As everyone knows, China closed its economy to the Western world after the establishment of the People’s Republic of China. Since 1978, however, China has implemented a Reform and Open-door policy. To develop the economy, China now welcomes foreign investors to establish businesses in China.  Further, in order to attract foreign direct investment (FDI), the Chinese government may provide foreign investors with preferential treatment.  However, in order to meet the requirements of WTO membership, the Chinese government has subsequently been gradually reducing preferential treatments for Foreign Direct Investment in order to equalize treatment of foreign invested and Chinese domestic companies. In particular, in 2007, China promulgated The Corporate Income Tax Law which unifies the two income tax systems for foreign affiliates and domestic enterprises.

In general the Chinese economy is open to global investors, even compared to developed countries. Currently, almost all industries are available for foreign investment.  In this regard, potential investors may refer to Guidance for Foreign Investment Industries, which are regularly issued by the Chinese Government.  The latest Guidance is available here [1]

Guidance for Foreign Investment Industries differentiates industries into three categories: encouraged, restricted and prohibited industries. The remaining industries are permitted for foreign investment.  For example, in the event Italian investors decide to invest in China, just as the investors from other countries, they may apply for necessary approvals to the related authorities, mainly the Bureau of Commerce. For some large investment projects, investors are required to apply for approval from the National Development and Reform Commission (NDRC) or the State Council. Having obtained necessary approvals, the foreign investors must then apply for appropriate business licenses from the Administration of Industry and Commerce (AIC) .After obtaining the business license, foreign invested companies may do business in China legitimately. Of course, as in other countries, the foreign-funded companies must abide by all related Chinese law when conducting business.

Of course, foreign investors cannot invest in prohibited industries. However, foreign investors may apply for and receive approvals and business licenses with relative ease in the encouraged and allowed industries.  The time required to satisfy the requirements varies according to industry and the total investment amount. In general, to complete the entire process for setting up a foreign invested company (Joint Venture or WOFE) will take 2-5 months.

In addition, foreign companies may elect to register a representative office (Rep Office) in view of their own demands and situation, especially in the initial stages of investment in China. It is generally more convenient and economical to set up a Rep Office than to incorporate a subsidiary.  Indeed, the process of registering a Rep Office may be completed in one month.  However, establishing a Rep Offices has its own disadvantages. A Rep Office may only carry out non-profit making activities (e.g. providing information to clients, maintaining contacts with clients etc.).  Tasks such as signing a contract on behalf of the company may not be allowed.

To attract FDI, most Chinese local governments (at the county or city level) have investment promotion agencies (IPA). The duties of IPA are to attract FDI and facilitate foreign investors and/or foreign funded companies to do business. Some IPAs may provide so-called “one-stop service” for foreign investors to do business in China, including but not limited to incorporation of a WOFE and/or JVs for the investors, and coordinating the relationship with local authorities.

The author strongly suggests foreign investors contact the local IPAs to request assistance, especially at the initial stage of their investment in China. In addition, some foreign businessmen in China from certain countries have chambers of commerce in China. The chambers of commerce generally provide valuable suggestions and information for newcomers in China. Of course, foreign investors may seek advice and legal service from local legal professions, especially for large investments.

To learn more about FDI in China, you may read the Presentation made by the author-FDI & China [2] or log on the author’s website[3] to look for some useful information.

Shen, Linchang

Director of Dept. of Foreign Affairs,

Shanghai Promise Law Firm

Zhangyang Road 707,

Suite 808 Shanghai, P.R. China

Telephone: (86)21-68879992

Cell phone: (86)15000355201

Email: yzslc@yahoo.com.cn