Switch of domicile by foreign enterprises (1): methods and options

In the past three years, the number of cases involving the relocation of foreign investment enterprises (FIEs) within China, especially the relocation of domicile across districts and between cities, has increased considerably. China currently does not have any specific laws governing this relatively new area, and both theoretical research and the government’s practical experience in granting such approvals are inadequate. When an FIE changes its domicile within China, a number of legal issues are usually involved, such as approval and registration, liquidation and deregistration, the disposal of immovable property, the transfer of assets and the succession to and transfer of corporate rights and obligations, as well as tax, labour and personnel matters.

Legal framework

Specific laws and regulations are available for reference in the areas of acquisition, merger, demerger, reinvestment, increase and decrease of registered capital and liquidation of FIEs, but laws and regulations governing changes of domicile do not yet exist. Other than the State Administration for Industry and Commerce which has issued, in conjunction with the Ministry of Commerce and other ministries, notices regarding procedural requirements for changes of domicile by FIEs, only a few local governments have published guidance documents or internal notices for the purpose of handling practical situations in their localities, or for other related purposes. An example of this is the Notice on Strengthening the Administration of the Relocation of Domicile of Enterprises Between Districts, issued by the Shanghai finance and taxation department in early 2009.

To change the domicile of an FIE, reference must be made, in principle, to the substantive provisions and procedural requirements for a change in business address of an FIE provided in the PRC Company Law and the three FIE laws (namely the PRC Sino-Foreign Equity Joint Venture Law, the PRC Sino-Foreign Co-operative Joint Venture Law and the PRC Wholly Foreign-Owned Enterprise Law) and their respective implementing regulations. Specific laws and regulations covering the establishment, liquidation, finance, accounting, taxation, business and labour relationships of FIEs may apply, depending on the relocation methods chosen. Finally, FIEs must observe any specific local regulations relating to relocation of the place of origin and the destination.

Ways to switch domicile

There are two distinct legal methods by which FIEs can relocate their domicile within China: “direct domicile relocation” and “relocation of domicile by re-establishment”.

At present, PRC laws only govern one type of domicile switch, which is the change of registered place of business of an FIE, or “direct domicile relocation”. This describes a situation where an enterprise directly relocates from its former place of business (“place of origin”) to a new place of business (“destination”), and changes its registered address. There is no provision in law which stipulates whether the place of origin and the destination must be located in the same district, municipality or province.

In practice, a considerable number of FIEs have chosen the alternative method, “relocation of domicile by re-establishment”. This means that the corporate legal person status of the original enterprise is liquidated and deregistered, and, meanwhile or subsequently, a new FIE is set up at the destination. The newly established enterprise will usually receive and deal in the core assets of the original enterprise and engage in the same business, or even directly inherit most or all of the business of the original enterprise through contractual arrangements.

Choosing a method

When choosing between the two methods of domicile relocation, enterprises and foreign investors must pay attention to the following legal factors in addition to operational requirements and cost:

Difficulty of obtaining approval: The procedures for “direct domicile relocation” are relatively simple as they do not involve the de-registration of a legal entity (although some local government authorities may set strict criteria in practice). An enterprise relocating in this way only has to obtain advice from the approval authorities at the place of origin, and approval from the competent department of the Ministry of Commerce at the destination, and then register with the bureau of industry and commerce at the destination. However, the procedures for “relocation of domicile by re-establishment” are more complex and much more time-consuming, as they involve two sets of different procedures – the liquidation and deregistration of the original enterprise, and the establishment of a new enterprise. Additional registered capital may also need to be injected into the newly established enterprise, thus increasing the financial burden on investors.

Succession to rights and obligations: As the legal entity of a relocating enterprise in a “direct domicile relocation” remains unchanged, the rights and obligations of the enterprise and the contracts executed by it do not, in principle, need to be changed. In contrast, in a “relocation of domicile by re-establishment” the original enterprise must be liquidated before it is deregistered, and must terminate all of its rights and obligations as well as all the contracts or business not yet fully performed or conducted. Therefore, if the original enterprise has any core business or material contracts which are by their nature untransferable, this may create an obstacle to the relocation.

Business transition: In the case of “direct domicile relocation”, an enterprise can continue to operate during the relocation process. However, the enterprise must be aware of any potential impact on its operation (such as failure to issue invoices in a timely fashion) due to the impact of the relocation on the departments in charge of banking, finance and tax during this particular period.

In the case of “relocation of domicile by re-establishment”, the original enterprise is not permitted to conduct any business which is not related to the liquidation once the liquidation process starts, and the newly established enterprise is not permitted to start substantive business before it obtains a business licence. Therefore, the enterprise needs to design a timetable for the domicile relocation plan in order to minimize the impact of the re-location on its operations to the greatest possible extent.

Martin Hu is a senior partner of Martin Hu & Partners. Kenneth Kong is a senior associate at Martin Hu & Partners.