Viewpoints from Kaizen

1. Introduction For an incorporation of an entity in China, there are many procedures, legal documentation and various governmental requirements. One of the documents to be submitted for the purpose of registration of a WFOE is the duly legalized Certificate of Incorporation or identity document of the shareholder of the WFOE. 2. Definition of Certificate of Incorporation A Certificate of Incorporation is a legal document relating to the formation of the investor corporation. It may differ among different countries. It is a certificate issued by the relevant government registry as confirmation of the due incorporation and valid existence of the company. American Legal system The meaning of a Certificate of Incorporation in the American context usually refers to the Articles of Incorporation or the Articles of Association. Despite the differences in the meaning of a Certificate of Incorporation, the usage of the Certificate of Incorporation in the incorporation of a […]

1. Responsibilities and Powers of Supervisor/Board of supervisors A limited liability company may set up a board of supervisors, which shall comprise at least 3 persons. A limited liability company, which has relatively less shareholders or is relatively small in scale, may have 1 or 2 supervisors, and does not have to establish a board of supervisors. The supervisor is also appointed by the investor. The board of supervisors or supervisor of a company with no board of supervisors may exercise the following authorities: (1) checking the financial affairs of the company; (2) supervising the duty-related acts of the directors and senior managers, and bringing forward proposals on the removal of any director or senior manager who violates any law, administrative regulation, the articles of association or any resolution of the shareholders’ meeting; (3) demanding any director or senior manager to make corrections if his act has injured the interests […]

1. Responsibilities and Powers of Director/Board of Directors The board of directors established by a limited liability company shall comprise 3 up to 13 members unless for the company with relatively less shareholders or a relatively small company, it may have an acting director and no board of directors. The board of directors shall be responsible for the shareholders’ meeting and exercise the following authorities: (1) convening shareholders’ meetings and reporting the status on work thereto; (2) carrying out the resolutions made at the shareholders’ meetings; (3) determining the operation plans and investment plans; (4) working out the company’s annual financial budget plans and final account plans; (5) working out the company’s profit distribution plans and loss recovery plans; (6) working out the company’s plans on the increase or decrease of registered capital, as well as on the issuance of corporate bonds; (7) working out the company’s plans on merger, […]

1. Power of Shareholder(s) The authority of a limited liability company is the shareholders’ meeting which comprises all the shareholders. The shareholders’ meeting shall exercise the following authorities according to Company Law of the PRC: (1) determining the company’s operation guidelines and investment plans; (2) electing and changing the director and supervisors assumed by non-representatives of the employees, and determining the matters concerning their remuneration; (3) deliberating and approving the reports of the board of directors; (4) deliberating and approving the reports of the board of supervisors or the supervisor; (5) deliberating and approving annual financial budget plans and final account plans of the company; (6) deliberating and approving profit distribution plans and loss recovery plans of the company; (7) making resolutions on the increase or decrease of the company’s registered capital; (8) making resolutions on the issuance of corporate bonds; (9) adopting resolutions on the merger, split-up, change of […]

1. Defining the Scope of Scope of WFOE Under China’s Company Law and Administration of Registration of the Scope of Business of Enterprises Provisions, an enterprise can only engage in operations within its business scope as approved in its registration with the enterprise registration authority. Unlike other countries, the defined business scope in China is more detailed and has more implications. Hence, an investor needs to take note of certain considerations when defining its business scope for registration. (1) Catalogue for Guidance on Foreign Investments The Catalogue for Guidance on Foreign Investments (“Catalogue” is a legal pronouncement by the Ministry of Commerce. It specifies the types of investments that are: A. Encouraged B. Prohibited C. Restricted D. Permitted. A. Encouraged Investments Typically, investments that may bring about technology transfer or IT advancement etc. into China are encouraged investments. Foreign investors are normally encouraged to establish Wholly Foreign-owned Enterprises (“WFOEs” to […]

