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MOFCOM finalises FIE record-filing measures
Practical Law UK Legal Update w-003-9184 (Approx. 10 pages)
MOFCOM finalises FIE record-filing measures
by Practical Law China
| Published on 13 Oct 2016 • China |
The NPC Standing Committee has passed a decision to amend four FIE laws regulating foreign and Taiwanese investment in China. Following the decision, MOFCOM released the FIE record-filing measures. The decision and the measures will eventually roll out the negative list approach for foreign investment nationwide. The decision took effect 1 October 2016 and record-filing measures took effect 8 October 2016.
Speedread
On 3 September 2016, the NPC Standing Committee passed a decision to amend four FIE laws regulating foreign and Taiwanese investment in China. On 8 October 2016, MOFCOM released the final version of the FIE record-filing measures. The decision and the measures put forward the adoption of a MOFCOM record-filing procedure for regulating foreign investment projects which are not covered under special management measures (that is, the negative list). The record-filing procedure will simplify the business registration process for, and enhance the efficiency of, regulating and operating foreign investments in China.
The decision took effect 1 October 2016 and the record-filing measures took effect 8 October 2016.
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) (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 took effect 1 October 2016.
The Decision adopts a pre-establishment national treatment plus a negative list approach to manage foreign investment in China. (The negative list 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).)
Foreign investment projects in industry sectors that appear on the negative list are subject to market entry special management measures. Foreign investment in these listed sectors needs an establishment approval from the Ministry of Commerce (MOFCOM) and, if the investment meets certain criteria based on size and sensitivity, a project approval from 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 a pre-establishment national treatment) will only require the investor(s) or the FIEs, where applicable, to make online record-filings with the competent MOFCOM offices through a centralised management system (MOFCOM record-filing) instead of applying for and obtaining approvals (which the government is not obliged to grant).
The Decision does not include specific items of the special management measures (that is, the negative list) that will apply nationwide but empowers the State Council to promulgate and release the list.
However, instead of rushing for the release of a negative list that must reflect the government's updated position in formulating industrial policies, the State Council authorised the NDRC and MOFCOM to jointly issue, on 8 October 2016, the Bulletin 22/2016, as a temporary arrangement in scoping out the specific coverage of the special management measures. On the same day, MOFCOM released the Interim Measures on Record-filing and Management of Establishment and Amendment of Foreign-invested Enterprises (外商投资企业设立及变更备案管理暂行办法) (Record-filing Measures). The measures provide for the implementation of the MOFCOM record-filing procedures.
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).
The key implications of the Decision are that:
- Foreign investors will receive a pre-establishment national treatment (that is, they are treated identically to domestic investors) in all industry sectors except for those subject to special management measures.
- For foreign investments in industry sectors not subject to special management measures, 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. For these projects, MOFCOM approvals are no longer required and the investors can directly apply for a business registration with the competent office of the State Administration of Industry and Commerce (SAIC) at the place of incorporation of the business.
Scope of negative list
In contrast with market predictions, the State Council did not publish a nationwide negative list together with the Record-filing Measures. Instead, as a temporary arrangement, the NDRC and MOFCOM were delegated to release the Bulletin 22/2016 to scope out the specific coverage of the special management measures. This Bulletin 22/2016 provides that special management measures mean:
- Those restricted or prohibited industries under the Catalogue of Industries for Guiding Foreign Investment 2015 (2015 Foreign Investment Catalogue).
- Those encouraged industries under the 2015 Foreign Investment Catalogue that are subject to:
- a shareholding requirement; or
- any senior management requirement.
For details of the 2015 Foreign Investment Catalogue, see Legal update, China releases new foreign investment catalogue. For more information on the industry categorisation and its impact under Chinese law, see Practice note, Chinese foreign direct investment law: overview: Categories of investment in the Foreign Investment Catalogue.
The Chinese government is negotiating bilateral investment treaties with the United States and the European Union, which will eventually require China to open its market further. However, an agreement between China and its major trading partners on how open the China market will take some time. This might explain the State Council's hesitation in releasing a nationwide negative list at this time.
Who is covered?
The types of foreign investment projects covered by the MOFCOM record-filing procedure include:
- Wholly-foreign owned enterprises (WFOEs).
- Sino-foreign equity joint venture companies (EJVs).
- Co-operative joint venture companies (CJVs).
- Foreign-invested companies limited by shares.
- Foreign-invested investment companies and their onshore investee companies.
- Foreign-invested venture capital companies and their onshore investee companies.
- Foreign investment projects by investors from Hong Kong SAR, Macau SAR and Taiwan area.
Qualified Hong Kong and Macau service providers investing under the special Closer Economic Partnership Arrangements (CEPA) 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).
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 actual controller of the FIE;
- any change of the investor's basic information, including, for example, the name, the nationality or district, the 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 FIE's investor(s);
- any merger, division and termination of the FIE;
- any mortgage, pledge or assignment of the property rights of a WFOE;
- any early recovery of investment by foreign investors of a CJV; and
- Any appointment of a third party to manage and operate a CJV.
Under the Record-filing Measures, the applicants need not submit their corporate governing documents (for example, the articles of association or the joint venture contracts) or any transaction documents (for example, share purchase agreements) in the course of a filing. More importantly, the Decision makes it clear that MOFCOM approvals are no longer required for FIEs not subject to special management measures. This may grant investors more flexibility in structuring their institutional and transaction documents that are no longer subject to any MOFCOM scrutiny.
