A new “filing and negative list” regulatory system for FIEs has now been officially launched in China.

On October 8th, 2016, the Ministry of Commerce (“MOFCOM”) issued the Interim Measures for the Administration of Establishment and Change Filings of Foreign-invested Enterprises (“Interim Measures”), 34 days after the Standing Committee of the National People's Congress (“NPC”) amended the “Three FIE Laws” (namely, the Sino-foreign Equity Joint Ventures Law, the Sino-foreign Cooperative Joint Ventures Law, and the Wholly Foreign-owned Enterprises Law) MOFCOM had published the Interim Measures for the Administration of Establishment and Change Filings of Foreign-invested Enterprises (Draft for Public Comment) (“Draft for Public Comment”) on September 3rd, 2016.

Also on October 8th the National Development and Reform Commission (“NDRC”) and MOFCOM jointly issued Announcement No.22 of 2016 (“Announcement No.22”), which provides that instead of the previous approval system a filing regime will be used for the establishment and changes to foreign-invested enterprises (“FIE”) that are not subject to national special administrative measures for admission, including requirements for equity investment and executives for enterprises in the prohibited, restricted and encouraged industries set out in the 2015 Guiding Catalogue on Industries for Foreign Investment (the so-called “Negative List”), .

On the eve of National Day (September 30th, 2016), the State Administration for Industry and Commerce (“SAIC”) issued the Circular of Registration of Foreign-invested Enterprises Subject to Filing Administration.

Just as we predicted in our 7 September article Farewell to the Era of Case-by-Case Approval Regime for Foreign Investment, the Interim Measures is not much different from the Draft for Public Comment in its scope , filing method, procedures, requirements and time limits. What turns out to be a big surprise to many people is the much-anticipated negative list: instead of introducing a new set of special measures for admission of foreign investment (Negative List) as it had done in the past for free trade zones, the State Council merely referred to the relevant industry categories already set out in the 2015 Guiding Catalogue on Industries for Foreign Investment!

In this article, we will discuss changes made by the Interim Measures, FIE filings, and what the Negative List looks like.

I. Interim Measures vs. Draft for Public Comment

Compared with the Draft for Public Comment, the Interim Measures has made several amendments to the scope of application, supervision and legal liability for filings, but few changes to filing requirements and procedures. Highlights of the Interim Measures are illustrated below:

Authorities in charge of filings:

  • The State Council department of commerce leads and oversees the administration of filing across the nation, but does not receive filings;
  • Authorities that receive filings are local commerce departments of provinces, autonomous regions, Municipalities, cities with independent planning status, Xinjiang Production and Construction Corps and sub-provincial cities, and counterpart authorities in free trade zones and national economic and technological development zones. Each is responsible for administering establishment and change filings for FIEs in their regions.

Scope of application:

  • “Foreign-invested enterprises” that are governed by the Interim Measures do not include enterprises established by foreign-invested equity investment enterprises;
  • For change in the basic information about an FIE that is subject to filing, the “nature of the matter” is now changed to “whether it enjoys an imported equipment tax exemption or reduction granted by the State”;
  • “Equity pledge” is removed from the list of matters of change that are subject to filing, but it is unclear whether the removal means that a change to an equity pledge of an FIE is still subject to approval under Several Provisions on the Alteration of Investors' Equities in FIEs, or that MOFCOM no longer oversees equity pledges of FIEs outside the Negative List - it is expected that MOFCOM will clarify this in the future ;
  • A foreign investor's acquisition of a domestic enterprise is excluded from the list of filings and is still governed by the current special regulatory system, exactly as we predicted. Specifically, when a foreign investor acquires a domestic enterprise with no foreign investment, the Provisions on Foreign Investors' Merger with and Acquisition of Domestic Enterprises applies. Where a listed domestic company is involved, the Administrative Measures on Foreign Investors’ Strategic Investments in Listed Companies applies. However, following the completion of a foreign investor's acquisition of a domestic enterprise with no foreign investment, the resultant FIE must make filings when a change occurs to the FIE, provided it is not subject to the national special administrative measures for admission.

Filing procedures:

  • When the law requires a merger, division or capital reduction to be announced , the filer must state that it has duly made the announcement when making a change filing;
  • For foreign-invested listed companies and companies listed on the National Equities Exchange and Quotations, changes in an investor’s basic information or shareholding must be filed only when there is an accumulated 5% change of the foreign investor’s ownership and its controlling position or its relative controlling position changes.

Method of filing: FIE establishment and change filings are to be made online via an integrated system.

