Foreign Invested Enterprises Registration Procedures – Approval Phase

Viewpoints > Viewpoints from Kaizen > China > Foreign Invested Enterprises Registration Procedures – Approval Phase

(The procedures described below apply to registration of Wholly Foreign Owned Enterprises, Sino-Foreign Equity Joint Ventures, Sino-Foreign Cooperative Joint Ventures.)

The establishment of foreign investment enterprises consists of three phases: (1) approval of the project proposal, feasibility study report, Joint Venture Contract and Articles of Association; (2) registration with the AIC; and (3) post-establishment procedures.

APPROVAL PHASE

All foreign investment projects are subject to approval by government authorities. The major legal documents involved in this phase are the project proposal, feasibility study report Joint Venture Contract and Articles of Association. Relevant Chinese laws provide that a joint venture agreement should also be executed and submitted to the Chinese government authorities. However, as a practical matter, the joint venture agreement has been abolished.

For joint venture projects relating to infrastructure construction, the project proposal and feasibility study should be submitted to the State Development Planning Committee or its local counterparts for approval. For joint venture projects relating to technology upgrade of exiting enterprises, the project proposal and .feasibility study should be submitted to the State Economic and Trade Commission or its local counterparts for approval.

The project proposal and feasibility study for other joint venture projects and feasibility study for WFOEs should be submitted to MOFTEC, other government agencies or their local counterparts for approval. The Joint Venture Contract and Articles of Association for all foreign investment projects should be submitted to MOFTEC or its authorized agencies for approval.

(1) Project Proposal

Project proposals are only required for joint venture projects. WFOEs are not required to submit project proposals. The project proposal should be prepared by the Chinese party. Project proposals are usually compiled after the joint venture parties have had a preliminary exchange of their intentions for setting up a joint venture and have achieved a basic agreement. A project proposal is mainly to discuss, from the macro perspective, the necessity and possibility for the joint venture project. In ordinary cases, a project proposal should be submitted to the approval authority after the foreign party or parties have been selected. However, if a project is deemed very advantageous and profitable, in order to select better foreign investors, a project proposal] may be submitted first to the approval authority before a foreign party is selected.

Chinese law requires that the following contents should be included in the project proposal which is subject to the approval of the planning authority:

(i) General information regarding the Chinese party – Such information should include the name of the Chinese party, a general introduction to its operations, legal address, the legal representative’s name and position, the authority in charge of the Chinese party;
(ii) The joint venture purpose – The joint venture purpose should focus on the necessity and feasibility of earning foreign exchange and technology import.
(iii) The joint venture party – The information regarding the joint venture party includes the name of the foreign party, its country of incorporation, legal address, the name, position and nationality of the legal representative of the foreign at venture party.
(iv) The business scope and business volume – The business scope and business volume should focus on the necessity of the project, the need for the products in domestic and foreign markets and their manufacturing information, and the sales -region of the products of the joint venture.
(v) Estimate of Investment – The investment for a project consists of the fixed assets and the working capital for the project.
(vi) Investment Methods and Sources of Capital – The capital ratio of the joint venture parties and the capital contribution methods should be specified in a project proposal application.
(vii) Manufacturing Technology and Major Equipment – The project proposal should specify information regarding the equipment and technology to be used by the joint venture. Important technological economic data should also be set forth in the project proposal.
(viii) The Amount of Requisite Major Raw Materials, Water, Electricity, Gas and Transportation and Their Sources.
(ix) The Number of Personnel and Methods of Recruitment.
(x) Economic Benefits and Foreign Exchange Arrangements.

In addition to the above information, a project proposal should also have the following attachments:

(i) Letter of Intent of the Joint Venture Parties;
(ii) The result of the investigation of creditworthiness of the foreign party;
(iii) Preliminary survey and forecast report of the domestic and international market needs, or the opinions of the relevant responsible authorities for sales of the products;
(iv) Letter of Intent of the relevant authorities for major raw materials, energy and transportation; and
(v) Letter of Intent of the relevant authorities regarding arrangement of investment funds.

The above requirements are formulated based on the assumption that a foreign party has been selected. If no foreign party has been selected, the Chinese party may also submit a project proposal for approval. The relevant information concerning foreign parties may be submitted to the approval authority after the foreign party is selected. If the planning authority does not reply within one month after it receives the investigation results of the creditworthiness of foreign parties, the approval may be deemed to be tacit. Therefore, the Chinese parties may start to work on the feasibility study of the project.

For foreign investment projects relating to the technology upgrade of existing state-owned companies, the State Economic and Trade Commission requires that the following information must be included in the project proposal:

(i) The purpose, necessity and basis for the project;
(ii) The plan of products and the plan of assimilating imported technology, preliminary assessment of the market demand and preliminary opinions on the technology upgrade scales;
(iii) Information of resources, construction conditions and preliminary analysis of the potential foreign party;
(iv) Estimate of total investment and financing methods;
(v) Major content of the technology upgrade and preliminary arrangement of schedules; and
(vi) Preliminary estimate of economic benefits and social benefits.

