Streamlining procedures for filing business activities for a China company is one of the major ongoing goals of the country’s reforms. Recent regulatory changes with market access for foreign investors and the revised China Companies Act have led a large number of commercial enterprises, in particular foreign owned business entities, to file amendments to their business activities.
However, under the revised rules, a commercial enterprise that needs to amend only a single permitted business activity classification will be required to simultaneously change all of its other items. Therefore, a commercial enterprise will need to not only focus on identifying how its activities fit within the rubric of the revised classifications, or whether its current activities can use its existing business activities filings. This article will provide a background on the streamlined regulations, with a goal of analyzing how the revised China market oversight agency rules will affect your business in China by possibly creating new restrictions, and includes strategic insights and recommendations.
Contents
What are business activities and commercial enterprises?
Compliance with Business Activities Registration
Selecting the Appropriate Category of Business Activities
No Impact of New Categories on Business Operations
What are business activities and commercial enterprises?
Chinese lawmakers decided that their business law should have a variety of unique concepts to express the country’s distinct culture. Those familiar with US or UK business law are familiar that a corporation and LLC in its certificate of incorporation will declare a “business purpose,” usually anything lawful. Chinese business law has the “business purpose” for some entities such as LLPs, and gives partners a choice to declare whether their formation documents will describe a business purpose or business activities. Many lawyers with English as second language refer to the business activities as the “business scope” which can be very confusing.
Traditionally, the distinction between business purpose and business activities in China has been that companies are required to register their business activities, display their principal business activity in their business name, and cannot carry on business for a business activity that has not received regulatory approval. Otherwise, they would be fined, but recently China has begun changing these rules. An existing problem in Chinese law is that licensing was being done both in the entity formation documents, and in regulatory permits, and commingling these systems has made it hard to do business.
A commercial enterprise in Chinese business law, similar to the US and UK, refers broadly to non-entities such as individuals registered to do business, sole proprietors, or business entities such as limited liability companies. Translations of Chinese laws confusingly refer to these as “market subjects,” largely obscuring the intended meaning.
Compliance with Business Activities Registration
China has begun implementing a revised business activities filing system that is part of a broader policy initiative to achieve separation of certificates/permits at the regulatory level. What Chinese policymakers mean by separating certificates and permits is that your business certificate will serve the purpose of being a certificate of formation for a commercial enterprise. Activities that require specialized regulatory approval will obtain a separate permit that is not part of your business certificate. A common complaint of businesses is that they are unable to commence business because a single permitting item on their business certificate, completely blocks off all business operations. By separating the roles of permits and certificates, Chinese policymakers hope to eliminate unnecessary permit delays.
In 2021, the National Market Oversight Administration published its Request for Public Comment on the Permitted Business Activity Nomenclature List, a new regulation to supplement the Better Business Environment Administrative Regulations. The purpose of establishing this list would be to enhance freedom to do business, streamline regulatory filings, and establish more uniform business laws across China’s numerous jurisdictions.
Although the Permitted Business Activity Nomenclature List has not been issued, the Request constitutes a clear directive from the head office for local government subordinates to establish a uniform law for business activities. It also mandates improvement in the quality of their work, as the list establishes norms for how regulators serve the public, and don’t affect the legal rights of a commercial enterprise. In the years 2021-2022, the various local government offices across China adopted their own nomenclature lists that advocated naming convention standardization, and uniformly announced to the public that businesses would have freedom to autonomously declare their own business activities.
In the example of Beijing, under their 2022 Commercial Enterprise Filing Administrative Regulations Implementation Process Circular, they set up an online platform that allows point-and-click selection where you can pick the most relevant nomenclature item for your business activity. When a user updates their business activities, they must choose from a list of the new categories. When read together with China’s national Commercial Enterprise Filing Administrative Regulations Implementation Process Circular and its Supplemental Rules, a business in Beijing is not required to update their business activities and are permitted to use the legacy categories, but when changing their business activities, the entity must fully conform it to the new Nomenclature List.
The rules are in a state of flux and are very much being applied based on individual regulators’ personal discretion. To ensure you make the right decisions and stay in compliance, CBL can help you find a lawyer specialized in this field with affordable rates.
