China

There are two types of incorporated entity (known as enterprise legal persons) that are not state entities, which conduct commercial activities under PRC law.  They take the forms of either a Limited Liability Company (LLC) or a Joint Stock Company.

• With regard to an LLC, shareholders bear liabilities to the company in accordance with the amounts contributed by each shareholder. Capital contributions are made to the registered capital of the company, which is not organized by shares, and shareholders have a percentage ownership in the registered capital. An LLC must have a minimum of two and no more than 50 shareholders.  Mandatory amounts of registered capital are proscribed in regulations, depending on industry sectors.
• For a Joint Stock Company, the entire share capital of the company is divided into shares of equal amounts and shareholders bear liabilities according to the number of shares they hold. Minimum amounts of total share capital are proscribed in regulations.
• Under both corporate forms, shareholders have rights to enjoy capital gains, make policy decisions and select management and board members, generally according to the percentage amount or registered or share capital that each shareholder owns.

See Q.6  for rural cooperative organizations.

a. Joint Stock Company

b. Limited Liability Company

Generally, Chinese companies are required to consider the interests of employees, minority shareholders and the broader category of public interest.

In particular, the PRC Company Law requires a company to protect the legitimate interests of its staff and worker, strengthen labor protection and ensure safe production. A company must also provide its employees with training.  Employees have the right to form trade unions, which the employer must provide “necessary conditions for” and grass roots organizations of the Chinese Communist Party of China must carry out their activities in accordance with the PRC Constitution.

Currently non-state non-profit organizations in mainland China comprise three categories: foundations; social associations (membership associations); social service institutions (together, Social Organizations).  Generally, the type of Social Enterprise referenced in this questionnaire falls under the category of a private social service institution, which can only be formed by individuals who are PRC nationals.  Unless otherwise stated, responses in this questionnaire refer to the category of private social service institutions.

• There is a separate category of non-profit known as a public institution, comprising quasi-state organizations such as universities, which is not discussed in this questionnaire since public institutions are essentially operated by the government.  It is important to note that many Social Organizations have close ties to government agencies and may be funded by the government.
• Social Enterprises (private social service institutions) are defined as “non-profit legal persons established by natural persons, legal persons, or other organizations mainly using non-state-owned assets to provide social services.”
• There are also unregistered organizations, which often partner with public institutions or Social Organizations, but which do not have legal protections and cannot receive non-profit benefits, such as tax exemptions.
• Other quasi-non-profits, such as chambers of commerce, are registered as regular companies but are subject to special government supervision.
• With the promulgation of the Charity Law (2016), it is now possible to establish a charity adopting one of the above Social Organization forms, or to amend an existing Social Organization to include charitable aims.  It is also possible to establish a charitable trust under the Charity Law.

There is no specific organizational form for all Social Organizations, instead there is a patchwork of forms with different rules and regulations.

a. Different types of Social Organizations adopt different organizational forms as required by law.

b.  It is not possible to generalize; sometimes traditional forms are mandated.

c. Generally, non-profits can achieve their objectives with legal protections.

d.  There are many restrictions on what a Social Organization in mainland China can do, depending on its objectives and relevant government policies.

e.  N/A currently.

f.  Social Enterprises (private social service institutions) are not prevalent.

See response to Q.4 above.

a. In theory, non-profit income such as donations and state subsidies, is tax-exempt.

b. All Social Organizations or public institutions are non-profits.

c. No.

d. All Social Organizations or public institutions are non-profits, chambers of commerce and similar quasi-non-profits adopt corporate forms and generally have some commercial activities.

The Law on Specialized Farmer Cooperatives, effective 2007, provides for the legal form of rural cooperatives.  The law acknowledges the cooperative principles formulated by the International Cooperative Alliance (ICA), but is flexible with regard to implementation.  For example, the law permits investment by PRC investors such as wealthy individuals, enterprises and government agencies and distribution of profits to cooperative members out of a cooperative’s surplus on the basis of investment shares.  Cooperatives often benefit from favorable local policies, financial subsidies, favorable tax policies, etc.  A wide range of cooperatives has been established, from private shareholding-type cooperatives to cooperatives established by farmers for purposes of pooling resources and participating in supply chains, the legal regime governing them is relatively undeveloped.  In recent years the PRC government has prioritized the All-China Federation of Supply and Marketing Cooperatives, providing massive amounts of funding, with a view to alleviating rural poverty and systematizing the existing cooperative regime, which has sometimes been a vehicle for non-compliant activities.

Social Enterprises must be registered with the Public Security Bureau (PSB) at State Council and/or provincial level, and with relevant industry regulators, depending on which industry sector they operate in.  Similar to all corporate enterprises, they are required to submit annual audits for regulator purposes and may have other reporting requirements, depending on the sector in which they operate.

No.

General requirements at law including: (i) requirements regarding employees contained in relevant laws, (ii) general environmental compliance regulations, which are too numerous and technical to list; (iii) general corporate governance rules contained in laws and regulations; some AHAD rules contained in relevant laws, although this area of law generally is undeveloped as yet.

No.

No, although increasingly companies have internal requirements that new investors are required to meet.

Not currently.

