Establishing a foreign invested enterprise in China - Norton Rose

Establishing a foreign invested enterprise in China - Norton Rose

Establishing a foreign

invested enterprise in China


Establishing a foreign

invested enterprise in China


Norton Rose Group

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© Norton Rose LLP 2010 Edition No. NR8079

The whole or extracts thereof may not be copied or reproduced without the publisher’s prior

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This publication is written as a general guide only. It does not contain definitive legal advice and

should not be regarded as a comprehensive statement of the law and practice relating to this area.

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06 Categories of foreign investment

07 Corporate form of foreign invested enterprises

09 Approval/registration procedures for establishing an FIE

10 Capitalisation and debt structure

12 Foreign exchange issues

14 Current incentives for foreign investment into China

15 Employment issues

17 Appendix 1: General approval and registration procedures chart

18 Appendix 2: List of documents required for the application process

19 Contacts

Establishing a foreign invested enterprise in China

06 Norton Rose LLP

Categories of foreign investment

Foreign investment into China is regulated on an industry by industry basis. The PRC government

has classified different industry sectors either as “encouraged”, “restricted” or “prohibited”.

Any industrial sectors that are not stated to be included in any of such categories are deemed

to be in a fourth, “permitted” category. The classifications are detailed in the Foreign Investment

Industry Guidance Catalogue (外商投资产业指导目录) (Catalogue) which is periodically

updated by the authorities in the PRC. Encouraged industries are more likely to receive

favourable tax treatment and may be eligible for various forms of financial subsidy. Industrial

activities that are permitted should not generally be affected by significant foreign investment

restrictions. However, where an industry is restricted, foreign investment is usually limited

to a minority shareholding in a joint venture with a Chinese partner whilst industries that

are prohibited are not open to any form of foreign investment at all.

The current version of the Catalogue was promulgated on 31 October 2007 by the National

Development and Reform Commission (NDRC) and the Ministry of Commerce (MOFCOM).

The current Catalogue added 94 types of encouraged industries. The trend of the current

Catalogue is to encourage the development of projects using high technology or advanced

materials. The revised Catalogue also encourages investments in environmentally friendly

and resource saving projects.

In addition, specific regulations may apply different rules depending on the location in

the PRC of a foreign investment project or the home jurisdiction of the foreign investor

concerned. For example, the Industry Catalogue for Foreign Investment in the Central-Western

Region (中西部地区外商投资优势产业目录) (Western Catalogue) was issued jointly

by NDRC and MOFCOM in 2004 to promote and regulate foreign investments in the

comparatively less developed middle and western regions of China. In addition, special

rules are applicable to various types of investment project covered by the Closer Economic

Partnership Agreements (CEPA) between Mainland China, Hong Kong and Macau, which

generally operate to confer preferential treatment to qualifying investors from Hong Kong

and Macau.

Before setting up a foreign invested enterprise (FIE) in the PRC, a foreign investor should

consult the Catalogue and other related regulations such as the Western Catalogue and

CEPA (if applicable) to identify the relevant industry sector(s) of its planned activities in

China and check the relevant entry requirements. Such requirements may dictate the form

of enterprise that is permitted, the maximum allowed foreign equity percentage and the

minimum registered capital of an FIE. More heavily regulated sectors of the PRC economy

may also be subject to additional requirements published by the PRC governmental

authorities who regulate the applicable sector.

Corporate form of foreign invested enterprises

Corporate form of foreign invested enterprises

An FIE established in the PRC will, in most cases, be regarded as a PRC legal person.

There are five main types of FIE which may be established in the PRC:

• Wholly foreign-owned enterprises (WFOE)

• Sino-foreign joint ventures which can either be equity joint ventures (EJV) or cooperative

joint ventures (CJV)

• Foreign-invested companies limited by shares (FICLS)

• Foreign-invested partnerships

• The vast majority of foreign investors establish either a WFOE (a wholly-owned subsidiary)

or an EJV.


A WFOE is a limited liability company which is wholly-owned by foreign investor(s). A WFOE

may generally be set up by foreign investors where the type of business which will be carried

out by the WFOE is not subject to any shareholding restrictions set out in the Catalogue or

other PRC regulations. A foreign investor is advised to check the Catalogue and other relevant

regulations to determine whether the form of a WFOE is permitted for the relevant industry.

