Chinese laws for commercial activities in China

An Introduction to Chinese laws governing the subjects conducting commercial activities in China

Investors who are going to set up enterprises always pay attention to their organizational forms, since forms are closely related to the decision-making process, taxation and risk avoidance afterwards. An increasing number of foreigners have been planning to or have invested in China since the adoption of reform and opening up policy. The organizational forms of enterprises that Chinese investors shall set up vary from those foreigners shall do. This article will analyze the differences through comparison, so as to facilitate you to carry out investment activities.

I. Organizational forms of enterprises taken by Chinese investors

In China, the most common organizational forms of enterprises include sole proprietorship enterprise, partnership enterprise and company system enterprise according to the legal standard. Companies are divided into oneperson limited liability companies, limited liability companies and joint stock limited companies.

1. Sole proprietorship

A sole proprietorship enterprise is an enterprise that is invested and owned, operated and controlled by individuals. Individuals

enjoy all profits as well as take all risks. It is the oldest and simplest organizational form. Sole proprietorships are mainly prevalent in retail, handicrafts, agriculture, forestry, fisheries, services and family workshops.

2. Partnership

Partnership refers to a profitmaking organization into which the partners enter by concluding a partnership agreement that stipulates that they jointly contribute capital, operate, share profits, take risks, and bear unlimited several and joint liabilities for the debts of the enterprises. Partnerships include general partnerships and limited partnerships.

3. Company

A Company refers to a legal person that is established by investors (or shareholders). A company operates independently and is responsible for its own profits and losses. According to Chinese Company Law, its organizational forms include limited liability companies and joint stock limited companies. A one-person limited liability company is a company with only one natural person shareholder or one legal person shareholder. A limited liability company shall be set up by more than one but no more than fifty shareholders, each of whom shall bear limited liability

to the company within the amount of capital contribution subscribed by them. The company, as the legal person, shall bear full liability for the debts with all its assets. A joint stock limited company refers to a legal person established according to law, in which all its capital is raised through the issuance of shares and is divided into equal shares.

II. Organizational forms of enterprises taken by foreign investors

Foreign Investment Law of the People’s Republic of China (“Foreign Investment Law”) was passed on March 15, 2019. The law will take effect on January 1, 2020, when the Law of The People’s Republic of China on Chinese-Foreign Equity Joint Ventures, Law of the People’s Republic of China on Foreign-Funded Enterprises and Law of the People’s Republic of China on Chinese-Foreign Contractual Joint Ventures (“Three Laws on Foreign Investment”) will be repealed simultaneously. The existing foreign-invested enterprises established in accordance with the provisions of the Three Laws on Foreign Investment will gradually apply to Company Law of the People’s Republic of China, Company Law of the People’s Republic of China, etc. For foreign investors, what needs to be considered is the transition of organizational form formerly established according to the Three Laws on Foreign Investment after the implementation of Foreign Investment Law. Article 41 of the new law provides for a transitional period of five years, that is, existing foreign-invested enterprises may continue to retain their original organizational form for five years after the implementation of the new law. After five years, the new law should definitely apply to the forms companies are organized.

1. Before the implementation of Foreign Investment Law

As you have read above, before the promulgation of Foreign Investment Law, the organizational form of foreign-invested enterprises was mainly stipulated in the Three Laws on Foreign Investment and their related rules. According to the law, the legal organizational form of foreign investment enterprise is mainly the limited liability company. In addition, the partnership enterprise is also included. It should be noted that article 47 of the Law on Sole Proprietorship Enterprises provides that the foreign investors cannot set up sole proprietorship enterprises. Specifically, foreign investors can set up the following types of enterprises in China:

(1) Chinese-foreign equity joint ventures

Chinese-foreign equity joint ventures are also called equity joint ventures. It is an enterprise jointly invested and established in China by foreign companies, enterprises and other economic organizations or individuals together with Chinese companies, enterprises or other economic organizations. Chinese-foreign equity joint ventures shall be organized as a limited liability company with the status of Chinese legal persons. Foreign investors shall generally account for no less than 25 per cent of the registered capital. The joint venture may make capital contributions in cash or in the form of buildings, workshops, industrial property rights, proprietary technology, etc. Foreign investors may remit their profits and other lawful rights and interests abroad or reinvest them in China.

(2) Chinese-foreign contractual joint ventures

Chinese-foreign contractual joint ventures are also called contractual joint ventures. They are enterprises jointly organized by foreign companies, enterprises or other economic organizations or individuals together with Chinese companies, enterprises or other economic organizations within Chinese territory. Parties shall explicitly stipulate on the conditions, rights, obligations, income distribution or risks, the assumption of debts, the management mode of the enterprise and the disposal of property after the expiration of the term in the joint ventures contract.

