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Forming Companies in China: China’s Foreign Investment Information Reporting System Is Not Making Things Easier

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Forming companies in China: Like a Maze
Forming companies in China: Like a Maze

As part of the supporting regulations relating to the Foreign Investment Law (FIL), China’s Ministry of Commerce (MOFCOM) and State Administration for Market Regulation (SAMR) issued the Measures for Foreign Investment Information Reporting (the “Reporting Measures”). Under the FIL and the Reporting Measures, all foreign investors or foreign invested enterprises (FIEs) must report to MOFCOM information related to any foreign investment via the Enterprise Registration System and the Enterprise Credit Information Publicity System.

According to the FIL, the Reporting Measures and the accompanying announcement and the Q&As published by MOFCOM and SAMR, the following activities must be reported:

  1. Foreign investors forming FIEs (Foreign Invested Enterprises) in China.
  2. Foreign investors forming representative offices in China that engage in production and business operations.
  3. Foreign investors acquiring stocks, shares, assets or other similar equity of a Chinese company.
  4. FIEs re-investing and forming subsidiaries in China.
  5. Foreign investors investing in new projects in China, individually or jointly with other investors (without forming a Chinese entity of acquiring another Chinese entity’s stock or ownership interests). As explained below, this is not likely to concern the average investor.

Niether the FIL nor its supporting regulations explain what “investing in new projects” means, which makes it confusing as to how foreign investors can invest in projects in China without establishing an FIE or acquiring another entity. A possible explanation is that this refers to the activities set out in the Measures for the Administration of Registration of Enterprises from Foreign Countries (Regions) Engaging in Production and Business within China, which regulate the registration of business activities carried out in China by foreign investors without establishing an FIE or acquiring a separate Chinese entity.

These Measures were initially issued in 1992 and updated in 2016 and 2017. Only limited activities in highly regulated industries are listed in these Measures. For example, exploration and exploitation of onshore and offshore oil, establishing branches of foreign banks in China. In practice, investors in these industries would communicate directly with the regulatory authority for the particular industry (e.g. China’s Banking Regulatory Commission) instead of filing a regular company registration with the SAMR.

Foreign investors or FIEs may report relevant information through the following reports:

  1. The Initial Report upon forming an FIE or acquiring a non-FIE by foreign investors.
  2. Amendments to the Initial Report if if there are changes made to it.
  3. A Cancellation report upon dissolution of an FIE or upon conversion from an FIE to a non-FIE.
  4. Annual reports. FIEs must submit annual reports for the preceding year by the end of June each year.

Investors and FIEs can submit these reports via the Enterprise Registration System by SAMR, which will share the information with MOFCOM and other government agencies. FIEs formed after January 1, 2020 are no longer required to file with MOFCOM.

The information reporting system saves most FIEs a separate filing with MOFCOM. But such filing has become less significant in recent years, as it normally does not require substantive review by MOFCOM or its local branches.

On the other hand, other practical challenges still exist when forming entities in China. For example, foreign investors need to provide documents to prove their identity or company status, which must be authenticated by Chinese embassies or consulates in the country where the investor is located. Since late last year, my law firm’s China company formation team has been seeing an increase in the Chinese consulates rejecting authentications based on some “new” never published requirement. The challenge is not that the lack of good written laws, but the increasing usage of unwritten rules that vary depending on time and place and that cannot be known until the government says they exist. Until China stops using random new rules to slow down the forming of foreign entities in China, its new law for establishing FIEs in China cannot be said to have made forming such companies in China any easier.

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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