WFOEs were originally conceived to encourage manufacturing activities that were either

export orientated or introduced advanced technology to China. However, with China’s entry

into the WTO, these conditions were gradually eroded and WFOEs are increasingly being used

for a much wider range of activities including consulting and management services, as well

as software development and trading.


EJVs and CJVs are most commonly used in industries that are not currently open for foreign

investment in the form of a WFOE or where a foreign investor depends on the local knowledge

and resources of a Chinese partner. Although EJVs and CJVs are both forms of joint venture

vehicle, there are significant differences between them, particularly with respect to profit

sharing arrangements.

An EJV must take the form of a limited liability company. The profits and losses of an EJV

must be allocated according to the ratio of capital contributions made by the joint venture

partners. An EJV is the most common form of FIE, especially in the manufacturing sector.

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A CJV offers more flexibility to the parties involved because they can decide how the profits

and losses will be allocated among themselves and this need not be in proportion to their

respective capital contributions. It is also open for the parties to agree that one party should

recover its investment through an accelerated repayment structure, whereas the other party

will acquire specified assets of the CJV at the end of the joint venture’s term. Therefore,

the partners of a CJV are able to allocate the investment risk between them by agreement

to a much greater extent than is possible using an EJV. A CJV (also sometimes referred to

as a contractual joint venture) may take the form either of a limited liability company or

of a non-legal person (which broadly equates to a partnership). In practice, the majority

of CJVs do take the form of a limited liability company.


Foreign investors may also establish a company limited by shares (or joint stock company)

which has capital divided into shares. An FICLS must have a minimum of two (and less than

two hundred) initial shareholders (or promoters), including at least one foreign investor,

and a minimum registered capital of RMB30 million. Foreign investors rarely set up a new

business in China using the form of an FICLS because of the more stringent capital and

regulatory approval requirements applicable to setting up an FICLS. An FICLS more commonly

arises where a foreign investor converts an EJV into an FICLS after successful expansion

of its existing business. An FICLS is also the only form of FIE whose shares can be listed

on one of the two stock exchanges in China.

Foreign-invested partnership

From 1 March 2010, foreign investors have been permitted to establish partnership

enterprises in the PRC. Foreign investment made through a partnership will not require

MOFCOM approval, but NDRC approval and any industry-specific approvals may still

be required. Foreign investment made via a partnership structure will be subject to any

limitations under the Catalogue (meaning the partnership can only engage in areas of

business for which no foreign shareholding restrictions are imposed under the Catalogue),

although the Administration of Industry and Commerce (AIC) (rather than MOFCOM) will be

responsible for reviewing compliance with applicable foreign investment controls and all

application documents submitted by the applicant. AIC shall report to local MOFCOM at the

time of registering a new foreign invested partnership. There are no published requirements

on the minimum amount of registered capital, the debt to equity ratio, or the time limit

for making capital contributions to a foreign-invested partnership.

Approval/registration procedures

for establishing an FIE

Approval/registration procedures for establishing an FIE

The overall approval process for establishing an FIE can be broken down into different

stages as follows:

• As an initial step, the investors must obtain project approval from NDRC and complete an

environmental impact assessment examination conducted by the relevant environmental

authority. If the FIE intends to conduct certain types of business in more heavily regulated

areas (such as financial services), preliminary consent from the relevant regulatory bodies

must also be obtained at this stage

• Next, the investors will need to seek approval for the establishment of an FIE. The approval

application is generally handled by MOFCOM and the level or branch of MOFCOM that

is responsible for the application will be determined by the classification of the industry

concerned under the Catalogue and the amount of investment involved. MOFCOM approval

is evidenced by an approval letter and a certificate of approval issued by MOFCOM and

the approval process will generally take between one and three months to complete

(depending on the level of MOFCOM involved). In certain sectors, an additional or

separate approval must be obtained from the applicable industry regulators

• Investors must then submit the relevant approval letter, approval certificate and certain

other required documents to the applicable local branch of the AIC in order to complete

the registration procedure for the incorporation of the FIE and obtain a business licence

issued by the AIC. The AIC essentially performs the function of a company registry in

the PRC. After a business licence is issued by the AIC, the FIE is formally established

under PRC law and is permitted to commence business operations

• Following the establishment of the FIE, certain additional registration procedures must

be undertaken with various government departments within the legally prescribed time

periods. In most cases this will include registrations with the applicable tax bureau,

foreign exchange authority, labour bureau, finance bureau and customs authority.

