INTRODUCTION
Before 1978, China's economic policies were mainly aimed at self-reliance. As a result, the country was virtually shut off from world economic developments. In 1978, China opened its doors to foreign investment with the goal of modernising its economy and raising the living standard of its people. The country has since established the necessary legislative basis for foreign investment and has actively sought to acquire modern foreign management and technical skills.
China adopted a Constitution in 1982 which has been amended various times since. The national legislative organ is the National People's Congress
(NPC), which convenes annually for two weeks. When the NPC is not in session, its permanent organ, the Standing Committee, exercises most of its powers. The primary executive organs of state power are the President, who is the head of state, and the State Council being the government. The Chinese Communist Party remains the main political force in China and controls all appointments to key state organs. The
People's Republic of China (PRC) is a unitary state which has delegated certain legislative and executive powers to regional or local authorities.
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VISAS AND WORK
PERMITS
General
Foreigners who wish to enter, pass through or reside in China must obtain a visa from a Chinese embassy, consulate, visa office or other agency authorised by the Ministry of Foreign Affairs. Visas must generally be obtained before entering China, although visas may be obtained at the border in some circumstances.
Business visits
Foreigners who wish to travel to China for business, to attend seminars or participate in scientific or cultural exchanges are required to apply for a business
"F" visa. This visa can be for single, double or multiple entries. An F visa is valid for stays of one to six months and may be renewed up to three times in China for a maximum period of one year.
In order to apply for an F visa, an applicant must obtain a formal invitation letter, setting forth the entry purpose and date, from an authorised Chinese entity. This letter can normally be obtained by an authorised travel agent or through a Chinese sponsoring organisation in the relevant location. The applicant must then present the invitation letter together with other necessary documents to the local Chinese embassy or consulate to apply for the visa.
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TYPES OF
BUSINESS ENTITIES
General
China recognises a wide range of business vehicles, some of which are only open to domestic investors. The principal business entities available to foreign investors are:
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representative offices;
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branch offices;
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equity joint ventures;
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cooperative joint ventures;
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wholly foreign-owned enterprises;
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companies limited by shares with foreign investment; or
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holding companies.
Special regulations have been adopted to govern the establishment and operation of each of these foreign investment vehicles.
China's Company Law mainly regulates two types of business entities: limited liability companies and companies limited by shares.
Companies
Limited liability company
A limited liability company may be set up by between one and 50 shareholders. The words
"limited liability company" or "limited company" must be included in the name of the company. A limited liability
company's constitutional documents are its articles of association. A minimum capital of RMB 30,000 is required for the establishment of a limited liability company. Capital contributions may be made in the form of cash and non-currency assets that can be appraised and denominated in currency and are legally transferable, such as in kind contributions, industrial property or land use rights.
A limited liability company is liable for its debts to the extent of its assets, while the liability of its shareholders is limited to the amount of their respective capital contributions.
The highest decision-making authority in a limited liability company is vested in the
shareholders' meeting. A limited liability company may choose to establish a board of directors and a supervisory committee.
Company limited by shares
A company limited by shares may be established by promotion or share offer. A number of promoters between two and 200 is permitted. If the company is established by promotion, the promoters must hold all of the shares. If it is established by a share offer, the promoters must subscribe to at least 35% of the shares and offer the rest to the public. Establishment by share offer is subject to the approval of
China's securities regulator. The minimum capital of a company limited by shares is RMB 5 million.
A company limited by shares is liable for its debts to the extent of its assets, while the liability of its shareholders is limited to the amount of their respective shareholdings.
Foreign-invested business entities
Representative office
Many foreign enterprises have established representative offices in China as the first step of their market entry strategy, as they are fairly easy and inexpensive to establish. A representative office is not an independent legal entity and does not have its own capital.
A foreign enterprise can engage in a limited range of activities through a representative office. In general, a representative office is only permitted to engage in indirect business operations in China. It may represent the foreign enterprise in carrying on activities such as business liaison, product and service introduction, trade name promotion, market surveys and research, and warranty and after-sale service management. A representative office is not permitted to engage in direct business activities.
A representative office cannot employ Chinese employees directly. Local employees must be employed through a designated Chinese labour service agency. A representative office must have a chief representative, who may be foreign or local.
