Foreign-invested Construction Enterprises: The Next Legal Step

According to the FICE Provisions, foreign investors may establish FICEs as Sino-foreign equity or cooperative joint ventures, or as wholly foreign-owned enterprises (WFOEs). FICEs can also be established through reinvestment by a foreign-invested enterprise or by way of a foreign-invested enterprise's purchase of shares in another construction enterprise. Oddly, the FICE Provisions state that in the case of a joint venture the Chinese party must hold at least 25% of the venture's registered capital. This is difficult to reconcile with the fact that WFOEs are permitted. It could be that this was a simple typo in the drafting process that got past the editors, as many foreign investment regulations provide that the foreign party's interest in a joint venture may not be less than 25%. Be this as it may, the rule at present is that while WFOEs are permitted, in the case of a joint venture the foreign party's share can be no more than 75%.

After its establishment, the FICE must apply for a construction enterprise qualification certificate. The FICE Provisions set out the process for establishing the FICE itself, and the Implementing Rules cross-reference the Construction Enterprise Qualification Administration Regulations (Ministry of Construction Order No. 87, issued on April 18 2001) and several other regulations that delineate the process for obtaining the required qualification certificate. Together these regulations create a relatively straightforward but potentially lengthy process. From submission of the correct application documents to receipt of the FICE business licence, the FICE Provisions allow for up to 130 days. After the business licence is obtained, the FICE must then apply for a qualification certificate. This process can take up to 60 days from receipt of the application materials by the relevant department in charge. Thus, even assuming that all the proper documents are submitted on the first attempt, under the relevant regulations the whole process can take more than six months from start to finish.

Scope of Construction Activities

The FICE Provisions do not mention the types of construction activities in which FICEs can engage. The Implementing Rules clarify this uncertainty by defining "construction activities" as including "new construction projects and renovation or expansion of existing projects in the fields of civil engineering, architecture, circuitry and pipeline installation and outfitting".

Newly established FICEs will have their qualifications approved according to the lowest qualification level. However, foreign construction firms possessing prior contracting experience in China and seeking to establish an FICE can apply directly for level two qualification or higher based on their contracting experience. If a foreign enterprise acquires an interest in or purchases a wholly domestically owned construction enterprise, the newly restructured FICE must have its qualifications re-approved.

Qualifications for Foreign Service Providers

Foreign service providers of FICEs, including individual management and technical personnel, must meet various qualification standards and/or work experience requirements relevant to their position as required by construction enterprise qualification standards, and provide relevant documentation thereon. All foreign service providers must reside in China for at least three months out of the year.

By Tarrant M. Mahony, Freshfields Bruckhaus Deringer, Beijing