By Michelle Tzhori, Esq. (licensed in Israel and New York)
Through an Order of the President No.51, China promulgated on September 3 2016, the Decision on amending four Laws related to Foreign Direct Investments (FIE) in China (the Decision). The Decisions came into effect as of October 1, 2016. To implement the new laws, the Ministry of Commerce of China (MOFCOM) issued on October 8 2016, Interim Measures on the Administration of Record Filing for the Establishment of and Change to Foreign Invested Enterprises (the Interim Measures).
According to the Decision, several articles on administrative examination and approval processes in the following laws have been revised: 1) the Law on Wholly Foreign-owned Enterprises, 2) the Law on Sino-Foreign Equity Joint Ventures, 3) the Law on Sino-Foreign Cooperative Joint Ventures, and 4) the Law on the Protection of the Investments of Taiwan Compatriots have been revised to reflect further mitigation of the previously notorious regulatory and bureaucracy procedures associated with the formation of foreign-related entities and the approval of foreign related projects in China.
The above Decision is another loop in the long chain of administrative reliefs and opening-up efforts that China has been going through since its accession to the World Trade Organization (WTO) in 2001. Prior to its WTO accession, China’s approach towards foreign direct investments (FDI) had been strict and uncompromising. Previously, a number of industries were prohibited to FDI activities and the main available paths for foreigners required cooperation with Chinese controlling partners. Approval processes of FDI projects lasted months and years and involved various approval phases, obstacles and unpredicted requirements. The main tool for reviewing and evaluating the registration of an FDI project was the Foreign Investment Industry Catalogue, which was updated every several years.
China’s opening-up efforts following its accession to WTO span periodic adjustments to certain industries, and reflect through concurrent revisions of the Investment Catalogue. It commenced by mitigation of the holding ratio requirements between Chinese and foreign parties, allowing more and more foreigners to hold controlling stakes in Joint Venture entities. Further improvements led to the gradual transition of various industries from a ‘prohibited’ status to ‘restricted’ and later on to a lucrative ‘encouraged’ status. By being categorized as ‘encouraged industry’, investment projects in such certain industry could enjoy preferential treatments and various benefits and grants aimed at speeding up the development of such industry, and were allowed fully foreign ownership. Again, the investment Catalogue has been updated in the past decades, and its most updated version is the 2015 edition.
Another recognized step in China’s long economic journey was the establishment of the Shanghai Pilot Free Trade Zone (SHFTZ) in the fall of 2013. Click here to read our previous article about the SHFTZ. The SHFTZ was a revolutionary milestone in the approach towards FDI projects and its administrative uniqueness was reflected, inter alia, in a shortened approval and registration process. prior to the establishment of the SHFTZ (and after its establishment – in any location beyond the SHFTZ), FDI projects were reviewed according to the then applicable Investment Catalogue and were deemed to a long, rigorous approval process that required, inter alia, thorough analysis of the project and the relevant industry, an initial application to receive MOFCOM’s approval which required various documents including a feasibility study report, whereas today, new FDI projects submitted to the SHFTZ obviate the long MOFCOM approval process, and instead are subject to a simple record-filing procedure that assumes the project is approved – for as long as the project is not included in the scope of a Negative List that defines the industries that are prohibited or restricted for foreigners. Those industries not included in the Negative List are considered ‘permitted’. The analysis whether an industry is included in a Negative List is straightforward and it is rare to encounter hesitations regarding the approval prospects of a certain project.
Well, the news introduced by last month’s Decision is an enlightening one and it sets a complete new regime of FDI in China, aimed at expanding foreign economic cooperation and technological exchange, and promoting the development of China. We shall review the news herewith.
Under the new regime, FDI projects that do not fall within a Negative List are exempt from approval processes and are not subject to any shareholding limitations. Such projects would only require a record filing procedure through MOFCOM’s online system or its local counterparts before the registration or as late as 30 days after the registration at the local Administration of Industry and Commerce (AIC). This refreshing news, that matches the treatment of FDI projects at the SHFTZ to the entire mainland China, is a big leap in the approach towards FDI in China and the former need to scrutinize such projects.
The new record filing process described above applies to the following matters that previously required pre-approvals from MOFCOM or its local branches:
- FIE establishment;
- FIE major corporate changes, such as:
(i) Changes to basic information on an FIE, including name, registered address, type of enterprise, duration of existence, industry of investment, business type, business scope, whether the equipment for the FIE is eligible for tax reduction or exemption, registered capital, total investment, organizational structure, legal representative, ultimate actual controller of the FIE and contacts or contact details;
(ii) Changes to basic information relating to the investors of an FIE, including name, nationality or address (registered place or address), ID card type and number, subscribed capital contribution, form of contribution, deadline for contribution, source of fund and type of investors;
(iii) Changes to equity interests or interests in the cooperative joint ventures;
(iv) Mergers, spin-offs and terminations;
(v) Mortgages and transfers of property rights and interests of FIEs;
(vi) Early exit of investment by foreign investors from cooperative joint ventures (CJVs); and
(vii) Delegation of operation and management of CJVs.
It will take 3 working days for the filing if the application matter falls within the record-filing scope, provided that all required documents are duly submitted.
FIEs which business falls within the Negative List shall still be subject to the approval administration and the simple online record-filing arrangement is not applicable to such projects.
The Decision and the new Interim Measures are another step in the administration reform that commenced several years ago, and is designated to ease the registration procedures in China, enhance foreign direct investments and increase the trade and cooperation between Chinese and foreigners. This administration streamline will remove redundant obstacles related to technical procedures, and will enable foreign businesses and Sino-foreign cooperation to concentrate on the essence, that is, the businesses itself rather than the surrounding bureaucracy.