Jenny Zhang, Attorney at Law, Lawyer, Law firm in Dalian, China

Many foreign friends hesitate to decide the form of investment, a WFOE or a Representative Office in China?To answer this question is just like to anwer “how do I decorate my condo?”. It absolutely varies from person to person.

Unlike the total “Chinese legal person” as a WFOE, a Representative Office is not a separate legal entity rather it is an extension of its parent enterprise. A Representative Office may only engage in non-profit making activities such as conducting research and survey for its parent enterprise in the local market or liaising with local and foreign contacts in China on behalf of the parent enterprise. As as resulet, a Representavie Office can’t invoice its business and the rights and obligations shall be undertaken by the parent enterprises. 

The governing rules on representative offices of foreign enterprises are Regulations on the Administration of Resident Representative Offices of Foreign Enterprises. In applying for the establishment of Representative Offices, a foreign enterprise shall submit the following documents and materials to the Registration Authority.

1. Application for the Registration of the Establishment of Representative Office;
2. Proof of the domicile of the foreign enterprise and legitimate business certificates for more than 2 years’ existence;
3. Articles of association or constitutional agreements of the foreign enterprise;
4. Letters of appointment of its chief representative and representative(s) issued by the foreign enterprise;
5. Identity certificates and resumes of the chief representative and representative(s);
6. Financial Creditworthiness Certificate issued by financial institutions that have business connections with the foreign enterprise; and
7. Certificate for the lawful use of the premises of the Representative Office.

If laws, regulations or State Council rules provide that approval is required for the establishment of Representative Offices, the relevant foreign enterprises shall, within 90 days from the date of approval, file an application for establishment registration with the Registration Authority and submit relevant approval documents.

All these days, I’ve been visited a lot by foreign educators seeking to open schools in Dalian, and most of times, none of them have any idea as to what would be involved and as to what the costs would be.

I made a research and here is my report of this question.

Rules & Regulations

The rules and regulations that govern the setting-up schools include Education Law of PRC, Vocational Education Law of PRC, Higher Education Law of PRC, and Private Education Promotion Law of the PRC. All these laws provide that foreign organizations and persons can set up schools with Chinese organizations, but there are no more specific rules about how to cooperate between the parties. All the details are reserved to be explained by the State Council.

After China’s entry into the WTO, Regulations of the People’s Republic of China on Chinese-Foreign Cooperation in Running Schools was enacted, also with its Concrete Measures. However, this Regulation mainly governs the cooperation between foreign educational institutions and Chinese educational institutions (see Article 2). That is to say, for individual foreigners, they even have no qualification to be governed by this Regulation.

Therefore, the answer is individual foreigner can not set up schools in China to provide education service to Chinese citizens. Foreign investors can only establish schools for children of foreign personnel under Interim Regulations for the Administrion of Establishement of Schools for Children of Foreign Personnel by the Ministry of Educaion of  PRC.

Alternative Solution:

After reading the above, maybe you would feel depressed a lot. Don’t be disappointed, if you determine to create a business and make some kind of achievement in China as a teacher or a headmaster, there is a compromise way for you—that is to be affiliated to a school or training center with an education license. We call it “Gua Kao”(挂靠) in Chinese.

Gua Kao is to use the other’s license and run one’s own business. All the operation has to be under the other’s name, including issuing invoices. Legally, Gua Kao is a kind of cooperation between the foreign educator and the Chinese school. A complete agreement seems to be necessary and essential for both parties. Actually, the approval of an education license is very hard even for most of Chinese. The requirement of scale and capital for schools is much stricter than the requirement for common businesses. Quite a lot of business starters choose to be adjunct of other schools. Like licensing, the starters pay fees to the schools with license.

During the process of finding your partner, the school with license, do make a due diligence research and make sure they really possess the license.

Good News:

Maybe you still feel worried for using the other’s license. Even the Agreement is “perfect drafted”, there are still some concerns, e.g. if you intends to do a long term business, or if you want to promote your own brand.

