The legal system of Mainland China is a typical civil law system, in which legal norms are mainly manifested in the form of statutory law. Such laws are enacted by legislative or authorized bodies at different levels in accordance with statutory procedures, and systematically presented in the form of codes or laws, administrative regulations, local regulations, ministerial rules, and local government rules. Statutory law constitutes the core basis for the application of law, and judicial organs base their judgments on the existing and valid legal texts in the course of adjudication. In practice, detailed implementing rules, regulatory rules issued by competent industrial authorities, and judicial interpretations promulgated by the Supreme People’s Court often exert a substantive impact on the application of law.

In contrast to the common law system, which takes judicial precedents as an important source of rules and emphasizes the binding force of stare decisis, the legal system of Mainland China does not recognize precedents as having a formal law-creating function. Although court decisions may exert a certain reference effect in practice, their legal validity still derives from existing legislation and its authoritative interpretation.

In mainland China, the main forms of commercial entities include:

1. Limited Liability Company
A limited liability company is the most common and widely applicable form of enterprise, with independent legal person status, and shall have no more than 50 shareholders. The shareholders of a limited liability company are liable to the company to the extent of their registered capital, and the company is liable for its debts with all its assets.

2. Joint Stock Limited Company
A joint stock limited company has independent legal person status, and shall have no more than 200 shareholders. Its capital is divided into equal shares. Shareholders are liable to the company to the extent of the shares they subscribe for, and the company is liable for its debts with all its assets. This form features a more standardized governance mechanism and is suitable for large-scale enterprises seeking extensive social capital. Upon approval, it may raise funds through public offering of shares on public capital markets.

3. Partnership Enterprise
A partnership enterprise is a for-profit organization without legal person status, and is not required to establish a board of directors, shareholders’ meeting or board of supervisors. It is divided into general partnerships and limited partnerships:

A general partnership consists of general partners, who bear unlimited joint and several liability for the debts of the partnership and jointly conduct partnership affairs.

A limited partnership consists of general partners and limited partners. General partners conduct partnership affairs and bear unlimited joint and several liability for the debts of the partnership, while limited partners are liable for the debts of the partnership to the extent of their subscribed capital contributions.

Partnership enterprises are characterized by flexible establishment and tax transparency, and are commonly used in investment fund management, equity incentive platforms, professional service institutions and other fields.

4. Sole Proprietorship Enterprise
A sole proprietorship enterprise is established with investment from a single natural person and does not have legal person status. The investor owns the enterprise’s property and is liable for the enterprise’s debts with his/her personal property; if the enterprise is funded with family property, the investor shall be liable with family property.

5. Individually Owned Business
An individually owned business is a market entity engaged in small-scale business operated by a natural person or a family. It does not have legal person status, and the operator is fully liable with personal or family property. It is mainly applicable to smallscale operations. In particular, overseas investors are prohibited from engaging in investment or business activities as investors of individually owned business.

6. Branch
A branch is a subordinate entity established by a head company in accordance with the law, without independent legal person status. Its civil and legal liabilities shall be borne by the head company.

7. Representative Office of a Foreign Enterprise
A representative office of a foreign enterprise is a non‑operational office established in China by a foreign enterprise, without legal person status. Its legal liabilities shall be borne by the foreign enterprise. A representative office shall not engage in production or business activities, but may conduct non‑operational activities such as business research, client visits and communication, business liaison, product exhibition and technical exchange on behalf of the foreign enterprise.

All commercial entities shall go through the relevant formalities for business permits and/or establishment registration for their establishment, modification or deregistration.

As a general principle, non‑PRC entities conducting commercial activities directly within the territory of the PRC must do so through a legally established presence in China, except for the following circumstances:

1. Cross‑border trade in goods

A foreign enterprise engaging in international trade in goods with a Chinese enterprise constitutes the most typical scenario where no local establishment is required. The parties enter into a sales contract, the goods go through import and export formalities with the customs authorities, and cross‑border settlement is conducted via banks. The foreign enterprise is not required to maintain a legal presence in China, but shall nonetheless comply with applicable provisions on customs, taxation, foreign exchange administration and other relevant regulations.

2. Cross‑border trade in services such as technology licensing and consulting

A foreign enterprise providing cross‑border services to Chinese clients, including technology licensing, consulting and design services, may conduct such activities by entering into a service agreement if it does not need to maintain business premises or sales personnel in China. The services may be completed outside China with the deliverables provided to the Chinese client. However, the foreign enterprise shall comply with PRC laws and regulations relating to taxation, technology import and export, foreign exchange administration, data security and compliance, consumer protection and other relevant areas.

3. Temporary activities such as participation in exhibitions and business negotiations

Personnel of foreign enterprises entering China to participate in industry exhibitions, conduct business inspections, negotiate with potential partners and other temporary commercial activities are not required to establish a legal entity for such purposes.

With the exception of non‑operational representative offices of foreign enterprises and branches, the registration of registered capital is required for the establishment of all forms of legal entities in China, including both foreign-invested enterprises and domestic enterprises. However, except for special industries described in the next paragraph, there is no statutorily required minimum registered capital for general industries.

Generally speaking, companies engaging in specific industries involving public interests and financial security, such as finance, telecommunications, labor dispatch, investment and tourism, shall satisfy the minimum registered capital requirements upon establishment, and such capital is usually required to be fully paid in at the time of establishment. For example:

(i)The minimum registered capital for establishing a national commercial bank is RMB 1 billion; (ii)The minimum registered capital for establishing a city commercial bank is RMB 100 million; (iii)The minimum registered capital for establishing a rural commercial bank is RMB 50 million; (iv)A company applying for labor dispatch services must have a registered capital of not less than RMB 2 million; and (v)A company engaging in national value-added telecommunications services nationwide or across provinces, autonomous regions and municipalities directly under the central government must have a minimum registered capital of RMB 10 million.

For the differences between entities of various legal forms, please refer to Item 2# above.

For foreign investors that engage in substantive business operations in China, the limited liability company and its branches are the most commonly used entity forms, primarily for the following reasons:

(1) Ease of establishment and familiarity with registration authorities, suitable for enterprises of all operational scales. The establishment procedure for a limited liability company is standardized and mature with clear approval steps. Mature operational pathways cover name pre-approval, business registration, tax filing, bank account opening and other procedures. It is suitable for small and medium-sized enterprises and start-up projects, and also satisfies the stable operation needs of large-scale foreign-invested enterprises.

