China company law
1. When was China's most recent Company Law issued and when did it take into effect?
On 27 October 2005 at the 18th session of the Standing Committee of the 10th National People's Congress, China's top legislature adopted the Draft of the Amendment of the Corporate Law. It came into effect on 1 January 2006.
2. How do China's Company Law and related Chinese laws and regulations affect foreign-invested companies?
Foreign investors looking to incorporate in China should comply with Chinese laws and regulations specific to foreign-invested companies. They will also be subject to the Corporate Law; however, there is no clear stipulation in the regulations specific to foreign-invested companies.
3. What is the minimum registered capital requirements for both companies limited by shares and LLCs?
For companies limited by shares, the minimum registered capital has been cut by 50% to RMB 5 million (approx. USD 625,000).
- For LLCs, the minimum registered capital for all types of business has been slashed across the board to a unified level of RMB 30,000 (approx. USD 3,750).
- The threshold requirement for registered capital is also subject to specific laws and regulations that may set higher thresholds for different industries. For example, insurance companies must have a minimum registered capital of RMB 200 million.
4. What types of assets meet capital requirements?
Any non-cash asset, including intellectual property, that can be monetarily valued and legally transferred can be counted towards the minimum capital requirement. Cash contributions shall not be less than 30 percent of a company’s registered capital.
5. Are there any special regulations concerning the registered capital of foreign-invested companies?
Foreign invested enterprises are allowed to contribute their registered capital by installments, provided that: (i) the first installment of no less than 15% of the total registered capital is paid within 90 days upon establishment; and (ii) the
remainder is paid within one to three years depending on the amount of registered capital.
6. What role do the articles of association play under China’s Company Law?
The articles of association are given greater importance under the 2006 law, as compared to previous versions of the law.
The notice was issued by the Development and Reform Commission of Beijing Municipality on October 24, 2007 and took effect on the same day.
The 2007 Guiding Catalogues of Beijing Municipality on Industrial Structure Adjustments are based on the 2005 Guiding Catalogues on Industrial Structure Adjustments issued by the State, the relevant provisions on industrial policies in Beijing and the guide for industrial development. The Beijing Catalogue consists of three catalogues: the encouraged catalogue, the restricted catalogue and the eliminated catalogue.
1. What industries are included in the encouraged catalogue?
The encouraged catalogue mainly includes key technologies, equipment and products that may promote the economic and social development of Beijing, are beneficial to energy conservation, environmental protection and industrial structure optimization and upgrading, and need to be encouraged and supported by policies. The catalogue covers 26 industries and several technologies including coal, power, fuel, natural gas, steel, automobiles, construction, information industry, environmental protection, resources conservation and multiple utilization.
2. What industries are included in the restricted catalogue?
The restricted catalogue mainly includes productivity, processing and products which require modification or are prohibited on the ground of failing to meet the Beijing standards, requirements for admission to the industry or relevant provisions, or hinder the modification of the industry in Beijing. This catalogue covers 16 industries including coal, electricity, fuel, the information industry, construction materials, pharmaceuticals and textiles.
3. What industries are included in the eliminated catalogue?
The eliminated catalogue mainly includes the backward technologies, equipment and products that fail to follow the relevant laws and regulations of the State and Beijing, seriously waste resources, pollute the environment, fail to provide safe production conditions and should be eliminated. The backward processes and equipment cover 15 industries including coal, power, fuel, natural gas, chemicals and steel, while laggard products mainly cover 11 industries including natural gas, chemicals, railway, steel, construction materials, medicine and machines.
4. What about the industries that fall outside these three catalogues?
The industries that fall outside these three catalogues but meet the relevant laws, regulations and policies are classified as permissible. However, their catalogue will not be listed in the Guiding Catalogues of Beijing Municipality on Industrial Structure Adjustments.
China’s Eleventh Five-Year Plan on Use of Foreign Investment (17/04/2007)
1. What is a five-year plan?
By summarizing the overall picture of the use of foreign investment in China during the tenth five-year period (i.e. the 2001-2005 period) and analyzing the prospective domestic and international economic environment for the eleventh five year period (i.e. the 2006-2010 period), the Plan brings forward the guidelines, strategic targets, important missions and corresponding policies on the use of foreign investment during the eleventh five-year period. The Plan provides essential guidance to those likely to be involved in foreign investment in China in the eleventh five-year period.
2. What does this plan entail?
According to the Plan, during the eleventh five-year period, China will shift its focus from contending with a shortage of funds and foreign exchange to introducing advanced technologies, management experience and high-caliber personnel, with the aim of significantly altering China’s focus on quantity of foreign investment to quality. It is intended that China will strive to expand the fields into which foreign investment is permitted. Previously, foreign investment has been limited to the fields of simple processing and assembling and low-level production and manufacture. China intends now to encourage foreign investment into such new fields as research and development, high-end design, and modern communications so that China might advance to become one of the world’s key manufacturing bases for high added value products and also so that China might further open up its service industries.
In addition, through the introduction of foreign advanced technologies and management skills, foreign-funded enterprises will be given chances to lead and bring along Chinese enterprises so as to improve their independent innovating ability. With these aims in mind, the Plan identifies eight major missions and lays down eight key policies on the use of foreign investment for the
eleventh five-year period.
