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1.2 Characteristics Of The Business License

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Every company incorporated within the territory of mainland China, both domestic and foreign invested, is issued a business license upon completion of incorporation procedures. In addition, every company incorporated in mainland China holds a set of company seals. Both the contents on the business license and the imprints of the company seals are registered and maintained at the in-charge registration authorities, the Administration of Market Regulation (AMR).

When performing third party due diligence in mainland China, the single most important document to request from potential customers or suppliers is a scanned color copy of the business license, with an imprint of the company chop affixed to it. The business license forms the starting point of the investigation and when provided, it should be assessed carefully. In this chapter the characteristics of the business license are discussed in detail to provide an understanding required to verify the authenticity of the business license.

Companies incorporated within the territories of Hong Kong S.A.R. or Macao S.A.R. are governed by the in-charge authorities of the respective Special Administrative Regions and are subject to different laws and regulations and as a result hereof hold separate incorporation documentations which are not discussed in this chapter.

1         Size and format

Business licenses are drafted in portrait orientation, and when issued by the Administration of Market Regulation, two hardcopy versions are provided. The original version is printed on A3 format, and a smaller original copy is issued in A4 size. Figure 1 illustrates an anonymized template of the current business license format.

2         Company registration number               

Per 1 October 2016 the company registration number listed on the business licenses consists out of 18 digits. Each number is unique for a company registered within the mainland China. For performing due diligence, a profound understanding of the logic behind the number sequence is of importance to verify whether the information known or provided is in alignment with official recordings. Figure 2.1.1.B illustrates the structure of the company registration number.

First digit

The first digit refers to the code of the registering authority. At current nearly all business licenses are issued by the Administration of Market Regulation, which holds the digit “9”. This digit as part of the company registration number has been newly introduced per 1 October 2016. It was not listed on prior versions of the business license formats. The addition implies the possibility that in the future governmental authorities other than the Administration of Market Regulation may assume responsibility for review, approval, and release of business licenses.

Second digit

The second digit of the company registration number refers to the type of legal entity that has been registered. Registration of the following three types of entities are possible.

  • “1” : Enterprise
  • “2” : Individually-owned enterprises
  • “3” : Professional farmers cooperatives

Third to eight digit

The third to the eighteenth digit refers to the administrative code of the registering authority.

Ninth to seventeenth digit

The ninth to seventeenth digit of the company registration number refers to the organization code of legal entity that has been registered. The organization code is the mark for any organization registered within the territory of mainland  China.

Eighteenth digit

The eighteenth digit serves for verification purposes to carry out quick checks to confirm the business registration number is correct. In the event (a part of) the number is mistyped, the check digit indicate a  false registration and this possible to identify invalid numbers. Unlike the other digits, this final digit can be either a number or a letter.

3         Company name

From a due diligence point of view, the company name is of great importance. The company name as included in the business license is to be registered at all official documents as well as on the company seals. In its official use, companies are not permitted to deviate from its registered name.

In China, company names are generally only registered in Chinese characters are subject to a fixed form. Company names consist out of four elements and organized a pre-defined structure:

[Registered location] + [Trade name] + [Industry] + [Organization type]

“Shanghai ABC Management Consulting Co. Ltd.”

Alternatively, foreign-invested companies have the possibility to place the Registered location after the Trade name or Industry, resulting in the following company name structure:

[Trade name] + [Industry] + [Registered location] + [Organization type]

“ABC Management Consulting (Shanghai) Co. Ltd.”

The registered location refers to where the company has been incorporated and formally registered at a branch the Administration of Industry and Commerce. This registration may be at local, municipal, provincial, or state level. Every company that has been registered in China holds a business license, which among others includes the business scope that describes the main business activities a company is allowed to perform. Under the industry section, the company name includes a brief description of the main activity in accordance with the National Standard Classifications of Industries.

