Legal Updates from some of our members

15 Mar 2022

Highlights of Unified Market Entities Registration and Administration Regulation

The Administrative Regulation on the Registration of Market Entities promulgated by State Council on July 27, 2021 and its implementation rules released by State Administration for Market Regulation (“SAMR”) (collectively, the “Regulation”) took effect on March 1, 2022. The Regulation has set out unified provisions of registration and administration of all types of market entities for profit-making business activities, superseding scattered rules previously issued for different market entities.

1. Who are market entities covered by the Regulation

Market entities refer to all natural persons, legal persons and non-incorporated organizations that engage in for-profit business activities in China, including the following:

(1) companies incorporated pursuant to the Company Law, and enterprise legal persons that are not incorporated as companies and their branches;
(2) sole proprietorships, partnership enterprises and their branches;
(3) specialized farmers’ cooperatives (associations) and their branches;
(4) self-employed individuals;
(5) branches of foreign companies; and
(6) other market entities as prescribed by laws and administrative regulations

2. The Regulation requires filing of information of beneficial owners with limited exceptions

In addition to general registration items such as name, business scope and registered address of market entities and special registration items such as shareholders, partners and investors, the Regulation requires market entities to file their beneficial owners for anti-money laundering supervision.

 Definition and scope of beneficial owners

According to a Provisional Rule on Administration over Information of Beneficial Owners of Market Entities (the “Draft Beneficial Owner Information Rule”), a draft jointly released by SAMR and the People’s Bank of China for seeking public opinion, a beneficial owner refers to a natural person who ultimately owns or actually controls market entities or enjoys the ultimate revenue of market entities.

Specifically, a natural person will be deemed as a beneficial owner of market entities if he or she:

(1) ultimately owns more than 25% of a company’s or a partnership enterprise’s equity interests, shares or partnership interests, either directly or indirectly; or
(2) otherwise, solely or jointly exercise actual control over a company or a partnership enterprise; or
(3) ultimately enjoys more than 25% of a market entity’s revenue, either directly or indirectly.

For the purpose of the above test, “actual control” under the item (2) includes, without limitation, control through contract, kinship and other ways, such as appointment and dismissal of legal representative, director, supervisor or senior officers or executive partner, decision of formulation or implementation of significant business operation or management, decision of financial expenses, actual possession and use of material assets or cash for a long term.

If no one meets the above threshold of beneficial owners, personnel who is in charge of daily operation of market entities, such as legal representative of a company or executive partner of a partnership enterprise, will be deemed and filed as beneficial owner.

 Specific information of benefit owners to be filed

Market entities need to file the following information of beneficial owners with the competent administration for market regulation:

• Name
• Gender
• Nationality
• Date of birth
• Habitual residence or address of employer
• Contact information
• Information of ID card or passport
• Type of beneficial ownership, percentage of equity interests, shares or partnership interests, dates of beneficial ownership formation and termination (if applicable)

Those market entities which are completely owned by natural person shareholders or partners and have registered capital of no more than RMB 10 million may be exempt from filing of beneficial owners, as long as no natural persons other than shareholders or partners exercise actual control over or receive revenue from, those market entities, or have control over or receive revenue from, those market entities, through ways other than equity interests or partnership interests.

 Actual controller disclosure for foreign investment enterprises

Foreign investment enterprises are required to disclose their actual controllers in the foreign investment reporting to China’s commerce authorities. Slightly different from the beneficial owners, actual controllers are generally defined by China’s Company Law as persons who exercise actual control over a company through investment, contract or other arrangements even though they are not shareholders of the company. In practice, commerce authorities will not require further look through if disclosed actual controllers are natural persons or publicly listed companies. It is noteworthy whether such practice will change after the Draft Beneficial Owner Information Rule is officially promulgated.

3. Market entities may apply to suspend businesses and acquire dormant status under certain circumstances

China’s Company Law empowers administration for market regulation to revoke companies’ business licenses if they fail to start business operation within 6 months after establishment without justification or cease business operation for a period of more than 6 months. The Regulation for the first time introduces a dormant company concept, allowing market entities to discretionally apply to administration for market regulation to suspend their businesses for a period up to 3 years in the event of business difficulties due to natural disasters, accidental disasters, public health emergency, social security events and other reasons.

A market entity should make filing with the competent administration for market regulation before it becomes dormant. It may also apply to activate its business operation at any time during the dormancy period. But the dormant status will automatically lapse if the market entity conducts any business during the dormancy period or the filed dormancy period has expired or the accumulated dormancy period has exceeded 3 years.

Although a dormant market entity does not need to conduct business, it should still disclose its annual report. Furthermore, it is not clear yet whether a dormant market entity will be exempt from daily tax declaration and other daily compliance requirements.

4. The Regulation formalizes real-name authentication process, while allowing submission of notarized ID documents and in-person submission of ID documents as backup

Local administration for market regulation will conduct real-name authentication through facial recognition or other ways when applicants apply to register and file the following persons:

(1) legal representative, executive partner and person in charge
(2) shareholders, promoters, directors, supervisors and senior management personnel
(3) investor of sole proprietorships, partners of partnership enterprises, members of specialized farmers’ cooperatives (associations), self-employed individuals
(4) registered contact persons and recipients of legal documents (applicable to foreign investment enterprises)
(5) designated representatives or proxies

If persons concerned fail to pass the real-name authentication, they may instead submit notarized ID documents or make in-person submission of their own ID documents.

5. A market entity may have only one domicile or principal business premises unless provincial governments permit otherwise

It is a long tradition that a market entity may have only one domicile or principal business premises. The Regulation continues the tradition but meanwhile acknowledges the ongoing trial of “one business license, multiple premises” by empowering provincial governments or lower-lever governments authorized by such provincial governments to formulate detailed rules to provide more conveniences to business operations of market entities.

Take Shanghai as an example. Shanghai administration for market regulation started the trial of “one business license, multiple premises” from January 1, 2019. It allows that if a market entity (excluding foreign investment enterprises which conduct restricted business sectors under the Negative List) operates its business at a site beyond its registered dominical or principal business premises, it may apply to file such site as another business premises without a need to register a branch company, under the conditions that (i) the new site and the registered domicile or principal business premises are within the same district; and (ii) businesses operated at the new site do not go beyond the registered business scope or require governmental permit.

It is expected that along with the effectiveness of the Regulation, provincial governments or their authorized departments will continue the trial and formalize the “one business license, multiple premises” at certain point of time.

MHP Law Firm︱www.mhplawyer.com︱︱T +8621 61132988︱F +8621 61132913
© MHP Law Firm
This Newsletter is only offered for the purpose of sharing information. It discusses legal developments and should not be regarded as legal advice for specific situations. If you wish to obtain more information, please contact us at .

The Law Firm Network is a network of independent law firms originated in 1989. Our members are not affiliated in the joint practice of law; each member firm is an independent law firm and renders professional services on an individual and separate basis.