterprise, or purchases the assets of a domestic enterprise and contributes such assets to a newly established FIE, which operates such assets.

Procedures for completing a foreign acquisition

Where the target company does not involve any negative list industry, the parties to the transaction must complete the record filing procedure with MOFCOM.

Where the target company involves a negative list industry, the traditional MOFCOM examination and approval regime continues to apply and the parties must submit the required application documents to MOFCOM or the local commerce bureau. Upon receiving the complete application package, MOFCOM or the local commerce bureau must either reject the application or issue a Certificate of Approval within 30 days.

Merger control filing

Under China’s anti-trust law regime, a concentration of businesses must be notified to the regulator if certain thresholds are triggered.

Concentrations include the following:

•          Mergers between undertakings.

•          Acquiring control of other undertakings through the acquisition of shares or assets.

•          Acquiring control of other undertakings, or the ability to exercise decisive influence over other undertakings, by contract or other means.

(Article 20, Anti-Monopoly Law 2007.)

Failure to notify can result in a fine of up to RMB500,000 and an order to unwind the transaction. Damage to a company’s reputation with the regulator should also be taken into account. Since 1 May 2014, the regulator has publicly announced its decisions on penalising parties who fail to notify their transactions.

A clearance decision on the transaction can be obtained within an initial period of 30 calendar days. The regulator has a non-binding target 30-day review period for qualifying simple cases. However, the clock only starts to run from the time the regulator declares the notification complete.

For an overview of China’s merger control regime.

National security review

If a foreign investment project is in a sensitive sector or field, it may trigger a national security review (NSR) process conducted by a joint-ministerial committee under the leadership of the State Council. The NSR process can result in a rejection of the project or the imposition of certain investment restrictions and, therefore, may significantly affect a foreign investor’s market access and investment into China.