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Business> Legal-Ease
UPDATED: December 15, 2006 NO.31 AUG.3, 2006
Practical Application of China Business (VI)

Applying for "encouraged" status

As with all business applications, these first need to go to the Ministry of Commerce or provincial commerce authority for the approval certificate, then to the provincial authority again for the business license. For encouraged status applications, these now need to be approved by the National Development and Reform Commission (NDRC). For investments less than $30 million, these can be approved at provincial level; those above need to be approved at state level.

If a foreign-invested enterprise, such as a wholly foreign-owned enterprise or a joint venture, applies for encouraged status after its establishment, such as in the case with an alteration or addition to its scope of business, or in the event this had previously been overlooked, the company would need to supply the following documents to the authorities:

· Application form

· Copy of business license

· Feasibility study report

· Certificate of approval

· List of imported machineries and equipment with description of number, unit price and total price

If the application involves an increase of capital, an audit report should also be submitted to the original approval authority.

It is worth noting that the NDRC and the General Administration of Customs have recently been tightening the administration of such exemptions. NDRC issued a further notice FGWZ [2006] 316 on February 22, 2006, to provide more details on certification procedures. The new procedures became effective on March 1. The new procedures define more clearly who the responsible approving authorities are and warn against abuses.

The procedures apply both to initial approval of Sino-foreign equity joint ventures, Sino-foreign contractual joint ventures and wholly foreign-owned enterprises, and increases in total investments of existing Sino-foreign equity joint ventures, Sino-foreign contractual joint ventures and wholly foreign-owned enterprises.

According to the administration procedures, as mentioned earlier, NDRC approval is required. Further filings for tax exemption on imported goods need to be made with the customs bureau and also with the tax bureau.

The notice also emphasizes that a project with total investment in excess of $30 million cannot be "compartmentalized" to avoid the scrutiny of the NDRC. Similarly foreign-invested enterprises are warned that they must not understate the amount of total investment and apply for an increase after a project and corresponding exemption are approved. Applicants and local approving agencies are also warned against unwarranted "stretching" of the meaning of exempt criteria. NDRC said it would strengthen review of approvals granted in respect of projects below $30 million to identify irregularities. Violations may lead not only to withdrawal of exemption, but also disruption of importation and hence serious financial damages to those involved.

Major points of the notice are as follows:

For a foreign-invested project with total investment over $30 million, the project approval paper should be issued by NDRC.

For projects under $30 million, the project approval papers should be issued by a provincial development and reform commission.

No entities other than NDRC or provincial planning authority have authority to issue the approval paper.


It is important to be aware if your intended activities in China fall into the "encouraged" sector. If so, and you and your advisors are aware of this, your company may apply for significant benefits in the reduction of tax, value-added tax rebates and even profit tax holidays, depending on the specific case. However, if you are not aware of these benefits and do not make a specific application to apply for them--your business stands to lose out significantly in terms of saved revenues.

Note: Encouraged Industries refer to those that promote the development of agriculture, involve high technology, upgrade product quality, promote environmental protection, promote exports and help the development of poorer and less-developed interior regions of China.

Chris Devonshire-Ellis chris@dezshira.com is a senior partner of Dezan Shira & Associates, Business Consultants www.dezshira.com

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