Branch office
Currently, only foreign companies in a limited number of business sectors, such as banking and insurance, have been permitted to set up branches in China. Although the Company Law authorises the establishment of branch offices by foreign companies generally, the competent authorities have yet to issue the necessary implementing rules that would allow a wider range of foreign companies to set up branches in China.
A branch of a foreign company does not have independent Chinese legal person status. As a result, the foreign company is directly liable for the obligations undertaken by the branch office.
Equity joint venture
An equity joint venture (EJV) is a corporate legal entity established by two or more foreign and Chinese parties. An EJV is a limited liability company with its own registered capital and a legal identity distinct from its investors. As an independent legal person, an EJV is capable of contracting and bearing liability on its own behalf.
The business scope of a joint venture must be clearly set out in the project documentation. An EJV may only conduct business within its approved business scope and the approval of the original approval authority is required to amend an
EJV's business scope. Each EJV will have registered capital that represents the equity investment contributed by the parties to the joint venture. The parties' contributions to the registered capital may be made in cash or in kind pursuant to a contribution schedule approved by the Chinese examination and approval authorities.
Foreign investment must normally account for at least 25% of the registered capital of an EJV. However, foreign investment in an EJV may be less than 25% of the registered capital provided that it is established in accordance with the mandatory establishment procedures. An EJV with less than 25% foreign investment will not be eligible to benefit from the preferential policies generally applicable to a foreign investment enterprise
(FIE).
The highest authority of an EJV is its board of directors. The board of directors must have a chairman and a vice-chairman, one of whom is generally appointed by the Chinese party and the other by the foreign party.
Cooperative joint venture
A cooperative joint venture (CJV) is a business arrangement established by two or more foreign and Chinese parties pursuant to a cooperation agreement. There are two types of CJVs: those that have legal person status (a separate corporate existence) and those without legal person status. Legal person status is the norm and there are special requirements that apply to CJVs that do not have legal person status. CJVs with legal person status are limited liability companies. Limited liability does not apply to CJVs without legal person status.
Limited liability CJVs share many characteristics with EJVs and, in particular, they have a registered capital and the liability of the joint venture partners is limited to their respective contributions to the registered capital. A feature that distinguishes CJVs from EJVs, however, is that the parties may agree to a profit and loss sharing arrangement that does not correspond with the ratio of the parties' capital contributions (as is required in the case of EJVs). Greater flexibility is also allowed in the form of permitted capital contributions and the distribution of assets in the event of dissolution.
As in the case of EJVs, foreign investment in a CJV must normally account for at least 25% of its registered capital. If foreign investment accounts for less than 25% of the registered capital, the CJV will not be eligible for the preferential treatments generally applicable to
FIEs.
A CJV may be managed by a board of directors or a joint management body. A CJV without legal person status must be managed by a joint management body. A
CJV's board of directors or joint management body must be composed of at least three members.
Wholly foreign-owned enterprise
A wholly foreign-owned enterprise (WFOE) is an investment vehicle established and operated by a foreign investor without the participation of a Chinese partner. WFOEs are prohibited in certain industry sectors. While more industry sectors are being opened to wholly foreign-owned investment following China's accession to the World Trade Organisation
(WTO), certain sectors will remain off limits to this type of investment for the foreseeable future.
A WFOE is usually a limited liability company although, subject to approval, other liability structures are theoretically permitted. A WFOE with limited liability status has its own registered capital and a legal identity distinct from its foreign investor. It is an independent legal person capable of contracting and bearing liability on its own behalf. The foreign investor may make its capital contributions to the WFOE in cash or in kind.
Company limited by shares with foreign investment
The establishment of a company limited by shares with foreign investment (CLSFI) must comply with the industrial policies and requirements generally applicable to foreign investment in China. A CLSFI may be formed by way of promotion or share float. If established by promotion, more than half of the promoters must be domiciled in China and at least one of the promoters must be a foreign shareholder. When the share float method is adopted, at least one of the promoters must have been profitable in the three years preceding the share float and the promoters must subscribe for at least 35% of the shares. The required minimum registered capital of a CLSFI is RMB 30 million, which is six times higher than that for a domestic company limited by shares. Foreign investment must represent at least 25% of the registered capital of a
CLSFI.
