China lawyers love China business licenses and we frequently use them to make sure the signing party to a China contract actually exists and is an officially registered entity. We also love them because they are often a fast and cheap treasure trove of helpful information. Reviewing a China business license is usually the first thing we do by way of due diligence in most China deals.
The below is an email from one of my firm’s China attorneys to a client, explaining what we were able to garner from the China business license of a Chinese WFOE our client was interested in purchasing.
- Company name: _____________.
No English language equivalent is given in the documents (which is unusual), but this translates as _____________(Beijing) International Trading Company Limited.
- Company address: Beijing City, Dongcheng District, ________Number ____, Unit ____.
This is a prestigious location in the center of the high‐end retail/office district.
- Registered Capital: $600,000 US.
The amount is relatively high because high registered capital is typically required for trading companies. A Chinese CPA must verify all registered capital contributions. You should obtain a copy of the verification. Note also that all WFOEs must undergo an annual audit and file an annual tax return. We should obtain a copy of the audit and the filed tax return(s).
- Representative Director: ____________
This person has primary authority for all company operations. We should ensure that you have complete control over this person together with the company seals/chops, bank accounts/bankcards and primary company documents. We should also immediately determine 1) who is the general manager and 2) who are the members of the board of directors.
- Formation date: __/__/2011. Inspected and approved: __/__/2012.
It is good that the company has been formally inspected. It means someone is trying to follow proper procedure.
- Scope of Business: Wholesale for various consumer goods; financial and business management; import and export of goods and technology, including export‐import agency.
This is a very broad scope of business that allows you to do consulting business in addition to trading. This is somewhat unusual and is a very good thing for you since it maximizes the flexibility of the WFOE. However, this scope of business does NOT allow the WFOE to operate as an advertising agency (see discussion below). On the other hand, the existing scope of business allows you to advise your customers on where and how they should place advertising and you can charge a fee for the service. You can also act as an intermediary in arranging with an advertising agency for placement. However, you cannot contract directly place the advertising. Only an advertising agency can do that.
- Shareholder: _______________Holding Company.
This appears to be the proper shareholder.
Advertising Agency Issue. Here is a brief review of the advertising agency rules. To place advertising in China, a company must be a licensed advertising agency. Foreign companies are permitted to form a wholly foreign owned advertising agency but the rules for doing so are quite strict. The primary rule is that you must prove that 85% of your income over the last 3 years comes from advertising. How you “prove” this is not stated in the rules. There are also special rules related to staffing and registered capital that add extra burdens.
The main issue, however, is the one I raised above. You cannot simply amend your current scope of business to add operation as an advertising agency as an additional item within the scope. Instead, you must form an entirely separate company, with a separate office address, staff, registered capital and the rest. As we discussed, you can, of course, enter into contracts between your Chinese entities that would allow you to offer an integrated package of services to your customers. But beneath that integrated package you will need to maintain a strict separation between the entities. Thus the person who formed the existing WFOE trading company did not make a mistake with respect to the scope of business. Rather, no one has taken the additional step of forming the additional company that would act as an advertising agency in China.