This is a complimentary recording: In this complimentary CSC® webinar, Kristina Koehler-Coluccia of Koehler Group—a CSC company—shares her expertise on China’s corporate compliance regulations. This webinar is for anyone responsible for the operation and compliance of China wholly-owned subsidiaries, joint ventures, and representative offices. Join us for:
- Updates on compliance regulations and how to navigate the endless introduction of new laws and circulars
- Tips on understanding guidelines and their various interpretations by central government, local government, and corporate service providers, including lawyers, accountants, and auditors
- General entity and document management in China
We’ll conclude with a brief demonstration of CSC’s Entity Management system, which serves as the baseline for thousands of successful companies’ international compliance management.
If you missed the first webinar in this series, be sure to check out, “Expansion into China – Establishing a legal presence.”
*This is a direct transcription and may contain inaudible portions
Anu: Welcome to our webinar, Corporate Compliance in China: Secure your Investment. My name is Anu Shah, and I will be your moderator. Joining us to today is Kristina Koehler-Coluccia. Kristina is one of the leading experts in entity incorporation in China. Since 2003, she has advised and represented Western clients and their business interests in China. She has worked on numerous complex transactions, including foreign direct investment, corporate restructuring, company liquidation and M&A deals. She frequently advises on and represents foreign clients in tax, accounting and trade related matters. And with that, let's welcome Kristina.
Kristina: Thank you, Anu. Prior to beginning today's presentation, I did just want to give a brief introduction to Koehler Group and who we are. Koehler Group is a CSC company. It provides a wide range of market entry consulting as well as expansion services in the three jurisdictions that we operate in. Our head office in Asia is located in Hong Kong, and we also have a subsidiary in Singapore and eight offices in China. Our firm was established in 1979 in Asia, and we have a team of just over 120 professionals that our located throughout our ten offices.
Our main objective is to help foreign investors not only with their market entry, but also their expansion into a specific jurisdiction, as well as expansion into the Southeast Asian region. And one of our unique advantages is that we do have consultants and legal professionals on staff that speak over ten languages, including all the local dialects in the jurisdictions that we operate in.
Now, the first slide today is, I mean, the words are very small and I apologize for that, but it just shows how detailed the agenda is today. The topic is about corporate compliance in China, and when I'm dealing with my clients, what's always interesting is that their focus primarily and initially is in relation to the incorporation of the entity. And because incorporation processes in China are so tedious and so lengthy, once the incorporation is done, they want a break. And they never think then about all that needs to occur in terms of corporate compliance and annual maintenance that has to occur thereafter.
Now, in the agenda today, I'm really highlighting the main corporate compliance procedures that exist in China. But of course, the issue is, is that there are many, many more corporate compliance items, but I could write a book about that. So if you do have specific questions, or I haven't touched on something today that is specifically associated to your needs, then please don't hesitate to contact me about that.
In addition, one of the last slides of today's presentation will be about tips for preparing and maintaining the documentation in relation to corporate compliance procedures. And this is a critical point because before I begin today's presentation, I do want to mention that maintaining documentation is not a legal obligation in China. It's up to you to manage the paperwork. And in China, it's renowned for being a paperwork country.
So let's begin.
Now, when you incorporate a company, regardless of the date of the incorporation, so that's going to be the date that's within your business license, you will have to do annual maintenance procedures, and these are requirements. Now, we're doing this presentation actually, in the most perfect time because these annual maintenance procedures are due to begin right now. So as you're probably all aware of, the fiscal year for the majority of entities in China is January to December. And starting in January, you have to close the year-end financial management reports. Generally, you then have Chinese New Year. And you have to start the audit procedures.
Now, once the audit procedures are done, this is where the annual maintenance procedures begin. You have the annual profits tax filings, and this is then followed by the annual inspection and the annual report, which is what you're seeing right now on your screen. It's a requirement for a limited liability company to go through a statistical analysis, which is just a very pretty way of saying you have a series of paperwork that needs to be completed to verify what is your status of your company. How much headcount do you have? What was your success in the prior year? And basically, this documentation is submitted to seven different government bureaus.
Now, we're very fortunate, because in the main tier one cities of China, primarily Beijing, Shanghai, Shenzhen, Guangzhou, as well as several of the tier two cities, this annual inspection report can be done online. So it's just a matter of going through, and once you click the Submit button, it goes to the seven different government bureaus. Unfortunately, in many other cities, it is about filling A3 size pieces of paper and filling in all the data by hand and physically, then going to the various government bureaus to submit it.
The deadline for submission for the annual inspection or annual report for a limited liability company is June 30th of every year. And the key point is, you should not miss that deadline. If you do, and you haven't applied for an extension, then actually the name of the company could be blacklisted within the Administration of Industry and Commerce's website, basically meaning you have a black mark.
