The purpose of establishing China subsidiary in China.
Enterprises interested in developing long-term business in China should consider setting up subsidiaries in its territory. Although foreign companies can sign some commercial contracts with China enterprises, such as sales contracts, licensing agreements and distribution agreements, they cannot directly conduct business in China without an approved business license. Operating through subsidiaries is at least beneficial-and sometimes necessary-to overcome some legal or commercial restrictions against foreign companies.
Some foreign companies may have established permanent offices in China. This kind of office acts as a liaison office within the parent company. However, these representative offices cannot directly conduct business in China, because according to the laws of China, the resident offices are not independent legal persons and do not bear independent civil liabilities to third parties, so they have no right to conduct major commercial activities, such as signing commercial contracts with third parties. In addition, the office cannot directly employ local staff in China. However, there are exceptions to these restrictions. For example, offices can sign non-operating contracts such as office space lease contracts.
Enterprises that intend to invest directly in China, employ local employees, conduct research and development, manufacture products and directly sell their products or services in China should consider setting up a subsidiary in China.
Form of subsidiary body
The term "subsidiary in China" as mentioned in this article refers to an entity whose at least one shareholder is a foreign entity established outside China or an individual who is not a China citizen ("foreign investor"). China usually refers to such subsidiaries as "foreign-invested enterprises". The shareholding ratio of foreign investors in foreign-invested enterprises is generally not less than 25%.
If all shareholders of a company are registered in China or citizens of China, the company is a domestic-funded enterprise rather than a foreign-invested enterprise. Although both foreign-invested enterprises and domestic-funded enterprises are under the jurisdiction of China's Company Law, foreign-invested enterprises are also under the jurisdiction of relevant laws specially formulated for foreign-invested enterprises, so in fact, foreign-invested enterprises follow laws and regulations attached to or different from domestic-funded enterprises in many aspects.
In some business areas that restrict foreign investors from entering, such as telecommunications services and network content providers, even if foreign-invested enterprises are allowed to enter, there are still many thresholds, such as setting a ceiling on the shares held by foreign investors (which means that foreign investors must establish joint ventures with China), attaching requirements to their investor qualifications, and/or the approval procedures for setting up foreign-invested enterprises are usually longer. In this case, foreign investors usually do not set up foreign-invested enterprises, but let individuals or entities associated with China set up purely domestic enterprises, or set up purely domestic enterprises in the above way while allowing or encouraging foreign-invested enterprises in the industry. This structure usually establishes relevant contractual arrangements between foreign investors, their unrestricted foreign-invested enterprises and domestic-funded enterprises in China. This flexible contractual arrangement with relevant domestic enterprises can help foreign investors achieve their business goals faster and more effectively.
Foreign-invested enterprises have the following four forms of establishment:
1. Wholly foreign-owned enterprises (wholly foreign-owned enterprises);
2. Sino-foreign joint ventures (joint ventures);
3. Chinese-foreign cooperative enterprises (cooperative enterprises); and
4. Sino-foreign joint-stock companies (joint-stock companies).
China said that the first three types of enterprises are called limited liability companies, although the shareholders of joint-stock companies also bear limited liability according to their subscribed shares. Joint-stock companies require foreign investors to hold more than 25% shares, which is not as common as the other three forms. Foreign investors tend to choose the first three forms of establishment. The main reason is that the establishment of foreign-invested enterprises in the form of joint-stock companies requires the approval of the Ministry of Commerce, which takes a long time, and the minimum investment of joint-stock companies is higher than other forms. In addition, the shares held by the promoters of the joint venture company shall not be transferred within three years after the establishment of the company. Therefore, unless China's subsidiary intends to be listed on the China stock market in the near future, most foreign investors will choose to set up wholly-owned enterprises, joint ventures or cooperative enterprises.
Foreign investors should choose between wholly-owned enterprises and joint ventures and cooperative enterprises according to their own business models and conditions, unless the industry in which foreign-invested enterprises are located restricts the form of establishing wholly-owned enterprises. At present, if the industry allows wholly-owned enterprises, foreign investors may prefer to choose wholly-owned enterprises. If foreign investors especially need to rely on local support in land, factories, equipment and local sales and marketing channels, and China can also assist foreign-invested enterprises in these areas, foreign investors can also consider joint ventures and cooperative structures. However, since many foreign investors are already familiar with the market and business environment in China, if they can get local support by hiring local competent employees, they can also take the form of sole proprietorship. In addition, China government departments have become more and more accustomed to direct communication with foreign companies. For the above reasons, wholly-owned enterprises that rely on local resources and channels may not necessarily have disadvantages. Moreover, the parent company of a sole proprietorship enterprise is more flexible in controlling the sole proprietorship enterprise, controlling its intellectual property rights, and making contractual arrangements with the sole proprietorship enterprise and withdrawing from the sole proprietorship enterprise.
