China WFOE Registration Guide (5) - Defining the Scope of Business

1. Defining the Scope of Scope of WFOE

Under China’s Company Law and Administration of Registration of the Scope of Business of Enterprises Provisions, an enterprise can only engage in operations within its business scope as approved in its registration with the enterprise registration authority. Unlike other countries, the defined business scope in China is more detailed and has more implications. Hence, an investor needs to take note of certain considerations when defining its business scope for registration.

(1) Catalogue for Guidance on Foreign Investments
The Catalogue for Guidance on Foreign Investments ("Catalogue" is a legal pronouncement by the Ministry of Commerce. It specifies the types of investments that are:
A. Encouraged
B. Prohibited
C. Restricted
D Permitted.

A. Encouraged Investments
Typically, investments that may bring about technology transfer or IT advancement etc. into China are encouraged investments. Foreign investors are normally encouraged to establish Wholly Foreign-owned Enterprises ("WFOEs" to conduct their businesses. Encouraged investments can normally apply for preferential treatment, tax incentives and financial subsidies.

B. Prohibited Investments
Prohibited investments are normally in industries which are prohibited to foreign investors e.g. sectors concerning government security and social or public interests. Until more sectors are liberalised, foreign investors can set up Representative Offices ("ROs" to study the Chinese market and conduct liaison and marketing promotion for the parent company within its defined business scope.

C. Restricted Investments
Foreign investments are still restricted in some industries in terms of equity interest or participants or other conditions. For example, foreign headhunting companies cannot establish WFOEs but can only set up joint ventures and own up to 70% in equity. Restrictions can also be in the way the business is conducted. For example, until very recently at the end of 2006, foreign banks are not allowed to carry on RMB retail business.

D. Permitted Investments
Investment projects that do not fall under the first three categories will be regarded as permitted projects. Generally, foreign investors can conduct permitted projects by establishing WFOEs.

Besides the Catalogue, a further check with the local authorities is highly recommended. This is because the regional economic promotion strategies of different regions may mean that an enterprise in the same business can be considered as an Encouraged Investment in the western / developing regions, but classified as a Restricted Investment at the coastal /developed regions.

(2) Identification of the Business Scope
There are 2 categories of permitted businesses according to the Provisions on the Administration of Registration of Business Scope for Enterprises: General Business and Permitted Business. Enterprises under the General Business category can register directly with the enterprise registration authority. An enterprise under the Permitted Business category, however, has to be examined and approved by certain authorised agencies before being registered. For example, insurance companies should get approval from the Insurance Supervision Association.

(3) Consistency with Articles of Association and Feasibility Study Report
The business scope and registered capital should be stated clearly in the Articles of Association and Feasibility Study Report of an enterprise. If the business scope is not described properly, it may affect the types of business activities the enterprise can carry out and the incentives it can acquire. Hence, the investor is encouraged to take this into consideration early, for example, at the feasibility study stage.

The proper description of an encouraged business can mean the granting of tax exemptions on the investor’s imported equipment as registered capital, and the fact that he can use equipment in lieu of cash as its registered capital, provided the investor has obtained the certificate issued by the government for the encouraged business.

(4) Nature of Business
A. There is a format to follow in forming the name of an enterprise, where the nature of the enterprise business should be mentioned. Usually the full enterprise name is in this format:

"City" + "Name" + "Nature of business" + "Limited"

"Name" + "Nature of business" + ("City" + "Limited"

B. Nature of scope of businesses
An enterprise conducting many businesses should focus on its main business and describe other related businesses in accordance with relevant regulations of the State. For example, a manufacturing enterprise can operate non-self production trading business as a minor business (up to 30%-49%, depending on the region); a trading company can provide after-sales/consulting services relevant to the products it trades in.

It is not advisable to group irrelevant businesses under one company name, although this might be the case in other countries e.g. a manufacturing company can legally operate as a financing business in another country. There is no benefit in doing so as it does not allow for a lower capital commitment. The authorities will not allow an enterprise to have multiple businesses under one name without sufficient Registered Capital. In some extreme cases, the local SAIC simply will not approve such an registration application where the scope of business includes two or more lines of businesses.

2. Amendment to the Business Scope

When an enterprise intends to change its business scope, it has to amend its Articles of Association accordingly. Together with the amended Articles of Association and Board Resolution, the enterprise has to apply for approval from the Shanghai Foreign Economic Relation and Trade Commission and then file the changes with the registration authority within 30 days.