Now, a lot of people are talking about setting up an entity in China. They're always looking at limited liability companies and comparing it to representative offices. Now, even if you have a representative office in China, you still have to go through an RO inspection, and it is much more detailed than a limited liability company, primarily because the representative office is tied to its parent company, which is an overseas entity. And the issue is, is because many investors set up fake parent companies, which is quite a funny thing considering we're going through the situation of the Panama papers at the moment, is that every year now, it's a Chinese requirement because of these fake holding companies to actually notarize the company kit of the parent company. And that has to be done with the Chinese embassy.
So if you're in the U.S., you have a Delaware company as a holding for a representative office, you are required to submit the parent company documents, usually it's the memorandums of understanding as well as the business licenses, probably a document of good standing, to the Chinese consulate or embassy at the nearest state where you are located. Now, in the U.S., to get these notarizations done, it usually does take around two to three weeks by all the consulates or embassies. So you need to be aware of that. And again, for a representative office, the deadline is June 30th.
Now, I get a series of questions in relation to the annual inspection and annual report, primarily because my clients don't necessarily speak Chinese. They certainly can't write Chinese. And when they are going through these reports, they're sort of wondering, what is this? In the event, you will always need to have somebody on the ground who completes this documentation, either through the online software system or in handwritten form on the A3 pages.
Now, as I mentioned, what happens if there are delays? Now, delays can be primarily incurred through the delays of your audits. If you are not tight on all the annual maintenance procedures that need to occur, then the annual inspection, which is the last step, will be always delayed. So you've got to make sure you really stick to these tight time frames. If you feel there is going to be a delay, and you're not able to reach the June 30th deadline, then you should apply for an extension.
And there are no issues in terms of applying for an extension. You should just know that you should be doing it so that the government, the Administration of Industry and Commerce, as well as the MOFCOM are aware of this. If you do not complete the annual inspection, then basically you are blacklisted within the Administration of Industry and Commerce's websites. As I mentioned, also, can it be done online? Yes it can.
Now, the critical point for me, and this is basically purely associated with representative offices versus limited company, is that because of this whole situation of representative offices being set up by these fake type of holding companies, is that there are random site visits that are done to the office. And I'll give you a case study of what happened. We had a client, actually in Guangdong Province. They are an operational company. The parent company is also operational, so it's not one of these fake holding companies. They had a random site visit on the day that all the staff were onsite at clients' offices.
The Administration of Industry and Commerce officer, he padlocked the door to the office. And the next day, when a staff member arrived, they couldn't go in. It took up to seven working days to get the padlock taken off, because they had to go to the Administration of Industry and Commerce, file an application, submit further documentation, until finally they would open the doors, which means you don't have access to computers, files, whatever you may need. So it is important to at least have a receptionist available, or somebody constantly in your office around the period of the summer months, June, July, August, September, in case these surprise visits are actually done.
In addition to all of that, you need to be aware of how to deal with these officers. And this is a key point because I get a lot of phone calls of panicky clients saying, "There's someone at my door, and I don't know what to do." Well, the key point is, any officer of any government bureau, has a badge. And the first thing you have to ask for is, can I see this badge. I want to review your badge. I want to see your badge number. And you should always write down, number one, the badge number and the name of the officer that is standing at your door.
Why should you be doing this and why should you be checking that? Because you don't want just someone random coming to your door asking to see your certificates and licenses if you don't really know who the person is and if they're actually a government officer. Usually you just take them to your conference room. You ask them what can you do for them. They will ask you to see a list of documentation. Usually it's your business license, approval certificate, maybe a few other things. And you just show it to them. They may ask to have photocopies of it. They cannot take any types of originals away from you. So they can only take photocopies if they actually ask for them.
So again, no need to panic. Just be calm if someone does approach you. And like anybody in a uniform, or even if they're in plain clothes, ask for their badge and to prove who they say they are.
The next step after the annual inspection, annual report, is the business license or registration certificate renewal. Now, what's important to note is that your business license does need, for a limited liability company, does need to be renewed on an annual basis. And usually, the process is just taking the original, going to the Administration of Industry and Commerce, showing it, basically proving that you haven't lost it yet. And usually they'll provide you a chop or a stamp on it or on a separate documentation saying that they've seen it. Very simple process, a little bit time consuming in terms of going to the bureau because all companies have to do this all at the same time.
In addition to the business license renewal is the fact that for a limited liability company, you have, at the point of incorporation decided about the term of validity. And usually, on average, for limited liability companies, it's a minimum of ten years of validity, all the way up to 50 years. And what a lot of people forget to do is to renew your business six months prior to the termination of that validity period. And that date is actually written on your business license.
Why do you need to do it so far in advance? Why six months? Well, the key point there is that when you do this renewal, so-called renewal of your limited liability company, it's actually as if you are incorporating your company again because you do have to go through the articles of association once more. You do need to have, potentially, a new feasibility study drafted. You have to renew all the appointments of the corporate structure, etcetera. So you do need to have time to do all of this, reformulate all of the documentation, and then submit it prior to the deadline.
