Establishing Your Business

We wish we could say that establishing your company will be quick and painless, but we’d be lying. You will get frustrated at times. This section — and your legal team — can help you out. Remember that finally receiving your business license will be a fantastic feeling.

China, may I? Getting business approvals

When setting up a limited liability company (LLC) or a rep office, you generally deal with two main approval authorities: the Ministry of Commerce (MOFCOM) and the State Administration of Industry and Commerce (SAIC) — or their local branches. The terminology and process is a little different with rep offices than with LLCs, but the idea is the same in terms of receiving an approval to set up shop and then registering the business and receiving your business license.

This section mostly discusses getting approval for an FIE LLC from MOFCOM and SAIC. For certain industries, particularly restricted ones, the approval process is more complicated and can involve other ministries.

Introducing your friendly neighborhood approval authorities

MOFCOM and SAIC are actually the acronyms for the national-level organs. Unless you’re making a very large investment or investing in a sensitive industry, you’ll be dealing with their local branches. Local MOFCOM branches are often called COFTEC (Commission of Foreign Trade and Economic Cooperation). SAIC’s local branches are usually referred to as [city or province name] AIC (Administration of Industry and Commerce) — for example, Qingdao AIC.

Keep in mind that local practices at the approval authorities can vary quite a bit. Different MOFCOM and AIC branches usually use different forms. In addition, some branches may require certain formalities that others do not. For example, some branches may want a little more documentation from the country in which the parent is incorporated.

Find a trustworthy local business services company or attorney where you’re going to set up. If you’re more comfortable with providers that aren’t local, that’s fine. Just be ready to have some patience as they run into differences in local practice that require them to redo some forms and signatures.

Getting your approval certificate from MOFCOM/COFTEC

Here’s how the approval process works:

According to the letter of Chinese law, you’re also supposed to seek approval for your project from the State Development and Reform Commission (SDRC) around the time that you go for MOFCOM approval (the law is unclear as to the relative timing). Most projects seem not to actually need this approval, but if your project is subject to central-level MOFCOM approval, you’ll likely need SDRC approval as well.

Getting MOFCOM and the AIC to approve your scope of business

The Articles of Association (AOA) in your application packet lists your scope of business. The scope of business must be pretty specific, and both the Ministry of Commerce (MOFCOM) and the Administration of Industry and Commerce (AIC) separately scrutinize it to see whether your proposed investment is in line with the foreign investment catalog (see the earlier “Checking out the catalog” section).

In some cases, MOFCOM approves the scope of business as it is, but the AIC rewrites or rejects it. If this happens, you can’t yet start your business or you don’t get the status you want.

Size can be a factor in getting the approval you want — a smaller company may be able to use its nimbleness to find a creative way to do the business it wants to do while receiving favorable status; a large, famous company is usually likely to get more deference, though.

Talk with both approval authorities as you write your scope of business. That way, you can get informal pre-approval of your scope. You can always apply down the road to change your scope of business.

Your company should never deviate from its approved scope of business. Doing so can get you in serious trouble with the government: revocation of your business license.

Taking it in the chops As you go through the approvals process, you’ll notice that government agencies and private companies stamp a lot of documents. These stamps, called chops, usually contain the agency or company’s name. China is big on chops — most documents aren’t official until someone chops them. After your company is established, you go to a licensed chops maker to get your own set. Treat your company’s chops with care. Not only do they act as an official company endorsement of a document, but you may not be able to do some business without them. For instance, Winston Zhao, the partner-in-charge of Jones Day’s Shanghai office, tells the story of a foreign client who owned a manufacturing company in China. The foreign investor had appointed a local Chinese person to be the chief representative of the company. As often is the case, the chief representative was made the signatory on the company’s bank accounts. After several years, the foreign investor wanted to make a change and fired the chief representative. The fired individual had access to all the company’s chops, though, and took them with him on his way out. The bank wouldn’t change the signatory on the accounts because the company no longer had its chops — even though the investor had all the paperwork to prove that it was the rightful owner of the account! Eventually, the investor had a to pay a ransom to get its chops back.

