(The Foreign Invested Commercial Enterprise)
Today is the turn of the Foreign Invested Commercial Enterprise (FICE). The aim of this entry is to present the basic characteristics of this investment instrument which basically is used to carrying on the following activities:
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Import, export, distribution and retailing
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Retailing–i.e. selling goods and related services to individual persons from a fixed location, as well as through TV, telephone, mail order, internet, and vending machines
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Wholesaling – i.e. selling goods and related services to companies and customers from industry, trade or other organizations
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Representative transactions on the basis of provisions (agent, broker)
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Franchising
As part of its World Trade Organization accession process, China ratified regulations that permit foreign companies to establish fully operational wholly foreign-owned enterprises that can distribute, act as an agent, retail and wholesale domestically, source domestically, and import and export, and as of 2005, do so all over China.
As a FICE is also a type of WFOE (
http://blawg.lehmanlaw.com/wordpress/?p=1686
), it is not surprising that both are somewhat similar in terms of legal status, structure, registration requirements and establishment procedures. The main differences between the two lie in their primary function – the manufacturing WFOE is obviously primarily used for manufacturing while FICE is primarily used for trading and distributing goods. (Main difference between a WFOE and a FICE, available at:
http://www.china-briefing.com/news/2012/05/11/china-fice-vs-manufacturing-wfoe.html
).
These companies, i.e. FICEs, also enjoy the 100 percent foreign ownership by which WFOEs are defined (the WFOE Law is available at the following web-site:
http://www.lehmanlaw.com/resource-centre/laws-and-regulations/foreign-investment/law-of-the-peoples-republic-of-china-on-wholly-foreign-owned-enterprises-2000.html
) .
The activities listed above can also be achieved through other means such as agents. However, a FICE will bring the control needed to secure quality, service level, and it brings you closer to your suppliers as well as enable you to invoice your clients in Chinese currency. There are limitations, however. A FICE cannot change the nature of the product but only sell what is has purchased. Additionally, certain products – such as books, periodicals, newspapers, automobiles, medicines, salt, agricultural chemicals, crude oil, and petroleum – face some ownership barriers. Namely, if a foreign investor in China has more than 30 retail stores that distribute the above products from different brands or suppliers, the foreign investor’s share in the retail enterprise is limited to 49 percent.
Otherwise, for those that do not distribute the above goods, there are no limitations on ownership share or retail units. Foreign investors interested in international trade should also know that FICEs can now obtain their own import/export license.
Establishing a FICE
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Though legally speaking the minimum for establishing these types of enterprises is RMB30,000, usually the authorities do not approve the proposed project if the investment is less than RMB100,000. Nonetheless, the approval authority will consider more factors, e.g. business scale, business plan, and then determine whether the proposed amount of registered capital will be sufficient to run the proposed business. The investor has a period of two years to pay-in the registered capital. The only requirement is that 15% should be paid within 3 months upon issuance of the Business license.
In China a FICE is required to open at least two bank accounts, one is the registered capital bank account for injection of registered capital; another is basic RMB bank account for normal operation. In practice, most Chinese banks have their own standards on company’s registered capital, and if the registered capital is too low, the bank might refuse to open the bank account for the company.
Tax treatment
There are two main taxes to be levied on the FICE, i.e. Corporate Income Tax (CIT) and Value Added Tax (VAT).
The CIT is levied on profit earned (revenue less deductable cost and expenses) and the standard rate of CIT is 25%. It is possible to reduce the taxable income by transfer pricing.
The VAT is a turnover tax to be paid on transaction and calculated based on the sales value. The standard rate of VAT is 17% which however can be deducted by the input VAT. So the VAT payable is the net amount by using the VAT the taxpayer collected from its customers (so-called VAT output) minus the VAT the taxpayer paid to its vendors (so-called VAT input). This rule is not applied to small-scale taxpayers whose annual turnover is lover than 800,000 RMB. Small scale taxpayer is subject to a simplified calculation with 3% fixed tax rate, VAT input cannot be deducted from the VAT output.
What is important to remember here is that a FICE can take the form of both a WFOE or a JV. Therefore the rules governing these forms of investment should also be considered when operating a FICE through one of these forms.
Starting with the next entry, we will introduce the joint venture (JV) and the remaining instrument at the disposal of the foreign investor to establish a presence in China.
– Cristiano Rizzi