For a representative office, what is relatively new since a few years is that in most of the major cities, they have a term of validity of between three to five years, which means you only have to renew the RO in a period of three to five years. The renewal procedure is actually identical to the RO inspection in terms of your corporate parent company documents being notarized by the Chinese embassy and the Chinese consulate. So the most efficient process would be to do the RO inspection as well as the RO renewal at the same time so that you only have to do one type of notarization, but that does require quite precise planning in order to be able to achieve that.
Now, one of the key changes since October 2015, is what we call the 3-in-1 business license. Now, what does this basically mean? Prior to October, when you registered your company, you had a business license, an enterprise code certificate, and you had your tax certificate. So you basically had three certificates with three identification codes on them, meaning that there was no synergy between any of these government bureaus.
As of October, 2015, they've transitioned this to the 3-in-1 business license, whereby the enterprise code certificate and the tax certificate are now taken away. You have one certificate, called the business license, and you have what is called the USCC code, which is one code registered with all the government bureaus. So now there is synergy. You are going to have one file that is going to be accessed by numerous government bureaus. People need to be aware of this change, primarily for bidding processes. That's been our experience so far.
Companies that are bidding for projects, usually the state owned companies, their in-house counsels are not necessarily aware of this 3-in-1 business license change, and they usually still ask to see the enterprise code certificates and tax certificates, which actually don't exist anymore. So you need to be aware and explain that if you're asked in a bidding process.
Now, what our experience has been so far with the annual compliance, so the annual inspection report as well as the business license renewal, is that the change from your existing certificates to the 3-in-1 business license must be done first, which is why I'm mentioning it here. It is important that it be done.
A question that I get asked a lot is, is it required to have the shareholder representative or anybody from the corporate structure present in China to sign for any of these annual inspections, annual reports, business license renewals? In fact, all you need is the legal representative to sign off on the annual inspection reports, which is always a bit of a difficulty because generally this individual's not Chinese and doesn't speak Chinese. So a lot of these documents have to be translated in order for there to be a clear understanding, and it is my recommendation that they be translated so you know what you're signing.
Our experience so far with the 3-in-1 business license is that it's an automatic change. No signature is required. You go straight to the Administration of Industry and Commerce. You apply for the change, and within 24 hours you will get the new business license issued.
So again, fantastic. I get a lot of people saying China's very bureaucratic and very slow, but things are certainly changing. And with this 3-in-1 business license, that is what we see. Things are changing. Things are becoming simplified and much, much more quicker in terms of applications.
Now, renewals of licenses and contracts, this is something that again, people don't pay attention to. We provide a lot of internal audit services to clients, and one aspect that we look at through these internal audits is looking at specific licenses and contracts. And it is amazing to see how people forget to renew these. So for example, special licenses like the ICP license. If you're doing ecommerce in China, you will have a separate license to your business license called the ICP license. Or if you are importing food and beverage, you will also have the food and beverage license. If you are an accounting firm, you will have an accounting license. And all of these license have to additionally be renewed on an annual basis, and you should not forget about it.
It is a key component, because if you do get a surprise visit to your office, by, for example, the tax bureau or the customs bureau, they will want to make sure that that special license, that specific license, is renewed. Trademark licenses, in China, generally, you have about ten years of validity for your trademark. But you just should not forget to renew it, again, at least six months prior, if not a year prior to the termination date in order to make sure you secure your trademark in time. Contracts with suppliers, contracts with customers, contracts with third party providers, all of these items should be renewed. And there should be some type of database where you know when you have to restart the negotiations.
Lease agreements, critical point because your landlord in the majority of cases, will not approach you two to three months prior to the termination, and you might get stuck into a sticky situation because you didn't start the negotiation process prior. Employment contracts, that's actually one of the key components that I face a lot with my clients, is that they will have fixed term contracts, and either they will not even discuss renewals, but they keep the people on and then never sign new contracts thereafter and not realize that open ended contracts exist. The open ended employment contracts are the easiest things in the world because you don't have to remember to renew them.
In addition to that, if you are giving salary increases, you should have all of this information documented. So make sure that all this paperwork, and again, it really is paperwork, is done.
Now, I get asked a lot, well, is any of this ever filed anywhere? No, it's not filed anywhere. It's not even a requirement by the Administration of Industry and Commerce or even the Labor Bureau or the Real Estate Bureau to file these things. It's up to you to be proactive and do it yourself, which basically means you need to be organized in making sure your paperwork is properly filed internally because there is no external force that is pushing you to get it done. So that is a very critical point.
Now, I've listed here one item which some of you may think is a bit odd, but as my clients are currently expanding within the Chinese market, for example, if they're based in Beijing or they're based in Shanghai, they're now looking to open up branch offices in the West, such as Hangzhou or Chongqing. And the questions that I get asked a lot are the following. If I have a Shanghai company, and I want to now set up an operation in Chengdu, but I only actually want to employ one person, do I really have to set up a branch company? Common sense should tell you yes. But of course, there are a lot of loopholes in the system.
