Introduc)on � China’s Accession to WTO: Dec 2001 Ø Significant event: Chinese + Foreign Investors Ø Expected Result: Trade Liberalization + increased opportunities Ø Fastest growth rate: Large markets for international business
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Content
Part I China Legal
System
State structure
Legislation
Judicial system
Part II Foreign
Investment Enterprises
Five FIE vehicles
Pros & Cons
Key considerations
3
Introduc)on
4
I General Government
(Central)
5 Ethnic
Autonomous Regions
4 Municipalities Directly under
Central Government
II. 23 Province
III. Municipality
IV. Country
V. Township
VI. Village
2 Special
Administrative Regions
1.1 The overall state structure
Xinjiang Tibet
Inner Mongolia Ningxia Guangxi
Hong Kong 1997
Macau 1999
Beijing Shanghai Tianjin
Chongqing
Six Levels State Hierarchy
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6
National People’s Congress
& Standing Committee ☆
☆ State council
Ministries
Commissions
Supreme People’s
Court
Supreme People’s
Procuratorate
Central Military
Commission
Communist Party 1921
1.1 The overall state structure
Central level Legislative power Highest Organ
Judicial power Procuratorial power
Political power
Accountable
Military power Executive power
Highest Organ
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1.1 The overall state structure � National People’s Congress
1. Highest organ of state power + Highest legislative body
2. Citizens exercise power; Composed of deputies elected (3000) ;
3. Term: 5 years; In session annually
4. Main functions: A. amend the Constitution and supervises; B. enacts and amend basic laws C. appoints and remove top officials D. examines and approves state budget E. approves the establishment of political regions
5. Permanent body: NPC Standing Committee
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1.1 The overall state structure � State Council
1. Highest organ of state administration 2. Composition: Premier, Vice Premier, state councilors, ministers, Auditor-general, and Secretary-general
3. Term: same as NPC; No more than two consecutive terms.
4. Main functions: A. Adopts and enact administrative regulations B. Issues decisions and orders in accordance with the Constitution and laws; C. Formulate and implements national economic plan and state budget;
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China: Separa)on of Power ?
Q: Whether China has the doctrine of separation of
power ? • YES---Various organs hold different power; perform different functions
• NO--- NPC have the highest power and supervise all other organs; power to interpret laws
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People’s Congress
Standing Committee
Local Government People’s Court
People’s Procuratorate
1.1 The overall state structure
Local level Same structure
Higher-level Local
Government Higher-level
Court Higher-level
Procuratorate Accountable
Legislative power Highest Organ
Supervisory power Municipal vs Provincial
Village vs Township
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Legis lation
In
China
Constitution ☆ Adopted and Amended By NPC
Basic Laws NPC & Standing Committee (Criminal/
civil/government organ)
Administrative Regulations
State Council (Implement basic law)
Government Rules
1. Ministerial & Departmental rules
2. Local Governmental rules
Local Regulations People’s Congress (Actual circumstance; practical needs)
Self-governing regulation
Specific rules People’s Congress: Auto-Regions (political, economic, cultural features)
1.2 Legisla)on
1.2 Hierarchy of legal norms
Constitution
Basic Laws
Administrative Regulations
Local Regulations
Local Rules
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Supreme law
Not Contravene
Take 2nd precedence
Take 3rd precedence
Local regulations take precedence over local rules enacted by the same level
Conflicts in norms: Specific over General
New over Old
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1.3 Interpreta)on of legal norms Legal
Interpretation
Legislative Interpretation
(Laws)
Administrative Interpretation
(Administrative regulation) (Governmental rules)
Judicial Interpretation
(Laws)
NPC Standing
Committee State Council Subordinates
Supreme People’s
Court
1981 NPC Resolution
Least weight Middle weight Greatest weight
Non-trial application Exclusive interpreters Common to indicate
No authorization Uniform application
At Trial Source of law
Where necessary: Concrete meaning
Legal basis Same effect as law
Legal Significance
1.3 Judicial System
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Four Levels
Jurisdiction
Two-trial system
Supreme People’s Court
High People’s Court (32: province; auto-regions;
municipalities directly)
Intermediate People’s Court (380: municipalities)
Basic People’s Court (3000:country)
Divisions: Criminal
Civil Administrative
Special Courts: Forest
Railway Military
Maritime
2. Foreign Investment Enterprises in China
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According to the statistics:
from Jan to Dec 2013, Newly
Approved Foreign-invested
Enterprises amounted to 22,773;
Actual use of foreign investment
reached USD 117.586 billion.
