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Establishment and
Termination of Enterprises
I. Procedure for Establishment of Enterprises
In applying for the establishment of a Sino-foreign equity joint
venture or contractual joint venture enterprise, the investors concerned
shall generally go through the following four steps:
1. To submit to competent authorities the proposal (application)
on the project to establish the enterprise; Only when this proposal
is approved can the investors proceed to do the various work centering
on the production of the feasibility study report on the project.
2. To submit to competent authorities the feasibility study report
on the project; Only when this report is approved can the investors
proceed to sign the contract, charter of incorporation and other
legal documents concerning the establishment of the enterprise.
3. To submit to competent authorities the contract and charter
of incorporation concerning the establishment of the enterprise;
After these legal documents are reviewed and approved, competent
authorities responsible for the review and approval (hereinafter
referred to as ¡°the reviewing and approving authorities¡±)
will issue the enterprise with a certificate of approval for the
foreign-funded enterprise. The aforesaid three steps are the steps
for official approval of the establishment of a joint venture enterprise.
The Chinese partner in the joint venture shall be responsible for
submitting the legal documents to competent authorities for review
and approval. In order to simplify the procedure, the application
for the establishment of a small-size project can go through the
steps in unitary way.
4. And, with the certificate of approval issued by the reviewing
and approving authorities, to contact competent administrative authorities
for industry and commerce to go through the formalities for registration.
The procedure for the establishment a wholly foreign-owned enterprise
is simpler. In applying for the establishment of a wholly foreign-owned
enterprise, the investor can submit a formal application, the charter
of incorporation and other legal documents for approval after the
initial application for the project is approved in writing by the
reviewing and approving authorities. After the formal application,
the charter of incorporation and other legal documents are approved,
it can take the certificate of approval and contact competent administrative
authorities for industry and commerce to go through the formalities
for registration.
II. Competent Authorities Responsible for Official Approval and
Jurisdiction of Approval
In line with law, the establishment of foreign-funded enterprises
in China is subject to the approval of competent authorities. Competent
planning authorities shall join other government authorities in
reviewing and approving proposals (applications) for the establishment
of general foreign-funded projects and relevant feasibility study
reports. Competent foreign trade and economic cooperation authorities
shall join other government authorities in reviewing and approving
proposals (applications) for foreign-funded technical transformation
projects. Competent authorities for foreign trade and economic cooperation
shall be responsible for reviewing and approving contracts and charters
of incorporation concerning the establishment of foreign-funded
projects.
Where projects fall into the category of projects constraining
foreign investment, where projects fall into the category of projects
whose conditions for construction and production are subject to
comprehensive balancing by the State, where the export of products
of projects is subject to the limitation of quotas or licensing,
or where the approval of projects is beyond the jurisdiction of
local authorities, competent authorities under the State Council
¨C the highest governing body of China ¨C shall be responsible
for their approval. Where projects fall into the category of projects
of service trades whose establishment is restricted, such as projects
for the construction of airports, hotels and commercial retail outlets,
projects of leasing, cargo transportation agency, banking and insurance,
and projects for the incorporation of investment companies and joint
stock companies, competent authorities under the State Council shall
be exclusively responsible for their approval.
For projects which do not fall into the aforesaid categories, governments
of Chinese provinces, autonomous regions or provincial-level municipalities
concerned or government agencies authorized by them shall be responsible
for their approval. The jurisdiction of local governments for the
approval of foreign-funded projects only covers projects with a
total investment of no more than 30 million U.S. dollars each. After
a foreign-funded project is established with the approval of a local
government, the party concerned shall submit relevant documents
to competent authorities under the State Council for record in line
with relevant regulations. In order to simplify the procedure for
official approval of foreign-funded projects and shorten the time
for the approval, Chinese provinces, autonomous regions or provincial-level
municipalities may transfer the power of approval to lower levels
within their jurisdiction in accordance with concrete local conditions.
III. Principles of Approval
The principles of approval are to check whether the contracts and
charters of incorporation submitted conform to Chinese law, rules
and administrative regulations; to check whether the projects concerned
meet the contents of the feasibility study reports and documents
approved; and to check whether the projects concerned conform to
the principle of equality and mutual benefit.
In line with Chinese law, the contracts and charters of incorporation
of foreign-funded enterprises are subject to approval by the government's
reviewing and approving authorities before becoming valid.
IV. Registration
In the stage of application for the establishment of a foreign-funded
enterprise, there are the following two steps of registration:
1. The registration of the name of the enterprise after the registration
of the enterprise as a project;
2. And, the registration of the establishment of the enterprise
after the contract and charter of incorporation are approved by
the reviewing and approving authorities.
