On 27 July 2021, China released the new Administrative Regulation of the People’s Republic of China on the Registration of Market Entities (“Regulation”), which is the first unified administrative Regulation to regulate all types of market players. The Regulation was enacted on 1 March 2022. On the same day, China released the relevant implementation rules.
The Regulation and its subsequent implementation rules, combine and integrate the registration management of all types of market entities and achieve the unification of rules in the establishment, amendment, and de-registration of market entities in Mainland China.
In this article, we examine how the Regulation will affect foreign companies established or to be established in Mainland China.
Definition of market entities
Under the Regulation, market entities refer to any natural persons, legal persons, and unincorporated organizations that engage in profit-oriented business activities, which include:
- companies and non-corporate enterprise legal persons and their branches;
- sole proprietorships, partnerships and their branches;
- specialized farmers’ cooperatives (associations) and their branches;
- individually-owned businesses;
- branches of foreign companies; and
- other market entities as prescribed by laws and administrative regulations.
How does the Regulation affect foreign companies planning to set up in China?
Foreign companies intending to set up a Foreign-Invested Enterprise (FIE) in China can expect equal treatments as other domestic market players. The Regulation will improve efficiency by streamlining registration procedures, reducing the application materials, and optimizing the registration and filing process. According to the Regulation, the registration authority will only conduct a formality examination (rather than a substantive examination) on whether the application materials are complete and meet the statutory form. If so, the authority will confirm the registration on the spot.
However, even though the authority does not substantially examine the application materials, foreign companies must carefully prepare the application materials and complete the information accurately. Submitting false materials or concealing any important fact by fraudulent means will trigger punitive measures. Furthermore, with China’s implementation of the social credit system, once the company is established, it will be subject to supervision based on the risk level set by the National Enterprise Credit Information Publicity System. As a result, even though the Regulation has removed a lot of the bureaucratic barriers during company registration, foreign companies must stay vigilant on compliance in the long run.
How does the Regulation affect foreign companies that are already established in China?
The Regulation introduced a “Dormant System” that allows companies to suspend business within a certain period due to natural disasters, accidents, public health, or public security incidents. When a company decides to suspend its business, it shall go through the record-filing formalities with the registration authority before the suspension. Upon the expiry of the filed period of business suspension or a cumulative period of three years, the company should be deemed to resume business automatically. However, if it decides to discontinue operation, the company should promptly file for de-registration.
Foreign companies already established in Mainland China but are facing temporary operational difficulties due to unfavorable market situations can consider applying for the “dormant” status rather than closing the company. During the suspension period, companies can observe the market and evaluate whether they should reinstate their operation or exit the market accordingly.
The Regulation also introduced a simplified de-registration system when a company is to be terminated due to dissolution, declaration of bankruptcy, or other statutory causes. The simplified de-registration system allows eligible companies to “fast track” their closure. The requirements of applying for a simplified de-registration are:
- The company has no creditors’ claims and debts or has completely paid off its debts, has no or settled the debt settlement expenses, employee wages, social insurance premiums, statutory compensation, or taxes (overdue fines or fines) payable, and
- All investors undertake in writing to assume legal liability for the authenticity of the above circumstances.
Our advice
Before setting up a company, foreign investors must carefully prepare the related application materials, including the appropriate amount of registered capital, capital contribution plan, and management structure. Although the government filing to apply for a business license has been streamlined, investors should also pay attention to those post-registration tasks. For example, in opening the capital and RMB basic accounts, the China company will be subject to the local bank’s Customer Due Diligence requirements. In most cases, banks perform both formality and substantive examinations of the business, such as paying a visit to the physical office and verifying the legal representative’s identity in person. Foreign investors should seek experienced consultants who can provide all-rounded support in the company set-up, rather than simply finding someone that will only do the “legwork”.
For companies already established in Mainland China, a health check on all information registered with the government should be conducted regularly. Details such as company address, company contact number, the passport number of the legal representative should be updated promptly to avoid restrictions on government services and banking functions that can disrupt business operation.
For some companies with difficulties in operation that have not yet made any profit, we recommend applying for a suspension of business. Many foreign SMEs in China choose to “give up” the company in times of difficulty, leaving tax filings and payments outstanding, which will result in the company being labeled in the List of Enterprises with Abnormal Operation. Following the Regulation, applying for a suspension of business allows the company to stay dormant in China legitimately while cutting substantial operating costs.
If you have more questions regarding company registration or de-registration in China, please reach out to our China Consultancy Team via cct@cwhkcpa.com.