In addition to newly established foreign-invested enterprises, foreign investors can also set up subsidiaries by acquiring existing foreign-invested enterprises or domestic-funded enterprises, and the acquired enterprises will become wholly-owned enterprises or joint ventures and cooperative enterprises.
The establishment of shareholders and the location of subsidiaries
From the perspective of China law, the examination and approval procedures and treatment of foreign-invested enterprises in China are not directly related to the nationality of foreign investors or the country of company registration. No matter where foreign investors are established-in Cayman or in the United States, they need to go through the same examination and approval procedures, abide by the same laws and regulations and enjoy the same treatment. Investors from Hongkong, Macau and Taiwan Province Province who invest and set up enterprises in Chinese mainland are also regarded as foreign investors and enjoy the treatment of foreign investors. Of course, depending on whether China has signed a bilateral tax treaty with the investor's country, different countries have different tax impacts on foreign investors. In addition, when determining the founder and location of the subsidiary, foreign investors must make plans for future withdrawal. Therefore, foreign investors must first determine their overseas institutions and plan the impact of the laws of the jurisdiction on their taxes.
Qualified talent pool is one of the main factors to decide where to set up a subsidiary. Universities are suitable for high-tech companies to seek qualified R&D talents. Therefore, China's two largest cities, Beijing and Shanghai, naturally become gathering places for high-tech companies. Such as Jiangsu, Zhejiang, Sichuan, Guangdong and other developed areas also have a large number of high-tech talents. Similarly, production subsidiaries can consider establishing factories and distribution institutions in labor-intensive areas.
In China, it is very important to maintain relations with local governments and enterprises. Therefore, many investors will look for a place where they can often communicate closely with local governments and enterprises, or prefer to set up subsidiaries in areas where they can hire competent managers and good local networks. Good relations now are not necessarily black-box operations, but communication and communication. A good relationship is conducive to the rapid and smooth operation of subsidiaries.
Many cities and regions have established industrial science parks and offered various concessions to attract investors to invest in them. Tax preferences, mainly income tax and import tax, depend on the nature of the park and foreign-invested enterprises. Except for local taxes and fees, all major foreign-funded enterprises pay taxes according to national standards. Investors need to ensure that the park they choose should be officially recognized by the state. As for which city to choose, foreign-funded enterprises need to examine many other important factors, such as human resources, local support, relationships, transportation, infrastructure and so on.
Establishment procedures and approximate costs
Enterprises with foreign investment must obtain the approval of the Ministry of Commerce or the competent commercial departments of provinces and cities (collectively referred to as the "examination and approval authorities"). The examination and approval authority shall determine the examination and approval authority of foreign-invested enterprises according to the total investment of foreign-invested enterprises and the nature of the industries to be engaged in. Because the approval of the central government takes a long time, foreign investors prefer that their subsidiaries be approved by local governments. At present, most foreign-invested enterprises can be examined and approved by the relevant departments of provinces and cities. Without specific legal restrictions, foreign-invested enterprises can be approved and registered within one month after all the required documents are prepared and submitted to the local examination and approval authorities.
Once approved, a foreign-invested enterprise shall register with the State Administration for Industry and Commerce or the corresponding departments at the provincial and municipal levels (collectively referred to as the "registration authority"). The registration authority shall issue a business license to a foreign-invested enterprise, and the foreign-invested enterprise shall be deemed to be established according to law from the date of issuance.
China law divides foreign-invested industries into the following four categories: 1) encouragement category; 2) Allow; 3) restrictions; Or 4) prohibition. After joining the WTO, China relaxed the restrictions on foreign-invested industries.
The main expenses for establishing a foreign-invested enterprise include registration fees, announcement fees and registered capital. According to the registered capital, the registration fee and announcement fee collected by the registration authority total about 1000 to 3,000 USD. The more foreign-invested enterprises invest, the higher the cost, but the total cost does not exceed 8 thousand dollars.
Generally speaking, for foreign investors, the biggest expenditure is registered capital (which also determines the registration fee and announcement fee collected by the government). The laws of China require shareholders to pay their capital contribution in cash or in kind. All shareholders of a foreign-invested enterprise shall, according to the establishment documents, subscribe for the registered capital in proportion to their respective ownership, and pay it in full within a certain period of time after the establishment of the foreign-invested enterprise. The first investment shall be made within 90 days after the issuance of the business license, and the amount shall not be less than 15% of the registered capital.
