China amends FIE laws for record-filing of foreign investment projects

Practical Law UK Legal Update w-003-3381 (Approx. 9 pages)

China amends FIE laws for record-filing of foreign investment projects

by Practical Law China

Background

On 3 September 2016, the National People's Congress (NPC) Standing Committee passed the Decision to Amend Four Laws including the Wholly Foreign-Owned Enterprise Law of the People's Republic of China (关于修改《中华人民共和国外资企业法》等四部法律的决定) (the Decision). The Decision amends the existing four foreign investment laws that apply to foreign-invested enterprises (FIEs) in China and significantly changes the regime governing inbound foreign investment that has been in place since the early 2000s.The Decision will take effect on 1 October 2016.

The Decision adopts a negative list approach to manage foreign investment in China. A negative list approach to foreign investment means that foreign investors receive national treatment (that is, they are treated identically to domestic investors) in all industry sectors except those which appear on a list to be published by the Chinese government (that is, the negative list). This approach was first trialled in 2013 in the China (Shanghai) Pilot Free Trade Zone (Shanghai FTZ) (see Practice note, China (Shanghai) Pilot Free Trade Zone: overview: Negative list approach) and is now rolled out nationwide by the Decision.

Foreign investment projects in industry sectors that appear on the negative list are either prohibited or subject to specified restrictions. Foreign investment in restricted areas needs prior approval from the Ministry of Commerce (MOFCOM) and, if the investment meets certain criteria based on size and sensitivity, the National Development and Reform Commission of China (NDRC). For these projects, the existing foreign investment regulatory regime continues to apply (see Practice note, Chinese foreign direct investment law: overview).

Foreign investment projects in industrial sectors that do not appear on the negative list (that is, those in which foreign investors receive national treatment) will only require the investor(s) or the FIEs, where applicable, to make on-line record-filings with the central or competent local office of MOFCOM through a centralized information management system (MOFCOM record-filing) instead of applying for and obtaining approvals (which the government is not obliged to grant). The MOFCOM record-filings will replace MOFCOM approvals for the establishment, merger, dissolution, extension of business term and certain alterations to the governing documents of FIEs.

The Decision does not contain specific items of the negative list for foreign investment that is going to apply nationwide, which will separately be promulgated and released by the State Council, supposedly no later than 1 October 2016, the effective date of the Decision.

Following the Decision, MOFCOM released the Interim Measures on Record-filing and Management of Establishment and Amendment of Foreign-invested Enterprises (Draft for comment) (外商投资企业设立及变更备案管理暂行办法(征求意见稿)) (Draft Record-filing Rules) for public comment on the same day. The draft sets out the details of the MOFCOM record-filing procedures. The closing date for comments is 22 September 2016. The draft, being the crucial legislation to implement the Decision, is expected to take effect on 1 October 2016, same date as the Decision.

What is the change?

The Decision amends the following four foreign investment laws (FIE laws):

Wholly Foreign-owned Enterprise Law of the People's Republic of China 2000 (中华人民共和国外资企业法).
Sino-Foreign Equity Joint Venture Enterprise Law of the People's Republic of China 2001 (中华人民共和国中外合资经营企业法).
Sino-Foreign Cooperative Joint Venture Enterprise Law of the People's Republic of China 2000 (中华人民共和国中外合作经营企业法).
Law of the People's Republic of China on the Protection of Investment of Taiwan Compatriots 1994 (中华人民共和国台湾同胞投资保护法).

Once the Decision takes effect, the key implications are that:

A nationwide negative list for foreign investment will replace the Foreign Investment Catalogue that has been in place in China for over two decades. (The most recent revision of the catalogue is the Catalogue of Industries for Guiding Foreign Investment 2015 (2015 Foreign Investment Catalogue) (see Legal update, China releases new foreign investment catalogue).)
MOFCOM record-filings for foreign investment projects will replace MOFCOM approvals except for certain industrial sectors included on the negative list.

Scope of MOFCOM record-filing

For an FIE subject to the MOFCOM record-filing regime, a filing is required for:

The greenfield establishment of the FIE.
All subsequent amendments of the FIE. These cover:
- any change of the FIE's basic information, including, for example, the name, registered address, term of operation, registered capital and total investment amount, legal representative and ultimate controlling person of the FIE;
- any change of the investor's basic information, including, for example, the name, nationality or address, subscribed capital, means and schedule of capital contribution, and source of capital of the investor;
- any change of the shareholding or co-operative interests of the investor(s) of the FIE;
- any pledge of the equity of the FIE;
- any merger, division and termination of the FIE;
- any mortgage, pledge or assignment of the property rights of a wholly-foreign owned enterprise (WFOE);
- any early recovery of investment by foreign investors of a Sino-foreign co-operative joint venture company (CJV); and
- Any appointment of a third party to manage and operate a CJV.

(Article 6, Draft Record-filing Rules.)

The MOFCOM record-filing does not require the applicants to submit their corporate governing documents (for example, the articles of association or the joint venture contracts) in the course of the filing. More importantly, the Decision makes it clear that for FIEs not subject to the negative list, MOFCOM approvals are no longer required for these matters. This may grant investors more flexibility in structuring their institutional documents and dealing with corporate governance issues.

Who is covered?

The types of foreign investment projects covered by the MOFCOM record filing procedure can be:

WFOEs.
Sino-foreign equity joint venture companies (EJVs).
CJVs.
Foreign-invested investment companies and their onshore investee companies.
Foreign-invested venture capital companies and their onshore investee companies.
Foreign-invested equity investment companies and their onshore investee companies.
Foreign investment projects by investors from Hong Kong SAR, Macau SAR and Taiwan area.

(Articles 31 to 33, Draft Record-filing Rules.)

For qualified Hong Kong and Macau service providers investing under special CEPA arrangements, they are subject to a record-filing procedure as well but a different set of rules applies (see Legal update, MOFCOM initiates record-filing procedure for CEPA service providers).

Record-filing procedure

Under the current foreign investment regime, the establishment and any subsequent amendment of an FIE require a number of government approvals (see Practice note, Establishing a China business: Process for registering a business) and it may take up to three months (or even longer) to complete the entire business registration process.

The MOFCOM record-filing procedure greatly simplifies the business registration process by:

Allowing the applicants to apply for business registration or any update registration with the State Administration for Industry and Commerce (SAIC) or its competent local office first before they carry out the MOFCOM record filing.
Adopting an on-line application and information sharing platform easily accessible to all investors.
Requiring the central or local MOFCOM to complete the filing within three working days.

The details of the record-filing mechanism are set out in the table below.

Type of record-filing	Establishment of FIEs	Amendment of FIEs
Time of filing	Either before the issuance of the business licence (but after obtaining the approval for pre-verification of company name), or within 30 days after the issuance of the business licence.	With 30 days after passing the resolution or decision on the amendments by a shareholder meeting or board meeting.
Applicants	All investors (or founders) of FIEs or their representatives or agents.	Representatives or agents of FIEs.
Authorities	Competent central or local MOFCOM
Application platform	On-line submissions of all required documents through a foreign investment centralised information management system.
Level of scrutiny	Only formality review on the completeness and correctness of the filed information by record-filing authorities.
Government handling timeline	Within three working days.
Insufficiency of filing information	If the filing information is incomplete or incorrect, the record-filing authority must inform the applicant in one instance and the applicant has 15 days to submit the requested supplementary documents though the on-line system.
Collection of record-filing receipt	After receiving a notice, FIEs or investors can present their company name pre-verification approval or business licence to collect a receipt from the recording-filing authority.

Sanctions for non-compliance

The Draft Record-filing Rules grant a comprehensive inspection right to record-filing authorities and allow them to impose different sanctions on FIEs and foreign investors who violate the rules.

Triggering events	Sanctions
Failure to carry out the record-filing. Failure to provide accurate information. Providing false or misleading information. Material omission in the record-filing.	An order for correction. A fine from one to three times of illegal gains.
Engaging businesses in restricted sectors without government approval.	An order for correction. An order for ceasing operation of the relevant business. A fine from one to three times of illegal gains with a cap at RMB 30,000.
Engaging businesses in prohibited sectors.	An order for ceasing operation of the relevant business. An order for disposing shares and assets within a specified timeframe. A fine from one to three times of illegal gains with a cap at RMB 30,000.
Failure to co-operate with record-filing authorities in their inspection.	An order for correction. A fine under RMB 10,000.

Commentary

The revisions to the FIE laws and the adoption of a nationwide negative list represent a milestone development in reforming China's foreign investment regulatory regime. Although yet to be released, the nationwide negative list for foreign investment is likely to be based on the version that has been successfully trialled in the four pilot free trade zones (FTZs). It is anticipated that the list will be released soon as it is the basis for the application of the Decision and the newly introduced MOFCOM record-filing regime. Once released, the list would replace the 2015 Foreign Investment Catalogue as one of the most closely watched indicators of China's macro-economic policies toward foreign investment.

This approach to embed the negative list into the existing FIE laws works as a compromise alternative to the regime proposed in the draft Foreign Investment Law circulated by MOFCOM for public comment in January 2015 (see Legal update, Draft Foreign Investment Law open for comment until February 17). Some key mechanisms introduced in the draft Foreign Investment Law (for example, the negative list approach, national treatment for foreign investors and the information reporting and sharing mechanism) are actually implemented and achieved through the release of the Decision. However, some other important issues are still pending for clarification, for example, the legality of the variable interest entity (VIE) structure under Chinese law (see Practice note, Variable interest entity (VIE) structures in China). The release of the Decision to amend the FIE laws might signal that the Chinese legislation bodies are suspending their deliberation of the draft Foreign Investment Law.

Amending the FIE laws is just a first step toward the practical implementation of the MOFCOM record-filing regime. Many other related issues have to be addressed or clarified to ensure an effective enforcement of this reform. These may include:

Harmonisation with subordinate legislation. The FIE laws are supplemented by a body of subordinate legislation either enacted by MOFCOM or jointly with other government agencies under the State Council. The application and implementation of the new record-filing regime would require the amendments to those subordinate legislation as well. Otherwise, the inconsistent governing provisions between the amended FIE laws and the subordinate legislation unavoidably would lead to uncertainties and difficulties in enforcing the new regime. The Draft Record-filing Rules do not specify whether the new rules can prevail over the conflicting provisions of other legislation. Hopefully this important issue can be addressed in the final version.
Scope of carve-out matters. Under the negative list trialled in the FTZs, the following types of transactions which are subject to specific regulation in China remain subject to those regulations within the FTZs:
- Foreign investors' acquisitions of the assets or equity of domestic Chinese companies (Provisions on Foreign Investor’s Merger with and Acquisition of Domestic Enterprises 2009 (关于外国投资者并购境内企业的规定)).
- Foreign investors' strategic investment in listed companies (Administrative Measures for Foreign Investors’ Strategic Investment in Listed Companies 2005 (外国投资者对上市公司战略投资管理办法)).
- Foreign investors' use of equity interest in domestic enterprises for capital contribution (Interim Provisions of the Ministry of Commerce on Equity Contribution Involving Foreign-Invested Enterprise 2012 (商务部关于涉及外商投资企业股权出资的暂行规定)).
- FIEs' onshore investments into other entities of a restricted industry sector (Interim Provisions on Investment Made by Foreign-Invested Enterprises in China 2000 (关于外商投资企业境内投资的暂行规定).
It remains unclear at this stage whether these carve-out matters will appear in the nationwide negative list.
Co-ordination with the NDRC project approval regime. Project approval is a verification or a record-filing procedure with the NDRC or its local branch, depending on the size and nature of the investment (see Practice note, Establishing a China business: Project approval). The project approval step can often be skipped for projects involving service industries and smaller wholly foreign owned investments because the establishment approval authority (that is, central or local MOFCOM) may not require evidence of project approval for these projects. It remains unclear whether central and local NDRC will simply or adjust their project approval regime to accommodate the MOFCOM’s reform.
Implication with the market access negative list. In addition to the negative list for foreign investment, Chinese government is in the course of formulating a market access negative list and a draft pilot version has been circulated by the NDRC on 12 April 2016. The pilot programme applies in Shanghai, Tianjin Guangdong province and Fujian province on a trial basis starting 1 December 2015 and ending 31 December 2017, and will be implemented nationwide from 2018 (see Legal update, Draft negative list for market access: implications). The concept of a market access blacklist is that for industries not on the list, all market participants will be subject to the same systems of regulation and corporate law, whether they are owned by foreign companies or individuals, by private Chinese citizens or by the Chinese state. According to the draft pilot version, those restrictive administrative measures appearing in the market access negative list include conditions familiar under China’s traditional examination and approval approach such as qualifications requirements, requirements to obtain industry-specific operating permits, restrictions on the scope of business operations, and so on. It is yet to be seen how the government will draw a line between the two blacklists.
National security review. The Draft Record-filing Rules require foreign investment projects to comply with the existing national security review (NSR) regime. Although China has enacted the National Security Law of the People’s Republic of China 2015 (中华人民共和国国家安全法), but this top-tier law obviously lacks implementation details. At national level, the existing NSR regime expressly governs foreign acquisitions of domestic Chinese companies but not greenfield investments by foreign investors (see Practice note, Establishing a China business: National security review (NSR)). Once a record-filing regime is adopted, it is crucial for China to have an enhanced NSR regime that can be applied and implemented for all types of foreign investment.
Co-ordination between different government agencies. Under the record-filing regime, central and local SAIC can register an FIE directly if they take the view that the FIE is not subject to the negative list for foreign investment. It could happen that the SAIC and MOFCOM might have different interpretations toward the application scope of the record-filing rules. Local variations might also occur across the country or at different levels of the agencies.

Source

CPC website: Decision to Amend Four Laws including the Wholly Foreign-Owned Enterprise Law of the People's Republic of China (关于修改《中华人民共和国外资企业法》等四部法律的决定).
MOFCOM website: Interim Measures on Record-filing and Management of Establishment and Amendment of Foreign-invested Enterprises (Draft for comment) (外商投资企业设立及变更备案管理暂行办法(征求意见稿)).

China amends FIE laws for record-filing of foreign investment projects | Practical Law