The approval process set out above is a general outline only of the main procedures involved

in establishing an FIE in China. The process may be varied or simplified according to the

prevailing local rules and practice and the requirements of any applicable industry regulators.

As a rough rule of thumb, the whole establishment process typically takes between three

and six months to complete.

An approval process flow chart for establishment of an FIE is attached as Appendix 1 and

a list of documents required for the application process is attached as Appendix 2.

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Capitalisation and debt structure

Total investment and registered capital

Under PRC law, all companies including FIEs, must have a prescribed minimum amount of

registered capital (currently RMB30,000 for a limited liability company). Every FIE formed

as a limited liability company must have, in addition to its registered capital, an approved

amount of total investment. Total investment is a unique legal concept applicable in the

PRC that has important implications involving certain aspects of an FIE’s business.

Registered capital refers to the total capital contribution of the investors that is registered

with the relevant government authorities. Total investment refers to the overall amount

(including registered capital and funds potentially borrowed by the company) that is required

for establishment of the planned project and achievement of its intended scale of production

as stipulated in the joint venture contract and/or the articles of association of the FIE.

Registered capital contributions are subject to more stringent regulation and supervision

than total investment and must be contributed by the investors within certain time limits

set out in the articles of association and mandated by law. In practice, part of the registered

capital can generally be contributed within two years after establishment of the company

in accordance with the contribution schedule prescribed in the joint venture contract

and/or the articles of association. Various governmental authorities, including the local

AIC, the tax authorities and customs authorities, will annually make a joint inspection of

each FIE. One aspect of the annual inspection is to verify whether the registered capital

has been contributed by the investor(s) in compliance with the prescribed schedule.

Total investment, on the other hand, is not subject to any such contribution time limits

or supervision. There is no requirement that the FIE does actually in practice fund the

difference between the registered capital and the total investment.

The PRC authorities stipulate the minimum ratio of registered capital to total investment

for newly established FIEs. The ratio effectively determines the maximum debt-to-equity

ratio of an FIE based on a sliding scale by reference to the total investment.

Total investment Minimum registered capital

US$3 million or less 70 per cent of total investment

Above US$3 million up to and including

US$10 million

Except where total investment is less than

US$4.2 million

Above US$10 million up to and including

US$30 million

Except where total investment is less than

US$12.5 million

50 per cent of total investment

Registered capital must be at least

US$2.1 million

40 per cent of total investment

Registered capital must be at least

US$5 million

Above US$30 million One third of total investment

Except where total investment is less than

US$36 million

Registered capital must be at least

US$12 million

Capitalisation and debt structure

Registered capital and total investment amounts may have an effect also on FIE term loans.

The State Administration of Foreign Exchange (SAFE) requires that the cumulative amount

of foreign debt under term loans (meaning loans with a term of more than one year) incurred

by an FIE shall not exceed the difference between its total investment and registered capital.

As such, if an FIE’s registered capital and total investment are the same amount, the FIE

would not be permitted to incur foreign debt (ie, borrow from banks outside of China or

from the FIE’s foreign investor or an overseas affiliate).

Form of registered capital contribution

Registered capital can be contributed either in cash or in various other types of “in kind”

property including equipment, machinery, intellectual property and technology. The value

of the contribution in kind must be appraised and verified by a qualified asset appraisal

firm in the PRC. According to the PRC Company Law, for a limited liability FIE, the aggregate

contributions in cash of all shareholders must comprise at least 30 per cent of the

registered capital of the FIE.

Any equipment and machinery which are contributed as registered capital must be an

integral part of the ongoing operations of the company and the valuation of such equipment

and machinery must be supported by documentary evidence.

Three conditions apply to any contribution of intellectual property or technology as registered

capital. First, the intellectual property or technology concerned must be of significant

importance to the operations of the FIE. Secondly, the value of such intellectual property

or technology should be appraised and supported by relevant documentation. Thirdly, for

a WFOE, the total value of all intellectual property and technology contributed as registered

capital cannot comprise more than 20 per cent of the registered capital of such WFOE.