The trade name is the name of the company the founders will chose when registering the company and usually consists out of two to four characters. Motivation for the selection of a Trade name can be diverse; the name can be related to the foreign parent company’s or group name, could be unrelated or could be chosen to convey a message of the founders.

The organization type indicates under which legal construct the company has been established.

When registering the company, founders will be required to provide multiple company names in case the selected company name is already in use, is too similar to another company’s name or does not meet the requirements or restrictions apply.

3.1     Regulations

With the aim to improve efficiency for enterprise name searching to support enterprise name registration process, in 2017 the State Administration published the Notice Regarding Opinions on Promoting the Reform of Enterprise Name Registration (Gong Shang Qi Zhu Zi [2017] No. 54) “Circular 54”, as well as the Rules on Prohibited and Restricted Words to be used in Enterprise Names and Rules on Comparison of the Same/Similar Enterprise Names  (Gong Shang Qi Zhu Zi [2017] No. 133) “Circular 133”, which regulate the formulation of enterprise names.

The regulations make a distinction between general restriction rules, general prohibition rules and specific prohibition rules.

General restriction rules

In general terms when deciding on a company name, organization should:

  • Avoid the use of a name that is similar with the name of an existing company or an approved name of a company engaging in the same industry with the same registration authority. Exception apply when the organizations are related.
  • Avoid names that contain the name of a not-for-profit organization. Exceptions apply when the organizations are related, the not-for-profit legal entity / enterprise allows for the name to be used and the company name only contains an abbreviation or specific description of the organization.
  • Avoid expression or implication in the company name that represents the company as a not-for-profit organization or activities beyond the purposes of the enterprise establishment.
  • Not start the name with the wording of “China (中国)”, “Zhonghua (中华)”, “Quanguo (全国)”, “Guojia (国家)”, “International (国际)”. A foreign invested company that takes the name of its majority foreign shareholder may use the phrase of “China (中国)” in its name.

General prohibition rules

The general prohibition rules are implemented to avoid company name duplications, avoid the use of words in company names that may harm China’s national or social interests, avoid the use of inappropriate words that may lead to deceiving or misunderstanding as well as other miscellaneous prohibitions.

Avoid duplications

It is prohibited for companies to use a name of an organization that has active business operations in the same industry, has been registered or use a name that has been approved by the same local registration authority under the State Administration for Industry and Commerce.

Avoid inappropriate words that may harm national or social interests

The following words re considered inappropriate:

  • Words with negative or adverse political influences.
  • Words involving terrorism, separatism, and extremism.
  • Words that may undermine national dignity.
  • Words with racial, sex and ethnic discriminations.
  • Words with feudalism nature, violating good social conventions or showing no respect for ethnic customs and traditions.
  • Words involving drugs, obscenity, pornography, violence, or gambling.

Avoid inappropriate words that may lead to deceiving or misunderstanding

The following words are considered inappropriate:

  • Words containing names of leaders of the Communist Party and government of the PRC, revolutionaries of the old generation, famous martyrs, or role models.
  • Words containing illegal organizations, reactionary political figures, or well-known villains.
  • Words containing reference to religious organizations or with obvious religious features.

Other miscellaneous prohibitions

The following words are considered inappropriate:

  • Words containing names of foreign countries (regions) and international organizations.
  • Words containing names of political parties, organizations related to the communist party, mass organizations, social organizations, and designation of military units.
  • Words containing foreign languages, letters, and Arabic numerals.
  • Other words and contents prohibited by laws, administrative regulations and so on.

Specific prohibition rules

  • The company name should not be the name of administrative divisions, industries, or structure of organizations.
  • In accordance with the main business activities of the proposed company, the industry or operational characteristics should be included in the enterprise name according to the National Standard Classifications of Industries. Prohibited industries prescribed by the laws, regulations and state council’s decisions should not be included in the company names.
  • The form of business organization of the company included in the company name should be consistent with its nature of business.
  • The administrative division included in the name of each company should be the name of the administrative division where the enterprise is located (county level or above).