If you are just employing one person in Chengdu, and you are renting a physical office space, definitely, you need to register a branch company. If you're having this one person working from home in Chengdu, that's your loophole. You don't necessarily have to register a branch, although you should. So it is a key point there. And of course, for me, working in China now for 13 years, I prefer transparency. And I just want everything to be clean and clear cut because growth does happen quickly in China. And all of a sudden, you may just have one person in Chengdu, and within six months you may have ten people unexpectedly, with no entity physically there, but all of a sudden you have rented an office. So my recommendation, again, is really do things right from the start.
When you set up a branch company, it involves paperwork. Basically it's similar to any type of incorporation process. You have to incorporate the branch. You need a registered office address. You will need a legal representative for that branch. And then you will need to decide what that business scope is at that branch. And ultimately, it has to follow the parent company's, by parent company I mean the parent company in China's business scope. There is a series of documents and licenses that have to be maintained and kept. There are requirements to do accounting, tax, payroll and other administrative functions. And a branch company also has to go through corporate compliance procedures on an annual basis. So what I just mentioned before for a limited liability company would apply to a branch company as well.
So no matter why type of entities you're establishing in China, and no matter how many of them you establish, you have to make sure you go through these corporate compliance procedures and maintain the licenses that are associated with those entities.
Now, I've also added here transfer of shares of an LLC, because we see that quite often now in China, where companies are looking to sell their Chinese subsidiaries. And again, there's a lot of paperwork that is involved. You have to create an evaluation report, whether it's a real estate or asset appraisal of your entity. You do need to draft a share transfer agreement, which does need to be submitted to the tax authorities. And again, the whole process involves changing all of your licenses in relation to the new shareholder of that company. And again, corporate compliance procedures thereafter have to occur. So be aware of the transfer of shares processes, the paperwork that's involved, and the paperwork maintenance that's also involved.
Now, something that's a little bit depressing is the liquidation of an LLC and a representative office. And again, people sometimes assume, well because it's China, you know, we can just exit the company without doing anything officially. That's a big no-no. If you're looking to liquidate your company, especially your LLC, you do need to form a liquidation committee. There is a series of documents that need to be signed, and you need to provide a suitable reason as to why you are looking to liquidate your company. That reason, hopefully, should already be within your articles of association that you drafted upon incorporating the entity.
So when you incorporated the company in China, your articles of association should have a clause within it providing reasons for liquidating the LLC. It probably isn't as extensive as you would like it to be, but as long as the reasoning is within it, for example, business has not gone well and you need to liquidate, or because of a bad employee who has taken business away from you, you need to terminate or liquidate.
The liquidation procedure of an LLC takes up to 24 months, two years, which, again, you will have no further costs or expenses during that period, but it is a period of corporate compliance. You need to make sure that all the licenses are up to date upon the start of the liquidation. You need to make sure that all annual maintenance procedures have been completed on the date of liquidation. You need to make sure that all employment contracts have been terminated and you have the documents associated with that. All assets have been sold and you have the corresponding documents available to that.
Why? Because the tax bureau will do a closure audit on your company, looking at probably the last three to five years of operation and making sure all documentation is valid. Again, this should be your motivation to make sure that internally, you have all your paperwork up to date in terms of contracts, licenses, etcetera. The closure of a representative office does not take 24 months, but it usually take 12 to 14 months, again because of the closure audit procedure where they also look at the last three to five years of operation.
Now, when you are updating anything or doing any type of corporate compliance procedure in your entity, the first document which has to be updated is your articles of association because the articles of association states everything. It states your registered office address. It states your corporate structure. It states your registered capital amounts. It states, actually, the entire company's bylaws. So that is the first document which has to be amended whenever you want to do any type of change or update in your Chinese entity.
It is very important to make sure that that document, that key document, is kept safe and all amendments are filed accordingly. When you do a submission for a change, the articles of association, or the amendment of the articles of association will be submitted. And upon completion or approval of that process, you will obtain a chopped and signed document in return from the Administration of Industry and Commerce approving that change. And that proof is that the amendment has been filed and is updated within the computer system of the Administration of Industry and Commerce.
Now, a question that I get a lot once a company has been incorporated in China is, well, you know, we had to create this feasibility study report, which at the time of the incorporation is probably more of a hassle than drafting the articles of association, usually because you get a draft sample of the AOA. And the feasibility study actually reflects your work forecasted P&L and budget of the entity.
Now, the feasibility study report, in effect, is never going to be looked at again after the incorporation, so that's one document you don't have to worry about. You should file it. You should keep it, but actually nobody will ever ask you about it again. And no government authority will ever reflect back on the feasibility study to say, "Oh, you know, you did this type of budget and you're not matching that budget." So don't worry about that document. Always place focus on the articles of association.
And just remember, the articles of association can always be amended, but no matter who your lawyer is in China or no matter who your corporate service provider is in China, the ultimate say, the ultimate authority that has say in terms of that change is the Administration of Industry and Commerce. No matter the relationship your lawyer will have with a government officer, no matter what relationship your corporate service provider will have with a government officer, the AIC will have the final say of that change. And in many cases, they may not approve certain changes.