(2) Clear liability boundaries, enabling effective investment risk isolation. Shareholders of a limited liability company are liable to the company up to the amount of their subscribed capital contributions, and the company is independently liable for its debts with all its assets. This institutional structure strictly segregates the assets of the investor (or parent company) from the operational risks of the company, preventing the investor from bearing unlimited joint and several liability due to poor corporate performance, thereby reducing legal risks for investors. It is particularly suitable for long-term operating entities that pursue stability and emphasize risk control.

(3) Strong commercial adaptability, with mature systems and high market recognition. Limited liability companies have a sound corporate governance structure and clear operational rules. As the most fundamental and widely applied form of business organization under China’s commercial regime, limited liability companies and their branches have the most mature legal provisions and practices in terms of equity structure, governance framework, profit distribution, equity transfer, liquidation and deregistration, among others, and are highly adaptable to a full range of market activities.

Laws and regulations including the Company Law of the People’s Republic of China, the
Partnership Enterprise Law of the People’s Republic of China, the Sole Proprietorship
Enterprise Law of the People’s Republic of China, the Regulations on the Promotion of
Development of Individually Owned Business, and the Regulations on the Registration and Administration of Representative Offices of Foreign Enterprises have established operation and management mechanisms tailored to the nature of various business entities, focusing on governance structure, rules of procedure and decision-making mechanisms. Taking a limited liability company, the most common entity established by foreign investors, as an example, its governance structure generally consists of the shareholders’ meeting, the board of directors, the board of supervisors or audit committee, and senior management, forming a basic governance mechanism under which shareholders decide major matters, the board of directors is responsible for operational decisions, the board of supervisors or audit committee conducts supervision and checks and balances, and senior management manages daily operations.

(1) The shareholders’ meeting is the supreme authority of a limited liability company composed of all shareholders. It is primarily responsible for deciding the company’s operational guidelines and investment plans, electing and replacing directors and supervisors, reviewing profit distribution plans, amending the articles of association, and adopting resolutions on major matters including capital changes, merger, division, dissolution and liquidation of the company. A one-person limited liability company has no shareholders’ meeting, and its sole shareholder exercises such powers directly.

(2) The board of directors is the company’s operational decision-making body, accountable to the shareholders’ meeting. A company with a small number of shareholders or a small scale may not establish a board of directors but only appoint a sole director. The board of directors generally implements resolutions of the shareholders’ meeting, decides operational plans and investment proposals, formulates basic management systems, and appoints or dismisses the general manager and other senior management.

(3) The board of supervisors or audit committee performs the company’s internal oversight function. Its main duties include examining the company’s financial affairs, supervising the performance of duties by directors and senior management, and safeguarding the company’s compliant operation.

4) Senior management generally includes the general manager, deputy general managers, the person in charge of finance, and other persons specified in the articles of association. They are responsible for the company’s daily operation and management and are accountable to the board of directors.

The company may establish other management positions through its articles of association according to its operational needs.

A branch of a company does not have independent legal person status, and its civil liabilities shall be borne by the company that established the branch. Accordingly, a branch has no shareholders’ meeting, nor an independent board of directors or board of supervisors. A branch is generally managed by a person-in-charge appointed by the head office for daily operations, and conducts business externally within the scope of authorization by the head office. Matters such as finance, contracts, employment, seals, budgets, material transactions and compliance management of the branch are usually subject to the unified control of the head office’s internal policies and approval procedures.

The qualifications of the legal representative and directors of a company are governed by the Company Law of the People’s Republic of China and relevant regulations. For general business, there are no universal residency or nationality restrictions; the core requirements focus on the number of persons and qualification criteria. However, certain industries with special provisions impose nationality restrictions.

For example, in Sino‑foreign cooperative educational institutions or programs, the principal or chief administrative officer must be a Chinese citizen, and at least one‑half of the members of the council, board of directors or joint management board must be Chinese citizens. Public air transport enterprises require that the legal representative be a Chinese citizen.

Foreign enterprises or foreign‑invested enterprises acting as shareholders shall comply with PRC provisions on foreign investment access.

China generally applies the administration system of pre‑establishment national treatment plus negative list to the qualifications of foreign enterprises or foreign‑invested enterprises as shareholders. Pre‑establishment national treatment means granting foreign investors and their investments treatment no less favorable than that accorded to domestic investors and their investments at the stage of investment access. The negative list regime refers to the special administrative measures for foreign investment access in specific fields promulgated by the state. Foreign investments outside the negative list are granted national treatment. That is, in all industries outside the negative list, foreign shareholders and domestic shareholders enjoy equal market access treatment without additional approval, and shareholders may hold equity in accordance with the law without restriction, subject only to the performance of information reporting obligations. Businesses within the negative list are subject to clearly defined off‑limit fields and conditional access fields, with special restrictions on shareholder qualifications, equity ratios, forms of cooperation and other matters. For details of the negative list and equity ratio requirements for foreign shareholders, please refer to Item #33 below.

In Mainland China, in addition to establishing a legal presence, overseas enterprises may expand their business through various cooperative arrangements. Common types include:(1) selling goods in the Chinese market via cross‑border e‑commerce platforms within China, or through cooperation with distributors or agents located in China; and(2) licensing relevant technologies and brands to Chinese enterprises in exchange for royalties. Expanding business in China through such cooperative arrangements shall be conducted in compliance with PRC laws and regulations governing foreign exchange flows, taxation, data security and compliance, technology import and export, consumer protection, and other relevant areas.

According to data released by the State Administration for Market Regulation, as of September 2025, the total number of all types of organizations in China had reached 202 million. Among them, for-profit legal persons (companies and other legal persons as enterprises) accounted for nearly 30%, and individually owned business accounted for 63%. By the end of 2024, foreign investors had established a total of more than 1.239 million enterprises in China, the majority of which were limited liability companies.

The Company Law of the People’s Republic of China has established a corporate governance standard for limited liability companies featuring clear rights and obligations, division of powers and checks and balances, standardized operation and high efficiency. These standards run through the entire life cycle of a company, integrating its establishment, decision-making, management and supervision processes. They not only ensure the compliant operation of the company but also protect the legitimate rights and interests of shareholders, the company and other relevant stakeholders.

For details on the corporate governance of limited liability companies, please refer to Item 6# above.

