Compliance for FTZ companies operating outside the zone

By Ye Fang and Zheng Jianjun, AllBright Law Offices
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According to the latest official statistics, by mid-September 2014, the newly established companies in Shanghai Pilot Free Trade Zone (FTZ) numbered more than 12,000. However, many of these registered companies are actually operating out of Shanghai FTZ for various reasons, raising a compliance issue: Should enterprises registered within the Shanghai FTZ run operations outside of the zone?

Ye Fang Senior Partner AllBright Law Offices
Ye Fang
Senior Partner
AllBright Law Offices

Take the company for example. Under the relevant laws and regulations, one of the essential requirements for company establishment is that the domicile of a company shall be its principal business office, and shall be in only one place, within the jurisdiction of its company registration authority. Article 23 of the 2014 Company Law stipulates that “incorporation of a limited liability company shall satisfy the following requirements: … (5) the company has a business domicile.” Article 12 of the 2014 Regulations on Administration of Registration of Companies provides that: “a company’s domicile is the place where the company’s main office is located. A company shall only have one domicile which has been registered by the company registration authority. The company’s domicile shall be within the jurisdiction area of its company registration authority.”

Legal persons

Other enterprises as legal persons should also have domiciles, or places of business. The 2014 Regulations on Administration of Registration of Enterprises as Legal Persons provides that having a fixed business place and necessary facilities is one of the conditions for establishing an enterprise as a legal person.

In the Official Reply from the State Administration for Industry & Commerce on issues concerning whether a newly established business place shall be registered, there should be only one domicile, no matter if it is an enterprise incorporated under the Regulations on Administration of Registration of Enterprises as Legal Persons, or a company incorporated under the Regulations on Administration of Registration of Companies. If an enterprise establishes or changes the business place, it should register with registration authorities, and there is no limitation on the number of business places.

The partnership enterprise can also only have one principal place of business. Article 8 of the Regulations on Administration of Registration of Partnership Enterprises provides that the registered principal business place of the partnership enterprise shall be only one, and shall be within the jurisdiction of its company registration authority. In practice, the industry and commerce registration authorities usually register the domicile as the business place.

FTZ compliance requirements

At the national level, the Implementation Rules of the Regulations on the Administration of Registration of Enterprises as Legal Persons requires that in addition to other conditions, there should be necessary business places and facilities compatible with its business scope for registration of enterprises. When applying for registration of a foreign-invested company, there should be a fixed business place and necessary facilities and employees.

Zheng Jianjun Partner AllBright Law Offices
Zheng Jianjun
Partner
AllBright Law Offices

The Shanghai government also proposed some basic requirements for the domicile of enterprises registered within the FTZ. It is reported that the standard requirements of the 2012 revised Regulation on Standardising the Management of Registered Domicile still apply to the registration of enterprises, that the registered domicile for a business and trade enterprise should be an independent space of not less than 20 square metres, the registered domicile for storage must not be smaller than 30 square metres and the division of storage must be reasonable, however the management committee of the FTZ is researching and designing with other relevant authorities the management approaches of the registered domiciles to be more in line with the characteristics and spatial arrangements of FTZ industries.

An enterprise that does not satisfy the basic requirements faces an array of punishments. Article 16 of the Regulations on Administration of Enterprise Registration in China (Shanghai) Pilot Free Trade Zone provides that the registration authorities shall establish and maintain an abnormal operation list, recording those enterprises that fail to publish their annual report within a stipulated period, or cannot be reached through the registered domicile, and other abnormal enterprises, which shall be announced to the public through the Credit Information System of Market Participants.

Where an enterprise has not performed its annual report obligation within three years after being recorded on the abnormal operation list, the registration authority shall record it in the abnormal operation list permanently and it must not recover normal status, and should be recorded in the serious offender enterprise list. The Administrative Measures on Directory of Enterprises with Abnormal Operation in China (Shanghai) Pilot Free Trade Zone (Trial), issued in 2014, further stipulate the implementing rules for the abnormal operation system.

As the Regulations for China (Shanghai) Pilot Free Trade Zone stipulated, the registered enterprises within FTZ may invest or do business outside the FTZ, and if there are special regulations requiring relevant formalities, the enterprises shall follow such regulations. Before carrying out business within business places beyond the registered domicile, companies must set up branches and go through the corresponding approval, filing and registration formalities. In an Official Reply from the State Administration for Industry & Commerce on issues concerning whether the newly established business place must be registered, the Regulations on Administration of Registration of Companies does not require registration of the business place; business places beyond the registered domicile must be registered as branches.

Registration formalities

Other enterprises must also apply for corresponding registration formalities. Article 4 of the Implementation Rules of the Regulations on the Administration of Registration of Enterprises as Legal Persons stipulates the enterprises and business entities that are not qualified as legal persons which must apply for business registration: (1) joint ventures; (2) branches of enterprises as legal persons; (3) branches established by foreign-invested enterprises; and (4) other entities engaged in business activities. Take partnership enterprise for instance; article 12 of the Law of Partnership Enterprises provides that if a partnership enterprise plans to set up a branch, it must apply for registration at the registration authority in the place where the branch is to be located and obtain a business licence.

In conclusion, enterprises in the Shanghai FTZ can invest or do business outside of the zone, but to carry out business through business places beyond the domicile they must go through the relevant approval, filing and registration formalities.

Ye Fang is a senior partner, Zheng Jianjun is a partner and Liao Ning is a legal assistant at AllBright Law Offices

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