Selecting the Appropriate Category of Business Activities
The Nomenclature List has not yet been published by the China National Market Oversight Administration. However, the regulators in Beijing have said that commercial enterprises can rely on categories shown in the Permitted Business Activity Nomenclature List Lookup System to select the activity that most closely fits your business.
The business activities can be filled in as either general items or permit items; as described above, compliantly filing your business activities does not affect your company’s rights, obligations, or qualification. Companies whose existing business necessitate a permit should select from the appropriate “permit items” category, whereas others should choose a “general” category. Commercial enterprises whose business activities necessitate obtaining a regulatory permit should choose from the “permit item” and other business activities should be chosen from among the “general items.”
For some industries that require a permit item in order to register their business activities, for example alcohol sales, cosmetics, and Internet culture, or where there are already significant restrictions, for example foreign investment and market access, the policy has not significantly changed. For general items on a business certificate that do not require getting a permit under China’s legacy or new policies, have largely been changed or removed, so a new issuance will be starkly different from what was done in the past.
A review of public sources about the streamlined procedures show that much of the existing business activities content has been either removed or simplified, so you can see a substantial difference between the old and new classifications just by reading them. But overall, there are no substantive changes to the business activities and businesses can keep using their existing certificates, as most of the change revolves around nomenclature changes.
When choosing your China company’s permitted business activity classification, your representative should search by using keywords related to your business, industry, or products, and line these up with the regulatory concepts of “general items” and “permit items” to make a choice. According to the Beijing market regulators telephone hotline, simply making a good faith choice of the best match is adequate.
Chinese regulators are saying this because the current business activities nomenclature lists are quite outdated, and there are numerous businesses that cannot be matched with an existing category, especially those in emerging industries or that are foreign owned businesses. When this happens during the conversion of general items, the applicant and even regulatory office staff responsible for reviewing applications are unable to find a matching category, as the business activities lists have been frequently adjusted and category descriptions are inconsistent.
The State Council’s Circular requires that new categories be added as industries change, and applicants in uncovered emerging industries are entitled to fill their applications with category items that are chosen based on a reasonable reading of the policy documents and list of categories. We can expect China’s rules to be updated appropriately in the future.
Overall, since the system is still very new, it may be impossible to find a matching classification in the list, so at this juncture you should select the most accurate and appropriate classification using the lookup system and make a best effort to find something that conforms to your business activities.
No Impact of New Categories on Business Operations
Under the revised China Companies Act of 2024 at § 12, the business activities of a company must be listed in its articles of formation and any changes to them must obtain a government filing, and before doing so obtain approval for any items that require permitting under other administrative regulations. The revised law implies that for a commercial enterprise filing its business activities in itself should no longer control whether certain business activities can be undertaken or are prohibited, rather it should simply put parties on notice about the nature of their counterparty’s business.
In this vein, the China Market Oversight Administration in 2021 issued its Request for Public Opinion on Business Filing Uniform Law Reform, asserting that as the business activities are stated in the articles of association in public record in order to notify parties of their business lines; therefore, the company may freely carry on any business even those not registered, so long as they are not expressly prohibited or restricted. Only activities requiring a permit require prior approval. As can be seen from the government’s policy guidance, regulators will no longer fine a business entity or other commercial enterprise for operations outside of their business activities. Likewise, the Supplemental Rules impose a fine for carrying on business without obtaining the requisite permit, but not for operations outside of their business activities.
That means, the business activities filed for no longer restricts your business operations, and you may carry on any kind of business in China, unless that activity requires a permit in which case one must be separately obtained. In sum, there is no longer a mandatory requirement for your business to strictly follow the business activities nomenclature list, you should still update filings as needed. When doing this, use the Lookup System to search for the keywords related to your industry and products to find the closest match.
Moreover, the revised China Companies Act and other central government policies announcing the separation of certificates/permits, the business activities do not restrict the activities you can carry on, except for that anything requiring a permit requires prior approval. If you need help navigating bureaucratic legal requirements for compliantly filing your permitted business activities, CBL can help you find a specialized lawyer with affordable rates.