Registering a Wholly Owned Foreign Enterprise
The common types of foreign investment in China are: Sino-foreign equity joint venture, Sino-foreign joint venture and wholly foreign owned enterprise. Other types of investment(s) include: Establishment of foreign investment Co., Ltd, an investment company, Sino-foreign cooperative development, BOT, etc. The following is a brief introduction to the different registration options open to foreign enterprises.
A foreign-invested company is a special type of company which is to be prevailled on enterprises with foreign investment laws ; for those legal areas not covered, the foreign-invested enterprises are subject to the "Company Law".
Types of registration available to foreign enterprises
I - Sino-Foreign Joint Venture
Sino-foreign joint ventures are also known as equity joint ventures. They are composed of foreign companies, enterprises and other economic organizations or individuals alongside Chinese companies, enterprises or other economic organizations formed in accordance with the "PRC Foreign Joint Ventures Law" (and it’s implementing rules for the purpose of jointly investing in China's enterprises). Its characteristics are: joint investment, joint operations, according to their proportion of total risk investment, profits and losses.
Sino-foreign joint venture is in form of a limited liability company with Chinese legal person status.
Generally, a foreign investors’ share of registered capital investment ratio is not less than 25%. Joint investor(s) can contribute in cash form or in the form of buildings, plant, machinery, equipment and other materials, industrial property, proprietary technology, or as the right to use a premises. A share of the profits of foreign investors and other legitimate rights and interests can be remitted abroad, or in form of re-investment.
II - Sino-Foreign Co-operative Venture
A Sino-foreign co-operative venture is also known as contractual joint venture. It composes of foreign companies, enterprises and other economic organizations or individuals with Chinese companies, enterprises or other economic organizations in China formed in accordance with the "PRC Sino-foreign Joint Venture Law" (and its implementing rules), and in accordance with the cooperation conditions provided by foreign enterprises.
Sino-joint venture shall be provided for by all parties in accordance with their respective conditions, rights, obligations, income distribution or risk debt commitments, business management, the disposition of the property after the expiration of such mutual agreement, and the contract expressly agreed on in the enterprise. Sino-foreign joint ventures are generally held by foreign partners which provide all or most of the funds, technology and key equipment. The Anglo-side is usually responsible for providing the land use rights, the existing plant facility or part of the funds and so on.
Partners of the Sino-foreign joint venture should clearly state the expiry, collaboration, cooperation, all the fixed assets of enterprises owned by the Chinese collaborators, all unpaid foreign cooperators or similar terms in the contract. Companies can apply to have an advanced recovery of its investment in the following ways:-
- (A) In accordance with the terms of investment or conditions for cooperation to be allocated, or based on the expanded cooperation in the contract ratio of income distribution;
- (B) By the finance and tax authorities in accordance with relevant provisions of the tax examination and approval of foreign partners in the cooperative enterprise income tax before;
- (C) The finance and tax authorities and the examination and approval authorities of the other investment recovery methods.
Foreign partners should act in accordance with the above provisions. During the period of advance recovery of investment, the Chinese and foreign parties shall, in accordance with relevant laws and regulations and the respective cooperative enterprise contract, be liable for the debts of the enterprise.
A joint venture can choose whether or not to possess a legal entity. Joint ventures with an legal entity become limited liability companies. Unless stipulated otherwise in the cooperative enterprise contract, all parties are liable for its investment amount or subject to cooperation conditions to the extent the cooperative enterprise. The assets of a cooperative enterprise are liable for its debts.
The Foreign Trade Rules,(issued in 2002), document No. 575 states that it temporarily prohibits natural persons, in the territory of China, to newly establish or in a way of acquire for foreign companies, enterprises, other economic organizations or individuals to set up foreign-invested enterprises.
III – Wholly Foreign-Owned Enterprises
WOFE refers to foreign companies, enterprises and other economic organizations or individuals which are formed in accordance with the "PRC Foreign Law” in China by foreign investors to invest all the capital of an enterprise. This definition excludes branches of foreign enterprises and other economic organizations in the Chinese territory. Wholly Foreign Owned Enterprises are registered on condition that they comply with the applicable PRC laws concerning foreign legal entities prescribed. It can be in the form of a limited liability company or, if approved, in other form of liability entity. For a limited liability company, the corporate responsibility of foreign investors is limited to the amount of their subscribed capital contribution. As for the responsibility of foreign investors for other forms of foreign funded enterprises, it depends on the applicable PRC laws and regulations.