So let's start going through a bit of the dilemmas that exist when you want to do certain changes. So let's start with a change of the registered office address. Now, many of you may think, well, that's pretty straightforward. If I want to change my address, I just change my address. You have to be very careful. Why? Because the district in which you are registered in is the district in which you are utilizing the tax bureau. And this is a very key point.
So in China, let's start off with the basics. In China, when you incorporate your entity, the rule of thumb is one office address is one legally registered company. The concept of virtual offices does not exist in China. Basically, when you set up an entity in China, you must be operational. This holding type of entity or non-headcount entities don't exist. You have to be operational on the ground. The concept of freezing your company, or making your company dormant in China doesn't exist because you will always need to have a registered office address. And you will always need to do tax filings that occur on a monthly basis.
So I've put here some key considerations that I get asked about a lot and are important in understanding how complicated a change of registered office address can be. The first is, what happens if your registered office address is not your operational office? And I'll give you an example of a case study of this.
We had one client who basically decided, and this was many, many years ago when specific districts had specific enterprise income tax rates, profits tax rates. They decided to register their office in a specific district because they wanted to have the preferential tax rate, but they didn't want to physically be located there. So they rented a one person office, about 16 square meters, 160 square feet of an office, didn't even buy furniture, kept it completely empty, and paid a small rent.
What were the implication of that? Well, basically, any time that a tax officer wanted to go visit them or any other type of government bureau, there was nobody located there. And at one occasion, they actually asked to open the doors, and they knocked the door down and realized that it was a shell office, didn't even know where to find the appropriate individuals, didn't know where they were physically operated. And it caused a lot of dilemmas, penalties, along the way.
So of course, the main objective is, wherever your registered office address is, make sure it's also your operational office. Don't complicate things. And obviously, now in China, in most cities and in most jurisdictions, the profits tax rate is unified, so that helps a lot in solving that dilemma.
Now, what are the issues that are raised in terms of changing your registered office address? Well, I'll use the example of Shanghai. In Shanghai, there are numerous districts. If you are located currently in Jing'an district, and you want to move to Luan district, you need to go through a tax closure audit in Jing'an and reopen with the tax bureau in Luan. Now, this is not really a corporate compliance dilemma, but it is definitely and accounting and tax dilemma, and it's associated one with the other. Why? Because potentially for a period of 8 to 12 weeks, you may not be able to issue any types of invoices because of this change of office address. So you do need to be aware of what the consequences are.
In addition to that, if you are changing cities, and I'm starting to get that now quite a lot, where clients come to me and say, "I'm registered in Shenzhen. This was a terrible decision. I actually should be located in Shanghai. What can I do?" Well, unfortunately, the Administration of Industry and Commerce is sort of like a sole entity. And it's based within the city you're located in. So if you would want to move from Shenzhen to Beijing or Shenzhen to Shanghai, you actually have to go through a liquidation process, which lasts about 24 months, as I said, in Shenzhen, and reopen your LLC in Shanghai.
Now, the loophole around that which we usually recommend, but again, complications exist, is set up a branch company. That would be the only way to solve that dilemma and that issue. But it basically means you're incurring costs for supporting two types of entities. And as everybody is budget conscious today, that's where really the dilemmas lie.
So again, registered office address, the procedure and the process to change the address is pretty simple. There are a series of documents which need to be drafted. They need to be signed, usually by the legal representative of the company, and submitted to the Administration of Industry and Commerce. And then all of the certificates and licenses, because usually most of them have the registered office address mentioned on them, need to be updated. And the process, again, takes about 8 to 12 weeks. It is a bureaucratic process.
A new step that's occurring quite often for us now is also the change of name of the shareholding entity. Now, this gets to be quite complicated for the following reason. You may have a company in the U.S. It's been bought, and the name of the company in the U.S. is going to change. But this U.S. entity, the entity itself, is still going to own the subsidiary in China, but you still need to file an approval process with the Chinese government to say that the parent company name has changed.
And the Chinese government, and this has really been our experience, the Administration of Industry and Commerce, they don't always understand that process. And usually their first assumption is, oh, you're doing a transfer of shares application. You are actually not changing the name. You are actually selling the company to a new entity because there's a new name. So it causes a lot of confusion. It does require a lot of explanation.
The documents that are required from the U.S. have to clearly outline the change of name and that the structure, the entity in the U.S. has remained exactly the same. That's really the key point. If you have those documents in place, and they're notarized by the Chinese embassy and consulate, then usually the application procedure in China is pretty straightforward.
Change within the corporate structure is something I do on a day-to-day basis. Basically, you have change of board of directors, change of the executive director, GM, legal reps, supervisor, and for a representative office you'll have a change in chief representative. Here, the only comment that I will make is the following. Especially in situations where you're terminating someone in this structure and the termination is not going the way you would like it to go, the key point you have to remember is you need documents to be signed by the person who's being terminated. And if that relationship or that termination is not going smoothly, most likely that individual person won't sign anything. And that's where dilemmas arise.