If the project is less than US$30,000,000, the content of the project proposal may be simplified. However, in any event, the following information should be included in a project proposal:

(i) A basic introduction of the Chinese party and the reasons for the upgrade;
(ii) Major contents of the technology upgrade and technology import;
(iii) Expected technological and economic results as a result of the technology upgrade; and
(iv) Estimate of total investment and source of financing.

(2) Feasibility Study Report

After the project proposal is approved, the Chinese and foreign parties may carry out feasibility study research. Wholly foreign owned enterprise projects do not need to prepare project proposals. The foreign investors may directly prepare a feasibility study report.

A feasibility study report should investigate and appraise major factors of a project. It should cover economic issues technology, financial issues, management structure, cooperation conditions and other aspects in relation to the foreign investment company to be established.

Chinese laws contain mandatory clauses that must be included in a feasibility study report. For a joint venture project subject to approval by the planning commission (the feasibility study report for a WOFE should be submitted to MOFTEC or its authorized government agencies together with the Articles of Association and other documents), the following provisions must be covered in the feasibility study report:

(a) The basic information of the project;

The basic information of a project consists of the following:
(i) The name, legal address, purpose, business scope and business volume of the foreign investment company;
(ii) The name, incorporation location and legal address of each joint venture party; the name, position and nationality of the legal representative of each joint venture party; and the authority in charge of the Chinese party;
(iii) The total amount of investment, registered capital of the joint venture company (including the amount of self-owned funds to be contributed by each investor, the capital ratio, capital contribution method and schedule for capital contribution);
(iv) The joint venture term, the profit distribution method and the ratio of loss sharing;
(v) Approval document for the project proposal;
(vi) The names of the people responsible for preparing the feasibility study report; and
(vii) General introduction, conclusion, issues and suggestions of the feasibility study report.

(b) The arrangement of manufacture of products and its basis;

A feasibility study report should set out the demand in both domestic and international markets, the methods of market survey, and the current manufacturing ability of the existing plants and plants in construction China and overseas.

(c) The supply arrangement of raw materials, energy and transportation and the basis for such arrangement;

(d) Site selection and its basis;

(e) Selection of equipment, technology and manufacturing process;

(f) Arrangement of production;

A feasibility study report should address the number of employee sources of employees and the operational management of the joint venture company;

(g) Prevention of environmental pollution, labor safety, hygiene facilities and the basis for such;

(h) Construction methods, construction schedule and the basis for such;

(i) Capital financing and its basis;

(j) Foreign exchange arrangement and its basis;

(k) Comprehensive analysis;

Comprehensive analysis comprises economic, technological, financial and legal analyses.

(l) Major attachments

(i) The business license of each joint venture party;
(ii) Identification documents of the legal representative of each joint venture party;
(iii) The Balance Sheet and Profit and Loss Statement for each joint venture party;
(iv) Survey results of the demand in domestic and international markets, a forecast report and the export ratio of the products to be manufactured by the joint venture company;
(v) The opinion letters issued by relevant authorities for arrangements of raw materials, auxiliary materials, components, energy and transportation;
(vi) Opinion of the relevant authorities relating to equipment delivery;
(vii) Opinions of the relevant authorities relating to using the joint venture products to replace imported products;
(viii) Opinions of the relevant authorities relating to financing;
(ix) Opinion of the relevant authorities relating to site selection;
(x) Opinion of the relevant authorities relating to environmental protection, fire control, labor safety, hygiene facilities and earthquake;
(xi) Opinion of the relevant authorities relating to foreign exchange income and expenditure; and
(xii) Opinion of the relevant authorities on evaluation or preliminary review of the project.

The SDPC requires that except in special circumstances, a decision should be made on whether or not to grant approval for a feasibility s report within 90 days after the SDPC receives all the documents meeting the statutory requirements. For projects of over one US$100,000,000, the SDPC should forward the documents to the State Council for approval within the above time limit. If the submitted documents do not meet the statutory requirements or the attachments are not complete, the SDPC may request the applicant to submit additional documents. Otherwise, the SDPC may reject the application by returning all submitted documents. For the local development planning commission, the approval time limit is also 90 days.

The State Economic and Trade Commission (SETC) requires that a feasibility study report should be comprised of the following information:

(1) Introduction to the project;
(2) Basic information regarding the Chinese party;
(3) Estimate of the demand in both domestic and foreign market, the product level and production scale, and the prospect of export;
(4) Supply of fuel, energy, raw materials, components and public facilities;
(5) Several plans as to selection of technology and equipment;
(6) Selection of the best technology upgrade plan;
(7) Prevention of environmental pollution;
(8) Plans of production and personnel training;
(9) Schedule of the project;
(10) Investment estimate, financing, including repayment methods and exchange risk estimate;
(11) Economic and social benefit evaluation and analysis; and
(12) Agreements as to outside conditions for the project and other written documents.

