China: Types of Company
Foreign-Invested Commercial Enterprise
This page was last updated on 15 July 2019.
Though it was once normal for foreigners wishing to do business in China to use either a representative office or form a joint venture, these forms have their disadvantages. It is now more common to form a limited company under the Law on Enterprises Operated Exclusively with Foreign Capital, 1986 (Foreign Capital Company Law). One of these company forms is the FICE (which, incidentally, rhymes with ‘mice’).
Originally, WFOEs were intended for export or high-technology manufacturing, but China's entry into the World Trade Organisation (WTO) has led to a gradual broadening of the use of WFOEs into service and trading sectors. Before December 2004, WFOEs were not permitted to trade internally in China, with their own or other products. The Measures for Foreign Investment in Commerce, enacted in 2004, allowed a wide range of trading activities by WFOEs, in this case known as foreign-invested commercial enterprises (FICE).
Some types of wholesale and retail trading activity are still restricted however, including publishing, pharmaceuticals, many types of chemical, oil and gas, motor vehicles, and some types of agricultural produce. Detailed rules for implementing the Foreign Capital Company Law were enacted in 1990, and apply to the FICE format.
While the legislation lays down highly prescriptive rules for the formation and operation of a company owned by foreigners, the actual limited liability company itself must be formed under the Company Law of the People’s Republic of China, effective 1 January 2006. This piece of legislation brought Chinese company law significantly closer to Western practice.
As with a representative office, the formation of a FICE is conducted under local rules. The local authority will check that the proposed business is adequately capitalized and does not present environmental risks. Normally they will not be obstructive, though there are regional variations. Central government only gets involved if the business falls within nominated sectors such as financial services, telecommunications and the media.
The legal minimum capital is RMB100,000 (USD15,000) for a company with multiple shareholders, or RMB30,000 for a single-shareholder company. However, the registered capital must reflect the needs of the business and is likely to be far higher than the minimum for most businesses. Minimum required capital for FICEs is between RMB300,000 and RMB1m, depending on the type of operation. Capital requirements need to allow for the fact that many types of payment have to be made in advance; business credit is unusual in China.
The capital required by the business and set down in the approved business plan will actually have to be provided, in cash or in kind, according to the timetable proposed, and once provided cannot be taken back. Profits can be repatriated by all means, although the yuan (renminbi) is still not fully convertible, and transfers will have to be approved and conducted through an authorised bank.
FICEs, like WFOEs, are formed to operate within a defined business sector, known as business 'scope'. Any extension of the business scope into another sector is likely to require an additional registration process, although all activities that are ancillary to the primary purpose are permitted.
A FICE can employ both foreign and domestic workers, following appropriate procedures. As with a representative office or a regular WFOE, a FICE must have suitable premises in order to be registered in the first place. Such premises are likely to be within government-designated office, warehousing or manufacturing buildings.
Except in business sectors where central government permission is required (e.g. banking and financial services) the formation of a FICE is a regional affair.
A company name must be in both English and Chinese, though, for practical purposes, only the Chinese name is important. It cannot be identical or similar to a previously registered company name. The name can be pre-reserved for a period of up to six months, after which it will expire if not used appropriately.
A FICE must have a name in the form ‘Parent Company - Business activity – (City) – Ltd’, e.g. Jones Retail (Beijing) Ltd. The chosen name (and proposed alternatives) can be 'pre-registered' for a period of six months, allowing time for the registration process itself.
Premises designated by the government for business must also be found before the registration process can begin. Accommodation addresses are not permitted.
If retail or warehouse premises is also to be leased or purchased, its legal status must permit occupation or ownership by a FICE – often with cheaper premises this is not be the case. Expert advice is required on this and indeed on many aspects of starting a business in China.
In total, formation and registration will take up to six months, depending on the region or city in question and the complexity of the business plan. The initial registration of a FICE must be renewed annually. Registration is carried out by the local Administration of Industry and Commerce (AIC) without the involvement of the Ministry of Commerce (MOFCOM).
The registration process is conducted by a 'sponsor' – an appropriately authorised local company (which can itself be foreign-owned.) The paperwork the sponsor must submit to the AIC includes:
- Application letter and standard application form
- FICE’s articles of association
- Commercial feasibility study including the capital requirement
- Environmental protection study if appropriate
- Parent company’s certificate of incorporation
- Relevant extracts from the parent company statutes
- Credit reference from the parent company’s bankers
- Document appointing the director(s)
- Brief description of each directors and copies of their passports or other ID
- Evidence of the lease or purchase of office space
- Power of attorney in favour of the sponsor.
Once the business plan is approved, the AIC issues a foreign investment approval certificate. After registration has been approved, certain other formalities must be completed:
- Issue of a temporary business licence by the AIC
- Purchase of a 'chop' (carved seal used to authenticate documents) from an approved maker
- Provision of capital, or first tranche of 20% at least, and audit of this by a local accounting firm
- Issue of permanent business licence by the AIC
- Issue of an enterprise code certificate by the Bureau of Quality and Technology Supervision, which is required when registering with the tax authority, customs and to open a bank account
- Registration with the local and central tax authorities
- Registration with the customs authority if the company intends to import office equipment, cars or personal effects)
- Registration with the local Statistics Bureau.
Some of the salient characteristics of a FICE are as follows:
- There may be between one and fifty shareholders, who may be corporate
- The articles restrict the right to transfer shares
- Public offerings of shares are prohibited
- Equity shares are based on capital contribution and not on numbers of shares
- All shareholders must be foreign
- There must be one or more directors, but they cannot be corporate
- One company official must be designated as its legal representative, who may bind the company without the use of a ‘chop’
- There must be a general manager
- The various officers of the company need not be resident in China.
Within 15 days of approval of registration, books of account must be set up; they must be kept in a Chinese language. Audited accounts must be prepared by a domestic accounting firm on an annual basis which must be submitted to the tax authority. These are not publicly available.
The FICE's business licence and enterprise code certificate must be renewed annually. Renewal applications must be submitted one month before the expiry date.
Remittances overseas will almost certainly be subject to foreign exchange controls, and specific permission will probably have to be obtained on every occasion, although this process can very often be administered by local banks. Many types of overseas remittance incur withholding tax.
If a FICE ceases operations in China it must de-register and return its tax certificate to the tax authorities.
Under Chinese law a FICE may employ both Chinese and foreign workers. Individual labour contracts are required and must be submitted for approval to the local labour bureau.
The contract, which or course must be in Chinese, must include a minimum of seven clauses, as prescribed by Article 19 of the Labour Act, and must follow a format prescribed by the local labour administration.
Chinese labour law permits the termination of a direct employment on 30 days' notice, but if there is no demonstrable cause, legal action is permitted. Hence it may be sometimes be better to recruit Chinese workers through an official 'labour service' office as there is then no direct legal relationship with the employees. For representative offices, staff must be hired in this way, but for WFOEs it is optional.
There is a great variety of taxes in China, and a FICE may have to file various different types of tax return – monthly, quarterly or annually – covering enterprise income tax, value added tax, business tax, consumption tax, stamp duty, land appreciation tax, withholding tax (on foreign remittances). and, if there are employees, Income Tax and social security contributions, which are withheld from pay on a ‘pay as you earn’ basis.
The standard tax rate on the profits made by a FICE 25%. Some companies may be able to take advantage of a 15% tax rate; there are regional and national incentive schemes in particular sectors which allow for lower rates.