IV - The Foreign Investment Co., Ltd.
Foreign Investment Co., Ltd. is where foreign companies, enterprises and other economic organizations or individuals with Chinese companies, enterprises or other economic organizations, form an enterprise in China. This structure is formed in accordance with the principle of equality and mutual benefit, through subscribing a certain percentage of the shares. Foreign investors may also be able to acquire the company’s A shares in accordance with relevant laws and regulations of China's A-share listed companies and long-term investments in strategic acquisitions.
All companies with foreign investment capital may have a shares of equal value. Shareholders who undertake to subscribe for shares of the company, are liable for its debts. This is a form of foreign-invested enterprise and is subject to the relevant provisions of national laws and regulations for foreign investment enterprises.
V - The Investment Company
The investment company is the enterprise which foreign investors form in way of wholly-owned or joint venture with Chinese investors by way of direct investment. Its organizational form is a limited liability company. Companies which apply for the establishment of an investment company must have favorable credit and well-organized economic strength. The investor’s total assets must not be less than four hundred million U.S. dollars a year before the application is made, and at the time when the investor establishes the foreign-invested enterprises, the actual payment of the registered capital should be over ten million U.S. dollars; or the foreign investors should have a good credit and have the necessary economic strength. The investor in China needs to establish ten or more foreign-invested enterprises, with an actual payment of the registered capital contribution over thirty million U.S. dollars.
In order to encourage multinational corporations to carry out a series of investment activities in China, there is a wider operating scope of businesses for those investment companies approved by the Chinese government than those foreign-invested enterprises. Currently, investment companies are encouraged and allowed to engage and invest in industry, agriculture, infrastructure, energy and other areas.
VI - Venture Capital Enterprises
Venture Capital, primarily refers to those who invest in the equity of non-listed high-tech enterprises (hereinafter referred to “Invested Enterprise”) and to provide management services to the entrepreneurs in order to obtain capital gains. Foreign-invested venture capital enterprises (hereinafter referred to “Venture Capital Companies”) means the foreign enterprises, or those enterprises formed by foreign investors under the PRC law, companies, enterprises or other economic organizations (hereinafter referred to as “Chinese investors”). According to the "Foreign-Invested Venture Capital Enterprises Regulations" in China, these form for the purposes of setting up venture capital for business activities of foreign-invested enterprises. Venture Capital Companies can be in the form of a legal entity. It can also be in the form of a corporate organization. Investors of those non-legal entities (hereinafter referred to as “Unincorporated Venture Capital Enterprise”) are jointly liable for its debts. Investors can also state in the contract the amount they invest in the Unincorporated Venture Capital Enterprise, should its assets be insufficient to settle the debts. Other investors are limited to the amount of capital contribution they make.
Usually, the number of investors is between 2 to 50 people. At least one of them should have a starting investment in the main business and meet other requirements essential for investors. The minimum capital requirement is USD 10 million. The minimum capital requirement for those Venture Capital Enterprises is USD 5,000,000. In addition to the main investor, other investors should contribute no less than USD 1 million. Foreign investors can freely convert currency in their investments. Chinese investors are to invest in RMB.
VII - Sino-Foreign Cooperative for Development
Sino-Foreign Cooperative for Development refers to those Chinese and foreign companies entering into contracts to develop cooperation for offshore and onshore oil, mineral resources exploration. Currently, it is the most common use of economic cooperation in the field of natural resources.
The biggest feature is that: high-risk, high investment, high returns. Cooperative development is generally divided into three stages, namely the exploration, development and production phases.
VIII - BOT
The method of BOT means investors in the country they invest, undertake industrial projects or infrastructure projects. They are responsible for the construction, operation, maintenance and transfer. Investors operate within a fixed period of time and are allowed to be recovered within that period. The investment, operation, maintenance fees and other charges, after the expiry of the prescribed period, will be assigned to the government. Usually, BOT projects formed in China are highways, power plants and sewage treatment plants.
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