To give you just a funny story related to that, there was a very bad termination that occurred for a client of mine. We could not physically get the signature, and actually, the individual disappeared and we didn't know how to track him. We then jokingly, actually went to the AIC, explained the situation. And we raised the question, well, if this individual dies, we have no idea if he dies. We have no idea if he gets into an accident. What should we do? And the AIC individual bluntly said, we need to see the death certificate. We need to show proof that this individual either is alive or not, and we need his signature and potentially even his current passport copy to verify that he has agreed to this termination.
So what a lot of my clients do, or it's an advice that we give to our clients, is that for individuals that are in these positions, whether it's a board of director, a GM, a legal rep, a supervisor, is prior to appointing them in these positions, you ask them to sign termination documents, already now, which are safely kept, potentially by your in-house counsel, or by an external counsel, in the case that they need to be terminated. And you already have those signatures and documents on hand. That's the only way to really make sure you can make those changes that are necessary. I know it's planning way in advance, but it is a key point.
In addition to all of this, it is key to choose the right people for these positions. We had one client that in a 12 month period, 12 month calendar year, we did five changes, primarily because individuals were not comfortable holding those positions. And they decided at the last minute that they didn't want to be in those positions. So really, you don't want to continuously go through these compliance procedures and applications, and each application takes about 8 to 12 weeks to complete, and then have to do it all over again.
Another important point is, if you are, for example, changing the general manager, you have to make sure there's a replacement. Now, we had a case of a client where the legal representative, actually, he resigned from the company and moved to a brand new company. He was legal representative, and he told his company, "I want to be removed." The dilemma was, the company couldn't find a replacement. Nobody wanted to take that position. And for one year, they couldn't find a replacement. And what happened was the person who resigned actually sued the company, saying "For one year, I was liable in China for that position. I want money and compensation for it." So whenever there's a change, you've got to make sure that there's somebody that's there to replace that individual. Otherwise, the application cannot even be filed, because there always has to be someone taking on that role.
So I think I went through all of these points and these key considerations already on the last slide, but if you do have questions, please do let me know in the Q&A session.
Switching banks and changing the bank signatory, now for me this is also a corporate compliance procedure, primarily because clients are never happy with banks in China. Whether you're working with a foreign invested bank, such as HSBC or Wells Fargo or Citibank or Hang Seng Bank, you're always unhappy. Even if you work with the local banks, Bank of China or ICBC, there are always issues, whether it's due to the online banking system or whatever it might be. In addition to that, if there are changes in the corporate structure, you may find that you also need to change the bank signatories. And this can cause a dilemma.
Now, the procedures for opening new accounts and closing accounts is extremely tedious in China, primarily because the banks, like anywhere else in the world, have to go through their own KYC processes. And generally speaking, if there are any changes to the bank signatories, the individual does have to fly to China and meet with the bank in person, usually for five minutes and only to show their original passport, but it is an issue.
In addition to that, if, at any point, you've lost your licenses or you've lost your company chops or stamps, all banks, have very strict procedures in terms of terminating the old chops that are registered with them, and then implementing the new ones. If you're now aware, one of the stamps and chops that is issued is called the financial chop, which needs to be present for any type of transaction that you are doing outside of online banking. And if you lose the financial chop, then the whole process of updating that takes about ten working days, and it primarily means you cannot access the account for those ten days unless you're doing online banking.
If you want to add bank signatories or terminate bank signatories, again, generally that has to be done in person, which, again, very bureaucratic procedure. And to do anything with the banks, it does take about four weeks for them to process. So again, keep that in mind. Be very wary of switching banks, closing accounts, and if you really want to go through that process.
Change to the business scope, again, is something extremely common. Here on this slide I've listed the standard management consulting business scope and the standard wholesale trading company business scope. I'm going to use the example of the wholesale trading. As you can see, it says wholesale of a certain product, and you actually have to state the products that you're going to be trading. Generally speaking, when you incorporate your entity, one of the documents you must submit is a document listing all the HS codes of the products you're going to be importing, exporting or selling domestically.
Now, obviously, that list can be quite exhaustive and extensive, but at some point you may want to add the products. So if you're doing general trading, and today you're doing food and beverage, and tomorrow you want to do furniture, you've got to make sure you update that into your wholesale trading, into your business scope. Now, one of the key points that we're facing today is that if you are a wholesale trading company today, most likely you will want to sell domestically in China, either via ecommerce or through your own retail shop. And in this scenario you have to be aware of many things.
One, if you want to do ecommerce, you have to make sure you get the ICP license, the internet content providing license, first. And that's an extensive application procedure. If you want to have retail, a physical shop, you need to first sign the lease agreement of a retail space before you can change your business scope. That's one of the requirements of the Administration of Industry and Commerce to review. So any time you are changing your business scope, you need to be aware of what circumstances exist around it, what requirements and criteria exist around it. Will you need additional licenses to be able to do that specific activity? Are you, as a foreign investor, permitted to do that activity as well?