The registration of the name of the enterprise is intended to prevent
possible re-registration and use of the name by other parties in
the process of negotiations and official approval. No party concerned
may engage in business operations in the name of the enterprise
registered before the registration of the enterprise is completed.
After the contract and charter of incorporation are approved by
the reviewing and approving authorities, the investors shall take
the certificate of approval for the foreign-funded enterprise and
other documents concerned and apply to competent industry and commerce
administration authorities for registration within 30 days. After
the approval of competent registration authorities, a business license
shall be issued. The date of issuing the business license shall
be date of establishing the foreign-funded enterprise concerned.
V. Term of Operation
The term of operation of foreign-funded enterprises shall be fixed
by their investors through consultations in line with relevant regulations
of the State and in accordance with actual conditions of different
trades and projects. Generally, the term of operation of a foreign-funded
enterprise ranges between 10 years and 30 years, and may reach 50
years in the maximum. However, with the special approval of the
State Council, it may exceed 50 years. Where a Sino-foreign joint
venture enterprise falls into the category of projects encouraging
and permitting foreign investment, it is applicable that the investors
do not fix a term of operation. For a foreign-funded enterprise
whose term of operation has been fixed, where its investors agree
to extend the term of operation, they shall apply to the relevant
reviewing and approving authorities 180 days before the date of
expiry of the term of operation to obtain approval. Where the investors
fail to apply for an extension of the term of operation or where
the application for an extension is not approved, the enterprise
concerned shall be terminated upon the expiration of the term of
operation.
VI. Conditions for Termination
In line with Chinese law, a foreign-funded enterprise shall be
terminated where any of the following conditions occurs:
That the term of operation expires;
That the investors have decided to dissolve the enterprise because
of poor operation and serious losses;
That the enterprise can not continue to operate because one of
the partners has failed to fulfil its obligations defined by the
contract and charter of incorporation;
That the enterprise can not continue to operate because of serious
losses resulting from factors of force majeure such as natural disasters
and war;
That the enterprise has become insolvent;
That the enterprise has been dissolved for violation of law or
harming public interests;
And, that there have occurred other reasons to dissolve the enterprise
as defined by the contract and charter of incorporation.
VII. Procedure for Termination
Where there has occurred any of the conditions to dissolve a foreign-funded
enterprise, the board of directors of the enterprise shall file
an application and submit it to the reviewing and approving authorities.
The date of approving the application shall be date of terminating
the enterprise. Within a period of 15 days counted from the date
of termination, the enterprise shall make a public announcement
and notify all of its creditors that the enterprise has entered
the period of liquidating its assets.
Within a period of 15 days counted from the date of making the
public announcement, the enterprise shall produce a procedure and
principles for the liquidation of assets and nominate candidates
for the liquidation panel before submitting them to the reviewing
and approving authorities for approval. Only when they are approved
by the reviewing and approving authorities can the process of liquidation
start. The liquidation panel shall comprise representatives of the
board of directors, creditors and competent authorities in charge
of the enterprise. The liquidation panel shall be in charge of the
whole liquidation work and report to the board of directors. The
liquidation panel is under the obligations to check the assets,
creditor's rights and debts of the enterprise on an overall basis,
work out a statement of assets and liabilities and catalogue of
properties, propose the bases for assets evaluation and computation,
and work out the scheme for liquidation, which shall be implemented
after adoption by the conference of the board of directors.
Foreign-funded enterprises shall be liable for their debts with
all their assets. The remaining assets after the payment for debts
shall be shared among the original investors in line with relevant
provisions of the contract and charter of incorporation. The value
added of the net assets and residual properties of the enterprise
in excess of its registered capital shall be viewed as profits and
shall be subject to the levy of income tax payable in line with
law.
After the end of the liquidation of assets, the liquidation panel
shall present a liquidation report. After adoption by the conference
of the board of directors, the liquidation report shall be submitted
to the reviewing and approving authorities for approval. Then, the
parties concerned shall contact competent administrative authorities
for industry and commerce to go through the formalities for canceling
the registration and return the business license of the enterprise
for revocation.
It is necessary to state here that under most circumstances, the
structure of ownership of a foreign-funded enterprise, after its
termination, can be changed through the transfer of shareholding
rights, with the Chinese partner or other Chinese enterprises buying
the shares held by the foreign partner. An enterprise whose structure
of ownership has been changed may continue to operate in a new form
after re-registration by competent administrative authorities for
industry and commerce.
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