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Foreign exchange issues

Compared with many other countries, matters concerning foreign exchange (including the

repatriation of dividends in respect of an investment by foreign investors in an FIE) are

still strictly regulated in China. The regulatory body for foreign exchange in China is SAFE

and its local branches.

Foreign exchange registration and account opening

As part of the approval and registration procedures for establishing an FIE, an FIE must apply

for foreign exchange registration with SAFE at the place of its business registration within

30 days after its business licence has been issued. After completing the SAFE registration,

the FIE will obtain a Foreign Exchange Registration Certificate, which will be required by the

FIE in order to open foreign currency bank accounts in China.

Foreign debt registration

FIEs are allowed to borrow loans from offshore and provide security in favour of a foreign

party. The relevant loan and security will be treated as a “foreign debt” in China and will be

subject to SAFE supervision. Unlike purely domestic enterprises, FIEs are allowed to incur

foreign debt without requiring prior approval from SAFE. However, the loans and security

of an FIE which constitute foreign debt are still required to be registered with SAFE or

its local branch. As noted above, the total amount of foreign debt of an FIE cannot exceed

the difference between its registered capital and total investment amount (often referred

to as the “borrowing gap” of an FIE).

Repatriation of dividends

Before an FIE can declare and pay dividends to its foreign investor, it must satisfy the

following conditions:

• the FIE must first have made up any losses incurred by it in previous years of operation

and allocate a certain proportion of its after-tax profits to its statutory enterprise funds

as required by law

• the distributable profits of the current year must have been audited by a certified

public accountant in China

• the registered capital of the FIE must have been paid-up in accordance with the

approved timetable

• a board/shareholder(s) resolution must be passed to declare dividends and

• the FIE must have paid all due taxes in full.

In order to make payment of dividends to a foreign investor, the remittance of dividends

must be verified by a PRC bank authorised by SAFE. For this purpose, the FIE will need to

submit to its bank an application letter for the declaration and payment of dividends, the

foreign exchange registration certificate of the FIE, and a number of other documents which

evidence that the FIE has satisfied all of the required conditions. Such documents include

(i) the relevant board/shareholder(s) resolution declaring the dividend; (ii) tax returns and

a certificate issued by the tax authorities certifying full payment by the FIE of applicable

income tax; (iii) the auditor’s report on the distributable profits for the current year;

(iv) a capital verification report issued by certified public accountants in China showing

that the registered capital of the FIE has been paid-up in accordance with the approved

timetable; and (v) any other documents that may be required by SAFE.

Foreign exchange issues

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Current incentives for foreign investment

into China


China used to have a parallel tax regime with differing treatment for domestic companies

and FIEs. Under this regime, FIEs were taxed at a lower standard rate of income tax and may

have been eligible for other incentives including tax holidays and concessionary rates of tax.

The PRC Enterprise Income Tax Law which took effect on 1 January 2008 unified the tax

regime resulting in a single enterprise income tax rate of 25 per cent applicable to both

purely domestic enterprises and FIEs. However, certain tax incentives granted prior to

1 January 2008 may still be utilised by an FIE for a transitional period from 1 January 2008.

For example, the tax rate for FIEs previously granted a lower income tax rate of 15 per cent

will be gradually increased over a five year period following adoption of the Enterprise

Income Tax Law (ie, from 1 January 2012, the new tax rate of 25 per cent will be uniformly

applicable). “Production” FIEs with an approved operating period which exceeds ten years

are still entitled to utilise their previously approved tax exemption for the first two years of

operation followed by three years of concessionary tax at half the standard rate commencing

in the third year of operations. Such tax breaks (tax exemption and concessionary rates of

tax) will commence from the first profit-making year of the production FIE or on 1 January

2008, whichever is the earlier.

Development zones

In China, in addition to incentives granted by the government at national level, various

development zones across China offer certain incentives to foreign investors. These major

development zones include Shanghai Pudong New Area and Tianjin Binhai New Area.