A question that I get asked a lot is, how easy is it to change or update, add or remove items from your business scope? It is a relatively straightforward procedure. You just have to do your research to know what is required, and again, it takes about 8 to 12 weeks to complete. You just have to be aware whether additional licenses are needed because that can extend the application procedure.
If you want to move from a consulting company to a trading company, that's pretty straightforward, and there are no issues there. However, if you want to move from a trading company to a manufacturing company, this is where issues arise because a manufacturing company must be located in a factory space, in a workshop space. So you will have to move registered office address as well as update your business scope in order to be able to provide, to do that change. So you do need to be aware of that.
A question I get asked very often, almost on a daily basis, is today I have a representative office. Tomorrow I want to start invoicing customers. How can I do it? Unfortunately, you can't. A representative office cannot be converted into a limited liability company. You cannot change the business scope to be able to do that. So you do need to close down the representative office and establish a limited liability company to then offer consulting, trading or manufacturing services to be able to then invoice. Again, very bureaucratic, and unfortunately there's no loophole around that.
Increasing registered capital or applying for your foreign debt loan, this is very common, primarily because a lot of companies don't do the appropriate budgeting when they incorporate their entities, and they run out capital extremely quickly. You are able to increase your registered capital and your total investment. Any type of foreign capital that is injected into your entity in China must be registered with the State Administration of Foreign Exchange. Your registered capital is utilized as your working capital, but the banks will have strict criteria once the capital has entered into the capital account to convert that into your settlement accounts.
When you open your accounts in China you'll have three sets of accounts. You'll have a capital account, where registered capital or any type of loan goes into or any type of investment capital goes into. And then from there, it goes into your daily settlement accounts, where your daily trade transactions, expense payments, etcetera, are working. And then you'll have your tax account.
The key from getting your capital from your capital account to your settlement account, each bank has their own criteria in terms of doing that transfer, and there's a lot of paperwork that's involved with that as well. A loophole in terms of avoiding to increase your registered capital is to actually remit your foreign debt loan. Loans in China, the traditional types of loans that most people know about, don't really exist.
What does exist is your foreign debt loan, which is actually the total investment that you've indicated in your articles of association minus the registered capital amount. That can come in as a foreign debt loan and be paid back to the shareholding company as well. A foreign debt loan agreement will have to be signed and registered with the State Administration of Foreign Exchange. You can apply for loans locally in China.
It's, again, a lengthy procedure and something you would have to do on a face to face discussion with the banks. Usually they don't like to do that from overseas. Can you apply for loans overseas? Yes you can, but the process to register those loans is quite complicated. And if you do have specific questions regarding that, then I'd rather speak to you on that on a case to case basis because every client is quite different depending on the jurisdiction, where they're obtaining that loan from.
Annual compliance procedures, this is something that I had touched on early on in the presentation, and I just wanted to highlight it here because you all will have access to this presentation and I really wanted everyone to understand what are the annual compliance procedures. The first is the annual audit, which has to occur. You then have the annual individual income tax filing.
Now, if any of you are in-house counsels, the annual individual income tax filing is not your responsibility. It is the responsibility of the individual that has to file that. But if you are a foreign investor, you have staff that are earning more than 120,000 Renminbi per annum, I would recommend that you make sure they get that filing done, not that they come back on you and blame you for not having gotten it done and now they're incurring penalties and they want you, as a corporate entity to pay those penalties. So you should verify that those individuals are either doing that themselves or you offer to make sure that it gets done.
Annual profits tax filing has to occur. And then, as I mentioned earlier in terms of the corporate compliance procedures, you have the annual inspection and business license and registration certificate renewals.
Now the last slide are tips that I have prepared for you in terms of maintaining the documentation and what you need to consider when you're doing any type of corporate compliance procedure or update. As I mentioned very early on, there is no external push or force that is requiring you to file documents or contracts with any type of bureau. It is purely up to you to actually do that and keep those documents internal.
So my first recommendation is be prepared. All documents have to be in Chinese. What does that mean? It means, please, get things translated. Don't sign things you can't read, you don't understand. That just gets you into dilemmas at a later stage. And the excuse of, well, I don't understand it, that's not acceptable by any type of government bureau. It is your responsibility to get those documents translated. All the Chinese language documents, those are going to be submitted, so it is important to make sure that your translations are accurate.
In addition to all of that, you should make sure that all documents are signed both in English and Chinese, that you have history and verification on it. Now, generally speaking, every single government bureau will want a copy of an application document. So when you are signing something, you're not just signing one copy. You're generally signing five, six, seven copies, which is a nightmare. It's a paperwork nightmare. You have to sign numerous copies.
Now, point four, you may all think this is a joke, but it is actually extremely serious. You need to sign everything with a black ink pen. Anything written or signed with a ballpoint pen will be rejected by the government bureau. In addition, if you sign in blue, if you sign in red, if you sign in green, it will be rejected as well. Black ink pen primarily means a fountain pen, the traditional fountain pen. You may be asking why. Well, primarily it's because it shows a level of respect to the government officer that you are signing the documents with an ink pen. Sounds absolutely ridiculous. It's a fact and you need to take that into consideration.