Taking a limited liability company as an example, shareholders generally provide operating capital to the company through: (1) capital contribution and capital increase through paidin capital;(2) provision of shareholder loans; and(3) provision of guarantees to facilitate the company’s access to bank loans, loans from other financial institutions or third-party financing.

In practice, the operational procedures for these forms of working capital support are clear and well-defined. However, significant differences exist among them in terms of funding costs, convenience of capital contribution and utilization, foreign exchange registration and administration, recoverability by shareholders, and overall practicality.

For instance, once registered capital is paid in full, shareholders may not arbitrarily withdraw such capital in principle, except through statutory channels such as capital reduction, equity transfer or liquidation. Accordingly, the recoverability of capital contributions is significantly lower than that of loans.

Shareholder loans are more flexible in use than capital contributions and may be repaid prior to shareholder contributions without awaiting liquidation. Nevertheless, the amount of shareholder loans is subject to quantitative limits. In practice, such financing shall be determined comprehensively with reference to the company’s paid-in capital status, related-party debt-to-equity ratio, pre-tax deductibility of interest, foreign debt quota, net asset scale and registration requirements.

Loans from domestic banks or financial institutions are relatively costly but most convenient. In practice, where a company has a stable operating track record, asset base or guarantee support, bank lending is commonly used to supplement working capital, support inventory procurement, equipment upgrading or accounts receivable turnover.

Under the corporate regulatory regime of Mainland China, shareholders may recover their investment returns from the company directly through profit distribution and capital reduction, with the summarized procedures as follows:

1. Profit Distribution

(1) Resolution procedures. The profit distribution proposal shall be formulated by the board of directors and approved by the shareholders’ meeting. Prior to the determination of distributable profits, the company shall first offset any losses accumulated in previous years and allocate statutory surplus reserves and discretionary surplus reserves in accordance with applicable laws and regulations.

(2) Withholding tax. Profits distributed to foreign investors from a limited liability company within China are subject to withholding tax before remittance abroad (the applicable withholding tax rate may vary under tax treaties/arrangements between China and other countries/regions).

(3) Foreign exchange remittance procedures. Upon completion of the resolution procedures and payment of withholding tax, the company shall submit the relevant profit distribution resolutions, withholding tax payment certificates and other documents to the local bank for processing profit remittance.

2. Capital Reduction

(1) Resolution and announcement procedures. A limited liability company shall carry out capital reduction through the following steps:(i) Prepare a balance sheet and an inventory of property, and adopt a capital reduction resolution at the shareholders’ meeting (which requires the approval of shareholders representing not less than two‑thirds of the voting rights);(ii) Notify the creditors of the capital reduction within 10 days from the date of the shareholders’ meeting resolution, and make a public announcement in a newspaper or through the National Enterprise Credit Information Publicity System within 30 days. Creditors are entitled to demand the company to repay its debts in full or provide a corresponding guarantee within 30 days from receipt of the notice, or within 45 days from the date of the announcement if no notice is received;(iii) Complete the capital reduction registration with the local market supervision administration.

(2) Special notes for foreign investors. In principle, the amount received by foreign investors from capital reduction is limited to the reduction of paid‑in registered capital, and does not include other owners’ equity items such as capital reserves, surplus reserves and undistributed profits.

(3) Similarly to profit remittance, foreign investors shall complete the payment of withholding tax before going through foreign exchange remittance procedures at the bank.

Taking a limited liability company as an example, matters subject to resolution by the shareholders’ meeting are divided into ordinary resolutions and special resolutions as required by law, based on their importance, which apply different voting thresholds respectively. Ordinary resolutions shall be adopted by shareholders representing more than half of the voting rights of all shareholders of the company (rather than shareholders present at the meeting). Resolutions on amendment to the articles of association, increase or reduction of registered capital, merger, division, dissolution or change of the form of the company must be adopted by shareholders representing not less than two‑thirds of the voting rights.

Meanwhile, the law also grants a certain degree of flexibility to the articles of association within the statutory framework. The articles of association may stipulate other matters requiring resolutions of the shareholders’ meeting or the board of directors and the corresponding voting thresholds, as well as a written voting mechanism without convening a meeting.

For a limited liability company, the shareholders’ meeting is the supreme organ of authority. In principle, shareholders may issue binding instructions to the management, but such binding effect shall be achieved through corporate governance procedures (e.g., shareholders’ meeting resolutions and the board governance structure established by the shareholders’ meeting) or provisions in the articles of association. Shareholders themselves or their individual representatives are not entitled to directly issue binding instructions to the management, which embodies the core principle of separation of ownership and management in modern corporate governance.

If a shareholder issues direct instructions to the management beyond the limits prescribed by law or the articles of association, multiple legal consequences may arise. A shareholder that abuses its shareholder rights and thereby causes severe harm to the interests of the company or other shareholders shall bear civil compensation liability in accordance with the law, and other shareholders shall have the right to require the company to purchase such shareholder’s equity at a reasonable price. In addition, the PRC Company Law stipulates the doctrine of piercing the corporate veil (disregard of corporate personality), under which a shareholder that abuses the independent legal person status of the company and the limited liability of shareholders to evade debts, thereby seriously impairing the interests of the company’s creditors, shall be jointly and severally liable for the debts of the company. For a limited liability company with one sole shareholder, if the sole shareholder cannot prove that the company’s assets are independent of its own assets, such shareholder shall also be jointly and severally liable for the debts of the company.

Such rules apply to most commercial entities. For corporate entities, whether limited liability companies or companies limited by shares, the above governance principles are consistent.

Partnership enterprises are different. A partnership enterprise does not have a management body similar to a board of directors. The partners’ meeting composed of all general partners and limited partners has the power to decide major matters agreed in the partnership agreement, but it is not the supreme organ of authority. As the executive partner, general partners have the right to directly make decisions on operational and management matters in accordance with the law and the partnership agreement and represent the partnership enterprise externally. General partners shall bear unlimited liability for the debts of the partnership enterprise.

For a sole proprietorship enterprise, the owner may manage the enterprise in person, or entrust or employ another person to be responsible for its management. Therefore, the instruction relationship between the owner and the manager is closer to a principaloperator relationship rather than a hierarchical governance relationship in the corporate law sense.