What are the new requirements of Foreign-Invested Enterprises?
Many provisions of China’s Company Law (including recent amendments summarized in the February 2006 China Country File) have since been confirmed to govern ‘foreign-invested enterprises’ (FIEs), mostly now being referred to as ‘foreign invested companies’ (FICs). FICs are now subject to clearer
Requirements and procedures for key matters including establishment, classification, capitalization, internal structure, equity pledges and onward investments.
The main government document clarifying these matters (not all based on the Company Law) is the ‘Implementation Opinion for Several Issues on Application of Laws Concerning Foreign-Invested Company Examination, Approval and Registration Administration’. Issued by several ministries and departments on April 24, 2006. Also important is a related implementation circular issued by the State Administration of Industry and Commerce on May 26, 2006.
Notarization and consularisation: Applications for government approval of a FIC’s establishment or amendment require both notarization and (except in Hong Kong, Macao and Taiwan) consularisation of each foreign investor’s status documents.
Single-owner companies: A single-owner Wholly Foreign-Owned Enterprise (WFOE), like a domestic single-owner company, must have registered capital of at least 100,000 renminbi (US$12,608) and, if its single owner is an individual, is not permitted to establish or invest in another single-owner company. Unlike a domestic single-owner company, a single-owner WFOE may receive contribution of its registered capital in multiple installments.
What are the Liabilities of Foreign Invested Companies?
Liability limitation of a FIC, like a domestically owned company, is subject to the amended law’s statement that limited liability is not to be ‘misused’ for the purpose of evading liabilities and causing ‘severe harm’ to the interests of creditors. Also like for a domestically owned company, the position of a FIC’s ‘legal representative’ – bearing certain vaguely defined types of personal liability for the company’s conduct, which historically was filled by the company’s chairman or executive director – now may alternatively be filled by a company manager.
Can Foreign-Invested Companies be capitalized?
Capitalization: A FIC, like a domestically owned company, can be capitalized through contribution of any ‘non-cash asset that can be monetarily valued and legally transferred’. ‘Ownership’ of such assets is no longer required, which suggests that contributions can be made through sub-licenses of intellectual property rights. Cash must make up at least 30 percent of contributions to a FIC’s or a domestically owned company’s registered capital, while there is no longer any limit on the percentage made up by intellectual property rights. Capitalization cannot be accomplished by contribution of labor services, credit standing, goodwill, franchising rights, mortgaged property (whether movable or immovable), or individuals’ (as opposed to enterprises’) names. Valuation is required of non-cash contributed assets, by a (PRC-licensed) appraisal entity or, also permitted for a Sino-foreign equity joint venture, by agreement between the parties.
Pledges: FIC equity pledges have become more reliable, through provisions for issuance of pledge registration certificates and through prohibitions against transfer or re-pledge of the pledged equity – or reduction of the ‘corresponding-invested capital’ –except with the consent of pledges.
Onward investment: A FIC’s investment in other companies is no longer limited to 50 percent of its net asset value. Tax next: The next major convergence step, expected to be rolled out in 2007, will be reform and unification of corporate income tax.
Will Foreign Investment increase in china’s foreign market?
Investments from China into foreign markets will increase, along with opportunities for various financial institutions, based on China's recent liberalization of foreign exchange. In addition to further relaxation of controls on foreign exchange current accounts, China has taken its biggest step towards freeing outbound restrictions on capital accounts, by giving Chinese commercial banks, mutual funds, securities institutions and insurers greater opportunities to invest in overseas financial products.
These opportunities are likely to become part of a Qualified Domestic Institutional Investor programmed (QDII), which has been rumored for several years, and which would build upon the PRC's experience with the Qualified Foreign Institutional Investor programmed (QFII) that was formally introduced in 2002 as a liberalization of inbound investment into the PRC by qualified foreign investors. Beneficiaries in the short term will include not only PRC portfolio investors and financial institutions but also foreign financial institutions, which can expect expanded joint venture opportunities as well as instructions to act as investment managers and custodians. In the long term, these changes are likely to increase the ability of PRC financial institutions to compete on the global stage.
What are the regulations regarding the registration of an FIE in China?
An FIE should apply to the financial authority for financial registration within 30 days after submission of application for business registration or change of registration details. To apply for financial registration, an enterprise should complete the Financial Registration Form for Foreign-invested Enterprises, supported by the following documents: approval certificate for establishment of an enterprise; feasibility study report and its approval document; FIE contract (agreement), articles of association (copy) and their respective approval documents; business licence (copy); and information on the FIE's financial management system and related rules formulated in accordance with the relevant state regulations.
An FIE should submit its financial accounting statements and status report of its financial position to the competent financial or administrative authority and local tax office on a regular basis. The format, content and schedule for submission should follow the relevant stipulations by MOF. Annual financial statements and liquidation reports should be accompanied by an auditor's report prepared by Chinese certified public accountants (CPAs).
What are the capital requirements for investment in China?
