In this article, we discuss the new regulation regarding the administration of registration of market entities in China and the provision of suspending business operations without losing license for a period up to three years, a policy initially piloted in Shenzhen SEZ.
On July 27, 2021, Premier Li Keqiang signed a State Council decree unveiling a new regulation on the registration and administration of market entities, the Administrative Regulation of the People’s Republic of China on the Registration of Market Entities, which will take effect on March 1, 2022.
As the first legal document to uniformly regulate the registration and administration of all types of market entities, the Regulation will likely streamline market entities’ registration processes, lower institutional costs, provide legal safeguards for market entities, and promote fair competition among market entities, domestic or foreign.
The Regulation has a total of six chapters and 55 articles, which set out unified provisions regarding the registration standards, the registration procedures, supervision and administration, and legal liabilities for improper behaviors, etc. Below we introduce the main points in the Regulation that businesses need to know.
Who are market entities under Chinese law?
Since the reform and opening up in the late 1970s, China has issued multiple regulations on the administration of the registration of different market entities, such as the Administrative Regulation of the People’s Republic of China on the Registration of Companies, the Administrative Regulation of the People’s Republic of China on the Registration of Enterprise Legal Persons, the Administrative Measures of the People’s Republic of China on the Registration of Partnerships, the Administrative Regulation on the Registration of Specialized Farmers’ Cooperatives, and the Administrative Provisions on the Registration of Legal Representatives of Enterprises as Legal Persons.
With the Administrative Regulation of the People’s Republic of China on the Registration of Market Entities (hereafter referred to as the “Regulation”) coming into effect from March 1, 2022, the above separate regulations will be repealed simultaneously. Accordingly, the Regulation will regulate the registration matters of all market entities that are currently being regulated by these separate regulations.
According to Article 2 of the Regulation, the term “market entities” shall refer to all natural persons, legal persons, and unincorporated organizations that engage in profit-oriented business activities in China, including:
- companies and non-corporate enterprise legal persons and their branches;
- sole proprietorships, partnerships, and their branches;
- specialized farmers’ cooperatives (associations) and their branches;
- individually-owned businesses;
- branches of foreign companies; and
- other market entities as prescribed by laws and administrative regulations.
Registration and record-filing matter clarified
The Regulation sets unified rules on what kind of matters are subject to registration and what kind of matters are subject to record filing. This serves as a clear guideline for not only market entities but also registration authorities, that is, local Administration for Market Regulation (AMR).
Article 8 of the Regulation lists out the general registration and special registration matters for market entities. For all such matters, the market entity must register with the local AMR.
General registration matters are applicable to all types of market entities during registration, and include:
- Entity type
- Business scope
- Domicile or main business premises
- Registered capital
- Legal representative, managing partner or person-in-charge
Special registration matters apply based on the type of market entity, and include:
- Shareholders for limited liability company, promoters of a joint-stock company, or capital contributors of non-corporate enterprise legal person
- Investor information of sole proprietorship
- Partners of the partnership, including the methods for bearing liability
- Operators of the self-employed individuals
Article 9 clarifies the record-filing matters for market entities, for which the market entities can make a simpler record-filing with the local AMR. These include:
- Articles of association or partnership agreement
- Term of operation or partnership
- Contribution amount, term, and method of the shareholders of a limited liability company or promoters of a joint-stock company; and contribution amount or actual paid amount, term, and method of the partners of a partnership
- Senior management of a market entity
- Members of a specialized farmers’ cooperative
- Family members of self-employed individuals who are participating in the business operation
- Foreign-invested enterprise’s registration liaison officer and designated person/entity to receive legal documents
- Beneficial owners of a market entity
By clearly defining “general registration matters”, “special registration matters”, and “record-filing matters”, the market entity can have a clear understanding of what kind of formalities they need to follow, which will help to improve efficiency and avoid duplication of work as compared to the current mechanism with multiple individual regulations.
Formal examination only
The Regulation sets out the standards for registration matters.
Among others, Article 19 of the Regulation stipulates that the registration authority shall only conduct formal examination on the application documents. Where the application documents are complete and meet the statutory form, the registration authority shall issue confirmation and registration on the spot. If the registration cannot be done on the spot, the registration shall be completed within three working days. Where the circumstance is complicated, the time limit may be extended by three working days upon approval of the person in charge of the registration authority.
This will largely shorten the registration timeline as no substantial examination shall be conducted by the registration authority.
Under the current practice, the registration authority has the right to conduct substantial examination on the application documents of a market entity – if they have doubts. For example, at the incorporation stage of a market entity, the substantial examination could be a deeper check of the applicant by requiring the shareholder or the proposed legal representative of the market entity to come onsite to the local AMR, or an onsite check by the registration authority on the market entity’s office, or additional documents requirements on the market entity’s office premises. Such a substantial examination will take around two weeks on average based on our experience.
