Establishing Legal Investment Vehicles in China

　　In the December issue we overviewedthe seven legal forms for foreign direct investmentinto China and compared five ofthese forms in detail， namely： representativeoffice (RO)， wholly foreign-ownedenterprise (WFOE)， equity joint venture(EJV)， cooperative joint venture (CJV) andforeign-invested partnership (FIP). Thismonth we focus on the procedures toestablish these legal vehicles. Althougha CJV can be in the form of an incorporatedentity or a contractual cooperationarrangement (i.e. a non-legal person)，we will only discuss CJVs that are legalpersons because non-legal person CJVsare not as commonly used in practice aslegal person CJVs.

　　Step one： Name verification

　　A foreign investor must first apply to theState Administration for Industry andCommerce or its local branches (AIC) tohave the name of its China entity verifiedand approved. The verified name will bevalid for six months， but an extension maybe granted， if necessary.

　　Step Two：

　　MOFCOM and other approvals

　　Pre-registration approvals must beobtained to set up a WFOE/EJV/CJV. TheMinistry of Commerce (MOFCOM) or itslocal branches are the main approvalauthorities. MOFCOM approval can takebetween a few weeks to a few months，depending on the complexity of theinvestment and accuracy of the application.Further， industry-specific approvalsmay be required if a WFOE/EJV/CJV is tooperate in certain industries. For example，a telecommunications EJV must obtainapproval from the Ministry of Industryand Information Technology or itsbranches.

　　Pre-registration approval generally isnot needed for an RO， unless otherwiserequired under PRC law.

　　Step Three： AIC registrationRegistration with the AIC is requiredto set up a WFOE/EJV/CJV/FIP/RO. Asdiscussed earlier， an RO or an FIP maygenerally apply for registration with AICdirectly， while a WFOE/EJV/CJV must doso within 30 days after receiving preregistrationapproval. Once an entity isregistered， the AIC will issue a certificateof registration to an RO or a businesslicense to a WFOE/EJV/CJV/FIP.

　　Step Four：

　　Post-registration FormalitiesRegistration with specific governmentbodies is required within 30 days afterAIC registration. The main registrationsmay be completed with the followingbodies：

　　The relevant tax bureaus；

　　The relevant foreign exchange authorities；

　　The relevant Customs authorities

　　(if the entity engages in import andexport activities)；

　　The relevant labor bureaus； and？The statistics bureaus.

　　Step Five： Capital contributionThere is no registered capital requirementfor an RO， but a foreign investor ina WFOE/EJV/CJV must commit to a minimumcapital contribution when it appliesto MOFCOM for approval. This amount islisted in the business license of the entityas the registered capital. Although theminimum registered capital for a limitedliability company is only around $5，000under the PRC Company Law， in practice，the approval authorities tend to requirea higher amount. Each contribution ofregistered capital must be verified by aqualified verification institution， and averification report must be issued andsubmitted to the competent AIC.

　　A foreign investor of a WFOE/EJV/CJVcan make the capital contribution in onelump sum within six months after thebusiness license has been obtained. Alternatively，an initial contribution of at least15 percent of the total registered capitalcan be made within three months afterthe business license has been obtained，with the remainder contributed withintwo years (five years for a China holdingcompany). Failure to pay the registeredcapital within the prescribed period mayresult in the invalidation of the pre-registrationapprovals and registration.

　　A capital contribution may be in theform of cash or non-cash assets (e.g.industrial assets， land use rights， intellectualproperty or other propriety rights).

　　For a WFOE/EJV/CJV， a cash contributionmust be at least 30 percent of the registeredcapital and the value of non-cashassets must be appraised and verified.For a WFOE， an intellectual propertycontribution generally should not exceed20 percent of the registered capital.

　　For an EJV/CJV， an intellectual propertycontribution can be as high as 70 percentof the registered capital. For an FIP， laborservices can be contributed by partnersin addition to cash and non-cash assetscontributions， although the partnershipagreement should stipulate how suchservices will be valued.