Getting your business license from the AIC

Assuming your company is approved, you next go to the AIC for your business license. You must apply for your business license within 30 days of receiving your MOFCOM approval certificate. The business license application should include the following:

✓	An application form
✓	The AOA
✓	The MOFCOM approval certificate
✓	A copy of the parent’s certificate of incorporation
✓	A letter from a bank attesting to the parent’s good standing
✓	A list of the FIE’s directors, supervisors, and the general manager
✓	The name pre-approval notice
✓	Other documents required by the local AIC

If you wait more than 30 days to apply for your business license, your approval certificate will automatically become invalid.

If all is in order, the AIC issues your company’s business license within a few weeks. The date your company receives the business license is its birthday. It starts the clock running on a number of important timelines, such as your required registered capital contributions (see “Ownership and registered capital,” earlier in this chapter). Now you’re ready to start doing business!

Getting post-formation approvals

After you receive your license, you’ve formed your company. Here’s where to go from there:

✓	Register with the tax bureau and the Quality and Technology Supervision Bureau.
✓	You may need to deal with the State Administration of Foreign Exchange (SAFE, discussed in detail in Chapter 10) and the customs authorities.
✓	You may need approval from additional approval authorities if you’re going to do business in certain industries. For example, if you’re going to set up a coal-mining business, you also need approval from the Ministry of State Land and Resources and the State Development and Reform Commission (SDRC).

Landing your land

Land is becoming a hot-button issue in China. The state owns all land in China, but it sells land-use rights to companies. Land-use rights are basically long-term leases, usually good at least for several decades.

The central government has become concerned that in order to attract investment, local governments have been selling land-use on the cheap to investors. As a result, land use is an area where the law is changing rapidly. One recent change is that the central government has made clear that it won’t tolerate any more bargain land sales or land subsidies. Beijing has now specified minimum land-use right sale prices for most parts of the country.

Local governments aren’t generally happy about Beijing’s increasing regulation of land-use rights sales. However, the central government seems serious about cracking down in this area, so be skeptical of local governments that seem willing to give you a discount on the land price or a land subsidy.

Knowing your land-use rights

You need to know about three types of land-use rights:

✓	Granted: You want granted land-use rights because they’re the only rights that are transferable to other buyers.
✓	Allocated: Allocated land-use rights are not transferable, and they’re typically the type of rights that state-owned enterprises have.
✓	Collective: You have to worry about collective-use rights only if you’re purchasing land from a party other than the government. Collective-use rights are for use only by village or township cooperative enterprises. They can’t be transferred legally to investors — the government must first repossess the rights (usually paying compensation to the collective rights owners). Then it can turn around and grant the rights.

Law requires you to begin building on the land within one year; if you don’t begin within two years of purchase, you lose your land-use rights!

If you’re getting your land-use rights from the government, you sign a land-use rights grant contract with the local land bureau. The bureaus usually have their own contract. Your advisors should be able to tell you whether the contract is a standard form they’re used to seeing. If it isn’t, you may be able to use your advisor’s form instead; which form you use is something you have to negotiate (see Chapter 6 for tips on negotiating).

Considering options to expand

Land options are contracts that allow you to buy land at a fixed (or not-so-fixed, as we explain later) price in the future. Land options executed between two private parties are enforceable. However, some investors sign land options with land bureaus. Usually, this happens when the investor is setting up a facility and wants the ability to expand if all goes well. In these situations, investors often purchase land rights for one parcel of land and get an option on an adjacent parcel.

Whether options signed with land bureaus are enforceable isn’t clear under Chinese law. Some land bureaus may require you to pay for the option. Don’t be surprised if the price you’re asked to pay when you exercise your option is higher than the price agreed to in the option — especially with the pressure on local governments to get full prices for land.

Options are also complicated by the one- and two-year construction requirements for the land (see the preceding section) because Chinese officials can argue that you’ve tied up the land without using it. At best, the area of options is murky.

Visas: Getting yourself and your expatriate employees to China

Fortunately, getting yourself, your expatriate employees, and their families residence permit visas and working permits isn’t too hard. (Note: Spouses’ residence permits don’t allow spouses to work unless they change the visa after they find employment.) Here’s how the process works:

As soon as employees have residence permits, they can import their personal belongings. Unfortunately, furniture, home appliances, and electronic equipment are still subject to duty or tax.