You need to remember how you signed the original incorporation documents. What signature did you use? Now, most people have numerous signatures, depending where they are and how they're signing things. When you incorporated that entity, whoever was in the corporate structure showed their passport, and in their passport is where they are recording your signature. In addition to that, they are now scanning in all the appointment letters and signatures of the various people appointed within the corporate structure. They scan that into the computer system.
Any time you do any type of application thereafter, they're going to verify the signature, that it's the real individual that signed. If you don't remember your signature, the application will be rejected as well. So you do have to remember how you signed. Key point here, make photocopies of everything that you have submitted to the government bureaus because you won't get those necessarily back. So make sure you keep photocopies.
In some cities, applications are done online, followed by original documents submitted thereafter, very straightforward procedures. And this is usually done in the tier one cities. In other cities, it's an old school style application procedure, where you have to go in person. You have to meet the officer. You have to sit with them. You have to chit chat with them, and you're submitting the original documents.
A record of the online filing can be obtained, and this is where a lot of people then lose their mind and don't keep track of it. So anytime you've done a corporate change, first of all, your articles of association will be amended and you need to make sure you get an original, the chopped and signed approval that that record has been done, that that change has been done.
In addition to that, the online system at the Administration of Industry and Commerce will also be updated. You can obtain a printout from the Administration of Industry and Commerce highlighting all the main facts that we've actually gone through today. Who is in the corporate structure? Where is your registered office address? They don't have in China what we know in many other jurisdictions as a record of good standing.
For me, my definition of a record of good standing is getting a printout from the Administration of Industry and Commerce and seeing what has been updated in the system and to check whether that's the correct updates that are needed. Point eight is in reference to the articles of association, very, very important to make sure that that document, at the least, is updated and filed and you have it with you. As I mentioned, there's no requirement to file board resolutions, etcetera. That's all things that should be done internally.
Now, as you've seen throughout this whole presentation, I mean there's so much paperwork that's involved. And I haven't even gone through contracts yet, supplier contracts, customer contracts, employment contracts. It is really important to make sure that you have some type of compliance officer, not necessarily based in China, but somewhere in the world, that's keeping track of all the documentation and is understanding all the various systems and making sure that that individual has all the necessary updates of what's occurring with that entity.
The key is also, once you do want to make a change, you know everything up front, and it can be just a very swift process thereafter in terms of doing the updates. Anu, that's the end of the presentation.
Anu: Thank you, Kristina. That was great. We will now open up the Q&A session. Also, on your screen, we have a question for you. Would you like a CSC compliance specialist to contact you? We'll keep that screen up during the Q&A session, so feel free to make your selections. And also, just as a reminder, you can download a copy of today's materials from the handouts box. And if you'd like to see what other webinars CSC offers, click on the free education webinars link in the Join us for More box.
So now, Kristina, let's take some questions from the audience. While you were discussing the annual inspection report slide, Joyce wrote in asking, "Are these reports required for Chinese companies?"
Kristina: So that's a very good question, and that actually depends on the city that you're located in. But in theory, everything that I have mentioned today, which is focused on foreign invested companies going into China, it actually also relates to domestically owned companies that are also registered in China. Yeah.
Anu: Great, thank you. So while you were . . .
Kristina: But let me, sorry, Anu, let me just go back on that.
Kristina: For domestic companies, there are variances. So usually in the tier three, tier four cities, domestic companies are given tremendous leniency, so they don't have to go through all these procedures. In the tier one cities because of all the corruption issues that are going on, there's much more stringent procedures that are required for domestically owned companies to go through these corporate compliance procedures.
Anu: Great, thank you. While you were on the business license registration certificate renewal slide, Alice wrote in, do the LLC requirements you are discussing also apply to WFOE?
Kristina: Yes, so an LLC, so maybe I should have started that in terms of the presentation. So a WFOE is a wholly foreign owned enterprise, and when I talk about LLC's, limited liability companies, that is referring to any type of any type of limited liability company, whether it's a wholly foreign owned enterprise, a foreign invested commercial enterprise, a joint venture, all of these types of entities are LLC's.
Anu: Great. Thank you. Don wrote in, "Are there any age limitations of U.S. citizens on being a legal representative in China?"
Kristina: Oh, that's a very good question, and actually something that came up just last week with a client. To hold . . . so I think the key question there is actually related to whether an individual can obtain a visa versus whether they can actually hold any type of position. If the person is not residing in China, they can be whatever age. There are no issues there.
If the person is going to be residing in China, the issue then is related to visa applications. The retirement age in China for men is 65, and I believe for women it's 60 or 63. If you've hit that age, you will not be able to apply for a work permit and residence visa regardless of whether you hold a position within the corporate structure.
Anu: Great, thank you. So that is all the time we have today. If we didn't get to your question, we will contact you with a response after the webinar. Thank you to everyone who joined us today. We hope to see you next time.