China’s labor legal system is centered on the Labor Law and the Labor Contract Law, with a strong emphasis on the protection of laborers. Its core protection framework mainly includes:

1. Anti-discrimination

Laws strictly prohibit discrimination based on ethnicity, race, gender, religious belief, disability, or status as an infectious disease pathogen carrier.In particular, recent revisions to laws have strengthened protection for female employees, explicitly stipulating that employers may not inquire about marital or childbearing status during recruitment, nor may they use gender restrictions or pregnancy testing in pre-employment medical examinations as conditions for employment.

2. Working Hours, Rest and Leave

Laws prescribe the standard working hours system with fixed daily and weekly working hours, the piece-rate working hours system, and the non-fixed working hours system, which may only be implemented upon meeting statutory conditions and obtaining registration and approval. In addition, paid annual leave is a mandatory labor protection system.

3. Minimum Wage

Employers are legally obligated to comply with the minimum wage standard, the establishment and adjustment of which are determined by local governments in light of local economic conditions. The minimum wage is also mandatorily applicable during the probation period.Where an employer violates the minimum wage provisions, it shall be liable to pay additional compensation to the employee at a rate of not less than 50% but not more than 100% of the wages payable.

Furthermore, for workers in new forms of employment such as food delivery, courier services, and ride-hailing, regulatory authorities have issued a series of protection guidelines requiring platform operators in these industries to apply the hourly minimum wage standard prescribed by the government of the actual place of work to such workers, even where no labor relationship is established. The calculation of daily working hours for such workers shall include the cumulative time spent accepting orders on the day, plus appropriate allowances for necessary online waiting, service preparation, physiological needs, and other relevant factors.

4. Dismissal Mechanisms and Freedom of Career Choice

Employers must exercise caution when dismissing employees. For non-fault dismissals (e.g., due to illness, incompetence, or material changes in objective circumstances), the employer must follow prescribed procedures and may terminate the employment contract only after paying an additional one month’s salary and economic compensation.

In addition, employers are statutorily required to notify the labor union in advance when unilaterally terminating a contract, so as to establish an external oversight mechanism.

On the other hand, by setting financial compensation and applicable limits on postemployment non-compete restrictions, the law protects trade secrets while preventing undue restrictions on employees’ freedom of career choice.For post-employment noncompete restrictions, the monthly compensation paid by the employer shall not be less than 30% of the employee’s average wage in the 12 months prior to resignation. If the employer fails to pay such compensation for three consecutive months after the employee’s resignation, the employee shall have the statutory right to unilaterally terminate the non-compete agreement.

5. Social Insurance and Housing Fund

Statutory social insurance includes pension, medical, unemployment, work-related injury, and maternity insurance. Together with the housing fund, they constitute the social welfare protection for employees.

The procedures and costs for termination of a labor contract vary depending on the grounds for termination, which mainly fall into the following categories:

1. Termination by mutual consensus
Where a labor contract is terminated upon mutual agreement between the employer and the employee, the notice period and relevant procedures shall be subject to such agreement. Generally, no costs beyond those agreed shall arise.

2. Termination for employee misconduct
In cases where the employer terminates the labor contract in accordance with law or contractual provisions due to unilateral wrongful acts of the employee, the employer may dismiss the employee at any time without incurring severance costs, but bears a relatively high burden of proof.

3. Termination without employee fault
In circumstances such as the employee suffering from an injury or illness not related to work, being incompetent for the job and remaining incompetent after training or reassignment, or material changes in objective circumstances rendering the labor contract unable to be performed, the employer may dismiss the employee. However, the employer must give the employee 30 days’ prior written notice, pay economic compensation (calculated under a relatively complex formula) based on the employee’s length of service, and provide additional wages and other subsidies as required by law.

4. Collective Dismissal
Collective Dismissal may only be implemented under statutorily specified circumstances. The employer must follow prescribed procedures in making the dismissal decision, provide a 30-day advance explanation to the labor union or all employees, solicit the opinions of the labor union or employees, and finally file a report with the labor administrative authority. For collective dismissal, the employer must pay economic compensation to the laid-off employees in accordance with the law. If the employer fails to comply with statutory procedures or conducts illegal layoffs, it shall pay liquidated damages equal to twice the standard economic compensation. Individual enterprises facing genuine financial hardship may negotiate with the labor union or employees for installment payments or other payment arrangements if they are truly unable to make a lump-sum payment.

5. Unlawful Dismissal
Except for the circumstances described above, if an employer rescinds or terminates a labor contract in violation of laws and regulations, it shall pay compensation to the employee at a rate equal to twice the standard of economic compensation.

Under China’s legal system, employees’ participation in management and exercise of collective rights are mainly realized through trade unions, the workers’ congress, and the system of employee directors and employee supervisors in corporate governance. The specifics are as follows:

• A trade union is the core organization representing the interests of employees. Its functions include collective consultation and conclusion of collective contracts regarding labor protection, working hours, insurance and welfare, legal supervision over contract termination, and protection of employees’ legitimate rights and interests.
• The workers representatives’ congress is the basic form of democratic management in an enterprise. It shall be convened at least once a year. Its main functions are to hear reports on enterprise development, review and adopt collective contracts and employee welfare fund plans, elect or remove employee directors and employee supervisors, and supervise the enterprise’s compliance with labor‑related laws, regulations and policies. Smaller companies may have a workers’ congress exercise the functions and powers in lieu of a workers’ representative congress.
• Companies protect employees’ rights to supervision and participation in decision‑making through the system of employee directors and employee supervisors in their governance bodies. Generally: A limited liability company with fewer than 300 employees may include employee representatives on its board of directors; A limited liability company with 300 or more employees must include employee representatives on its board of directors; A wholly state‑owned company shall include employee representatives on its board of directors regardless of the number of employees. Employee directors shall have the same rights and bear the same obligations as other directors.
• A limited liability company with 300 or more employees and all companies limited by shares must include employee representatives in their board of supervisors or audit committee, and the proportion of employee representatives on the board of supervisors shall not be less than one‑third. Employee supervisors shall have the same rights and bear the same obligations as other supervisors.

Apart from the foregoing rules, PRC laws and regulations do not provide for general exemptions for any particular type of entity in respect of trade unions, workers’ congresses or workers representatives’ congress.

1. Legal Framework

Mainland China has established a comprehensive anti-bribery and anti-corruption system encompassing corporate internal control norms, administrative law enforcement and criminal liability prosecution. The system is structured as follows: (1) At the legislative level, it is regulated by a number of applicable laws, administrative regulations, departmental rules and normative documents; (2) At the institutional level, state supervisory organs, people’s procuratorates, people’s courts, market supervision and administration bureaus and industry competent authorities conduct investigation and supervision over the applicable subjects and acts respectively.

