China's absorption of foreign investment is an important content of China's fundamental principle of opening up to the outside world. The Law of the People's Republic of China on Chinese-Foreign Equity Joint Ventures, was promulgated by the National People's Congress in 1979, then the work of utilizing foreign capital as an important content of opening up to the outside world initiated as China's fundamental principle. After twenty years of great efforts, the scale of absorbing foreign capital increasingly expanded as well as the level was increasingly upgraded when China's law and managerial system on foreign investment have been gradually perfected. The achievements won the whole world's attention, which effectively promoted the continuous, fast and healthy development of national economy.

 

Foreign investors are allowed to set up the following types of business entities in China:

 

1. China Wholly Foreign-Owned Enterprise (WFOE)

 

A WFOE is a 100% wholly foreign-owned subsidiary doing business in China. The foreign company has sole responsibility for its profits and losses. It is required to register as a legal person who is restricted to certain businesses. The enterprise is able to implement strategies that effectively conform to the interests of the parent company abroad. Moreover, technology and know-how are given better protection. One effective use of a WFOE is to replace the foreign enterprise representative office (RO). Whereas foreign enterprises previously involved in a joint venture would establish ROs in Ch ina to manage the administrative aspects of the venture, some have resorted to setting up WFOEs to handle the same responsibilities.

 

①The term varies according to the nature of the enterprise; any extension is subject to the approval of the relevant government authority.

②There is a minimum capital contribution required, known as registered capital, which varies according to the business.

③A WFOE is allowed to acquire land use rights in the form of land use rights certificates.

④The establishment of export-oriented or high-tech WFOEs is encouraged.

 

Effective 11 December 2004, all foreign investors are able to establish WFOEs in commercial sectors, hence the term Foreign Invested Commercial Enterprise (FICE). The development has affected the following types of business activities in China:

 

①Commission agency

②Wholesaling

③Retailing

④Franchise

 

A wholesale FICE may carry out wholesaling, commission agency, import and export, and other auxiliary activities. FICEs may directly establish and operate new stores, and authorise others to open franchise stores. The development has reduced the minimum registered capital previously required, lifted the geographical limitations and also simplified the approval procedures.

There are, however, certain restrictions on the products and business activities related to China’s commitments as a member of the World Trade Organisation.

 

2. China Sino-Foreign Equity Joint Ventures

 

These are enterprises established in China with joint investments from foreign companies, enterprises or other economic bodies and Chinese economic bodies. Such enterprises involve joint investments, operations and share of risk in proportion to the amount of investment inputted by respective parties. Each party is jointly responsible for profits and losses. Investments can come in the form of currency, buildings, industrial property or equipment. The level of investment offered by a foreign company should not be less than 25%.

 

The corporate form of such joint ventures is the limited liability company, with a Board of Directors as its supreme body of power. Some joint ventures have adopted this corporate form.

 

3. China Sino-Foreign Cooperative Joint Ventures

 

Sino-foreign cooperative joint ventures refer to Chinese foreign contractual joint ventures. They are enterprises established in the country with investments or conditions for cooperation jointly offered by foreign companies, enterprises or other economic bodies, as well as by Chinese economic bodies.

 

The main difference from the equity joint venture is that investments of parties involved will not necessarily be converted into ratios of investments.

 

The rights and obligations of parties involved with regards to such issues as distribution, investments, operations and sharing of risks and profits is determined by contracts signed by parties from the outset of the venture. These ventures involve the foreign partner providing most or all of the funds while the Chinese partner to contribute land, facilities and perhaps a limited amount of funding. The usual approach is stipulated in the contract that the Chinese party will own all assets of the venture once the date of expiry is reached, with the foreign party recouping its investments within the duration of the venture.

 

Such forms of cooperative joint ventures are attractive, since they allow the Chinese partner to have a source of investment while permitting the foreign company to recoup its investments.

 

4. China Representative Office (RO)

 

Before actually investing in China, many foreign investors choose to set up representative offices (ROs) to engage in market research and to learn more about the country. An RO is optional before making an actual investment in China and is not an independent legal entity. It must confine its activities to promotion or acting as a liaison office on behalf of its parent company. An RO is not allowed to generate revenue, solicit business, engage in warehousing or sign contracts with customers. It can hire local staff through approved employment agencies. It should engage in activities that service the head office directly.

 

5.Chinese Holding Companies

 

Approval has recently been given to multinational corporations by China's Ministry of Foreign Trade and Economic Cooperation (MOFTEC) to establish foreign-invested holding companies. Though mostly analogous to Western Holding Companies, there are some differences. Multinational companies may wish to set up holding companies to increase investments or reinvestments in the country, as well as to coordinate investment companies already established here.

 

A Holding Company in the country may invest in such fields as industry, agriculture, infrastructure and energy, provided the State encourages foreign investments in these sectors.

 

Typical work undertaken by a Holding Company might include action as a purchasing agent, distribution or provision of after sales services. Provisional Regulations dictate that a Chinese Holding Company may enjoy preferential treatment of a foreign invested enterprise, and is awarded a foreign invested enterprise certificate and license.

 

①The total assets of the foreign company should be more than US$400 million and its capital contribution in China should exceed US$10 million, or the foreign company must have set up at least 10 FIEs in China with an aggregate capital contribution of more than US$30 million.

②The registered capital of a holding company in China should not be less than US$30 million.

③A holding company has the right to import and sell products, and provide maintenance services.

 

6. Special approved foreign JV

 

Foreign nationals are generally not allowed to hold equity of private companies in the country unless with special consent from the government. A merger and acquisition exercise involving foreign funds will convert a private company into a foreign JV.

 

For further information or assistance, please feel free to contact us

 

Tel: (86.20); 37887606         Mobile: 13928789801 (You can inquire in English)

Fax: (86.20); 37887609        E-mail: 2291837655@qq.com

Wechat:563491716              Skype: zanyaco                  

QQ: 1502027480                  Website: http://www. companyformation86.com

Address: Room 1001, No.621, Tianhe Road, Tianhe District, Guangzhou, China