Choosing Your China Structure: Foreign-Invested Commercial Enterprises

By RICHARD HOFFMAN

Choosing Your China Structure: Foreign-Invested Commercial Enterprises

By RICHARD HOFFMAN

When choosing an appropriate investment vehicle in China, many factors must be considered, as these will lead to different legal and tax considerations. Once you’ve clearly defned the needs and goals for your China investment, it is time to consider the legal form your China entity should take. Foreign investors have several choices for structuring a China enterprise: the representative office, the joint venture, the wholly foreign-owned enterprise (WFOE) and the foreign-invested commercial enterprise (FICE). These structures have different features that can help or hinder your China venture, so choosing the appropriate vehicle from the outset will be invaluable for the long-term success of any investment. Here we examine the FICE.

Foreign-invested commercial enterprises

Foreign-invested commercial enterprises are capable of conducting the following activities:

● Import, export, distribution and retailing

● Retailing—selling goods and related services to individual persons from a fxed location, as well as through TV, telephone, mail order, the Internet, and vending machines

● Wholesaling—selling goods and related services to companies and customers from industry, trade or other organizations

● Representative transactions on the basis of provisions (agent, broker)

● Franchising

These activities can also be achieved through other means such as agents. A FICE will, however, bring the control needed to secure quality, service level and bring you closer to your suppliers, as well as enable you to invoice your clients in Chinese currency.

There are limitations, however. A FICE cannot change the nature of the product but only sell what it has purchased. Additionally, certain products—such as books, periodicals, newspapers, automobiles, medicines, salt, agricultural chemicals, crude oil, and petroleum—face some ownership barriers. Namely, if a foreign investor in China has more than 30 retail stores that distribute the above products from different brands or suppliers, the foreign investor’s share in the retail enterprise is limited to 49 percent. Otherwise, for those that do not distribute the above goods, there are no limitations on ownership share or retail units. Foreign investors interested in international trade should also know that FICEs can now obtain their own import/ export license. Obtaining additional licenses for importing and exporting specific goods can become diffcult though it is necessary in certain cases.

Establishing a FICE

The establishment process for a FICE is very similar to that of the WFOE. However, FICEs do not have to fle an Environmental Protection Valuation Report as they do not manufacture or process. Also, FICEs are required to obtain a special import-export license record with the Customs bureau. As with the WFOE, special care also needs to be given to the articles of association, specifcally the inclusion of a general manager article, a trade union article and a supervisor article.

Registered capital

Minimum registered capital requirements have been reduced compared to a decade earlier. Secondly, the whole of China is now available for FICE establishment. The legal minimum for establishing these types of enterprises is 30, 000 yuan ($4,392) (If the Chinese laws or regulations provide a higher threshold than 30, 000 yuan ($4,392), then such higher threshold will need to be followed), but the presence of one shareholder usually causes an increase to around 100, 000 yuan ($14,600). Nonetheless, the market has now opened to some entrants who previously could not afford to get started in China. The concerns within the WFOE investment guide regarding working capital and registered capital’s relationship with total investment also hold true for the FICE.

The author is Senior Legal Associate of Dezan Shira & Associates Beijing Office (www.dezshira.com)