Management laws have the same minimum registered capital requirements for foreign-invested enterprises, while local governments have different requirements in practice. For example, Shanghai stipulates that the minimum registered capital of production-oriented foreign-invested enterprises is 200,000 US dollars, and the minimum registered capital of service industry is140,000 US dollars; In Beijing, foreign exchange equivalent to 500,000 RMB (slightly more than 60,000 US dollars) is acceptable. In addition, since the registered capital is only paid within the time stipulated in the establishment document, investors can pay their capital contribution in installments relatively flexibly, but investors of foreign-invested enterprises must pay their registered capital in full within three years after the establishment of the enterprise.
Hire local service agencies
In China, there are authorized institutions to help foreign investors set up foreign-invested enterprises. These agents can prepare the establishment documents and communicate with the examination and approval registration authority. This will help investors to speed up the establishment process. However, because most local governments are very willing to attract foreign investment, the approval of foreign-funded enterprises without special circumstances is procedural. Many investors realize that they can go through the approval process even without the help of an intermediary.
Lawyers can also help clients get approval and registration from government agencies. Sometimes, lawyers can provide customers with more economical and efficient services by cooperating with authorized agencies: the agency is responsible for daily communication with government agencies, while lawyers ensure the correct implementation of all legal documents and approval procedures.
Considering the cost, many investors are reluctant to set up foreign-invested enterprises with the help of lawyers at the initial stage. However, the cost of hiring a lawyer or a service agent is not necessarily expensive. Getting advice on the best legal structure from lawyers in China can be beneficial to future negotiations and financing, especially if investors intend to make special contractual arrangements for foreign-invested enterprises or put forward special requirements for the operation of foreign-invested enterprises.
Control of subsidiaries
The highest authority of domestic limited liability companies is the shareholders' meeting. In contrast, the board of directors is the highest authority in joint ventures and cooperative enterprises, and decides all major issues of joint ventures and cooperative enterprises. Directors are appointed by shareholders. According to the specific situation, how to stipulate and balance the power between the board of directors and the management can be flexibly arranged in the establishment document. Wholly-owned enterprises are more flexible in setting up, stipulating the division of powers and managing teams.
In addition to being dominated by the board of directors, the parent company can also establish some arrangements between it and its subsidiaries to control the subsidiaries. More commonly, the parent company owns key intellectual property rights and authorizes them to subsidiaries, or the products of subsidiaries can only be marketed, distributed and sold through the parent company. In addition, investors can also control the operation of subsidiaries to a certain extent according to the commitment clauses in the loan agreement.
Enlightenment of enterprise management
All China enterprises, including domestic-funded enterprises and foreign-invested enterprises, must conduct business within the business scope permitted by the business license. Generally speaking, the licensed business scope of domestic-funded enterprises is wider than that of foreign-invested enterprises. Domestic-funded enterprises can have a package of business scope, for example, the business scope can be "engaged in business activities permitted by law, but businesses that require special permission according to laws and regulations must obtain special permission before they can operate". At present, foreign-invested enterprises are generally not granted such comprehensive business scope. Because the industries that foreign capital can enter are classified as encouraged, permitted, restricted and prohibited, each foreign-invested enterprise can only operate certain approved specific businesses. For example, although foreign-invested enterprises can sell their own "produced" products, a foreign-invested enterprise approved to produce semiconductor products is generally granted the business scope of producing chemical products; Foreign-invested enterprises engaged in retail or wholesale business shall not sell third-party products (because foreign-invested enterprises engaged in retail or wholesale business must meet special legal conditions). However, in practice, the administrative organ has certain decision-making power on whether the business of an enterprise exceeds its approved business scope, so similar problems will cause uncertainty in implementation in practice.
In addition, even if some business activities are within the business scope, they still need special permission to be implemented. For example, to operate basic telecommunications services or telecom value-added services, you must obtain a license issued by the information technology department or its corresponding local department.
In the course of daily operations, foreign-invested enterprises can conduct transactions with other domestic and foreign entities, including signing commercial contracts, licensing technology, lending money to banks or hiring distributors, as long as these transactions comply with the laws of China. As a limited liability company, a foreign-invested enterprise is an independent legal person, limited to all its assets, and independently liable to any third party that deals with it. Shareholders shall be liable to the extent of their capital contribution to foreign-invested enterprises. Shareholders shall not be liable to the third party in the transaction except for paying the registered capital of the foreign-invested enterprise in full.
intellectual property
China protects intellectual property rights from both administrative and judicial aspects. The relevant administrative organs of the government impose administrative penalties on related infringements within the scope of their functions and powers, and intellectual property rights holders may also claim the right to demand the infringer to bear the liability for compensation from the China court. China is a member of major intellectual property conventions, including Berne Convention (involving copyright protection), universal copyright convention Convention, Paris Convention (involving patent protection), Patent Cooperation Treaty and Madrid Agreement (involving trademark protection). Trade secrets are mainly protected by anti-unfair competition law and contract law. Non-disclosure agreements or non-competition agreements are also valid and enforceable in China. Intellectual property rights can even be used as equity investment of foreign-invested enterprises, but its investment ratio shall not be higher than 20% of the registered capital (high-tech industries shall not exceed 30%). At present, the government is reviewing the rationality of this restriction.