Under PRC law, all companies including foreign investment enterprises (FIEs), must have a minimum registered capital (registered share capital). For FIEs, in addition to the requirement for minimum registered capital the requirement for total investment is a unique legal requirement that has implications involving many aspects of such company’s business. 1. Interpretation of Registered (Share) Capital and Total Investment According to the legal definitions, registered capital (share capital) refers to the total capital contribution of the shareholders that is registered with the relevant government agency. Total investment refers to the amount (including registered capital and funds borrowed by the company) that is required for the planned project as stipulated in the joint venture contract and the articles of association of the company. 2. Comparison Registered (Share) Capital and Total Investment Registered capital (share capital) contribution is subject to more stringent regulation and supervision than total investment. Registered capital must be […]

Feasibility study report is one of the documents to be submitted to the China Government for the purpose of application for registration of a Wholly Foreign Owned Enterprise. The aim of a feasibility analysis is to conduct a systematic all-in study and proof of the necessity and viability for kicking off a project in areas ranging from technology, economy, market, finance, resources to environmental protection and safety. Given relevant stipulations of the State and the particularities of the specific city, a feasibility report should include the following items: 1. The name, nature, address, and tenure of operation of the prospective enterprise. 2. The names of the investment parties, country (region) of registration, legal address, the name, title and country of the legal person, and a profile of the overseas investor (including capital credibility and operation prospects) 3. Scope and scale of operation, which include specific product name, size of production, […]

General Information Language The official language is Chinese, with English being used normally in the major cities, including Beijing, Shanghai, Shenzhen, Guangzhou and some other second tier cities. Currency The official currency is Renminbi (RMB) which is officially pegged to a basket of major currencies. Renminbi to US Dollar is trading at around USD1=RMB6.5. Exchange Control Yes. Type of Laws Continental Law. Major Features of Wholly Foreign Owned Enterprises (WFOEs) Type of Company Commonly used by foreign investors Limited Liability Company (LLC), a Company type generally referred to as a Wholly Foreign Owned Enterprise (WFOE); The Wholly Foreign Owned Enterprise (WFOE, also known as Wholly Owned Foreign Enterprises, WOFEs) is a Limited liability company wholly owned by the foreign investor(s). In China, WFOEs were originally conceived for encouraged manufacturing activities that were either export orientated or introduced advanced technology. However, with China’s entry into the WTO, these conditions were gradually […]

The procedures for closing a wholly foreign-owned enterprise its dissolution and liquidation are no easier or shorter than the process of setting up such a company, and normally take between six to nine months to complete. According to Chinese law, a WFOE must be dissolved if any of the following circumstances apply: (1) Its term of operation expires (2) The board of shareholders has adopted a resolution for dissolution to dissolve the company (3) It is merged or divided (4) Its business license is revoked by law, or the company is ordered to terminate or cancel it (5) Where there are serious operational difficulties and its continuance will cause significant losses to shareholders interests, and if these are not able to be resolved, shareholders representing 10 percent or more of the voting rights of all shareholders may request dissolution by the People’s Court (6) Other reasons for dissolution stipulated in […]

1. Before-Tax Distribution Overseas parent company can repatriate before-tax profits by means of inter-company charges such as royalty fees, loan interests, rentals, overhead charges, management fees, training fees, technical support fees and other service charges etc. But the overseas parent company may be exposed to Foreign Enterprise Income Tax (“FEIT”) of 10% and/or Business Tax (“BT”) of 5% on the gross income earned in China. The Foreign Investment Enterprise (FIE) will be deemed by law as the withholding agent of its overseas parent company to pay the taxes in China accordingly. Please also note that the Chinese tax bureaus may not allow the FIE to claim tax deduction of the inter-company charges unless the expenses are directly related to the FIE’s business operations and are charged at market rates. Inter-company Expenses Expenses can be deduct from the profits of the FIE? Any China tax exposure to overseas parent company? Royalty […]