4         Company type

For company registration purposes, registration of the following three types of entities are possible.

  • “1” : Enterprise
  • “2” : Individually-owned enterprises
  • “3” : Professional farmers cooperatives

5         Registered address

When performing due diligence, assessment of the business addresses should be made, as Chinese laws include provisions on the use of premises. The nature of business activities, as defined in the business scope, is another determent factor in company location as the business premises must meet legal requirements related to the business activities. For example, the business location must obtain the relevant licenses if a company registered at the address is to work with dangerous goods. This information can be verified with the competent authorities. Companies are not allowed to be located in a residential premise. According to law a residential premise can only be used for commercial purposes when unanimous consent of all the stakeholder neighbours is reached, and all legal procedures to convert the purpose of the premises from residential to commercial use has been completed. Certain buildings and locations, although its purpose is defined for commercial usage, cannot register foreign-invested companies.

6         Legal representative

The business license includes the legal representative by name. The legal representative is the main principal of the company and is the employee with the legal power to represent – and enter into binding obligations on behalf of the company in accordance with the law or articles of association of the company. A Foreign Invested Enterprise (FIE) more has official roles, such as shareholders, supervisors, directors, and senior management.

6.1     Shareholders

The shareholders assembly, which comprises all of its shareholders, exercises the following functions and powers according to the Chinese Company Law:

  • Decide on the operational policy and investment plan of the company.
  • Elect or replace directors and supervisors who are not representatives of the staff and workers and decide on matters concerning the remuneration of the directors and supervisors.
  • Examine and approve reports of the board of directors, reports of the board of supervisors or the supervisors, as well as the annual financial budget plan and final accounts plan of the company.
  • Examine and approve the company’s plans for profit distribution and for making up losses.
  • Adopt resolutions on the increase or reduction of the registered capital of the company, the issue of corporate bonds, and the merger, division, dissolution, liquidation, or transformation of the company.
  • Amend the company’s Articles of Association; and
  • Other functions and powers provided for in the company’s Articles of Association.

6.2     Supervisors

The role of the supervisor is to monitor the activities of the legal representative; thus, a supervisor is entitled to attend meetings of the board of directors as a non-voting participant and inquire about or put forth proposals on matters on which resolutions have been or are to be adopted by the board of directors or executive director. When the board of supervisors or the supervisor of a company observes something unusual in the operation of the company, it/he can investigate the operating situation; and when necessary, engage an accounting firm or other such services to assist in the work, with the entailing expenses borne by the company.

6.3     Directors

In the event a company has a relatively small number of shareholders or a single shareholder and is relatively small in scale, it is not required to implement a board of directors; an executive director position will suffice. The functions and powers of the executive director are to be stipulated in the company’s Articles of Association.

6.4     Senior Management

Senior management of a company includes the general manager, deputy general manager and CFO of a listed company, along with any other personnel designated as such in the company’s Articles of Association. The duties and responsibilities of senior management personnel other than the general manager are stipulated in the company’s Articles of Association.

7         Registered Capital

The registered capital is the initial investment made by the (foreign) parent company to its Chinese subsidiary used to fund the business operations until the subsidiary becomes financially independent from the parent company.

Until recent, the absolute minimum capital requirements per type of (Foreign Invested) Enterprise (FIE) had been defined by law, but in practice the actual capital requirements varied per geographical region and industry. Per 1 March 2014 for most industries the capital requirements have been cancelled, and the paid-up capital registration system has been replaced with a subscribed capital registration system, which allows new to be established companies to complete the business registration process without having to inject any initial capital contributions upon start-up. The specific implementation regulations are set by local governments at provincial or city level.

In China, the Articles of Association, a document that contains details on how a company is organized, of Foreign Invested Enterprises includes provisions on the payment of the paid-up capital, which the foreign parent company needs to honor. After the payment of each instalment, the Chinese subsidiary is required to engage a Chinese Chartered Public Accountant (CPA) to verify the transaction made and issue a Capital verification report.