As for the judicial enforcement of intellectual property infringement, the court can issue an injunction, order the infringer to pay economic compensation and publicly apologize. Although economic compensation can cover reasonable expenses and actual losses, and sometimes even infer actual losses, generally speaking, monetary compensation confirmed by the court is not enough to deter infringers. However, the current trend is more inclined to a larger amount of compensation judgment. In addition, for serious infringement of intellectual property rights, the infringer may be punished by more severe criminal law and sentenced to imprisonment.
foreign exchange
China does not allow foreign exchange to circulate freely in its territory. In addition to the maximum amount of foreign exchange allowed in the account, the foreign exchange income of foreign-invested enterprises must be converted into RMB (legal tender of China). On the other hand, legal payments abroad can be converted into foreign exchange. Banks with the right to handle foreign exchange business must check the prescribed documents before handling remittance business. After the remitter submits complete documents and vouchers to the bank and withholds relevant taxes (if any), shareholders' bonuses, licensing fees and payment for purchasing imported equipment and raw materials can be remitted abroad. In some cases, banks may also need to obtain approval from the State Administration of Foreign Exchange (SAFE) or its local authorities.
Enterprises with foreign investment must go through the formalities of foreign exchange registration before they can open foreign exchange accounts and handle relevant foreign exchange business. If China residents and entities wish to hold shares abroad, they need to apply for foreign exchange registration or approval from the foreign exchange administration. How to supervise related transactions from the perspective of foreign exchange is still uncertain, and it needs several relevant departments to clarify.
Employment and stock options
Enterprises with foreign investment shall abide by the provisions of China Labor Law and relevant laws and regulations, and handle social insurance benefits such as medical insurance, endowment insurance, unemployment insurance and housing accumulation fund. Enterprises may require employees to sign confidentiality agreements, non-competition agreements and intellectual property ownership agreements, but the terms of the agreements must comply with the provisions of relevant laws and regulations.
Nowadays, the granting of stock options has been more and more accepted by employees in China. However, employees have no fixed way to exercise stock options. In practice, some employees in China deposit funds in foreign accounts (or funds of family members and relatives) to exercise stock options. Because most China employees don't have foreign bank accounts, they can exercise stock options with their employers in a cashless way.
Withdrawal and liquidation
Foreign investors can directly sell their shares in foreign-invested enterprises, or indirectly withdraw from their subsidiaries by transferring their shares in the parent company of foreign-invested enterprises. The transfer of shares of foreign-invested enterprises must be approved by the original examination and approval authority, although such approval is generally procedural. The transfer of shares of overseas companies may not involve the transfer of the original examination and approval authority. . If a foreign investor transfers all his shares in a foreign-invested enterprise to a China investor, the foreign-invested enterprise will be transformed into a domestic-funded enterprise, and the new domestic-funded enterprise must be established in accordance with the Company Law rather than the relevant laws of the Foreign-invested Enterprise Law.
Sometimes some buyers will choose to buy the assets and business of the acquired enterprise instead of the shares. At this time, they will ask the acquired enterprise to liquidate and dissolve after the acquisition is completed. When the acquired enterprise is liquidated, it must distribute the remaining property to all shareholders in proportion to their respective shares after paying off the wages, taxes and debts owed to the third party. The advantage of this method is that after the acquisition, the buyer is not responsible for the third-party debtor of the acquired enterprise. However, the buyer wants to continue the contract signed by the original acquired enterprise, and the buyer may need to renegotiate with the original counterparty.
Investors can also list their companies registered abroad and then sell their shares in the open market.
conclusion
Companies accustomed to doing business in the United States may realize that China's legal system and business environment are quite different from the former. Investors or entrepreneurs who intend to set up subsidiaries in China should carefully consider their market demand and the long-term development strategy of subsidiaries.
After careful planning and arrangement, the subsidiary established in China can avoid unnecessary expenses in the process of fund-raising in the future and avoid unexpected events as much as possible. Only when investors fully understand the market restrictions and opportunities of China's business can they make correct business decisions, which will be conducive to their smooth establishment of subsidiaries, successful business development and safe exit.