Up to now, there is still no good resolution. In Catalogue for the Guidance of Foreign Investment Industries (2007), higher education is encouraged but skill traing is not mentioned. 2007 version has been implemented for almost 4 years. Recently, National Development and Reform Commission and Ministry of Commerce has recitified the Gatalogue and the draft is issued for comments. In the Draft for Comment, skill training is listed in the Catagory of Encouraged Foreign Investment Industries. We can believe that in the near future, when this new version is issued, the relevant governmental organs would issue detailed implementing procedures. At that time, for those who dreams to open language schools in China, all come to true.

Foreign trading company is also called Foreign Invested Commercial Enterpriese, FICE in China. For any foreign investor who intends to establish a trading company in Dalian or other cities in China, rules in Measures for the Administration on Foreign Investment in Commercial Fields (《外商投资商业领域管理办法》）will govern.

Under this Measures, the foreign invested commercial enterprise can be devided into four categories of businesses, including commission agency, wholesale, retail and franchising.

Generally speaking, common trading company belongs to the second categories, wholesaling. Under Article 9, foreign invested commercial enterprise may operate the following business upon approval for wholesaling business:

1.  Wholesaling of commodities;
2.  Commission agency (excluding auction);
3.  Importing and exporting of goods; and
4.  Other relevant matching businesses.

Only those that establish outlets or open stores in China belongs to the first category, the retail businesses, for example, Carrefore.

Minimum Registered Capital Required

There is a popular mistaken belief, the registed capital has to amount to 1,000,000 RMB for setting up trading company. That is the out of date. Under Company Law of P.R.C., the minimum registered capital is 30,000RMB. Now China treats foreign business nationally, so the same amount for setting up a foreign trading company. BUT, if there is just one investor, the minimum amount is 100,000 RMB. Therefore, only the newly established company has 2 or more than 2 investors, the rule of 30,000 RMB applies. Here Please note that  for special goods with large value such as car or heavy equipment, there would be special capital requirement for enterprise.

In practice, we usually recommand our clients to register with 1,000,000 RMB, which approximately is $150,000. On one hand, the business could satisfy the special requirement in registered capital mentioned above in most of  times. On the other hand, we have a lot of supporting reasons when we help drafting the feasibility report. And also the last but not the least, when the procedure of examination of capital injection is over, the investor could be free to use the capital in any way.

Registration Time

It normally takes 90 days to go through the procedures. But if the products trading need special approval from the  concerning Authority, the period will be prolonged.

If you want to set up a WFOE, you should offer the following documents:

1. the application paper and the resolution by the Board of the foreign investor
2. Feasibility Study report
3. Copies of the business licenses or certificates of incorporation of the foreign investor (with local notarization and verification of Chinese Embassy).
4. A copy of leasing agreement and the certificate of the real estate
5. A copy of Notice of enterprise’s name confirmation appraised by the Industry & Commerce Administrative Bureau.
6. Letter of Appointment of Directors, Directors name list and copies of their passports
7. Articles of Association
8. Credit Certificate issued by bank
9. Power of Attorney for delivery of documents

(DALIANNEWS) – Overseas enterprises invested in the port city of Dalian slumped in numbers but increased in terms of scale last year aimed the global financial crisis, according to the local Industry and Commerce Bureau, January 17.

Investment in modern service industries such as construction, real estate and banks accelerates fast.

New investment value totaled 6.577 billion dollars and registered capital reaches 5.473 billion dollars last year, up 146 per cent and 158 per cent respectively year- on- year.

Japan leads the list of investment source countries and regions, followed by Hong Kong, South Korea, U.S. and Canada.

As of the end of the year 2009, an aggregate of 8074 foreign companies have invested in Dalian with the value totaled 52.25 billion dollars and registered capital of 29.94 billion dollars.

(From:DALIANNEWS.COM)

The International Investment Dalian Summit 2009 was closed this Wednesday.

The summit invited senior management leaders of U.S. New York Stock Exchange (NYSE), the Nasdak Stock Market and financial elites in risk investment fund, private equity investment institutions, investment banks to join.

As I knew the summit pretty late, I just attended a road show on the last day in the New World Hotel. I believed it a good opportunity for many small and medium sized enterprises in northeast of China. That could be a platform for these enterprises to attract more overseas capital, or at least our enterprises can know where to find “help”.

In that meeting, I also met my counterpart, a lawyer from the U.S. Really a nice guy and nice meeting.