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China's New Regulations on the Administration of Market Entity Registration

Hanling & Partners Hanling & Partners Hanling & Partners
Hanling & Partners Hanling & Partners Sep 15,2022
Hanling & Partners Hanling & Partners 222

On 4 April 2021, the State Council adopted the new Regulations on Administration of Market Entity Registration which has already entered into force from 1 March 2022 (the “Registration Regulations”).

 

And on 1 March 2022, the State Administration of Market Regulation (SAMR) released the Rules for Implementation of the Market Entity Registration (the “Rules for Implementation”) to set out more detailed rules regarding the administration of market entity registration.

 

Enactment of the Registration Regulations and the Rules for Implementation has marked the beginning of a new mechanism on the administration of market entity registration in China and, by this article, we would like to introduce some highlights of the new regulations.

 

A Unified Mechanism

Before the enactment of the Registration Regulations, one of the biggest features of China’s market entity registration legal framework was the fragmented regulatory mechanism.

 

There were different rules on registration of different types of market entities including rules on registration of company, enterprise without legal personality, partnership enterprise, sole proprietorship and wholly privately owned enterprise. Even the SAMR is the authority to handle the registration of most types of market entities, because different rules were applied to different types of entities there were some differences or even contradictions in the registration system applied to different types of entities.

 

Now, with the enactment of the Registration Regulations, almost all other regulations on the registration of market entities were repealed at the same time. Article 2 of the Registration Regulations was clear that for the purpose of the Registration Regulations, the term "market entities" refers to natural persons, legal persons and non-legal-person organizations that are engaged in for-profit business activities within the territory of the PRC.

 

Although, rules on registration of different types of market entities would not be completely the same, but at least the Registration Regulations established a unified and coherent regulatory mechanism on the registration of market entities which was maybe the feature most worth mentioning of the new legislation.

 

Simplified Procedures

Another big feature of the new Registration Regulations and the Rules for Implementation is to simplify some of the registration procedures.  

 

For example, the Registration Regulations has canceled the long-time existing company name pre-approval procedure. In the old time, before the registration of incorporation of a company, it was necessary to submit a few options of company names to the local SAMR to see if any of them were available. When the local SAMR confirm the availability of the submitted company name, such a name would be “reserved” for a few months and the applicant must finish the registration within such time limit, otherwise the reserved company name would be released. The Registration Regulations has canceled such tedious procedure. Now, market entities can choose and decide their business names at the time of establishment registration by searching in the online database.

 

Another point that worth mentioning is that the registration authority will, in principle, only make a confirmation on the formality of the application documents. In practice, in order to avoid any disputes in the future, sometimes the registration authority may exam more than just the formality of the documents submitted by the applicant. The registration authority would often ask the applicant to submit more documents to verify the authenticity of the previously submitted documents. But in the Registration Regulations, it was clearly provided that the applicants shall be responsible for the authenticity, legality and validity of the materials they have submitted which means the registration authority would exam no more than the formality of the documents.

 

More importantly, the Registration Regulations also provides that registration authorities shall not require applicants to submit market entity registration related data that can be obtained through government information sharing platform, which will relieve the applicant’s burden of provision of information.

 

Introduction of New Mechanism

(1) Introduction of Simplified Deregistration Process

It is almost a common understanding that, in China, it is easy to establish a company but difficult to close one. With all documents duly prepared, registration of a new company could be done less than one week or even 1-2 days in some cities. But it would usually took 6 months to 1 year or even longer to deregister a company. Due to such a heavy burden, a lot of companies which have ceased to operate were just left there. In order to accommodate the needs for a more expedient deregistration of market entities, in 2016 the so called “simplified deregistration mechanism” was introduced and officially adopted by the Registration Regulations as a party of the registration mechanism of market entities.

 

There are three major differences between the simplified deregistration process and ordinary deregistration process. Firstly, under the simplified deregistration, the company does not need to file the members of the dissolution group to the local SAMR. Secondly, the company does not need to make a public statement on newspaper, instead the company can publish the creditor notice on the online enterprise credibility system. Finally, less documents would be required to be submitted in the simplified deregistration than in an ordinary deregistration.

 

However, the simplified deregistration process is only applicable to companies which have never occurred any debts or credits or all the debts and credits have been duly settled.

 

It is also worth mentioning that during the process of deregistration of a market entity, actually the most time consuming process is the audit and clearing process in the tax authority. In recent years, the tax authority has also introduced new mechanism to simplify the tax deregistration procedures.

 

(2) Introduction of Dormant Registration

The dormant company mechanism was adopted in many jurisdictions over the world. In China, market entities may be in a de facto dormant condition for various reasons. Sometimes, market entity have to temporarily cease its operation due to natural disasters, pandemics or market change. Also, as mentioned above, because of the burden of deregistration, market entity may be simply left there.

 

But because there was no dormant registration mechanism in China, even a market entity was in an actual dormant status, such market entity still have to perform certain obligations (for example file the annual report) to maintain its establishment. If the market entity failed to do so, such a company would be shown on the list of “abnormal operation”. And if a market entity has ceased its operation more than a certain period of time, the registration authority may compulsorily deregister such an entity. 

 

The new dormant registration allows a market entity be put in a middle status between “active” and “deregistered” for a period of no more than 3 years consecutively or accumulatively. Upon the expiry of 3-year period, the entity would automatically be deemed as has resumed its status as “active”.

 

But interestingly, Article 63 of the Rules for Implementation says the market entities under dormant registration shall also file its annual report. Which raised the question as what would be merit for a market entity to enter into such a dormant status.

 

(3) Beneficiary Owner Filing

The Registration Regulations adds the “beneficiary owner” as a new filing item as a measure to counter money laundering.

 

Currently, beneficiary owner filing is applicable to company, partnership enterprise, state owned enterprise and branch of foreign company. Other types of market entities are not required to file the beneficiary owner.

 

For a company, the beneficiary owner means anyone who (1) directly or indirectly owns more than 25% equities or shares or (2) individually or jointly exercise control over such company or (3) directly or indirectly holding more than 25% of such company’s benefits. If there are nobody falls within any of the three categories, the person who is in charge of the company’s daily operation shall be deemed as the beneficiary owner.

 

But it is worth noting, although the Registration Regulations has included beneficiary owner as one filing item. The regulations defining the meaning and scope of beneficiary owner was still in the status of gathering public comments. 

 

In Conclusion

As mentioned at the beginning of this article, the enactment of the Registration Regulations and the Rules for Implementation was an important milestone that marked a new era in the area of market entity registration. Registration mechanisms for different types of business entities have merged into a unified mechanism. And the legislator’s intention to establish a more business-friendly registration mechanism is also clearly reflected.