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New Commercial Registration Rules Provide FDI in Shenzhen With More Facilitation

Recently, Shenzhen Administration of Market Regulation (“SAMR”) issued the Revised Rules of Shenzhen Special Economic Zone on Commercial Registration (the “Revised Rules”) which was implemented on March 1, 2021.

As one of the four core cities of the Guangdong-Hong Kong-Macao Greater Bay Area, Shenzhen is constantly strengthening its role as the core engine in the development of the Greater Bay Area. The newly Revised Rules will unleash more market dynamics for the development of Shenzhen, while enhancing the facilitation of investment in Shenzhen.

The Revised Rules clarify the formalities and procedures for the establishment, alteration, and deregistration of commercial entities (including corporations, partnerships, limited partnerships, proprietorships, sole proprietorships, companies, or individuals) operating in Shenzhen. We shall introduce the key amendments as follows:

Simplifying the Process of Company Establishment

The Revised Rules have simplified the process and requirement in company establishment registration. This makes it easier for foreign investors to invest in Shenzhen.

Comparison between the Previous Rules and the Revised Rules are as follows:

Foreign Invested Entities (FIEs)

Invest in Shenzhen

Lawyer in China

Allowing Hong Kong and Macao Investors to Operate Cross-border Business

In the past, if investors from Hong Kong and Macao would like to directly operate business in mainland China, they had to set up foreign invested entities (FIEs) and obtain business licenses, as the same as foreign investors from other countries.

Now, in order to promote the development of regional integration in the Greater Bay Area, the Revised Rules allow enterprises registered in Hong Kong or Macao to directly obtain business licenses and engage in production and operation activities other than the negative list for foreign investment access. In addition, with such business licenses, they may also handle matters, such as bank account opening, taxation, customs, foreign exchange accounts.

Many foreign investors used to set up companies in Hong Kong first, and later set up their Chinese subsidiaries through their Hong Kong companies to further carry out business activities in mainland China. The Revised Rules will save a lot of time and cost for foreign investors who have set up companies in Hong Kong but also would like to directly carry out business in Shenzhen. In this case, foreign investors can decide whether it is still necessary to set up a new entity in Shenzhen.

However, the Revised Rules currently do not specify the details about how investors from Hong Kong and Macao can directly obtain business licenses. The specific details shall be worked out separately by the Shenzhen government.

Implementing a Temporary Closure Registration System

According to the current PRC Company Law, there is no provision design about permitting commercial entities to apply for suspending their business for a period of time before resumption. The relevant administration of market regulation can revoke the business license of a commercial entity that failed to submit annual reports for two consecutive years. However, in reality, many commercial entities, with willing to continue to operate, may shut down due to short-term operating difficulties. Once the business license of the commercial entity is revoked, its legal representative will encounter obstacles to start a business again.

In this case, especially after the outbreak of COVID-19, SAMR published the Measures on Further Optimize the Business Environment and Better Service Market Subjects on August 20, 2020. Since many commercial entities need to suspend their business in the short term when they faced business difficulties during the epidemic period, these measures firstly proposed the "dormancy" registration system for a trial. This system allows commercial entities to apply for "dormancy" according to the actual needs of production and operation. During the period of "dormancy", such commercial entities shall not be included in the list of abnormal business operations if the relevant administration of market regulation cannot contact the commercial entities through their registered domiciles.

The Revised Rules enshrine the above measures in its provisions. At this legislative level, the Revised Rules will further help commercial entities to get through the period of economic inactivity and save their maintenance costs. The Revised Rules allows commercial entities with temporary operating difficulties to enjoy a "dormant" status. The commercial entity may resume normal operation when possible and shall, within 10 working days from the expiration of the period of dormancy, terminate the temporary closure registration.

However, in this revision, it does not specify the identification standard of "not engaging in business activities" for dormant commercial entities. It should be noted that there is no rules or regulations regarding the period of dormancy in the field of taxation, social security and other administrative management in China at the present. In practice, many practical problems may be encountered, such as:

  1. Are commercial entities still required to pay taxes during the dormant period?
  2. Do commercial entities have to pay the salaries of their employees during the dormant period?
  3. Do commercial entities still need to pay social security for their employees during the dormant period?

It is clear that it requires further study and development of relevant rules or regulations by taxation, social security departments and other administrative management in China.

Allowing One License for Multiple Branches in Shenzhen Different Districts

Shenzhen has taken the lead in the implementation of "one license for multiple sites, one license for one district" in China since 2013. This Revised Rules expand the scope of "one license for multiple sites" and no longer require new branch of commercial entity operating across different districts in Shenzhen to apply for the new business license. Such commercial entity may merely add the information of the new branch into its current business license. This will greatly save the time and cost of expanding branches in Shenzhen, especially for chain-like enterprises.

Expanding the Scope of Virtual Address Service

The Revised Rules incorporate the virtual address service into the legislation of regulations and expand the scope of entities to provide virtual address service.

Now, commercial entities conducting business activities such as e-commerce, consulting, planning and other business that do not need a fixed domicile or operation business site, can entrust qualified business secretary enterprises, accounting firms, law firms or any other entities with domicile custody to provide the virtual address services.

The Revised Rules do not specify the details how to become a virtual address service provider and what is the procedures of entrusting such service. We consider that such virtual address should be able to be used as a registered address. The virtual address service provider should take care of the related office so that mails sent to the address can be well received, especially those from government authorities.

Conclusion

Shenzhen has a strategic position in the development of the Greater Bay Area and plays a role as an important support pillar of the “Belt and Road” Initiative. The Revised Rules will certainly bring more opportunities for above roles in Shenzhen, and further attract foreign investment.

In the meanwhile, as some provisions will need to be clarified through supplementary measures before they can be implemented, it is suggested that commercial entities with investment needs in Shenzhen pay attention to further legislative developments.

If you have any legal questions regarding investment or company establishment in Shenzhen, please feel free to contact us via administrator@legalandwise.com.

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