A New Line of Work: Changing the Business Scope of a Company in China
By Matthew Zito & Maria Kotova
Posted: 24th July 2014 09:39SHANGHAI – Companies evolve. Whether through natural expansion or midlife crises, sometimes it becomes necessary to branch out into something new. In China, a company’s operations are defined by its business scope, a one-sentence description of the industry(s) it is authorized to operate in. Therefore, any significant change to company operations must be preceded by a registered change of business scope.
For simplicity, in this article we assume that the foreign-invested enterprise (FIE) in question is a wholly-foreign owned enterprise (WFOE). WFOEs are categorized as one of three types—Service, Trading, or Manufacturing—which differ in terms of their eligible business scope and corporate establishment procedure. Generally, it is much easier to register a change of business scope within one’s existing WFOE category, rather than expand from a Service WFOE into a Manufacturing WFOE, for example.
For foreign businesses especially, it is imperative that company operations be reflected accurately in their business scope, as this connected to the “Catalog for the Guidance of Foreign Invested Enterprises” (“Catalog”) governing foreign investment into China. An enterprise’s business scope is administered by two state bodies—MOFCOM and the local Administration of Industry and Commerce (AIC) of registration—and is printed on its business license along with other registered information such as its name, registered capital, and legal representative. Foreign investors should be advised that any changes to a company’s business scope will be publicly accessible via AIC records.
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Moreover, FIEs are only permitted to issue invoices in consistence with their registered business scope. If a company provides services outside of its defined scope of activities, then it will be unable to issue invoices for the particular services. This can cause problems for one’s customers, who might demand the service be entered into their accounting books.
In some cases, companies may be afforded some wiggle room in how they design their business scope—and use this to influence the likelihood of approval/rejection, as well as various taxation and customs issues. For example, a company may choose to market itself as a service provider in a given industry, when in fact its business scope is registered only for consulting and the actual provision of services is outsourced to a local Chinese agent.
Disingenuously fabricating one’s business scope, however, can carry legal consequences including fines or the revocation of one’s business license. Importantly, the business scope of a given enterprise must include or reflect the industry contained in the enterprise name. If the company operates in several industries, then the first item listed in its business scope will be considered its primary industry for naming purposes.
Often, but not always, a change of business scope will require additional investment into the company’s registered capital, which can considerably prolong the application process. Additionally, depending on the nature of the proposed change of business scope, the enterprise may be required to obtain additional approval or modify their business premises to engage in the specified industry. Lastly, the enterprise will have to renew its Certificate of Approval granted by MOFCOM, this being the distinguishing factor between FIEs and domestic enterprises. These steps must all be completed prior to applying with the AIC to change the enterprise business scope, which proceeds as follows:
Step 1 — The company should convene a shareholder meeting and obtain a decision to alter the company business scope, including the specific revision(s) to be made. Next, the business scope as appearing in the company’s articles of association should be altered in light of the decision. Within 30 days of this decision, the company should apply at the original AIC of registration using the related application form.
This will require the original and copy of the company business license, the company seal and legal representative seal, proof of the shareholder decision, and the revised articles of association. If the change involves an industry requiring additional approval (such as an industry specific license), this must be applied for with the relevant authorities within 30 days of the initial decision to modify the business scope. Following AIC approval and the payment of related fees, the company will receive the revised business license.
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Note: The business scope of a branch company may not exceed that of its parent company; a branch company seeking to operate in an industry requiring approval must gain separate approval from its parent company, following which an application may be submitted for the branch’s change of business scope.
Step 2 — As with any update to a company’s business license, there will be various other forms of documentation that must be updated in light of the revised business scope, including the enterprise’s tax registration. Updating tax registration is quite complex, but is a crucial step in the overall process, as it affects the company’s ability to issue fapiaos (and thereby allow its customers to deduct input VAT).
Firstly, the company must apply for a change in registered information with the original State Administration of Taxation (SAT) of registration, within 30 days of the approval to change its business scope. This requires the following:
1. Approval from the local AIC to modify the company registered information and the business license (as obtained in Step 1);
2. The company’s original taxation registration certificate (original and duplicates); and
3. Other relevant materials.
The company will then be asked to fill out an application form for the change in registered information, which will be processed by the taxation authorities within 30 days of receipt. If successful, the company will be issued a new taxation certificate. Various punishments apply to a company that fails to register changes to its registered information with the taxation authorities.
Even based on the condensed procedure given above, it should be clear that modifying the business scope of a company in China is no easy task. Given the proper planning, however, it can be done. Depending on the specific revisions to be made to one’s business scope, the overall process can carry on for months, excluding the time required for the company to prepare internal documents. For these reasons, companies are strongly advised to contract the expertise of an experienced services provider, such as the professional tax and legal advisory team of Dezan Shira & Associates.
This article was first published on China Briefing.
Dezan Shira & Associates is a specialist foreign direct investment practice, providing corporate establishment, business advisory, tax advisory and compliance, accounting, payroll, due diligence and financial review services to multinationals investing in emerging Asia. Since its establishment in 1992, the firm has grown into one of Asia’s most versatile full-service consultancies with operational offices across China, Hong Kong, India, Singapore and Vietnam, in addition to alliances in Indonesia, Malaysia, Philippines and Thailand, as well as liaison offices in Italy and the United States.
For further details or to contact the firm, please email firstname.lastname@example.org or visit www.dezshira.com.