To establish am enterprise, a certain amount of capital is required as stipulated in the relevant regulations and application for business registration at the industry and commerce administration departments is also necessary.
(a) Forms of Investment
Investors may make contribution to the registered capital of an enterprise in cash, in kind, or in intangible assets. Investors making contribution in kind and in intangible assets must provide proof of ownership and right of disposal, or other proof of their validity as required by law. Investors are not allowed to contribute leased assets or collateral assets.
Investors making contribution in intangible assets (excluding land-use rights) should provide asset appraisal or valuation reports. In general, the value of the contribution may not exceed 20% of the total registered capital of the enterprise. Under special circumstances, the ratio may be allowed to reach a maximum 30% upon asset appraisal done by Chinese CPAs and approval granted by the industry and commerce administration departments.
If foreign investors are making contribution in cash, it should be in foreign currencies. However, profits in renminbi made from investment in other FIEs within the Chinese territory may be used as contribution in cash.
When the full amount of registered capital has been paid up, the FIE should appoint a Chinese CPA to compile a capital verification report.
(b) Investment Recovery
In general, during the operation period of the enterprise, investors are not allowed to withdraw their share capital by any means except through transfer of business as provided by law.
For Sino-foreign contractual joint ventures (JVs) whose contract stipulates that all the fixed assets should be handed over to the Chinese party upon expiry of the JV, provisions can be made in the JV contract that the foreign party may recover its investment during the term of the JV.
However, the foreign party should still be jointly responsible for the JV's liabilities in accordance with the relevant laws and regulations as well as the provisions of the contract. Any pre-tax investment recovery should be reported to the competent financial authority for examination and approval.
(c) Sources and Uses of Capital Reserve
The sources of an enterprise's capital reserve include: the balance from investors' capital contribution in excess of the prescribed amount of registered capital; the balance resulting from the different conversion/exchange rates used in the assets account and the paid-up capital account; income in the form of donations.
The designated uses of an enterprise's capital reserve include: in the event of heavy losses where the un-allocated profits of the previous year, the reserve funds and development funds of the enterprise are inadequate to make up for the shortfall, the board of directors may pass a resolution authorizing the use of such funds in making up for the losses; upon the board of directors' decisions and completion of the relevant procedures, the funds may be used to increase the capitalization of the enterprise.
What are the management measures and procedures concerning the usage and upkeep of assets?
The management measures and procedures concerning the usage and upkeep of assets are as follows:
(a) Management of Floating Assets
-Cash and bank deposits
The cash of an enterprise should be handled by designated personnel and an income and expenditure account must be set up to record all cash transactions. Bank deposits should be credited to accounts set up under the name of the enterprise.
-Advance payments and accounts receivable
Advance payments and accounts receivable should be handled and recovered in accordance with the relevant provisions in the contract or agreement.
-Foreign currency capital
The collection, payment and custody of foreign currency capital should comply with the relevant state regulations concerning foreign exchange management. The conversion between foreign currency and the bookkeeping base currency should be dealt with in accordance with MOF regulations.
-Inventories
Inventories should be properly itemised, reasonably valued, and well maintained. There should also be a well-established system for the receipt, issuance, requisition and return of inventories as well as for physical stock taking on a regular basis.
When an enterprise issues or requisitions merchandise, semi-manufactures, raw materials and finished goods, or requisitions low-value consumables and packaging materials, the actual costs should be calculated according to stipulated accounting methods or amortised.
Where the book value and the net realisable value of the inventories differ significantly, necessitating adjustment of the book value, adjustment can be made upon approval by the competent financial authority or central administrative authority.
-Investment in kind or in intangible assets
When an enterprise invests in another enterprise in kind or in intangible assets, the assets involved have to undergo appraisal. If the investment is intended to be a short-term one, the difference between the book value and the appraised value should be treated as current profit/loss. If it is intended to be a long-term investment, it should be treated as deferred investment profit/loss which should be accounted for as non-operating income or expenses over the investment period by equal annual instalments.
(b) Fixed Assets
-Contribution in fixed assets
When fixed assets are used as capital contribution, their book value should be set at reasonable levels as stipulated in the contract or agreement, or by adding up their appraised value based on market price with other fees incurred before contribution. In the case where an investor makes contribution to the enterprise in equipment, the original invoice issued by the manufacturer should be provided in order to ascertain its value.
-Depreciation
The depreciation of fixed assets is generally calculated by using the straight-line method or production/service output method on a monthly basis starting from the second month after the fixed assets are put into use. When the fixed assets cease to be used, depreciation would stop starting from the following month. If other depreciation methods or modifications to the existing method are preferred, application for approval has to be made to the relevant authorities pursuant to the law.
-Construction projects
Before a construction project starts, the enterprise should prepare a budget, procure the necessary equipment and materials at reasonable prices, accurately estimate costs, strictly control expenses, and determine the total costs as soon as possible.
(c) Intangible Assets
Where capital contribution is made in intangible assets, it should be accompanied by documents such as copies of proof of ownership, and detailed information such as the basis and standards of evaluation. Among these, the evaluation of proprietary technologies, franchise and goodwill should be conducted by authorized certification organizations or Chinese CPAs.