Existing EJVs, CJVs and WFOEs may apply to their original approval authority to convert into a CLSFI provided that they were profitable in the three years prior to the application. The original investors shall act as the promoters of the CLSFI, although they may be joined by new promoters. The application must also be approved by the Ministry of Commerce.
A CLSFI may be listed on stock exchanges in China as well on overseas stock exchanges. Such listings are subject to certain requirements in terms of capitalisation, business performance and number of shareholders.
Holding company
Holding companies are sometimes also referred to as "investment" or "umbrella" companies. They are FIEs established for the specific purpose of holding the equity interests in the various FIEs established by a single foreign investor in China. A holding company may be wholly foreign-owned or a joint venture with a domestic investor. The requirements in terms of capital contribution and existing investments for setting up a holding company are relatively high. There are two ways in which an overseas investor can qualify to establish a holding company. Under the first method, the investor must have a total capitalisation of at least US$400 million, and have contributed a minimum of US$10 million to the registered capital of its subsidiaries in China. Alternatively, the investor must demonstrate that it has established at least 10 FIEs in China with an aggregate paid-up registered capital of US$30 million or more.
A holding company may engage in a wide range of activities. In addition to investing in areas open to foreign investment, a holding company may provide enterprises that it has invested in
(invested enterprises) with a wide range of services relating to foreign exchange balancing, procurement of machinery and equipment, loan applications, market information, investment advice, technical support, staff training and human resource management. A holding company may also establish research and development centres and provide financial support to its invested enterprises.
Provided that a holding company satisfies certain requirements, it may provide its invested enterprises with specified additional services such as acting as a distributor for their products on Chinese and overseas markets, transportation, warehousing, leasing of machinery and office equipment, etc. It may also provide after-sales services, carry out systems integration of products manufactured by its invested enterprises and sell (but not retail) inside China the products it has imported from its overseas parent.
A holding company satisfying specified criteria may be recognised as the regional headquarters of a multinational company
(regional headquarters). Such a regional headquarters may engage in an even wider range of services including import and wholesale in China of the products of the multinational company and its affiliates, import of raw materials, components and spare parts necessary for the provision of maintenance services for the products of its invested enterprises and the multinational company, entrust other enterprises to manufacture or process its products or the products of the multinational company and sell the same on the domestic and overseas market etc.
Holding companies should charge for services rendered to their subsidiaries on an
arm's length basis and are taxed accordingly. They are prohibited from offsetting investment costs or losses from their pre-tax income or allocating these costs to their subsidiaries.
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BUSINESS
ENVIRONMENT
General
On 11 December 2001, China joined the WTO following negotiations which lasted over a decade. In order to become a WTO member, China agreed to fundamentally change the organisation of its economy.
China's commitments are contained in the Protocol on the Accession of the
People's Republic of China (Protocol) and relate, amongst others, to the removal of various restrictions on foreign direct investment, the lowering and removal of tariff and non-tariff barriers as well as an improvement of the transparency of the legal structure for investment and business. In addition, by becoming a member, China is also required to comply with the general framework of the WTO, which includes agreements on intellectual property protection, anti-dumping mechanisms, subsidies, trade-related investment measures (such as local content requirements, foreign exchange balancing requirements, etc) and a mechanism for the resolution of trade disputes.
To implement the Protocol, China is gradually removing or reducing foreign investment restrictions in most industrial areas. The Protocol contains detailed schedules for the opening up of various industry and service sectors to foreign investment. In some economic sectors, foreign investors will be permitted ultimately to establish WFOEs, thus doing away with the need for a Chinese partner. In other sectors, they will still be required to have a Chinese party but will be allowed to have an increased investment share.
China has removed or reduced a number of non-tariff measures which restrict trade, such as quotas, import licensing requirements, certification requirements, health and quarantine measures and technical standards. In addition, China is implementing a schedule of progressive reduction of the import tariffs on many imports.
China has committed to making the legal environment for foreign investment and trade more transparent. Since December 2001, the country has adopted a wide range of new and amended laws compatible with its WTO membership. In line with its transparency obligations, China has established a WTO Notification Inquiry Centre to which foreign parties may address inquiries about WTO and trade-related issues.