It is important to underline that the Capital verification report confirms the investment to have been paid into the company at a given time, but it does not guarantee the invested sum is still present in the company. The amount subscribed capital listed on the business license does not necessarily equal the sum of investment made:

  • Under current regulations investors are not required to pay in a (minimum level of) capital when the company is established but have the possibility to pay capital into the company based on the company’s actual liquidity requirements. Effectively investors have the possibility to pay-in capital over time when the investor deems suit.
  • In the event that the subscribed capital would have been invested in full, there is no guarantee that the capital still is present in the company. Business activities result in cash in and outflows which affect the capital position.

The subscribed capital does not equal cash at hand or bank.

8         Incorporation date

The incorporation date is the date the business license was issued by the Administration of Market Regulation.

9         Business period

The business period listed on the business license refers to the validity of the version of the business license, the document itself, and not to the business period of the company. The business period is usually set for a period of 20 or 30 years.

10       Business scope

Another important item listed on the business license is the business scope. In China, companies are only allowed to operate within a business scope approved by the relevant authorities. Per definition business scopes are narrowly defined. If a certain business activity is not defined it is not allowed to be performed. Thus, the business scope is to be well defined and leave no room for interpretation.

Additionally, China has set limitations on the industries in which foreign-invested enterprises are allowed to operate. A “Foreign Investment Catalogue” which is periodically jointly released by the National Development and Reform Commission (NDRC) and Ministry of Commerce (MOFCOM), better known as the “Negative list for Foreign Investment”, stipulates in which industries foreign investment is encouraged, welcomed, restricted, or prohibited.

10.1   Understanding China’s Foreign Investment Management System and Negative Lists

In recent years China has evaluated its existing foreign investment policies and developed and implemented a structured rule-based investment management system. The new Foreign Investment Law which came into effect per 1 January 2020, which combined with its detailed implementation regulations forms the basic law for foreign investment into China.

To manage the inflow and structuring of foreign investments, China operates multiple foreign Investment Negative Lists and Encouraged Lists, which are applicable to foreign investors with an interest to establish an enterprise located in either China or designated national level Pilot Free Trade Zones. In addition, a Market Access Negative List and a Catalogue for Guiding Industry Restructuring is operated, applicable to both foreign and domestic investors.

In this section China’s foreign investment management system is introduced to provide foreign investors with a detailed understanding on how the process of investment into China is structured. The steps to be taken by the foreign investor to determine whether the desired investments are possible and which requirements and conditions might apply is discussed in detail.

10.2   Applicable Foreign Investment-centered Regulations

Per 1 January 2020 China’s new Foreign Investment Law entered into effect, replacing the 1979 Law on Sino-Foreign Equity Joint Ventures, the 1986 Law on Wholly-Foreign-Owned Enterprises and the 1988 Law on Sino-Foreign Contractual Joint Ventures. The Foreign Investment Law combined with its detailed implementation regulations forms the basic law for foreign investment into China. Article 4 of the law stipulates that the State shall implement management systems of pre-establishment national treatment and negative list for foreign investment.

Foreign Investment Negative Lists

In addition to the Foreign Investment Law, China operates an investment catalogue system that combines elements of both open and closed lists. The Catalogues for Guidance of Foreign Investment Projects categorizes foreign investment based on industry and subdivides it into three categories, namely “prohibited”, “restricted” and “permitted”.

  • The prohibited catalogue is effectively a negative list detailing sectors in which foreign investment is not permitted, neither through direct investment, partnerships, or takeovers.
  • The restricted catalogue contains an overview of sectors and activities in which foreign investment is permitted, but in which the project examination and approval process may be stricter and take longer. Conditions to the investment might apply and are specified in the catalogue.
  • The permitted catalogue is not published. This means that foreign investors can establish enterprises and enter the Chinese market on an equal footing with domestic enterprises.