Key time limits related to filings:

  • For a change by resolution of the highest authority of an enterprise, the date of the resolution is the date of the change;
  • If a filer files insufficient or inaccurate information, or needs to further clarify its scope of business or submit supplemental material, the authority receiving filings will notify the filer once only to submit all required supplemental materials online within 15 business days;
  • if an FIE or its investors fails to submit all required supplemental materials within 15 business days, the authority receiving filings will notify the FIE or its investors online that their filings have not been completed;
  • An FIE or its investors may make separate filings for the same matter of establishment or change, and if the matter has already occurred, the separate filings should be made within 5 business days.

Materials to be filed: If the original materials are in a foreign language, their Chinese translations should be filed, and the Chinese content must be consistent with the original.

  • Regulatory review: Where there has been an inquiry about “whether a filer has forged, altered, rented, lent or assigned its Filing Receipt” any information revealed in the review will be recorded in the credit file system for foreign investors. If a filer fails to make necessary filings, submits untrue filings, forges, alters, rents, lends or assigns its Filing Receipt, fails to cooperate in a regulatory review or refuses to accept penalties imposed by the authority receiving filings, the relevant authority will publish this information on the foreign investment information disclosure platform.

The Interim Measures procedures for FIE establishment and change filings are summarized below:

Click here to view chart.

II. Major aspects of FIE filings

Major aspects of filings

Content

Scope of filings

Establishment of and changes in FIEs that are not governed by the national special administrative measures for admission

Authorities receiving filings

The State Council department of commerce leads and oversees FIE filing administration across the nation, but does not receive filings

Authorities receiving FIE filings are local commerce authorities of the provinces, autonomous regions, Municipalities, cities with independent planning status, Xinjiang Production and Construction Corps and sub-provincial cities, as well as relevant authorities in free trade zones and national economic and technological development zones. (at provincial level, and sub-provincial level)

Filing method

Authority receiving filings handles and completes filings online on the Integrated Foreign Investment Administration

Information System (“Integrated Administration System”)

Key time limits

Establishment: after pre-approval of enterprise name; before the issuance of business license, or within 30 days of the issuance of business license

Change: within 30 days of the occurrence of matters of change

*If materials for filings were submitted before issuance of business license, but actual conditions have changed, such changes must be filed within 30 days of issuance of business license.

Matters of change to be filed

  1. Changes in FIE basic information ;
  2. Changes in basic information on an FIE’s shareholders;
  3. Changes in equity interest or cooperation interest (for listed companies and companies listed on the National Equities Exchange and Quotations, changes in investors’ basic information or shareholdings could be filed only when the accumulated change of a foreign investor’s shareholding ratio exceeds 5% or its controlling position or relatively controlling position changes);
  4. Merger, division or termination (for those subject to announcement, a statement of the announcement status should be submitted);
  5. Mortgage and transfer of FIE’s interests in property;
  6. Early recovery of investment by foreign partners in Sino-foreign cooperative joint ventures; and
  7. Entrusted operation of Sino-foreign cooperative joint ventures.

Materials for filings

  1. Materials for pre-approval of enterprise name/business license;
  2. Letter of Undertaking to apply for establishment/change filings;
  3. Power of Attorney and Principal’s ID certificate;
  4. Power of Attorney and Principal’s ID certificate regarding procuration signature (if applicable);
  5. Certificates of investors' qualifications or natural person identity; and
  6. Certificate of the identity of legal representative.

Time limits

Within 3 business days; if supplemental materials are required, the filer will be notified once and for all to submit them online within 15 business days.

When filing is completed, the filer may collect a Filing Receipt with copies of materials for the pre-approval of enterprise name/business license.

Regulatory review

Spot checks, reviews due to whistleblower tips, reviews suggested by other departments, and ex officio reviews;

Information on an FIE’s or investors’ credibility revealed in the review is recorded in the credit file system for foreign investment, and shared by all departments.

Legal Consequences for wrongdoings

  1. For failure to submit filings in time or filings with significant omissions, a penalty of up to RMB30,000 will be imposed, if no corrections are made within a prescribed time limit, or if the wrongful filing is serious;
  2. A penalty of up to RMB30,000 will be imposed on a filer who conceals facts, provides misleading or false information, forges, alters, rents, lends or assigns its Filing Receipt, or engages in businesses on the Negative List without authorization. An order to make corrections within a prescribed time limit will be issued to the filer;
  3. Evasion and refusal of regulatory review is subject to an order to make corrections, and a penalty of up to RMB10,000; and
  4. Public officials who abuse powers, solicit and receive bribes in filings management are subject to administrative sanctions and criminal prosecution if criminal offences are found.