2. Extraterritorial Application and Cross-border Scenarios

China’s anti-bribery and anti-corruption system has extraterritorial effect under certain circumstances. Pursuant to the provisions of the Criminal Law on the principles of territorial and personal jurisdiction, criminal acts committed by Chinese citizens overseas shall be subject to criminal liability in accordance with the law if they meet certain conditions. In addition, overseas acts of Chinese companies may also fall within the scope of supervision and punishment if they affect China’s national interests or the order within China’s territory. Furthermore, as a contracting party to the United Nations Convention against Corruption, China undertakes international obligations to combat transnational corruption.

In the context of cross-border transactions or mergers and acquisitions, if overseas entities commit commercial bribery acts within China’s territory, Chinese law shall generally apply. At the same time, Chinese enterprises operating overseas may also be subject to the anticorruption laws of the local jurisdiction. Therefore, in cross-border arrangements, it is usually necessary to assess compliance risks under multiple jurisdictions.

1.Overview of the Legal Framework

Under the current legal system, China has established a relatively systematic and comprehensive substantive and procedural legal framework for combating economic crimes, which is mainly reflected in two levels: substantive criminal law and procedural criminal law. At the substantive law level, the Criminal Law sets up special chapters to regulate acts endangering the order of the market economy involving both legal persons and directly liable persons, which can be summarized into the following categories: (1) Acts undermining the order of market transactions; (2) Acts relating to financial order; (3) Acts relating to tax and fiscal administration; (4) Acts relating to the management order of companies and enterprises; (5) Acts infringing on property security.

At the procedural law level, the Criminal Procedure Law stipulates the procedures for case filing, investigation, prosecution and trial of criminal cases. Economic crime cases apply the general criminal procedure rules in terms of procedure, and may involve relatively complex investigation measures in practice. In addition, major criminal procedure cases usually involve a large amount of money, prominent professional characteristics, complex types of evidence and cross-regional even cross-border elements, thus having professional characteristics in procedural arrangements.

2. Existence of a Mandatory Reporting Obligation

(1) Mandatory reporting obligation stipulated by the Criminal Procedure Law

Pursuant to the relevant provisions of the Criminal Procedure Law, any entity or individual that discovers a criminal fact or a criminal suspect has the right to report or inform the public security department, people’s procuratorate or people’s court. Acts of knowingly providing a concealed place or property for others who have committed a crime, or helping them evade punishment may constitute a crime. Therefore, if an enterprise operator or individual knowingly assists in concealing evidence, transferring assets or obstructing investigations when aware that relevant personnel are suspected of economic crimes, he or she may bear criminal liability. However, the determination of a crime usually requires finding of positive assisting acts; mere failure to take the initiative to report to the public security departments does not of course constitute a crime under normal circumstances.

(2) Mandatory reporting obligation in specific industries

In some industries, laws or industry regulatory rules may require reporting certain circumstances to the competent authorities. For example, pursuant to the Measures for the Compliance Management of Financial Institutions, financial institutions are required to report suspicious transactions to the People’s Bank of China during anti-money laundering reviews.

Mainland China has established a comprehensive anti-money laundering and counterterrorist financing system covering criminal liability prosecution, administrative supervision, industry compliance and cross-border cooperation.

1. The Anti-Money Laundering Law and a series of supporting rules impose compliance obligations on financial institutions and certain non-financial institutions

Mainland China has built an anti-money laundering supervision system centered on the Anti-Money Laundering Law, covering financial institutions and certain non-financial institutions. The core statutory anti-money laundering compliance obligations of financial institutions and certain non-financial institutions are mainly reflected in four aspects: customer due diligence, preservation of data and transaction records, reporting of largevalue/suspicious transactions, and internal control. Failure to perform the above obligations stipulated by laws and rules may result in regulatory measures or administrative penalties. The People’s Bank of China assumes the core supervisory responsibility in the field of anti-money laundering, and non-bank financial regulatory departments supervise financial institutions to fulfill their anti-money laundering obligations within their respective regulatory scopes.

2. Anti-money laundering obligations apply to counter-terrorist financing at the same time

The counter-terrorist financing system usually includes a list management and asset freezing mechanism. Pursuant to the Anti-Terrorism Law, financial institutions are required to screen relevant accounts and take corresponding measures in accordance with the lists issued by regulatory authorities. Anti-money laundering obligations apply to counterterrorist financing at the same time, and terrorist-related assets shall be frozen.

3. The Criminal Law sets criminal liability for money laundering and terrorist financing acts

Pursuant to the Criminal Law, both money laundering acts and acts of providing funds or other property support for terrorist activities may constitute crimes. The determination of a crime usually emphasizes the element of subjective knowledge or constructive knowledge. If a legal person commits the relevant acts, it may bear criminal liability as a legal person; the directly liable persons in charge and other liable persons may bear individual criminal liability.

4. Cross-border capital flows and international cooperation

Pursuant to the Anti-Money Laundering Law, in the case of cross-border capital flows, financial institutions are required to strengthen reviews on anti-money laundering and counter-terrorist financing. China participates in multilateral anti-money laundering cooperation mechanisms and carries out information exchange and law enforcement cooperation with other jurisdictions.

Mainland China currently does not have a single mandatory due diligence special law on supply chain human rights and labor that is fully equivalent to the UK Modern Slavery Act, the Dutch Wet Kinderarbeid or the French Loi de Vigilance. Instead, it has built a supply chain compliance system covering labor protection, work safety, environmental protection, product quality and other aspects through scattered laws, regulations and policy documents, clearly defining prohibitive obligations and setting civil, administrative and criminal liabilities for end-of-chain accountability.

1. Domestic supply chains are mainly bound by laws and regulations on labor protection, work safety, environmental protection, product quality and other aspects

Chinese law explicitly prohibits forced labor and the use of child labor, with relevant provisions including the Labor Law, the Provisions on the Prohibition of the Use of Child Labor and the Law on the Protection of Minors. In terms of work safety and occupational health, relevant provisions include the Work Safety Law and the Law on the Prevention and Control of Occupational Diseases. In terms of environmental protection, relevant provisions include the Environmental Protection Law and the Law on the Prevention and Control of Air Pollution. In terms of product quality, relevant provisions include the Product Quality Law and the Law on the Protection of Consumer Rights and Interests. In addition, the Civil Code, the Criminal Law of the People’s Republic of China and the rules of labor supervision, environmental protection and market supervision competent authorities set civil, criminal and administrative liabilities for illegal acts for punishment

2. Export and cross-border compliance provisions respond to international rules

Pursuant to the Customs Law and the Export Control Law, the export of non-compliant products involving forced labor, child labor, etc. is prohibited.

