Establishing Foreign Investment

Principal Forms of Foreign Investment

1. Sino-Overseas Equity Joint Ventures (EJV).

2. Sino-Overseas Cooperative Joint Venture (CJV)

The major difference between an EJV and a CJV is that the investment of foreign investors in the latter does not need to be converted into shares or even if the investment is converted into shares, the distribution of profit, the bearing of risk, the sharing of liability and the assignment of property do not need to be decided on the basis of the shares of investors. Moreover, investment payback ways and administration in a CJV is more flexible.

3. Wholly Overseas Owned Enterprises

4. Sino-Overseas Share Holding Companies

Sino-overseas share holding companies are those in which all investment is composed of equal valued shares. They are limited companies and overseas shareholders are required to take at least 25 percent of the company's total registered capital. These companies can be set up by public offering or private offering.

5. Overseas Invested Financial Institutions

Foreign financial organizations applying to establish financial institutions in China should have total assets over some required standards. The home country of the head office must have a strict financial supervisory system. In addition, the head office should have established a representative office in China for more than 2 years. The application of a financial institution should strictly observe relative laws and regulations and should be approved by the People's Bank of China.

6. Representative Offices
A foreign company may establish a presence in China by setting up a representative office. The representative office must confine its activities to promotion or acting as a liaison office on behalf of the parent company. And it must not engage in any trading or business activities directly or on behalf of the parent company.

Other Foreign Investment Forms

1. BOT
BOT (Build-Operate-Transfer) is mainly applied in such infrastructure projects as toll road, power plant, railway, wastewater processing facilities, and subways, etc.

2. Compensatory Trade Enterprises
Compensatory trade enterprises are those in which overseas partners provide equipment and technology and are bound to purchase a certain quantity of the finished products. The equipment and technology provided by foreign investors can be purchased through installment. As agreed between both parties, loans for purchasing and importing equipment and technology can be paid by Chinese partners with other products as well as the finished products.

3. Processing and Assembling Enterprises
Processing and assembling enterprises are those in which overseas partners are responsible to provide raw materials, components, designs as well as the equipment and technology. The finished products are then taken back by the overseas partners to sell on the overseas market. The Chinese partners earn income in the form of processing fees. When overseas partners wish to sell their equipment and technology, the Chinese partners are entitled to make payment by installment or using their processing fees. The raw material for processing and assembling are all imported and the finished products are all exported.

4. Financial Leasing

Procedures To Establish an FIE
At present, the establishment procedures of an FIE is divided into two major steps: to obtain approval documents from relative authorities and to register with the relative Administration for Industry and Commerce. To be more specific, the procedures include: early-stage preparations, approval, business registration and other procedures.

1. Early-Stage Preparation
To select investment projects and cooperative partners, etc.

2. Obtaining Approval
All the Project Proposal, Feasibility Study Report and Articles of Association have to be approved by state level authorities or local authorities according to the project's nature, industry and investment volume.

3. Business Registration
An FIE must bring the Articles of Association, its contract and approval documents to the State Administration for Industry and Commerce or local AIC for business registration purpose and to obtain business license.

4. Other Procedures
Other procedures include tax registration, foreign exchange control registration, opening bank account, registration with statistic bureau, custom registration, fiscal registration, land use approval and capital verification, etc.

Procedures to Establish a Representative Office

1. Examination and Approval
Foreign traders, manufacturers, shipping agents, economic organizations and other groups shall report, according to their nature of business, to the Ministry of Foreign Trade and Economic Cooperation (MOFTEC) or other relevant ministries, committees or bureaus which are authorized to examine and approve the establishment of resident offices.

2. Business Registration
After receiving the approval documents, the representative office as well as its representatives should complete the registration with the relative Administration for Industry and Commerce.

3. Other Procedures
After obtaining business certificate, the representative offices should complete tax registration, open bank account , get customs approval for importing office equipment and daily necessities, get approval for employing Chinese personnel and approval for the residence of expatriate representative, etc.

Merger and Acquisition
China has established a legal and regulative system concerning transaction and transfer of property right on enterprise, includes Company Law and Bankruptcy Law. Foreign investors can carry out M&A in China upon approval of government authorities.

Statutory Requirements of Accounting and Auditing

1. Accounting
An FIE is required to maintain a complete accounting system and prepare financial statements. Three kinds of primary accounting books should be set up: journals, general ledger and subsidiary ledgers and their supporting documents. Computerized accounting records are also allowed. All supporting documents, accounting books and financial statements should be prepared in Chinese. However, foreign language can also be adopted along with Chinese. Generally, PMB is adopted as the base bookkeeping currency. If a foreign currency is used , the financial statements must be converted into RMB at the year-end.

In China, the accounting year is the calendar year, i.e., January 1 to December 31. However, if an FIE experiences difficulties in computing its taxable income according to the calendar year, other fiscal year is also allowed upon the approval of tax authorities. Enterprises that commence its business in the middle of a year or have operated for less than 12 months in a tax year may treat the actual operating period as a tax year.

The accounting system is based on accrual basis instead of cash basis.

2. Auditing
An FIE is required to entrust a Chinese CPA firm to audit its annual financial statements, accounting records and to issue auditor's report. All vouchers, accounting records and financial statements should be provided to the auditors. The auditing is carried out in accordance with Company Law, accounting regulations and tax laws. The statutory annual auditing of an FIE's financial statements is mainly for the purpose of tax authorities. The annual financial statements and auditor's report should be filed within 4 months after the end of the year.

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