Viewpoints from Kaizen

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 […]

1. Introduction On 12th December 1982, the State Administration for Industry and Commerce (SAIC) of the People’s Republic of China published the “Corporation Management Regulation” which states that from 1983 onwards, SAIC would implement company annual inspection procedures over the whole country. Annual inspection is particularly useful in improving the national control over company’s registration. SAIC makes the carry-out of annual inspection compulsory for all companies in order to ensure their existence and normal operations. 2. Companies subject to Annual Inspection The companies which receive the business license, including limited liability companies, non-company business legal persons, partnership enterprises, individual sole-source investment enterprises and branch offices, foreign enterprises, as well as other management units. Accordingly, the Wholly Foreign Owned Enterprises invested and set up by foreign corporations and individuals are also subject to the requirements of Annual Inspection Procedures. Newly set-up companies are also required to participate in annual inspection. Certain […]

Statutory Audit in China Under current legislation, all Foreign Invested Enterprises (FIE) such as Wholly Foreign Owned Enterprises (WFOE), Joint Ventures (JV), and Representative Offices (RO), are required to be audited on an annual basis. This statutory requirement has to be met prior to business license renewal every year. The deadline for the filing of annual audits is by the end of April of the following year (ie: your 2007 audited accounts must be filed latest by April 2008). FIEs can only distribute and repatriate their profits back to their home country after the annual audit and settlement of their relevant income tax liabilities. Annual audit of FIE statutory accounts must be conducted by a firm of Certified Public Accountants registered in the PRC under PRC regulations. Previously, only local Chinese CPA firms were permitted to perform the audit function, and international accounting firms were not allowed to enter Chinese […]

For any change of business scope, a resolution of the shareholders or board of directors is required. Then an approval and approving certificate for the change of business scope shall be obtained from the original examination and approving authority. After that an application form for registration of changes shall be filled and submitted to the administration bureau for industry and commerce together with the original resolution, approval and approving certificate, original true copy and duplicate of the business license of the company.