2.Foreign Investment Enterprises in China
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Top 10 nations investment
1. Hong Kong (USD78.302b),
2. Singapore (USD7.327b),
3. Japan (USD7.064b),
4. Taiwan Province(USD5.246b),
5. U.S.A. (USD3.353b),
6. R.O.K.(USD3.059b),
7. Germany (USD2.095b),
8. Holland (USD1.281b),
9. U.K. (USD1.039b)
10. France (USD762million)
2. Foreign Investment Vehicles
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Business
Vehicles
Representative office Branch
Sino-foreign
Equity Joint venture
(EJV)
Sino-foreign Cooperative Joint venture
(CJV)
Wholly Foreign Owned
Enterprise (WFOE)
Foreign Investment Enterprises (FIEs)
Chinese legal person
Core FDI instruments
Preparatory Nature
Limited Business Activities
Decide appropriate forms Depend on business strategy
China open its door in 1978
2.1 Representa)ve Office � Applicable laws
� Regulations on Administration of Registration of Resident Offices � of Foreign Enterprises (2011 by State Council)
� Requirements
1. Definition: working bodies established by foreign enterprises within CN
2. Legal Status: Not legal person
3. Title: “Country + Enterprise Name + City Name + RO”
4. Composition: A chief representative + 1-3 representatives
5. Scope of Activities: No profit-making activities ① Market surveys, displays and campaigns; ② Liaison activities (sales, service, procurement and investment)
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2.1 Representa)ve Office
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Formal Application
Domicile certification 2-year Business license
Articles of Association
Organization Agreement
Commission Documents
Identification papers & Resumes
Certificate of capital credit (issued by financial institutions)
Complete
Applications
Lawful right to use residency site
State AIC &
Authorized Local AIC
2.2 Equity Joint Ventures (EJV) � Applicable laws
1. Sino-Foreign Equity Joint Ventures Law (1979) (1990/2001) 2. Sino-Foreign EJV Implementing Regulations (2001)
� Definition: An equity joint venture is a Chinese legal person with limited liability,
which is established on the basis of a joint venture contract between Chinese and
foreign parties after approval by the Ministry of Commerce.
� Investor: Foreign companies, enterprises, economic entities, individuals � Form: Limited liability company (Chinese legal person)
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Framework
2.1 EJV: Applica)on Procedure
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Complete Documents
Application Form
Joint Feasibility
Report
Legal Documents
Joint Venture Agreement
Joint Venture Contract
(Centerpiece)
Articles of Association
List of Candidates
Project Proposal + Pre Feasibility Report
(Chinese party)
Preliminary Approval
MOFCOM
Government
Major points and principles
Right & Liability Governed by CN law
Objectives Organizational principles
Management methods
Assessment of Economic viability
VS
2.2 Equity Joint Ventures � Requirements
1. Capital: No less than 25% registered capital; Capital proportion
2. Investment: cash, in kind contributions (machinery equipment and materials), buildings, factory premises, Industrial property rights or technologies, right to use a site.
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Total Capital
US $ 3 million
US $ 3 —10 million
US $ 10 —30 million
US $ 30 million
Registered Capital
At least 70%
At least 50%
At least 40%
At least 33%
VS
2.2 Equity Joint Ventures � Requirements
3. Liability: Share profits/bear risks in proportion to contribution
4. Equity transfer: Consent of other parties; Approval of authority
5. Activities scope: “Definitive”; Approval of authority; Careful darting
6. Term stipulated in Contract: � Typically fixed term: 15-50 years depending on size and nature � Indefinite terms are permitted after approval � Fixed term: service industries; land development; real estate; natural
resource exploration.
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Dongfeng Auto Company
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China First Auto Works
2.3 Coopera)ve Joint Ventures (CJV) � Apart from EJV, foreign investors may also by means of CJV, in which
Chinese and foreign parties cooperate on the basis of joint venture contract, which became common in the early 1980s.
� Applicable laws
1. Sino-Foreign Cooperative Joint Ventures Law (1988/2000) 2. Sino-Foreign CJV Law Implementing Rules(1995)
� Requirements 1. Investor: Foreign enterprises, economic organizations, individuals 2. Two different legal forms:
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Hybrid CJV Separate entity
Limited liability company Legal person
Pure CJV No legal entity
Contractual agreement Non-Legal person
VS
Framework
2.3 Coopera)ve Joint Ventures Application Procedure
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Required Documents
Proposal for Establishment
Feasibility Report
Legal Documents
Joint Venture Agreement ☆
Joint Venture Contract
Articles of Association ☆
Business License
List of Candidates
Department Foreign Investment
Administration (Ministry of Commerce)
People’s Government Various Levels Approval
Key Documents: required by law to contain certain provisions
Similar to EJV
2.3 Coopera)ve Joint Ventures � Requirements
3. Contribution: Same as EJV 25%
4. Rights and Liabilities ① Liability: Hybrid (investment) vs. Pure (independently) ② Profits: need not in proportion; stipulated in agreement (Vs. EJV) 5. Term of Protection: ① Duration: Determined by parties in the contract; ② No maximum or minimum; Extension 180 days.