(3) Foreign-funded ventures

A foreign-funded venture refers to an enterprise established within the territory of China by a foreign company, enterprise, other economic organization or individual in accordance with the relevant Chinese laws and with all its capital invested by a foreign investor. A foreign-funded venture shall be organized as a limited liability company, excluding the branches of foreign enterprises and other economic organizations in China.

(4) Foreign investment co., LTD

A foreign investment co., LTD refers to a company jointly established in China by foreign companies, enterprises, other economic organizations or individuals and Chinese companies, enterprises or other economic organizations in accordance with the principle of equality and mutual benefit by purchasing a certain proportion of the shares.

(5) Investment company

An investment company refers to a company established by a foreign investor in China in the form of sole proprietorship or joint venture with a Chinese investor that engages in direct investment in the form of a limited liability company. Foreign investors applying to establish investment companies must have good credit standing, considerable economic strength, and has set up a certain amount of foreign investment in China, and its actual contribution to the registered capital is not less than 30 million us dollars. Investment companies established with the approval of the Chinese

government is generally given a wider scope of operations of enterprises with foreign investment, to encourage multinational companies to carry out series of investment activities. At present, investment companies can invest in industries, agriculture, infrastructure, energy and other fields where the state encourages and allows foreign investment.

(6) Sino-foreign cooperative development

Sino-foreign cooperative development refers to the risk of contracts entered by Chinese companies and foreign companies, the offshore and onshore oil and mineral resources exploration and development of cooperation. It is a kind of economic cooperation widely used in the field of natural resources in the world at present. Cooperative development is generally divided into three stages, namely exploration, development and production.

(7) Build-Operate-Transfer (BOT)

BOT means that the investor undertakes an established industrial project or infrastructure project in the country of investment and is responsible for the construction, operation, maintenance and transfer of the project. The investor operates the facility for a fixed period and is allowed to recover the investment, operation, maintenance and other costs of the project within that period and then transfer the project to the government of the project party upon expiration of the prescribed period. BOT is set up in the form of project companies in China, and it has been tried out in the fields of expressway, power plant, sewage treatment and so on.

2. After the implementation of Foreign Investment Law

After the implementation of Foreign Investment Law on January 1, 2020, Three Laws on Foreign Investment will be abolished and replaced. According to article 2, paragraph 3 of the new law, there are two types of enterprises that you can set up in China in the future:

(1) Foreign-invested enterprises in which all investments are made by foreign investors

Such foreign-invested enterprises correspond to “foreign-funded ventures” in the old law, including one-person company with foreign investment and foreign joint venture limited liability companies. There is no Chinese investors of its investors.

(2) Foreign-invested enterprises jointly invested by foreign investors and Chinese investors

Such foreign-invested enterprises correspond to Chinese-foreign equity joint ventures, Chineseforeign contractual joint ventures, foreign investment co., LTD and foreign-invested partnership in the old law. As discussed above, the innovation of Foreign Investment Law compared with the current law lies in the simplification and expansion of the form of foreigninvested enterprises at the “legal” level. Article 31 has clarified the organization form of enterprises with foreign investment, organization and activity rule, applying to the company law, the partnership enterprise law and other laws. Before the promulgation of Foreign Investment Law, article 217 of Chinese Company Law had incorporated the organizational form of foreign-invested enterprises into the scope of the Company Law adjustment. At present, article 30 of Foreign Investment Law specifies that the organizational form of foreign-invested enterprises shall be consistent with Company Law. Therefore, after the implementation of Foreign Investment Law, the legal entity form of limited liability company (including one-person company) and joint stock limited company, as well as the partnership of non-legal person organization of foreign investment enterprises have been confirmed at the legal level. Thus it expands the scope of the corporate organization form of foreign investment enterprises, and clarifies the legal source basis for the interim provisions on the establishment of foreign investment joint stock limited companies.

III. Conclusion

In the comparison of the old and new regulations, we can feel that Foreign Investment Law has made great breakthrough in the form of foreign-invested enterprises, reflecting the changes in the legislative purposes of China. At present, many implementation details of the foreign investment are yet to be supplemented by supporting regulations. “The Chinese government has initiated the formulation of supporting regulations and rules to refine the main legal systems identified in Foreign Investment Law and formulate operational rules,” premier of the state council Li Keqiang said in a keynote speech at Boao Forum for Asia, on March 28, 2009. We look forward to the innovation and breakthrough of relevant Chinese laws to further facilitate your investment in China.

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