In recent years, development zones in China have been competing with each other to attract

foreign investment in various sectors including regional headquarters of multinational

companies, financial institutions, shipping and high-technology development. For example,

Tianjin Economic – Technological Development Area (TEDA) offers various incentives

(including reduced income tax) to financial institutions, professional service providers

and high-tech companies operating in the zone.

Employment issues


Among the various areas of Chinese law, employment law is probably one of the least orderly

areas of law because it contains a complex and voluminous series of national, provincial

and local laws, regulations, measures, notices and directives. Furthermore, there exist

quite a number of inconsistencies amongst such laws, regulations, measures, notices and

directives. In addition to the large body of regulation on employment matters, the practices

of local labour authorities vary greatly from one locality to another. However, FIEs and purely

domestic companies are in general subject to the same legal regime in China governing

employment matters.

General rules

As a general rule of thumb, an employment contract is required to be concluded in writing

between an employer and each of its employees. The signing of a “collective” employment

contract between the employer and its trade union is also encouraged by the authorities

in the PRC.

An employment contract may have a fixed term, an indefinite term or a term determined

on a particular assignment basis. Unilateral termination of any kind of employment contract

by the employer is not generally permitted under PRC law except in specified circumstances

(as further discussed below). Fixed term contracts (usually for a period of two or three years)

are widely used because the employer can choose not to renew it when it expires (although

the employer will still be liable to pay severance to the employee) whereas termination by

the employer of an indefinite term contract must be based on one of the grounds permitted

by law. However, if an employee has performed two consecutive fixed term contracts, he/she

shall be entitled to require the employer to offer an indefinite term contract for any renewal

of the employment.

The standard hours of work are 8 hours per working day and 40 hours per week. Any work in

excess of these amounts is considered overtime, unless time off in lieu is given. The statutory

minimum overtime payment ranges from 150 per cent of normal pay for extra work performed

on an ordinary working day to 300 per cent of normal pay for work performed on holidays.

Termination of employment contract

Under PRC law, an employment contract may be terminated by the employer in specified

circumstances. However, an employer cannot terminate the employment contract with its

employee simply by giving notice in advance. Instead, the employer can only terminate

an employment contract if one of the circumstances specified under the PRC Employment

Contract Law occurs. These circumstances include situations where the employee is at

Employment issues

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fault (for example, where the employee commits a serious breach of the internal rules and

regulations of the employer; where the employee wilfully, through negligence or culpable

inefficiency, fails to perform the assigned duties; or where the employee is convicted of a

criminal offence) or not at fault (for example, where the employee is incapable of performing

their assigned role and remains incapable after training or change of position; or where the

employee has fallen ill or sustained injuries not arising from performance of his work duties

and as a result, is no longer able to carry out his original work duties or other work arranged

by the employer upon conclusion of medical treatment). Under the circumstances where

the employee is at fault, the employer may terminate the employment contract without

advance notice, whilst 30 days’ prior notice is required from the employer if the employee

is not at fault.

Except where an employee is dismissed on the grounds of fault, the employer is required

to make a severance payment to the employee at the time of the termination of the

employment contract.

Furthermore, the employer may require under the terms of the individual employment

contract that any employee who has held business secrets of the employer is contractually

prohibited from working for competitors of the employer, or producing products or

engaging in a business similar to that of the employer for a certain period of time (which,

however, cannot exceed two years) after the employment contract is terminated. In return,

the employer is required to pay compensation to the employee in consideration of the

restrictions imposed.

Trade union

Under the Trade Union Law, enterprises with at least 25 employees who are union

members may establish a grass roots trade union committee. The trade unions are entitled

to represent employees against the employer with regard to compliance with labour laws

and regulations. The trade union must be consulted with respect to major decisions

concerning the operation, management and development of the company, and a

representative of the trade union must be invited to attend any meetings held by the

employer affecting the vital interests of employees such as salaries, welfare, labour safety,

hygiene and social insurance. However, we understand that usually the trade union only

has the right to express its opinions on the above-mentioned issues and does not have

any right of veto over such issues.

Furthermore, the employer should inform the trade union in advance if it intends to

unilaterally terminate an employment contract with an employee. Where the trade union

is of the view that the employer is in breach of relevant laws, regulations or contracts by

terminating the employment contract and therefore requests the employer to review its

decision on termination, the employer is required to study the opinion of the trade union

and inform the trade union of the result of its study.