Other

  1. Applications for establishment or changes accepted before the Interim Measures' effective date will be suspended if they are not finished, and the filing regime will apply to them;
  2. Where antitrust issues are involved, relevant provisions apply;
  3. Where national security review is involved, relevant provisions apply; where an authority receiving filings believes a matter filed may be subject to national security review, the authority should promptly notify the investors to apply for security review with MOFCOM, and suspend all filing procedures;

4. Investment companies, venture capital companies are deemed to be foreign investors, and the Interim Measures apply;

  1. The Interim Measures apply mutatis mutandis where investors are from Hong Kong, Macau and Taiwan;
  2. Hong Kong and Macau service providers should invest only in the trade service sectors allowed under their respective agreements on trade in services, and their establishment and change filings are governed by the Administrative Measures for the Filing of Investment by Hong Kong and Macau Service Providers in the Mainland (for Trial Implementation);
  3. Relevant authorities in free trade zones and national economic and technological development zones should oversee FIEs and investors within their jurisdictions with regulatory review in accordance with the Interim Measures;
  4. Where inconsistency arises between existing MOFCOM provisions and the Interim Measures, the Interim Measures prevails;
  5. The Administrative Measures on Filing of Foreign Investment in the Pilot Free Trade Zones (Trial Implementation) will be repealed.

III.Exploring the Content of the Unexpected Negative List

As mentioned above, NDRC and MOFCOM jointly issued Announcement No.22 on the date the Interim Measures took effect This specified that the measures for admission of foreign investment (the “Negative List”) was to be in line with the Guiding Catalogue on Industries for Foreign Investment (2015 Revision) (the “Catalogue”) in regard to prohibited and restricted industries, with some encouraged industries being subject to relevant requirements for shareholdings and qualifications of executives. In other words, instead of establishing a nation-level separate, unified negative list for the transition to the filing regime, the authority simply adopted the three categories of industries under the Catalogue in effect (the “New Negative List”).

Both the FTZ Negative List and the New Negative List contain the prohibited, restricted and part of the encouraged industries in the Catalogue, showing a legislative trend to overlapping and convergence. Without detailing each list, an outline comparison of the two is as follows:

  • Prohibited industries. The New Negative List and the FTZ Negative List are essentially the same, with some exceptions like construction of golf courses and villas and the gambling industry, are only included in the New Negative List. Some other prohibited items, such as air transportation within China mentioned in the FTZ Negative List are not found in the New Negative List.
  • Restricted industries. The New Negative List and the FTZ Negative List are substantially the same. However, the restrictions in the FTZ Negative List are described in more detail while descriptions in the New Negative List are more general, especially when it comes to finance, transportation, storage and postal services. Take the financial industry for example. Compared with the New Negative List, the FTZ Negative List has more detailed descriptions of the types of organizations as shareholders of banks, the qualification requirements for the banking industry, restrictions on foreign invested banks and requirements for the establishment of insurers. In addition, some restrictions, are only included in the New Negative List such as the construction and operation of large-scale wholesale markets for agricultural products.
  • Encouraged industries. Both lists are basically the same with requirements on shareholding ratios and the identity of executives

While the New Negative List and the FTZ Negative List look to be substantially the same, they do differ in certain respects and it cannot be easily concluded that the access threshold set up by the New Negative List is lower or higher than that under the FTZ Negative List. Whether the Special Management Measures for Admission of Foreign Investment in the Pilot Free Trade Zones (Negative List) (the “FTZ Negative List”) promulgated in April 2015 will be repealed is not clarified in the Interim Measures or in the Announcement No.22 Therefore it is understood that the FTZs will continue to apply the FTZ Negative List and the New Negative List will apply outside the FTZs . For those industries listed only in the FTZ Negative List or with more detailed and specific restrictive requirements in that list, there might arise circumstances where approval procedures are required in the FTZs but not in other areas, or more restrictions are applied in the FTZs than outside.

There are two possible reasons for the absence of a separate and unified negative list. First, the one month period for public comment was too short for preparing a negative list that required extensive investigation and deliberation because it would be applicable to the whole country with a variety of complex environments. Second, taking into account the progress of bilateral investment treaties between China and the U.S., the EU and other countries and regions, it would be better to have a simple and unified negative list for the admission of foreign investment following the completion of negotiation for such bilateral investment treaties and the agreements reached. In addition to serving as the basis of a negative list, the Catalogue is expected to provide guidance on the catalogue of investment projects requiring government approval, division of power in NDRC-approved projects and regional preferential policies for foreign investment projects.

With the official establishment of the approval-free filing regime for foreign investment, and the announcement of an unexpected negative list, the “pre-establishment national treatment plus negative list” regulatory mode for foreign investment in line with advanced international practice has finally entered the implementation stage. As there is a long way to go before the country’s opening up and reform destination is reached, a large amount of regulation needs to be sorted out and coordinated, and many challenges and problems of uncertainty loom ahead. Nevertheless, when we are on the right track, we are not worried about how far we will go.

Editor’s note: this article was simultaneously published on Chinalawinsight.com