In association with Picozzi & Morigi Law Firm.
Feasibility of investment in Nanjing
The first step in analyzing the legal feasibility of an invest- ment in Nanjing is to ascertain whether, and under what conditions, the contemplated activity is open to foreign in- vestment. Such conditions may also include more favourable policies for activities in which the government is eager to encourage foreign investment. These classifications are set out in the Foreign Investment Industrial Guidance Catalogue (the “Guidance Catalogue”) issued by the PRC National Development and Reform Commission (“NDRC”) and MOFCOM. The Guidance Catalogue lists encouraged, restricted and prohibited activities and sectors. Activities not listed in the Guidance Catalogue as falling within the aforementioned categories are, in the absence of other rules to the contrary, considered to be open to foreign investment.
Forms of Business Establishment
Foreign investors wishing to establish a presence to do business in Nanjing must establish one of several different statutory forms of Foreign-Invested Enterprises (“FlEs”). It is possible to do some limited business in Nanjing without such formal establishment (e.g., through an agent), but this will be a requirement for any significant operation (e.g. in order to lease premises, open bank accounts, buy and sell local currency, or hire employees).
FIEs have traditionally been more strictly regulated than domestic enterprises in terms of investment approval, but within their permitted spheres have enjoyed preferential tax treatment and more liberal access to foreign exchange. The choice of the appropriate form of FIE depends upon the categorization of the intended activity in the Guidance Catalogue, as well as on the particular operational needs or objectives of the foreign investor(s).
The most popular forms of FIE include:
Wholly Foreign-Owned Enterprise (“WFOE”)
A limited liability company 100% owned by one or more individual(s) or corporate foreign investor(s). The liability of the investor(s) is limited to the WFOE’s subscribed registered capital. WFOEs are the most popular form of FIE.
Equity Joint Venture (“EJV”)
The most common of the two types of statutory joint venture. An EJV is invested in together by both foreign and domestic corporate investors. The equity interests of the investors, and the division of profits, is strictly proportional to their shares of contributed registered capital.
Cooperative Joint Venture (“CJV”)
Compared to EJVs, the investors in a CJV have greater flexibility in making contributions to CJV capital, and also in distributing dividends in ratios that differ from their respective equity shares. CJVs are normally established as legal person LLCs, but may also be established as a non-incorporated contractual cooperation. The liability of partners in an unincorporated CJV is unlimited. Non-incorporated CJVs are typically only established for specific, limited purposes and activities such as collaboration in natural resource exploration or venture capital investments.
Holding Company and Regional Head- quarters Investors with existing major operations in China may wish to consider establishing a holding company or a regional headquarters to help consolidate certain group treasury, support services and trading functions. There are significant minimum investment thresholds, and operations are limited to holding company functions.
Foreign Invested Partnership Enter- prise (“FIPE”) Except for market access and other key differences, FIPEs function under the same rules as domestic partnerships, and are generally much the same as partnerships in western countries. However, given the very limited experience with this form of entity, partnerships still face many more legal and administrative uncertainties relative to other more mature forms of enterprise.
Note that given their inherent costs and risks, a Joint Venture is rarely chosen where a WFOE is otherwise both permissible and feasible.
Procedure for setting up FIEs in Nanjing
Generally speaking, the applicant need apply for pre-regis-tration of the company name to the local Administration of Industry and Commerce. State Council approval is required for encouraged or permitted projects with a total investment of US$500 million or more, or for restricted projects with a total investment of US$100 million or more. Central approval will also be required for certain specific types of sensitive projects. After receiving the relevant approval(s), the applicant will need to file the application form and other related documents to MOFCOM for approval. After receiving approval, the applicant will need to submit all the relevant documents to the Administration of Industry and Commerce to apply for a business license. In addition, the applicant also need to register with various local government departments to obtain additional certificates such as the Enterprise Code Registration Certificate, Statistics Registration Certificate, Financial Registration Certificate, Tax Registration Certificates, Foreign Exchange Registration Certificate and Customs Registration Certificate.
Foreign representative offices and branch offices
A Representative Office is a permanent base that may con- duct some restricted activities to facilitate the sales and purchasing transactions of a foreign parent company (e.g. liaison, coordination, product marketing and promotion, and market research). A Representative Office is not itself permittedtoengageindirectprofit-makingactivitiessuch as the receiving of monies or the issuing of invoices for goods or services. The Representative Office of a foreign company must be registered with the Administration for Industry and Commerce (“AIC”), and MOFCOM approval is also required if the parent company’s business is anything other than trading, manufacturing, contracting, consulting, advertising, investing, leasing or providing shipping agency or employment agency services.
On the other hand, a foreign company branch office is permitted to engage in direct business activities. However, this is only available in certain industries, such as commercial banking and oil exploration.
Nanjing, located in the Yangtze River Delta, China’s most prosperous and vibrantly developing region, presents great opportunities and possibilities for foreign investors. Nevertheless, having sufficient local knowledge, market information and experience is crucial for foreign investors to establish business in Nanjing and a company’s strategy must be tailored specifically to suit its product or service, resources, and goals, as well as the reality of the local operating environment.
This article is intended solely for informational purposes and does not constitute legal advice. Although the information in this article was obtained from reliable official sources, no guarantee is made with regard to its accuracy and completeness. For more information please visit dandreapartners.com or WeChat: dandreapartners.