Appendix 1

General approval and registration procedures chart

Pre-establishment procedures Post-establishment procedures

4 weeks

1 to 3 days

1 to 2 months

1 to 3 months

2 to 3 weeks

Step 5.3

Foreign exchange registration

and permit for foreign

currency account (SAFE)

Establishment of a company in PRC

Pre-establishment procedure

Documents submission

Step 1

Pre-registration of the company’s name (AIC)

Step 2

Environmental impact

evaluation and project approval

(Environmental Administration Bureau and NDRC)

Step 3

Establishment approval (MOFCOM)

Step 4

Company registration (AIC)

Company establishment

Step 5.1

National organisation code certificate

(Local Quality and Technical Supervision Bureau)

Step 5.2

Permit to engrave company seals

(Local Public Security Bureau)

Step 5.4

Tax registration certificates

(State and local

tax bureaux)

Step 5.5

Permit for RMB principal account (People’s Bank of China)

Step 5.6

Other registrations and certificates

(Various registrations with local administrative

authorities, including: Customs, Finance Bureau, Statistics

Bureau, Labour Bureau and Social Security Bureau, etc.)

Appendix 1

• Notification of pre-registration

of the company’s name

• Environmental impact evaluation

report or registration form

• NDRC approval letter

• Letter of approval

• Approval certificate

• Business licence

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Appendix 2

List of documents required for the application process 1

• Letter of Application for the establishment of the FIE signed by the investor(s).

This letter summarises the key information about the investor(s) and describes the

proposed activities of the FIE

• Feasibility Study Report for the establishment of the FIE and its activities signed by

the investor(s) of the FIE. Generally, this will include a description of the investor(s),

the planned activities, financial forecasts, anticipated management structure etc

• Articles of Association for the FIE signed by the investor(s) of the FIE

• JV Contract for the FIE signed by the investor(s) of the FIE (if applicable)

• Letter of Appointment for the Board members of the FIE signed by the investor(s) of the

FIE. (Please note an FIE will require at least three directors)

• Letter from a reputable bank attesting to the good standing and creditworthiness of the

foreign investor(s) of the FIE

• Incorporation certificate of the investor(s) of the FIE which should be notarised by a public

notary and legalised in the place where the foreign investor(s) of the FIE is incorporated

• List of merchandise to be imported and exported by the FIE. This list will need to be

a reasonably detailed list of relevant products

• Power of Attorney signed by the investor(s) of the FIE and a Power of Attorney signed by

the FIE’s legal representative (ie, the chairman of the board of the FIE), each empowering

a representative in China to complete the registration procedures on its behalf

• Resume for each proposed director of the FIE detailing basic personal information,

including education and professional experience

• Copy of the Passport for each proposed director of the FIE and the Chairman or chief

executive officer of the investor(s) of the FIE

• Photograph of the legal representative of the FIE (ie, the chairman of the board of the FIE)

• Lease Agreement for the premises to be used by the FIE together with a copy of the

landlord’s title documents and

• A series of administrative forms to be obtained from relevant administrative authorities.

The types of form involved will depend upon the specific industry the FIE is involved in.

1 This List is generally applicable to the formation of an EJV, and the documents may vary slightly for other forms of FIE.


For further information, please contact:

Peter Burrows

Partner and Head of

Beijing and Shanghai

Norton Rose LLP

Tel +86 (10) 8448 8881


Office C-801, Lufthansa Center

50 Liangmaqiao Road

Chaoyang District

Beijing 100125

People’s Republic of China

Tel +86 (10) 8448 8881

Fax +86 (10) 8448 6220

Justin Wilson


Norton Rose LLP

Tel +86 (21) 6137 7000


27F, Plaza 66 II

1366 Nanjing Road West

Jing An District

Shanghai 200040

People’s Republic of China

Tel +86 (21) 6137 7000

Fax +86 (21) 6137 7088

David Stannard

Partner and Head of Asia

Norton Rose Hong Kong

Tel +852 3405 2388

Hong Kong

38/F Jardine House

1 Connaught Place


Hong Kong SAR

Tel +852 3405 2300

Fax +852 2523 6399


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Establishing a foreign invested

enterprise in China

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