3. Sanction-related supplier compliance requirements

China has established a transaction restriction system centered on national security and export control. Relevant laws mainly include: the Anti-Foreign Sanctions Law of the People’s Republic of China, the Export Control Law of the People’s Republic of China and the Regulations on the Export Control of Dual-Use Items. This is a transaction compliance system established around national security, foreign trade control and anti-sanction

Taking a limited liability company as an example, a company shall, at the end of each fiscal year, prepare a complete audited annual financial report in accordance with the

Regulations on Enterprise Financial and Accounting Reports and the Enterprise Accounting Standards. The core contents of the report include a balance sheet, an income statement, a cash flow statement and relevant supporting schedules. The company shall submit the financial and accounting report to each shareholder within the time limit stipulated in the articles of association.

In terms of external disclosure, non-listed companies generally have no obligation to publicly disclose complete annual financial statements to the society, but they still need to perform two sets of parallel declaration obligations closely related to annual financial information: First, the company shall submit and publicize the previous year’s industrial and commercial annual report through the National Enterprise Credit Information Publicity System from January 1 to June 30 each year. The basic registration information in the annual report shall be publicized to society, while financial indicators such as assets, liabilities, income, profits and total tax payment shall be decided by the enterprise in principle whether to publicize to the public. Second, if the company involves special circumstances such as foreign investment and financing, it shall also disclose annual financial information to the corresponding regulatory authorities in accordance with relevant regulatory requirements to ensure that the scope of disclosure complies with the provisions.

In addition, in accordance with the relevant provisions on tax declaration, the company shall submit the annual financial and accounting report to the tax authority within 5 months after the end of the fiscal year as an important basis for the final settlement of enterprise income tax, and the data in the report shall be consistent with the tax declaration data.

In respect of the annual compliance obligations of a company secretary, Mainland China only sets clear and mandatory annual regulatory requirements for the Secretary of the Board of Directors of listed companies, and has no provisions on the company secretary position or similar compliance requirements for non-listed companies.

A listed company must have a Secretary of the Board of Directors, who is responsible for meeting preparation, document custody, shareholder information and information disclosure. In accordance with the applicable exchange rules for listed companies, the Secretary shall participate in annual assessment, submit an annual performance report and receive continuous training.

The Company Law does not mandate the holding of an annual shareholders’ meeting for unlisted limited liability companies, but stipulates that a company may set out a mechanism for holding regular and special shareholders’ meetings in its articles of association. Regular meetings shall be held on time in accordance with the provisions of the articles of association, and the shareholders of the company may agree in the articles of association on the requirements, procedures, quorum and matters to be resolved for the annual shareholders’ meeting. A special meeting shall be held if proposed by shareholders representing more than one-tenth of the voting rights, more than one-third of the directors or the board of supervisors.

A joint stock limited company shall hold an annual general meeting once a year, and the annual general meeting of a listed company shall be held within 6 months after the end of the previous fiscal year. The matters to be considered and approved at the annual general meeting include: the annual work report of the board of directors, the annual work report of the board of supervisors, the annual financial budget and final account plan, the annual profit distribution and loss compensation plan, the annual report, and the election or dismissal and remuneration plan of directors and supervisors.

The Measures for the Administration of Beneficial Owner Information and the Measures for the Administration of Identification of Beneficial Owners of Customers by Financial Institutions have established the beneficial owner information management system in mainland China. Effective from November 1, 2024, companies, partnerships, foreigninvested companies, foreign-invested partnerships and branches of foreign companies shall file beneficial owner information through the relevant registration and filing system.

In addition to filing the beneficial owner of the affiliated foreign company in accordance with the identification criteria, a branch of a foreign company shall also identify and file at least one senior manager of the branch as a beneficial owner.

Taking a company as an example, the criteria for determining a beneficial owner are as follows: (1) A natural person who directly or indirectly holds more than 25% of the company’s equity or voting rights; (2) A natural person who ultimately enjoys more than 25% of the company’s income rights or voting rights even if failing to meet the criterion in (1) above; (3) A natural person who exercises sole or joint control over the company through personnel, finance or other means even if failing to meet the criterion in (1) above; and (4) If none of the above three circumstances exists, the senior manager responsible for the daily operation and management of the company shall be deemed as the beneficial owner.

(1) Enterprise Income Tax
Resident enterprises in China (excluding partnerships) shall pay enterprise income tax on the balance of their total income for each tax year after deducting non-taxable income, tax-exempt income, various deductions and allowable carry-forward losses from previous years. Unless recognized as a high-tech enterprise or a small and micro-profit enterprise, the enterprise income tax rate is generally 25%. Non-resident enterprises shall pay withholding income tax at a rate of 10% on their passive income derived from within China (such as dividends), subject to the tax treaty between their country of residence and China.

(2) Value-Added Tax (VAT)
VAT applies to the sale of goods, services, intangible assets and real estate within China’s territory. The VAT rate ranges from 1% to 13% depending on the specific category of sales and services and the scale of the enterprise.

(3) Consumption Tax
Levied on specific consumer goods (cigarettes, alcohol, cosmetics, luxury goods, refined oil products, etc.) at the production, import or retail link on the basis of VAT, with significant differences in tax rates for different consumer goods.

(4) Education Surcharge and Local Education Surcharge on VAT
The education surcharge and local education surcharge on VAT are additional taxes, both levied on the actual VAT and consumption tax paid by the enterprise. The rate of education surcharge is 3%, and the rate of local education surcharge is 2%.

(5) Urban Maintenance and Construction Tax (UMCT)
UMCT is also an additional tax, levied on the actual VAT and consumption tax paid by the enterprise. Its tax rate is divided into 1%, 5% or 7% according to the region where the taxpayer is located.