6. Recover of investment: (Vs EJV) ① Fixed assets given to Chinese party ② All loss has been covered
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Examples of CJV
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China Oil & Foodstuffs Corporation
COFCO-Cocacola
Sino-US CJV
Examples of CJV
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CVSC-TNS RESEARCH
Sino-French CJV
Taylor Nelson Sofres
2.4 Wholly Foreign-‐owned Enterprise � WFOE is a separate business entity and china legal person � Main difference with JV: 100% owned, no local party
� Applicable laws 1. Wholly Foreign-owned Enterprises Laws (1986) 2. Wholly Foreign-owned Enterprises Implementing Rules (1990/2001)
� Restrictions on WFOE 1. Prior to 2000: use advanced tech or export 50% products 2. Amendment: Article 3 Rules eliminated this requirement Ø Benefit the china economy; Encourage establishment of Tech-Ad-E Ø Result: A wider range of WFOEs; Still impose greater restrictions Ø Prohibited industries: press; publishing; insurance; radio; post & com
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2.4 WFOE: Applica)on Procedure
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Formal Application for Establishment (CN)
Feasibility Report
Articles of Association(CN)
List of Representatives
Registration certificate
Credit worthiness
List of materials need import ☆
Project Application
Report
Preliminary Approval
Approved by Examination Authorities
Easier than JV Harder than RO
No assistance of Chinese party
2.4 Wholly Foreign-‐owned Enterprise � Requirements
1. Subject: Foreign enterprises, economic organizations, individuals
2. Two Forms: ① Limited liability company: liable within the limits of investment ② Other types: pursuant to Chinese laws; exceptional case
3. Capital: 100% foreign owned; ① Same ratio requirements as JV ② Reduce, Transfer, Increase: Obtain approval
3. Investment: convertible foreign currency, machinery, equipment; Industrial property rights or technologies.
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Examples of WFOEs
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2.5 Foreign Companies Limited by shares
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� Applicable laws
� Provisional Rules on Several Issues Concerning the Establishment of Foreign Companies Limited by Shares (1995; Ministry of Commerce)
� Definition
� A company limited by shares with foreign investment" refers to legal person
established with the entire capital being divided into shares of equal value,
where the shareholders bear responsibilities to the extent of the number of the
shares they hold and, the company bears responsibilities for its debts with all
its assets, and where the Chinese and foreign shareholders jointly hold the
company's stock, with the shares subscribed and held by foreign shareholders
being more than 25% of the company's registered capital.
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Names, domiciles, representative Promoter
Name, domicile, objective Company
Means of establishment
Information about shares
Offer: Production, operation situation of promoter
Details on capital investment
Business scope
Time of application Signature and seals
2.5 Foreign Companies Limited by shares
Formal Application
Feasibility Report
Articles of association
Promoters’
Agreement ☆
Asset-evaluation Report ☆
2.5 Foreign Companies Limited by shares
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� Requirements
1. Establishment of Companies � Sponsorship: requirements in Company Law; one foreign promoter � Subscription: one promoters: successively made profits in last 3 years
2. Capital � Minimum amount: RMB 30 million; 25% foreign shareholding � Capital Transfer : Remaining 25%; promoters 3 years after registration
3. FIE’s Reorganization ☆ � Existing CJV, EJV, WFOE: making profits for 3 consecutive years � Original investors promoters: sign agreement & articles � Submit special documents to original authorities � Assumed all rights and obligations; specified in agreement & articles
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Original Contract Articles of association
Agreement on termination of original documents
Decision on reorganization
Certificate of approval
Financial reports 3 consecutive years
Promoters' credit references
2.5 Foreign Companies Limited by shares Formal Application
Feasibility Report
Articles of association
Promoters’ Agreement
Asset-evaluation Report
Other
Documents
Comparisons of Different FIE Vehicles
FIE Forms Purpose Pros Cons
Representative Office (RO)
• Market research; • Liaise with home country company
• Attractive way; Easiest type • No registered capital
• Monitor market; Quality control • Sector prohibited/restricted
•Limited business scope • Not profit-making • Not legal person • Size limit; Hiring
Equity Joint Venture
(EJV)
• Industries that by law require a
local partner
• Local partner’s existing facilities, workforce,
Sales channels, raw materials • Familiar with environment •Reduce startup cost and risk
• Find suitable partners • Split profits
• Less management control • Technology transfer/IP risks
Cooperative Joint Venture
(CJV)
• Hotels •Commercial complex
• Infrastructure • Mining projects
• More flexibility than EJV •Profit sharing; risk bearing
• Investment recover • Two legal forms
• Same as EJV • Not used for manufacturing
Wholly Foreign-owned
Enterprises (WFOE)
• Manufacturing • Service Providing
• R & D
• Greater freedom • 100% ownership
• Full management control • Better IP protection • Easy to terminate
• Capital requirement • Expensive; time-consuming
• More investment risks • Limited sectors
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2.6 FIEs in China
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2.6 FIEs in China
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SUM: 22514 SUM: 16187
2.7 Key FIE Considera)ons
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Key Considerations
1. Business Scope
2. Capitalization
3. Term of Operation Common terms: 15-50 years Fixed term industries
25% Registered Capital Ratios; Contribution forms
Business license; Definitive; Amend: Approved by authorities
Wide / Narrow
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