The SETC fails to expressly provide for the specific time limit for approval of feasibility study reports. However, because the SETC is responsible for approval of technology upgrade projects and the project proposal and feasibility study report are prepared by the Chinese parties, the Chinese parties may use their relationships with the SETC or its local counterparts to shorten the approval period.

(3) Joint Venture Contract and Articles of Association

The joint venture contracts and Articles of Association are usually approved by MOFTEC. MOFTEC has issued statutory provisions regulating the examination and approval of joint venture contracts and Articles of Association. MOFTEC and its local counterparts should follow the following principles when examining and reviewing a foreign investment project:

(i) Whether or not the Joint Venture Contracts and Articles of Association comply with Chinese law;
(ii) Whether or not the Joint Venture Contracts and Articles of Association comply with the feasibility study reports and relevant approval documents; and
(iii) Whether or not the principles of equality and mutual benefit are adhered to.

According to regulations, the MOFTEC and its local counterparts should examine the following key points of a foreign investment project:

(i) The validity of the Joint Venture Contract and Articles of Association;

In particular, the approval authority must review whether or not the Joint Venture Contract and Articles of Association include signature date and location, whether the signatories of the Joint Venture Contract and Articles of Association are the legal representatives of the contracting parties or authorized agents of the legal representatives.

(ii) Whether or not the Joint Venture Contract and Articles of Association contain all required provisions $ whether or not the documents submitted are complete;

(iii) Whether or not the Joint Venture Contract and Articles of Association involve any governmental activities and provisions binding a third party;

(iv) Whether or not the approval procedures have been completed for projects subject to special government approvals;

In China, projects subject to special government approval consist of (a) foreign investment projects in restricted industries, (b) projects requiring import of machinery and equipment, the import of which is restricted by the government, and (c) the export of the finished products which require export permits.

(v) Whether or not the business scope is clear and specific; whether or not the wording is accurate and standard;

(vi) The capital contribution ratio, the ratio between the total amount of investment and the registered capital, capital contribution methods and capital contribution schedule;

(vii) Whether or not the technology transfer complies with the Administrative Regulations on Technology Import Contracts and the feasibility study report;

(viii) Whether the Joint Venture Contract and Articles of Association contain clear and specific provisions concerning the purchase of equipment and raw materials, the export and domestic sales ratio of the finished products, the methods of sales, the pricing principles and obligations;

(ix) Whether the foreign exchange balance method is feasible;

(x) The salaries and benefits of the Chinese and foreign employees;

(xi) The composition and authorities of the Board of Directors, the procedures to convene Board meetings, the operational and management organizations;

(xii) Dispute resolution and penalty for a breach of contract;

(xiii) Termination, dissolution of the FIE; disposal of assets upon liquidation; and

(xiv) Whether the Joint Venture Contract and Articles of Association and their attachments are standard and comply with the requirements under Chinese law.

If MOFTEC or its local counterparts approve a foreign investment project, an approval letter will be issued. The approval letter usually consists of the following information:

(i) The names of the FIE and the parties to the FIE;
(ii) Business scope and production scale of the FIE;
(iii) Total amount of investment, the amount of the registered capital, the capital contribution ratio and capital contribution methods, the profit distribution principles (applicable only to CJVs);
(iv) Operation period;
(v) Confirmation of the list of equipment to be imported; and
(vi) Other issues that the approval authority needs to address.

The Chinese version of the documents submitted for government approval should prevail over other language versions. The investors should be responsible for the consistency of the various versions in different languages. In practice, many foreign investors negotiate with the Chinese parties over which version should be the prevailing version. From the perspective of the approval authority, no matter what the contract provides, the Chinese version should be the prevailing version.

Technology transfer agreements and contracted operation agreements should be submitted to the approval authority for approval either as separate documents or as attachments to the Joint Venture Contract. Loan agreements, equipment purchase agreements that involve no technology transfer, factory lease agreements, land use agreements and land grant contracts do not need to be submitted to the approval authority for approval.

The time limit for approval of Joint Venture Contracts and Articles of Association varies for different types of FIEs.

(1) For an EJV, the law requires that the approval authority should decide whether or not to grant approval within 3 days after receiving all documents. If the approval authority determines that the submitted documents do not meet the requirements, the approval authority should require the applying parties to revise the documents within a specific time limit. In the event that the applicant fails to revise the application documents, the approval authority should not grant any approval.
(2) For a CJV, the approval authority should decide whether or not to grant approval within 45 days after the approval authority receives all documents that meet the requirements.
(3) For a WOFE, the approval authority should decide on whether or not to grant an approval within 90 days after the approval authority receives all documents that meet the requirements.
(4) For a FICLBS, MOFTEC should decide whether or not to grant approval within 45 days after MOFTEC receives all the application documents that comply with requirements.

;