The main tax incentive policies implemented in mainland China are briefly summarized as follows:

(1) Enterprise income tax incentives for high-tech enterprises

• Tax incentive: Enterprise income tax is levied at a reduced rate of 15% in full;
• Validity period: 3 years starting from the year of issuance of the high-tech enterprise certificate, renewable upon expiration;
• Eligibility criteria: For high-tech enterprises, there are identification index requirements such as registration time, ownership of core intellectual property rights, proportion of R&D expenses, and proportion of income from high-tech products (services) in total income.

(2) Enterprise income tax incentives for small and micro-profit enterprises

• Tax incentive: Taxable income is calculated at a reduced rate of 25%, and enterprise income tax is paid at a rate of 20%;
• Validity period: Until December 31, 2027;
• Eligibility criteria: Enterprises engaged in industries not restricted or prohibited by the state, with an annual taxable income of not more than RMB 3 million, the number of employees of not more than 300, and total assets of not more than RMB 50 million.

(3) Reduction and exemption of “Six Taxes and Two Surcharges” for small-scale taxpayers

• A 50% reduction in the collection of resource tax (excluding water resource tax), urban maintenance and construction tax, real estate tax, urban land use tax, stamp duty (excluding securities transaction stamp duty), cultivated land occupation tax, education surcharge and local education surcharge for VAT smallscale taxpayers, small and micro-profit enterprises and individual industrial and commercial households.

For issues related to the free convertibility of foreign exchange, please refer to Item #34.

Chinese tax law requires non-resident enterprises to pay withholding income tax at a rate of 10% on their income from equity transfer and other passive income derived from within China, such as dividends and interest, which shall be declared and paid by the withholding agent to the competent tax bureau.

When an equity transfer of a foreign-invested enterprise occurs, the main enterprise income tax and stamp duty involved include:

(1) Enterprise Income Tax
If a Chinese tax resident enterprise is the transferor, the transfer income shall be included in the annual taxable income and declared and paid during the final settlement of enterprise income tax, applying the general applicable enterprise income tax rate.

If a non-Chinese tax resident enterprise is the transferor, its income from equity transfer shall generally be subject to withholding income tax at a rate of 10%, subject to the tax treaty between its country of residence and China.

(2) Individual Income Tax
When an individual transfers the equity of a foreign-invested enterprise in China, whether the individual is a Chinese tax resident or a non-Chinese tax resident, he or she shall pay individual income tax on the income from equity transfer at a rate of 20%.

(3) Stamp Duty
Regardless of the identity of the transferor and the transferee in the equity transfer, both parties shall bear stamp duty at a rate of 0.05% of the amount stipulated in the equity transfer agreement.

The acquisition of listed companies mainly applies the following normative documents: the Securities Law of the People’s Republic of China, the Measures for the Administration of the Acquisition of Listed Companies and the Measures for the Administration of Major Asset Restructuring of Listed Companies. In addition, each stock exchange formulates supporting business rules and information disclosure guidelines in accordance with its selfregulatory supervision responsibilities to conduct continuous supervision over open market acquisition acts.

The core supervision over listed company acquisition transactions mainly includes the mandatory information disclosure system and the mandatory tender offer system. When the control of a listed company changes through equity acquisition or major asset restructuring, the listed company shall make an effective internal resolution, disclose the transaction plan, target assets, pricing, source of funds, horizontal competition, connected transactions, performance commitments and follow-up plans in accordance with the requirements of the relevant stock exchange and the China Securities Regulatory Commission (CSRC), and obtain the approval of the relevant stock exchange and the CSRC (if applicable).

China’s anti-monopoly system includes the control of monopoly agreements, abuse of dominant market position, concentration of undertakings and administrative monopoly, which is a legal system composed of the Anti-Monopoly Law and a series of supporting rules and guidelines. It is uniformly implemented by the State Administration for Market Regulation, which authorizes provincial-level organs to enforce it.

1. Monopoly Agreements
Horizontal monopoly agreements between competitors and vertical monopoly agreements between upstream and downstream parties are prohibited.

2. Abuse of Dominant Market Position
Prohibited acts of abusing dominant market position include: unfair high or low pricing; predatory pricing; refusal to deal, restricted dealing, tying arrangements, discriminatory treatment; and added in 2022 for the platform economy, prohibition of engaging in monopoly through the use of data, algorithms, capital or platform rules.

3. Concentration of Undertakings
Transactions where undertakings merge, acquire or obtain control through contracts or other means that eliminate or restrict competition are prohibited. For foreign mergers and acquisitions of domestic enterprises, national security review shall be conducted simultaneously with anti-monopoly review under certain circumstances. See Item #33 – (2) National Security Review for Mergers and Acquisitions.

4. Administrative Monopoly
Acts of abusing administrative power to eliminate or restrict competition are prohibited, including: restricting the operation, purchase and use of specific commodities; regional blockades (discriminatory charges, technical barriers, checkpoints); excluding foreign operators from participating in bidding and investment; and formulating normative documents that eliminate competition.

The obligation to negotiate in good faith is mainly reflected in the regulation of good faith and liability for negligent conclusion of a contract at the civil law level in China’s existing legal system.

1. Principle of Good Faith

Pursuant to the basic principles of China’s civil legal system, civil subjects engaged in civil activities shall follow the principles of voluntariness, fairness, equal value and consideration, and good faith. Among them, the principle of good faith is applicable to the entire process of contract conclusion, performance, modification, termination and exercise of rights.
This principle requires parties to, when exercising rights and performing obligations: i) Not abuse their rights; ii) Not intentionally conceal important facts; iii) Not mislead the other party with false expressions of intent; iv) Not negotiate in bad faith or damage the other party’s interests by means of negotiations.

Therefore, even if no formal transaction documents have been signed, both parties shall conduct negotiations under the framework of good faith during the M&A negotiation stage.

2. Liability for Negligent Conclusion of a Contract

The Civil Code and the Contract Law explicitly stipulate the system of “liability for negligent conclusion of a contract”. This system applies to situations where a contract has not been formed, but one party has committed acts in violation of the obligation of good faith in the process of concluding the contract, resulting in losses to the other party. Typical circumstances usually include:

i) Falsely pretending to conclude a contract and negotiating in bad faith; ii) Intentionally concealing important facts related to the contract or providing false information; iii) Disclosing or improperly using trade secrets learned during the negotiation process; iv) Other acts in violation of the principle of good faith.

In M&A transactions, if one party has no genuine intention to transact but obtains commercial information in the name of negotiation, or uses negotiation to lower the other party’s market position, it may constitute liability for negligent conclusion of a contract. The aggrieved party may claim compensation for reliance interest, rather than expectation interest.

