Starting With the Law in China
Start With the Foreign Investment Catalog
The first place to start is the foreign investment catalog (officially, the “Catalogue Guiding Foreign Investment in Industry”). The foreign investment catalog breaks industries down into three categories: Prohibited, Restricted, and Encouraged.
- Prohibited industries are those in which foreign investors may not invest.
- Restricted industries do not freely allow foreign investment. The restrictions typically require foreign investors to joint venture with a Chinese company (usually with a cap on how much equity the foreign party may own) and / or impose minimum capitalization requirements.
- Encouraged industries are those for which the government in most interested in receiving foreign investment. There are usually tax incentives available for investment in encouraged industries. Encouraged industries are typically high technology-related and “green” industries.
Industries that are not classified into any of the three categories are generally assumed to be permitted, but without special incentives.
Create the "Business Scope"
Every company in China must have a “business scope” that explicitly states what it does. Companies may not operate outside of their business scopes, and the penalties for doing so may be severe. The authorities must approve each company’s business scope, and it is not unusual to have to revise the proposed business scope at least once. The business scope is relevant to the foreign investment catalog because investors may find that their proposed business could fit within one or more categories of the catalog, depending on how they word the business scopes. Therefore, investors may from time to time be able to massage the business scope in order to obtain more favorable classification.
Understand the Chinese Laws Governing Your Foreign Investment
After understanding where your proposed investment stands vis-à-vis the catalog, it is worthwhile to consider the laws governing the type of company you are considering: a wholly foreign-owned enterprise (“WFOE”) or a Sino-foreign joint venture (“JV”). Chinese laws work somewhat differently than you may be used to. There is a WFOE law, two Sino-foreign JV laws (one for “equity” JVs and one for “contractual / cooperative” JVs), and a company law, among many. However, many of the laws are vague and rely on “implementing regulations” to explain how they should be applied. In the Chinese system, the WFOE or particular Sino-foreign JV law (and their implementing regulations) will be controlling in the hierarchy, then the company law, and then other regulations. (This is a greatly simplified hierarchy, as investors often quickly find out when they start to learn about the maze of conflicting regulations and even laws that affect their plans.)
Involve a China Attorney Early On
In many cases, it is highly advisable to involve an experienced attorney in China early in the planning process. It is a good idea to familiarize yourself with the catalog and the laws mentioned here, but without experience in China, it can be difficult to interpret the information. Below are links to the documents mentioned above:
