Mining in China: licensing and company formation

Mineral extraction ranks among China's strategically important industries. The state supervises it closely and regulates it through many mandatory requirements. Reserves of coal and iron ore are substantial. So are reserves of copper, gold, lithium and other natural resources. The country ranks accordingly among the world's leading producers. Foreign capital enters mining in China only after careful preparation, a command of local legislation and compliance with numerous administrative procedures.

Legal regulation of mining in China

The PRC Mineral Resources Law carries the principal weight. That statute establishes the legal regime of the subsoil, vests mineral wealth in the State and regulates how rights to geological study and to extraction are granted. The same statute binds the user to employ natural resources rationally and, once operations end, to carry out environmental restoration and land reclamation.

Considerable importance attaches to the PRC Foreign Investment Law. It regulates the activity of foreign entrepreneurs, secures them equal conditions of business in sectors that stand open to them, and establishes the mechanisms of state protection along with the general procedure for conducting international business. The current foreign investment negative list also determines whether foreign capital may take part in a particular activity.

Incorporation is governed by the Company Law. That statute lays down the prerequisites for forming a company and the framework of corporate governance that follows. It determines as well the liability of the participants, the allocation of competence among the management bodies and the winding up of an enterprise.

The Environmental Protection Law matters equally. It establishes the environmental requirements binding on every enterprise engaged in mineral extraction in China. The same statute governs the assessment of a project's impact on the natural environment and the duties of pollution prevention, of land restoration and of monitoring.

The legal status of the subsoil

State ownership of every mineral resource is the founding principle of local legislation, and both the Constitution and the relevant statute fix it. The state retains the exclusive right to dispose of the subsoil and to determine the order of its use. It issues the licenses for geological study and for extraction and supervises rational development.

An enterprise may own production facilities or possess long-term rights to a land plot. Even so, the right to mineral extraction in China arises only once the corresponding state permits are granted. The subsoil is excluded from private ownership. What the investor acquires is narrower, a right of use bounded in scope and in time over a defined part of a deposit.

That right has strict limits. The permits fix which ground may be worked and which minerals are in question. They also state the permitted volumes, the term of validity and the obligations that statute places on the subsoil user. The user must employ natural resources rationally, follow the approved deposit development project and keep production processes safe. Environmental protection and the reclamation of land fall on that same user.

How to obtain a mining license in China

The planning stage settles which permits a line of activity demands. An investor planning a company for ferrous metal ore mining and processing should weigh the prospects of every license and approval in advance. First in the sequence stands the exploration license. It entitles the holder to prospect a defined block of subsoil, explore it and assess the reserves lying there. Once that work confirms reserves, the holder can seek the license covering industrial operations. The project will also call for:

• environmental permits;
• approval of the deposit development project;
• approval for construction of production infrastructure;
• permits in industrial safety;
• a land plot use permit.

An intention to form a company for coal mining in China, and for processing the output, brings the later licensing procedures with it automatically. Corporate registration by itself brings no subsoil use rights.

The project then undergoes legal preparation. That work covers what the statutes demand, whether foreign capital is admissible in the activity concerned and the corporate shape the future enterprise will take. The company once registered, the investor assembles the licensing dossier. It comprises:

• corporate materials;
• information on the investors;
• the feasibility study for the project;
• the geological survey report;
• technical documentation;
• plans for developing the deposit;
• industrial safety documents;
• environmental assessment materials.

From there the dossier is filed with the competent authorities for a comprehensive review. Specialists measure the project against the legislation, the technical requirements, state investment policy and the demands of rational resource use and environmental protection. Where necessary the applicant receives a request for further information or removal of defects.

I advise entrepreneurs forming a company for ferrous metal ore mining and processing to assemble the documentation long before the formal filing. Early preparation avoids substantial delay and raises the likelihood of a favorable decision considerably. The legislation lists many grounds on which a state authority refuses a license or terminates one already issued.

What the investor must satisfy

Anyone engaged in mineral extraction in China must meet the corporate and licensing standards. Environmental, land-use and sectoral standards weigh equally. The enterprise must be registered in due form, carry the corresponding line of activity in its registration documents and observe the basic norms.

To obtain subsoil use rights the enterprise must demonstrate funds sufficient for the project, a production base and specialized equipment. Qualified engineering personnel, technical specialists and an internal control system are required too.

Anyone whose company will mine and process ores of non-ferrous metal should test the project against every requirement in advance, because defects put right after filing tend to delay the investment substantially. Beyond the general corporate rules, the authorities apply the standing list of sectors closed or restricted to foreign participation. Special rules governing particular categories of deposit apply in addition.

I always advise an investor who will register a company for coal mining in China to commission a legal review before the corporate form is fixed. That identifies the possible restrictions early and points to the most effective model of market presence.

Throughout the review the authorities examine the registration data entered for the company. Its ownership structure, the beneficial owners, the financial position of the enterprise and further matters of the same kind come under the same examination. The investor confirms that the funds are lawful in origin, discloses those who own the company, and observes the legislation directed against laundering of criminal proceeds and against the financing of unlawful activity.

Choosing the corporate form

My standing advice is to analyze the intended activity in law and to weigh every organizational model before the project starts. Out of that comes the structure best suited to the statutes and to the aims behind the investment. It matters to anyone registering a company for non-metallic mineral extraction, since the corporate form bears directly on later licensing and on all subsequent dealings with the authorities.

Among the commonest routes into China is the subsidiary. PRC law regards such a company as a separate legal person with rights and duties of its own. Sole foreign ownership is possible; so is a mixed capital structure, as the project may require.

Corporate governance remains with the company itself. It may engage its own staff, conclude contracts and obtain the licenses its activity requires. Corporate and tax law bind it meanwhile, together with the rules that govern environment and labor and with the standards of its own industry. Where an investor will register a mining company in China, the subsidiary usually proves the most effective vehicle, whether the aim is a lasting presence or personal control.

A joint venture suits some projects better. Such a venture is formed by a foreign investor together with a Chinese partner. Terms of participation, allocation of equity interests, conduct of management and sharing of profit all rest on the constitutive documents and on the agreement concluded between participants.

Through the partner the investor draws on local experience and on knowledge of the regional market. That partner also brings commercial connections, production infrastructure and an established practice of dealing with the authorities. Joint ventures serve too in sectors that cap foreign capital, or that make a Chinese participant obligatory.

Besides a company established for mineral extraction in China, investors also consider the representative office and the branch. The legal status of these structures differs substantially.

A representative office may not trade. It may not obtain an extraction license, conclude transactions in its own name or draw income from commercial activity. Its functions are:

• market research;
• coordination of contacts with Chinese partners;
• representing the interests of the parent company;
• participation in negotiations;
• information support for the investment project.

Branches too have a narrow field of application. Whether one may be created at all depends on the legislation in force, and on the particular activity in question. Branches are far less common in the extractive sector, since most projects require a registered company competent to obtain licenses, to own assets and to answer to the authorities. Such structures therefore serve mostly as auxiliary units at the preparatory stage.

Exploration rights and geological study

No investor may explore a territory without the relevant permit. The subsoil is state property, and access to it is granted only through the established administrative procedure. It matters to investors registering an enterprise for oil and natural gas extraction, because those lines also carry sectoral requirements and demand a correctly defined business scope.

The exploration license is the instrument granting the right to study a defined block of subsoil. It confirms the holder's entitlement to carry out prospecting and exploration, to identify reserves and to judge what prospects further development of the deposit holds. Before that license is sought the investor prepares an application, with a documentary file behind it. The file includes information on the applicant and on the planned works. A technical plan of the research, the feasibility study and further material of the same kind belong there too.

The license fixes the boundaries of the block and its term of validity. It states as well which categories of work are permitted and what obligations lie on the subsoil user. The company must follow the approved research program, file reports, keep the work safe and meet the environmental requirements.

For foreign capital, the structuring of the activity ahead of any filing is an important stage of mining in China. An entrepreneur forming a company for work on the subsoil should see that the registration documents match what is actually planned and that the activity matches sectoral regulation.

Geological exploration is the decisive stage of preparation for industrial extraction. It examines the geological structure of the territory, establishes the grade of the mineral raw material, computes the estimated reserves and assesses whether commercial exploitation is possible. Exploration comprises research of several kinds.

For particular kinds of research investors engage specialized organizations holding the necessary permits and qualifications. International companies entering China use that route often, since it lowers the administrative burden at the early stage.

How to register a mining company in China

The local regulatory model rests on state control over natural resources. Registration alone therefore brings no automatic entitlement to work a deposit. Three matters must be established beforehand: that the project conforms to the legislation; that financial and technical means for safe development exist; that the authorities in charge have issued their permits.

Anyone who plans to register a mining company in China follows a set sequence. Incorporation comes first, readiness for the special permits afterwards. The stages are set out below; taken in order, they give the work its structure and keep the requirements in sight.

Stage 1. Preliminary analysis and choice of structure

I recommend opening with an assessment of the future project in law and in commerce. The analysis addresses:

• the minerals to be extracted;
• the region of the future facility;
• limits on foreign participation;
• whether a Chinese partner is needed;
• the scale of investment;
• licensing and environmental approval requirements;
• prospects of rights to a specific block of subsoil.

That work also determines which organizational model is the most suitable. Entrepreneurs whose enterprise will extract oil, or natural gas, should establish in advance every requirement imposed by law and by administration.

Stage 2. Assembling and filing the registration documents

Once the structure is settled the investor assembles the documents for state registration. They must go through the procedure that gives them legal force in China, notarial certification included. The description of the activity requires particular attention. A mining enterprise must define its lines of work precisely, since they have to correspond to the licenses it will subsequently hold.

Stage 3. Registering the company

Documents ready, the application is filed. The authorities check that the materials are complete, that they conform to the legislation and that nothing bars the company from being set up. On a successful review the enterprise receives its business license, which certifies state registration of a mining business. That license confers legal personality; the rights to the subsoil are registered separately and later. From that point the enterprise may take the corporate actions the statute permits.

Stage 4. Permits and the launch of the facility

With the materials in hand the company goes through the special license procedures. The list varies with the project:

• subsoil use rights;
• the extraction permit;
• environmental approvals;
• permits for construction of production facilities;
• industrial safety approvals.

Only when every mandatory requirement is met may the enterprise proceed to launching the facility itself.

Taxation of a mining project

Before the project starts I recommend a preliminary analysis, since faulty planning substantially affects the economics of the deposit. Companies planning specialized work in mineral extraction in China should weigh these questions with particular care, because a subsoil use permit confers commercial opportunity and imposes a body of obligations toward the state alike.

Enterprise income tax is levied at 25% on taxable profit. The base is the income of the company less documented expenses and production costs. Depreciation of equipment, management costs, research spending and the other items Chinese law admits reduce that base as well.

Particular categories of enterprise may fall under special tax regimes. An enterprise certified as high and new technology, for instance, may claim the preferential rate of 15% where the established conditions are met.

Sales of mineral raw material and of processed products fall under value added tax, whose rate varies with the product and with the regime applied. Most goods are taxed at 13%, and much of the extractive industry's output falls with them. A project of this kind requires early attention to the structure of supply. Export operations, domestic sales and the order of documentation matter just as much.

Resource tax applies in addition under a statute of its own. Its annexed schedule carries a rate for every mineral, and where a band appears the province fixes the figure inside it. Anyone engaged in mining in China should allow for these:

• coal: 2% to 10% of the sale value, the figure set provincially;
• oil: 6%, nationwide;
• natural gas: 6%, nationwide;
• rare metals and certain other resources: a rate fixed mineral by mineral;
• non-metallic minerals: the figure set provincially inside the band prescribed.

Conclusion

China holds substantial reserves of many kinds of natural resource, a developed industrial infrastructure and high demand for mineral raw material. Entry, however, requires close knowledge of the administrative procedures and of the expectations behind them. Rules on subsoil use and on environmental safety bind the industry. Industrial supervision, foreign investment, licensing rules and tax duties rest on one body of law.

Incorporation by itself confers no right to begin work. The investor has several stages to pass. Preparing the project correctly before the formal procedures carries particular weight. Errors in the choice of business structure lead to significant delay and additional cost. So do an inadequate check of the restrictions applying to foreign investors, faulty documents and technical materials that fall short of the authorities' requirements.

Our consulting agency makes an investment project in mining in China considerably simpler and lowers its legal risks. We help entrepreneurs, and companies from abroad, to shape a China strategy and to work through everything the statutes demand. With us the client settles on the fitting structure, prepares the documents correctly and orders its dealings with the authorities.