Intellectual property
Trade marks
The Trade Mark Law and its Implementing Regulations govern the trade mark application procedure and the protection of registered trade marks. Both trade marks and service marks may be registered in China. Trade mark registrations are the primary means for protecting trade mark rights in China. With the exception of well-known trade marks, China does not recognise trade mark rights acquired through use. The first person to register a trade mark in China is regarded as the owner of that mark. Registration of trade marks is therefore essential to secure protection.
The trade mark registration procedure includes examination as to formality and for prior conflicting marks. The procedure is characterised by short deadlines and the lack of opportunities for formal negotiations with the Trade Mark Office as to the terms on which a mark may be accepted for registration. There are also strict rules regarding the form in which registered marks may be used. Matters such as the selection, use and registration of Chinese character equivalents to marks in Roman letters must also be considered when registering a trade mark in China.
Patents and designs
Under China's Patent Law, three kinds of patents are available, namely invention patents, utility model patents and design patents. The three requirements for granting a patent are novelty, utility and inventiveness. A granted invention and utility model patent is infringed by anyone who, without the consent of the patent owner, makes, uses, offers for sale or sells products directly obtained through the patented process for production or business purposes. An owner of any kind of patent right also has the right to prevent any other party from importing, without its authorisation, the patented products or product obtained through the patented process for production or business purposes. Similarly, a granted design patent is infringed by anyone who, without the consent of the design owner, makes or sells products incorporating the patented design for production or business purposes.
Copyright
The Copyright Law and its Implementing Regulations govern the protection of copyright works. Works include written literary works, musical, dramatic, folk art and dance works, artistic and photographic works, film, television and video works, engineering design and product design blueprints and maps. Registration is not, in general, necessary in order to acquire copyright. Registration of computer software is separately regulated under the
Computer Software Protection Rules. Acts of copyright infringement include copying and publishing a copyright work without the consent of the copyright owner, falsely claiming authorship of a copyright work and adapting, translating, annotating or editing a copyright work without the consent of the copyright owner.
Enforcement
The intellectual property (IP) regime in the PRC is subject to unique and specialised considerations, given its reliance on administrative enforcement procedures. Dedicated administrative authorities have power under the relevant IP laws to control the misuse of specific IP rights. Under the PRC
Trade Mark Law, the relevant Administrative Authority is the Administrative Authority for Industry and Commerce
(AIC). The AIC also has power to enforce the PRC Anti-Unfair Competition
Law, which bans certain types of intellectual property infringement. The Administrative Authority for Patent Affairs is the relevant authority under the PRC
Patent Law and the National Copyright Administration is the appropriate authority under the PRC
Copyright Law.
Although the ultimate forum for upholding IP rights in the PRC is the
People's Court (IP Division), the most efficient and cost effective way of enforcing IP rights in the PRC is often by way of administrative enforcement action. Administrative enforcement actions can be taken very quickly, sometimes within days of infringing products being found, and can be disposed of completely within 2/3 months. If infringing products are found they can be seized and destroyed. Fines are imposed upon infringers and they may be ordered to pay compensation. In serious cases, if the quantity of infringing products is large, criminal proceedings may be instituted against the infringer, thereby increasing the deterrent effect on others.
Franchising regulations
PRC domestic and foreign franchises are governed by the Measures for the Administration of Commercial Franchise Operations
(Franchise Measures). For foreign franchises, the Franchise Measures operate in conjunction with the Measures for the Administration of Foreign Investment in the Commercial Sector
(Commercial Enterprise Measures).
The Franchise Measures set out a number of stringent requirements which a franchisor and franchisee must meet before they may enter into franchise agreements in the PRC. In particular, a franchisor must, either itself or through a subsidiary or its holding company, have operated two shops for at least one year before it may lawfully grant franchises. The effect of this is to prohibit franchises from coming directly from overseas without establishing an operations company in China.
The Commercial Enterprise Measures govern the establishment with foreign investment of enterprises which engage in distribution activities (including wholesale, retail and franchising) in China. The Commercial Enterprise Measures require that companies engaging in distribution activities satisfy certain capital investment requirements and approval requirements and impose restrictions on the involvement of FIEs in the distribution of certain types of goods.