Generally, philanthropic or charitable funding is made at the request of, or with the approval of local government authorities and payments must be made in accordance with government requirements.  The situation with respect to rural cooperatives differs, see Q.I.6.

N/A

Types of government funding and support available to Social Enterprises:

a. Generally, no such funding is available to private Social Enterprises, although some Social Organizations are established by the State and funded by the State.

b. N/A

No.

N/A

N/A

In mainland China, for-profit Social Enterprises are treated as regular commercial enterprises and must comply with relevant laws and regulations regarding the operation of companies, and foreign investment.

Foreign investment in any form of Social Organization currently is not permitted. Instead, pursuant to the Law on Management of Overseas NGO’s Activities in Mainland China (2017) (Foreign NGO Law), qualified overseas Social Enterprises are permitted to apply for a representative office or to enter mainland China on the basis of a temporary license.  However, other than a rectification process for pre-existing foreign NGOs that had been established before the promulgation of the Foreign NGO Law, which were re-registered as rep offices with the PSB, as far as we are aware no fresh applications for foreign Social Enterprises to enter mainland China have been granted.  We note that the Foreign NGO Law provides for a government to government basis on which to establish a foreign rep office or obtain a temporary license in mainland China.

Currently, crowdfunding is not recognized as a lawful activity in mainland China.

Any tax exemptions uniquely available for Social Enterprises:

a. In theory, donations and state subsidies are income tax exempt for Social Organizations. Such organizations may also be eligible for exemptions from business tax and VAT, depending on the identity of the donor, the purpose of the donation and other factors.

b. For-profit entities must pay all taxes.

c. Activities of Social Organizations are strictly proscribed, any non-compliant organization will lose its tax benefits and incur penalties.

According to the Public Welfare Donations Law, contributions to Social Organizations are theoretically deductible from income tax, depending on the type of the taxpayer, the type of beneficiary and the use of the donation. In theory, individual taxpayers can deduct up to 30% of taxable income for charitable donations. Separate registrations are required to obtain such tax benefits. 

No.

N/A

No.

Generally, only Social Enterprises established by or at the behest of the State are provided with government resources.

Small businesses are treated separately from Social Enterprises and sometimes benefit from tax and other local favorable policies, generally see response to Q VI.3.

Regulatory scrutiny of Social Enterprises and in particular private social services institutions, is more intense and their activities are strictly proscribed.  If a Social Enterprise comes under the jurisdiction of an industry regulator, such as the Ministry of Education, it will be subject to the specific requirements of that regulator, as those requirements pertain generally. Rural cooperatives are an exception to this statement, see Q.I.6.

Social Enterprises are regulated by the Public Security Bureau, (PSB) and relevant industry regulators, depending on the industry sector.  Some legacy foreign NGOs were formed as companies and registered with the former local Administrations of Industry and Commerce, such entities are now required to re-register with the PSB and relevant industry regulators (see Q.II.4.f).

No.

Depending on the policies of the local jurisdiction where an entity is incorporated it can take between 3 and 12 months to establish a regular commercial LLC, including tax and other registrations.   If the entity is a Wholly Foreign Owned Entity (WFOE), the process can take somewhat longer.

Currently, foreign-invested Social Enterprises are not being approved for establishment and the timeline for establishing such entities is unknown.  For domestic Social Enterprises, the timeline depends on local policies.

N/A

Government policy appears to change fairly often with regard to start-ups and for-profit SMEs, in part depending on the industry sector.  For example, IT start-ups generally are favored and many receive government support directly or indirectly.  Generally, however, the current financing environment in mainland China is not conducive for start-ups or SMEs, which are also subject to relatively heavy regulatory burdens when compared with some other jurisdictions.

Social Enterprises cannot be formed easily in mainland China.

While government policy strongly favors rural cooperatives (see Q.I.6), it does not favor the establishment of Social Enterprises and foreign investment in such institutions currently is not permitted.  Generally, Social Organizations in mainland China would not take part in government procurement.

Historically, mainland China has had issues with corruption.  However, an extremely robust enforcement campaign, combined with amendments to relevant laws and regulations, coupled with robust nationwide compliance programs have generally improved the situation with regard to corruption in mainland China over the past 10 years.  Fraud is an ongoing issue.  There is robust enforcement with regard to fraudulent activities by PRC criminal authorities and the commercial environment is changing gradually to embrace compliance with laws.  

It is unlikely that going forward the PRC government will permit private foreign non-profits to play a part in the PRC social enterprise environment, except in a strictly-controlled fashion.

PRC law generally covers most aspects of social and environmental responsibility and changes to laws in this area are made relatively quickly if those changes are supported by government policy.  Issues lie more with non-compliance and enforcement, given that mainland China’s current legal system only has approximately 40 years of full operating history.  Over the past five to 10 years, the government has focused heavily on compliance and clear advances are being made.

In mainland China, the government is responsible for policy in connection with all ESG activities, for promulgating and implementing laws and for enforcement of such laws.  Given that in the past some politically-oriented foreign organizations have attempted to establish themselves in mainland China, authorities are circumspect with regard to permitting the establishment of non-profits with foreign investment, even if their scope does not have a political orientation.