Carve-outs for record-filing
Although not part of the Record-filing Measures, MOFCOM officials clarified on its website the carve-outs from the ambit of the measures. Specifically, the following types of transactions (which are subject to specific regulations in China) remain subject to those regulations:
- 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)). These acquisitions still require MOFCOM approvals, regardless of the industry sector where the business is engaged.
- Foreign investors' strategic investments 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)). These investments still require MOFCOM approvals, regardless of the industry sector where the business is engaged.
- FIEs' onshore re-investments (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). For these re-investments, where the investee company falls into:
- an encouraged or permitted category of the 2015 Foreign Investment Catalogue, the investor can apply for the company registration with a competent SAIC office directly; or
- a restricted category of the 2015 Foreign Investment Catalogue, the investor must obtain an MOFCOM establishment approval before applying for the company registration with a competent SAIC office.
It is notable that both the Record-filing Measures and the website digest are silent on how to deal with the situation where a foreign investor uses the equity interest of a domestic enterprise for capital contribution into an onshore entity. Under the 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) (2012 Interim Provisions), this type of matter requires MOFCOM approval (see Practice note, Payment options (inbound M&A): China: Equity non-cash consideration). When the record-filing approach was trialled in China's free trade zones (FTZs), the FTZ rules expressly provided that the 2012 Interim Provisions still applied for a transaction involving any equity non-cash contribution. However, this carve-out is not incorporated into the Record-filing Measures. It is yet to be seen how MOFCOM will treat this issue in practice.
Reduced filing burden of listed companies
To ease the filing burden of listed companies, foreign-invested listed companies and companies listed on the National Equities Exchange and Quotations only need to go through the record-filing procedures for change in basic information of investors or shares in any of the following situations:
- The accumulated change of the shareholding percentage of foreign investors exceeded 5%.
- The share controlling or relative share controlling status changed.
Record-filing procedure
Under the current foreign investment regime, the establishment and any subsequent amendment of an FIE require a number of government approvals and it may take up to three months (or even longer) to complete the entire business registration process (see Practice note, Establishing a China business: Process for registering a business).
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 a competent SAIC office first before they carry out the MOFCOM record filing.
- Adopting an online application and information sharing platform easily accessible to all investors.
- Requiring a competent MOFCOM office to complete the filing within three working days.
Details of record-filing mechanism: table
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. | Within 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 MOFCOM office | |
Application platform | Online submissions of all required documents through a foreign investment centralised 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 issue a one-time notification to the applicant through the online system and the applicant has 15 days to submit the requested supplementary documents. | |
Collection of record-filing acknowledgement | After receiving a notice, FIEs or investors can present their company name pre-verification approval or business licence to collect an acknowledgment from the recording-filing authority. | |
Sanctions for non-compliance
The 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 |
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Commentary
The revisions to the FIE laws and the adoption of a negative list approach represent a milestone development in reforming China's foreign investment regulatory regime. Embedding a 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, pre-establishment 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 legislative bodies are suspending their deliberation of the draft Foreign Investment Law.
Shortly before the release of the Record-filing Measures, MOFCOM circulated a draft version for public comment (see Legal update, China amends FIE laws for record-filing of foreign investment projects). The final issued version is quite similar to the draft version with only a few changes, including, for example,
- Pledge of an FIE's equity is not a record-filing matter. This signals that MOFCOM is likely to stop their oversight of this type of matter.
- Listed companies are subject to a reduced filing burden (see Reduced filing burden of listed companies).
- Record-filing Measures prevail in case of any discrepancy with legislation issued by MOFCOM.
These changes are helpful in dealing with some uncertainties in the implementation of the MOFCOM record-filing procedures. However, many other related issues are yet to be addressed or clarified to ensure an effective enforcement of this reform. These may include:
- Harmonisation with subordinate legislation issued by other government agencies. The FIE laws are supplemented by a body of subordinate legislation separately or jointly enacted by MOFCOM and other government agencies under the State Council. The application and implementation of the new record-filing regime would require the amendments to the subordinate legislation as well. Otherwise, the inconsistent governing provisions between the amended FIE laws and the subordinate legislation would unavoidably lead to uncertainties and difficulties in enforcing the new regime. The Record-filing Measures only resolve the prevailing issue in case of any conflicting legislation enacted by MOFCOM and do not specify whether the new rules can prevail over any conflicting provisions of legislation issued by other government agencies.
- 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. It remains unclear whether and when the NDRC will simplify or adjust their project approval regime to accommodate the MOFCOM’s reform.
- Interplay with the market access negative list. In addition to a negative list for foreign investment, the Chinese government is currently formulating a market access negative list. A draft pilot version was circulated by the NDRC on 12 April 2016 (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 and restrictions on the scope of business operations. It is yet to be seen how the government will draw a line to distinguish the two blacklists.
- National security review. The Record-filing Measures 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), this top-tier law obviously lacks implementation details. At the 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)). After the adoption of the record-filing regime, 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, a competent SAIC office can register an FIE directly if they consider that the FIE is not subject to the negative list for foreign investment. It is possible for the SAIC and MOFCOM to have different interpretations toward the application scope of the Record-filing Measures, or even for different SAIC offices to hold different views on the same issue. Local variations are likely to occur across the country or at different levels of the agencies.