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China Company Start-up Checklist, Part I

Company Establishment Checklist Although this checklist is primarily geared toward the establishment of Joint Ventures, it can be easily adapted to the establishment of Wholly Foreign Owned Enterprises (see the final section of this article) Keep in mind that the following list of documentation and procedures is not necessarily exhaustive. Industry-specific regulations complicate matters in some industries (for example, securities and insurance), examination and approval authorities can be arbitrary, and local differences can be significant. Nevertheless, the following should give you a detailed and fairly comprehensive idea of what is required. 1. Is foreign investment permitted in your industry? Check the Foreign Investment Guidance Catalog, which lists industry sectors in three categories – Encouraged, Restricted, and Prohibited. Any sector not listed is classified as Permitted.

The Encouraged category is quite broad, covering over 250 industry sectors. Generally speaking, Encouraged activities conserve energy or raw materials, promote agriculture, or otherwise promote China’s economic development. Enterprises doing business in the Encouraged category are eligible for significant tax breaks and other incentives, and approval procedures are generally more streamlined. The Restricted category includes activities that use outdated technology, harm the environment, or are in sectors of the economy that the Chinese government wishes to restrict from international competition. Enterprises operating in the Restricted Category are required to use Joint Ventures rather than Wholly Foreign Owned Enterprises because foreign equity participation is limited.

This usually results in either (i) the Chinese party to the Joint Venture owning a controlling interest (at least 51%), or (ii) a relative controlling interest (the cumulative equity interests of all Chinese partners must exceed the equity interest of any one foreign investor), depending on the activity. Furthermore, Restricted projects must be approved at higher levels of government, and approval is harder to obtain. Prohibited activities are generally activities that seriously damage the environment, threaten national security, use large areas of agricultural land for non-agricultural purposes, or otherwise harm or threaten the public interest. In line with its policy of encouraging the development in central and western China, the national government has also issued the Central and Western China Foreign Investment Guidance Catalogue which lists additional activities that are classified as Encouraged only if undertaken in central or western China. Even in Encouraged categories, the foreign investor is usually expected to hold at least a 25% equity stake in a Joint Venture of WFOE. Fortunately, a 25% equity stake will allow the enterprise to be classified as a Foreign Invested Enterprise (“FIE”) and thus eligible for special tax breaks and incentives. Note: Chinese foreign investment law also bestows other advantageous classifications on FIEs. It would be especially helpful for the purpose of obtaining tax and other incentives if you could get your Joint Venture of WFOE classified as either a Technologically Advanced Enterprise or an Export-oriented Enterprise. 2. If you are considering a Joint Venture, check out potential partners.

You should work with a local consultant or attorney to help you identify suitable partners. Nevertheless, there is no substitute for due diligence. 3. Is the intended enterprise name permitted and available? Company name pre-registration begins with an application form that varies according to the type of enterprise - Equity Joint Venture, Cooperative Joint Venture (also known as a Contractual Joint Venture), or Wholly Foreign Owned Enterprise. There are also certain restrictions on name usage – for example, the enterprise’s name must include an indication of locality even if it also indicates another place name (for example, “California Industrial City Development Co., Ltd.” became “California Industrial City (Zhengzhou) Development Co., Ltd.”). After the enterprise name is approved, a Name Pre-Registration Notice will be issued.

4. Project Approval Stage (a) Preliminary Submissions The Chinese party to a Joint Venture must apply for preliminary project approval by submitting (i) the Project Proposal (ii) the Preliminary Feasibility Study Report, (iii) a Memorandum of Understanding between the Joint Venture parties to the examination and approval authority. Duplicate submissions to other departments may be required. Pay particular attention at this stage to drafting your enterprise’s scope of business. Please note that a Project Proposal is not required in every case, and in some cases the examination and approval authority may wish to streamline the entire Project Approval Stage – the less money you are investing, the more likely the process will be streamlined. If everything is in order, a preliminary project approval should be issued in about three weeks. Note: If your Chinese partner is a state-owned enterprise (or if state-owned assets will be contributed to the Joint Venture), a State-owned Enterprise Asset Evaluation must be completed, and application may be required at this stage. (b) Preparation of the Final Feasibility Study Report After obtaining the preliminary project approval, the Chinese and foreign investors should jointly prepare a final Feasibility Study Report presenting problems to the examination and approval authority for help. In this way the final report is hammered out through mutual feedback between the Joint Venture partners and the examination and approval authority. Upon request and approval, under certain circumstances a thorough Project Proposal can substitute for the final Feasibility Study Report.

(c) Final Submissions Submit the following to the examination and approval authority: 1. Standardized application; 2. Final Feasibility Study Report; 3. Joint Venture Contract; and 4. Articles of Association signed by the Joint Venture’s legal representative. Other documents include (but are not necessarily limited to): 1. Name registration notice. 2. List of members of the Board of Directors and copies of their IDs (government-issued IDs for Chinese; passports for foreigners).


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