However, under the Regulation, a market entity can get the registration decision from the competent registration authority within one or two days – if their application meets all the formality requirements.
Business suspension introduced
The Regulation introduces a business suspension rule, which aims to help market entities survive the hardship during their business operation.
According to Article 30 of the Regulation, a market entity can apply for business suspension for up to three years where its business operation is difficult due to such reasons as natural disasters, accidents, public health incidents, or public security incidents. During the business suspension, the market entity can suspend its business operations but keep its business license.
Under current practice, if a market entity stopped business operation for more than six months, its business license could be revoked by the registration authority.
Moreover, prior to the promulgation of the Regulation, the provision of business suspension was trialed in Shenzhen under the Rules of Shenzhen Special Economic Zone on Commercial Registration (“Shenzhen Rules”), which took effect on March 1, 2021. A comparison of the Regulation and the Shenzhen Rules with regards to business suspension is summarized as follows:
|Comparison of the Business Suspension Rules under the Regulation and the Shenzhen Rules
||The Regulation (Art. 30)
||Shenzhen Rules (Art. 25)
|Conditions for business suspension
||Business operation is in difficulty due to:
– natural disaster
– public health incident
– public security incident
|Handling of Labor relations
||The market entity is required to negotiate with its employees on the handling of labor relationships and other relevant matters in accordance with the law prior to suspension
|Record-filing & publicity
||Record-filing and publicity are required, and publicity shall include the following:
– Term of suspension
– Address for the service of legal documents and other information
|Record-filing and publicity are required
|Term of business suspension
||Shall not exceed three years in total
||Shall not exceed two years in total
|Requirements of domicile or principal business place
||During the suspension period, the address for the service of legal documents could be in lieu of its domicile or principal business place
||Carrying out business activities during the suspension period shall be deemed as resumption
||– Upon application of termination of suspension
– Upon expiration of suspension period
*Even if there are no conditions on the application of business suspension under the Shenzhen Rules, in practice, if a market entity wants to apply for business suspension, it still needs to meet some requirements, such as “established for more than one year, being not in the list of business abnormalities or list of serious violations of untrustworthiness”.
By applying for a business suspension under the Regulation, a market entity can save costs on office rent, utility, human resources, etc. As stipulated in Article 30 of the Regulation, during the period of business suspension, the market entity may use the address for the service of legal documents in lieu of its domicile or principal business place, which means during such business suspension period a physical office is not required.
To be noted, a market entity can enjoy benefits from business suspension, yet there are still some important questions that need to be addressed, such as:
- How to define the entity’s eligibility for business suspension under the Regulation?
- Does a market entity need to provide relevant documents to prove its operation difficulties?
- Is there any limitation on the years of the establishment like is the practice in Shenzhen?
- How to deal with the labor relationship with the entity’s current employees and pay social insurances during the suspension period? Currently, there are no specific guidelines on this.
- How to deal with the tax filing issues under business suspension? The business suspension does not necessarily exempt the market entity’s tax filing obligations under the current stage.
- How to supervise the market entities’ status during suspension?
- What is the next step if the business suspension expires, and the hardship is still faced by the entity?
Simplified deregistration introduced
According to Article 33 of the Regulation, if a market entity has no existing credits or debts, and has paid off all required tax, salaries, and other related fees, and is not in the business operation abnormal list – it may apply for the simplified deregistration to exit the market. As stipulated in Article 33, the simplified deregistration will require a written commitment of all investors to assume legal liabilities for the authenticity of all mentioned circumstances, such as debts and credits. This written commitment shall be published through the National Enterprise Credit Information Publicity System for a period of 20 days, and if there are no third parties raising any objections during or after this period, the market entity can apply for deregistration with local AMR.
Under the current practice in Shenzhen, if a market entity wants to deregister through the simplified deregistration procedure, it shall make an announcement of simplified deregistration and the written commitment of all investors to the public through Shenzhen AMR’s system for 20 days and then submit the deregistration application to the local AMR once the 20 days expire.
The simplified deregistration creates a more flexible market exit mechanism for all market entities. Compared with the general deregistration procedures, the simplified deregistration procedure is more streamlined and time-saving because the market entity does not need to do record filing of liquidation committee with the local AMR and do a public announcement on newspaper for at least 45 days before submitting the deregistration application.
The promulgation of this new Regulation will promote the development of all types of market entities and ensure fair competition between the entities, but more implementation rules and explanations and cooperation with different departments will be required to safeguard the Regulation’s implementation.
China Briefing is written and produced by Dezan Shira & Associates. The practice assists foreign investors into China and has done so since 1992 through offices in Beijing, Tianjin, Dalian, Qingdao, Shanghai, Hangzhou, Ningbo, Suzhou, Guangzhou, Dongguan, Zhongshan, Shenzhen, and Hong Kong. Please contact the firm for assistance in China at firstname.lastname@example.org.
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