China has no special legislation on employee protection for M&A transactions. Employees’ rights in the event of enterprise acquisition are mainly derived from the general labor legal system. Relevant norms are based on the Labor Law of the People’s Republic of China, the Labor Contract Law of the People’s Republic of China, the Company Law of the People’s Republic of China and supporting judicial interpretations, forming a protection system centered on the stability of labor relations.

In general, Chinese law emphasizes the continuity of labor contracts and the stability of employees’ rights and interests. The general principles are as follows:

i) Equity acquisition generally does not affect the continuity of labor relations;

ii) Asset acquisition does not of course lead to the automatic transfer of labor relations; iii) M&A itself does not trigger a mandatory prior approval or co-determination mechanism by employees;

iv) Employee compensation or negotiation obligations are usually triggered by personnel adjustments or changes in labor relations, rather than by the transaction itself.

China implements a management system of pre-establishment national treatment plus negative list for foreign investment. Pre-establishment national treatment means that foreign investors and their investments are accorded treatment no less favorable than that accorded to domestic investors and their investments at the investment access stage and outside the negative list, without the need for additional approval, may hold equity in accordance with the law, and only need to fulfill the information reporting obligation. The negative list refers to the special administrative measures for foreign investment access implemented by the state in specific fields, which clearly demarcates the fields where foreign investment is prohibited and the fields where foreign investment is allowed on a conditional basis, and sets special restrictions on shareholder qualifications, equity ratios, forms of cooperation and other matters.

(1) Negative List System

Compared with the 2021 version, the currently effective 2024 version of the Special Administrative Measures for Foreign Investment Access (Negative List) has a continuous reduction in the total number of items and a complete elimination of restrictions in the manufacturing industry. Among them:

(i) The number of prohibited fields has been reduced from 17 to 16, including rare and superior varieties, genetically modified varieties, aquatic product fishing; exploration, mining and dressing of rare earth, radioactive minerals and tungsten; wholesale and retail of tobacco monopoly, postal services and domestic express delivery of letters; internet news information services, online audio-visual services, press and publication; development and application of human stem cell and gene diagnosis and treatment technologies; compulsory education, military affairs, ideology and culture, etc.

(ii) Foreign investment is allowed in restricted fields, but must strictly meet the conditions stipulated in the list. The core restrictions are mainly focused on equity ratios, forms of cooperation and other aspects. The main fields where restrictions are retained include: breeding of new varieties of wheat and corn; construction and operation of nuclear power plants; domestic water transportation, public aviation, general aviation, civil airports; value-added telecommunications and basic telecommunications; certain fields of service industries such as finance, education, medical care and culture.

(2) National Security Review for Mergers and Acquisitions

Under the following circumstances, foreign investment that affects or may affect national security shall be proactively declared to the Office of the Foreign Investment National Security Review Working Mechanism under the National Development and Reform Commission (the Office also has the right to require the parties to declare) and subject to foreign investment national security review before the implementation of the investment:

(i) A foreign investor, alone or jointly with other investors, makes an investment to establish a new project or set up an enterprise within China’s territory;

(ii) A foreign investor acquires the equity or assets of a domestic enterprise through merger and acquisition;

(iii) A foreign investor makes an investment within China’s territory through other means.

The industry scope of foreign investment national security review includes:

(i) Investment in fields related to national defense security such as military industry and military industry supporting industries, and investment in areas surrounding military facilities and military industry facilities;

(ii) Investment in important fields related to national security such as important agricultural products, important energy and resources, major equipment manufacturing, important infrastructure, important transportation services, important cultural products and services, important information technology and internet products and services, important financial services, key technologies and other important fields, and obtaining actual control of the invested enterprise.

Foreign exchange is not a freely convertible currency in mainland China. Mainland China implements a foreign exchange flow policy of free convertibility under current account and gradual opening of capital account. The state imposes no restrictions on regular international payments and transfers including trade in goods and trade in services; whereas the capital account including investment and borrowing is opened in a limited and regulated manner, and direct investment, securities investment, external debt, etc. shall go through registration or filing and approval in accordance with the provisions.

Chinese law strictly prohibits illegal foreign exchange acts such as fictitious trade, structured transactions, split settlement and sale of foreign exchange, underground banks, foreign exchange evasion, foreign exchange arbitrage and illegal foreign exchange trading. All foreign exchange receipts and payments shall be handled through foreign exchange accounts, which are divided into current account and capital account accounts and shall not be mixed or used interchangeably.

1. Overview

In China, the termination of a company’s operation and its withdrawal from the market are usually completed through three stages: voluntary dissolution, liquidation and deregistration. The legal person status of the company is officially terminated upon completion of the deregistration.

i) Voluntary dissolution followed by liquidation and deregistration is the most common withdrawal route;

ii) If an enterprise is insolvent, it shall withdraw from the market through bankruptcy liquidation proceedings; iii) For enterprises with no actual operation or no creditor’s rights and debts, the simplified deregistration procedure may apply.

The choice of different routes mainly depends on the enterprise’s asset-liability status and historical operation situation.

2. Voluntary Dissolution and Liquidation

Voluntary dissolution usually includes the following steps:
i) Adopt a dissolution resolution or confirm the occurrence of dissolution causes; ii) Establish a liquidation group (generally composed of directors, unless otherwise stipulated in the articles of association or the shareholders’ meeting); iii) Notify creditors and make a public announcement; iv) Settle assets and debts; v) Prepare a liquidation report; vi) Complete tax liquidation and tax deregistration; vii) Apply to the market supervision and administration department for deregistration; viii) The company registration authority announces the termination of the company. The liquidation group is responsible for handling creditor’s rights and debts, asset disposal,
employee placement and other matters. The legal person status of the company is officially terminated only after the completion of liquidation and deregistration.

3. Bankruptcy Liquidation in Case of Insolvency

Creditors, debtors or persons with liquidation liability in accordance with the law may apply to the people’s court for bankruptcy liquidation. The bankruptcy liquidation procedure generally includes the following steps:

i) A person with liquidation liability in accordance with the law applies to the people’s court; ii) After accepting the application, the court appoints a receiver to take over the company; iii) The management right of the company is transferred to the receiver; iv) The receiver is responsible for asset disposal, creditor’s right review and distribution; v) After the conclusion of the procedure, the court issues a ruling on the conclusion of the procedure, and the receiver handles the deregistration.