China WFOEs and JVs: Still tough navigating
On October 1, China changed its system for government control over foreign investment. The change was accomplished by revising the statutes concerning wholly foreign owned entities (WFOEs), equity joint ventures and contractual joint ventures and by promulgating a new basic regulation governing registration of foreign invested entities (FIEs).
The big change under China’s new system is that government regulation of foreign invested entities will move from a system that requires MOFCOM (China’s Ministry of Commerce) approval to one that will now just require simple registration with MOFCOM. This change will be implemented through the issuance of a National Negative List. For FIEs that are not restricted or regulated under the National Negative List, MOFCOM requires online registration through a national website employing a standard set of documents. This registration will apply to initial formation of the FIE and to most changes in FIE structure, such as changes in management, ownership and registered capital.
The following essential elements of this new system have already been implemented:
All future Foreign Invested Entities (FIEs) formed in China will now follow the following five-step procedure:
Step 1. Obtain name reservation from the local administration of industry and commerce (AIC).
Step 2. If not restricted by the National Negative List, register online with MOFCOM. Provided the registration is accurate and complete, the regulations require MOFCOM to issue a registration notice within three days. Though the new regulations allow for registration with MOFCOM after issuance of the AIC business license, all of the AIC agencies with which we have spoken have told us that they will require MOFCOM registration prior to issuance of the AIC business license.
Step 3. Register your FIE with the local AIC. Since the local AIC may impose special procedures for FIEs, it is not yet known what impact of the change on this step will have overall. The most likely result at the outset is that each district will impose its own rules. Some districts may impose rules to make things easier. And some districts may impose rules that increase the time and documentation effort required at this stage. Though this result would be contrary to the spirit of the new laws, such a result would be consistent with past local government practice in China.
Step 4. Each local AIC will require compliance with other regulatory requirements such as environmental impact statements, building construction safety reports, neighborhood impact reports, energy usage reports, local employment impact reports, reports required for access to local special benefit programs, land usage and price analysis reports, and similar. The list of required studies and reports can get shockingly long and must be determined on a local AIC to local AIC basis. Dealing with these requirements typically requires a major amount of time and effort and expertise in forming a FIE in China.
Step 5. After receipt of a business license, comply with AIC, tax agency, regulatory agency and banking registration procedures. These requirements may be local, provincial or national, depending on the nature of the FIE business. Compliance with all these requirements is required before the FIE can formally begin business. Such compliance typically adds at least a month to the formation process.
Some China attorneys see the change in China’s FIE laws as a move to “open up” China to increased foreign investment. At this point, and for the following reasons, we do not foresee much change:
So the net effect is that China’s new FIE rules do not provide for any major change in the structure of the PRC system of management of foreign investment. There has been no opening up and the time and effort required to form a FIE is not likely to substantially change.
So what has changed for registering WFOEs and Joint Ventures in China? I will discuss that in my next post.
We will be discussing the practical aspects of Chinese law and how it impacts business there. We will be telling you what works and what does not and what you as a businessperson can do to use the law to your advantage. Our aim is to assist businesses already in China or planning to go into China, not to break new ground in legal theory or policy.
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