Foreign investors looking to enter the Chinese market may first review the foreign investment catalogue applicable to the territory of mainland China. In the event desired business activities are not permitted to be undertaken, or restrictions apply, foreign investors may review the foreign investment catalogue applicable to China’s Pilot Free Trade Zones to determine foreign investment is permitted or whether similar restrictions apply.

Effectively, China operates two catalogue systems in parallel; one catalogue system applies to the overall mainland China region on a national level and the second catalogue system is applicable to the designated national level Pilot Free Trade Zones. The content of the two catalogue systems differs as there are fewer regulatory restrictions in Pilot Free Trade Zones in selected cities compared to the mainland China region.

Foreign Investment Encouraged Lists

In addition to the negative lists, an encouraged catalogue exists which provides an overview of industries where foreign investment is welcomed, and where investors may be able to enjoy preferential treatment from respective local governments. The foreign investment encouraged catalogue is divided into two sub-catalogues; one catalogue applies to the whole country and the other catalogue is applicable to 22 provinces located in China’s central, western, and northeastern regions.

10.3   Applicable Domestic And Foreign Investment-centered Regulations

When the desired investment is allowed, or restrictions apply which are deemed acceptable by the investor, next step is to review the Market Access Negative List to understand whether licensing or certification requirements apply. In parallel the investor is to review the Catalogue for Guiding Industry Restructuring to understand whether specific technology, equipment, and products are allowed to be utilized in China.

Market Access Negative List

China’s Market Access Negative List applies to both domestic and foreign investors. Similar to The Catalogues for Guidance of Foreign Investment Projects, investments are categorized based on industry and subdivided into three categories, namely “prohibited”, “restricted”, “permitted”. The “permitted” catalogue is not published. The negative list provides an overview of relevant procedures, technical standards, and qualification criteria to enter restricted markets as well as the respective government departments in charge of each industry and further outlines prohibitive regulations.

Catalogue for Guiding Industry Restructuring

China’s industrial policy is reflected in the “Catalog for Industry Restructuring”. The catalog is an important guide for investment directions as it provides insight in how the Chinese authorities manage investment projects, formulate, and implements fiscal, tax, credit, land, import and export policies. The Catalogue subdivides industries into “encouraged”, “restricted” and “obsolete” categories. Business activities in industries that are not categorized as “encouraged”, “restricted” or “obsolete”, and comply with the relevant national laws, regulations, and policies, are allowed to be performed. Permissible categories are not included in the “Catalog for Industry Restructuring”.

  • The encouraged category consists mainly out of industries that utilize key technologies, equipment and products that have an important role in promoting economic and social development, contribute to saving resources, protection of the environment, and optimizing and upgrading the industrial structure. The industries are encouraged and supported by policies and measures.
  • The restricted category consists out of industries that mainly utilize backward technology which do not meet industry access conditions and relevant regulations, which do not contribute to the optimization and upgrading of China’s industrial structure. These industries are supervised by the Chinese authorities. Focus goes out to transformation of these industries and prohibition of new production capacity, process technology, equipment, and products.
  • The elimination categories consists out of industries that utilize mainly backward technologies, equipment and products that do not comply with relevant laws and regulations, seriously waste resources, pollute the environment, and do not have the conditions for safe production.

11       QR code

The business license includes a QR code. Chapter 2 discusses the verification of the business license, which is possible through the branch office of the Administration of Market Regulation that has reviewed and approved the incorporation of the company subject to verification within their jurisdiction, or online via the National Enterprise Credit Information Publicity System (NECIPS). Scanning the QR code making it possible to go directly to the information system and look up information about the company under verification.

12       Registration authority

The registration authority refers to the (local) Administration of Market Regulation which reviews the incorporation request and approves registration and incorporation of the company within their jurisdiction.