Barriers to entry
[ By Dezan Shira & Associates ]
There remain some challenges for foreign investors in this sector, however. Not least, because :
- there are many different regulations related to real estate
- these regulations are still evolving
- their application varies from city to city
- the regulations are incomplete and sometimes do not appropriately cover all real estate situations
Earlier this year, for example, one of our clients faced financing difficulties because the SAFE refused to allow conversion of a payment in HKD to the owner of their desired property into RMB.
Another client, who had bought several floors in a building in Shenzhen in 2003-2004 without difficulty, came across new problems this year when they attempted to buy another floor in the property, relating to the name of their company.
Company names must not be overlooked in China. Article 9 of the Implementation Measures on Registration and Administration of Enterprise Names (promulgated on 8 December 1999, revised on 14 June 2004) requires that an enterprise name be in the following form - “City or Region + Trade Name + Business Sector + Form of organisation”.
In real estate, the choice of business sector is critical. Both the AIC (Administration for Industry and Commerce) and BOFTEC (Bureau of Foreign Trade and Economic Cooperation) require registered capital of USD30m If the term “Investment” is included in the company name. Companies that cannot achieve this financial threshold must opt for a different nomenclature, as “real estate property management”.
Under Article 1 of the Regulations on Establishment of Foreign-Funded Investment Companies, if a foreign enterprise or individual intends to purchase property, they shall apply to setup a FIE. Only after obtaining the approval and registration from competent authority can they conduct related activities in accordance with the approved business scope. BOFTEC has to approve the firm’s business scope and according to interpretations by BOFTEC and AIC in recent cases, “real estate intermediary service” means real estate transaction (sale and purchase), and leasing.
However, when a company engaged in management of property other than its own it must have the special qualification of “property management”, however, investors can get round this rule and use instead the term “property management” if it adds also “management of own property”. It is almost a formula, where the first term is restricted by the second term.
In the end, the best solution for our Shenzhen client was to incorporate a FIE.
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