In 2014, Chinese lawmakers enacted and amended a series of laws, regulations and rules in many areas, covering issues such as company registration, foreign direct investment, outbound investment, foreign exchange, IP and labor. This special edition briefly highlights the most noteworthy of these. Please see our monthly legal flashes for more information and analysis here.
One of the most significant changes in 2014, from a corporate perspective, was the Amendment to the Company Law of the People’s Republic of China by the Standing Committee of the National People’s Congress approved on December 28, 2013 (the “Company Law Amendment”), effective March 1, 2014. The Company Law Amendment abolishes the requirements on minimum registered capital, unless established otherwise under laws regulating certain specific industries, a nd minimum ratio of cash contribution, as well as the statutory timeframe for capital contributions. This implies a reduction of financial burden on investors, who may now freely decide these issues by covering them in the articles of association. Given th e trend of relaxing government supervision of corporate governance, companies are expecting more regulatory reforms in the coming year.
A series of other regulations were adapted last year and brought into line with the Company Law Amendment, mainly affecting the regime for company registration in China:
- The State Council amended a series of administrative regulations, including the Regulations of the People's Republic of China on Registration Administration of Companies and the Regulations on the Administration of Enterprise Legal Person Registration of the People's Republic of China, to reflect the major changes introduced by the Company Law Amendment. As the requirement for registering the paid-in capital is lifted, the capital verification report is no longer compulsory except in specific cases.
- The State Administration for Industry and Commerce (“SAIC”) enacted the Administrative Provisions on the Registration of Enterprise Registered Capital, also effective March 1, 2014, removing the requirements for registering companies’ paid-in capital, but requiring companies to specify the timeframe for capital contribution in their articles of association.
- As these changes also affect foreign-invested enterprises, other regulations, such as the Detailed Rules for the Implementation of the Law on Wholly Foreign- Owned Enterprises, the Detailed Rules for the Implementation of the Law on Equity Joint Ventures and the Detailed Rules for the Implementation of the Law on Cooperative Joint Ventures, have been partially amended. However, the ratio of registered capital to total investment applicable to foreign-invested enterprises is not affected by these law amendments.
Along with the Company Law Amendment, the annual check system for enterprises has been replaced with an online public annual report system, as established in the Provisional Regulations on Enterprise Information Disclosure issued by SAIC on August 7, 2014, and effective October 1, 2014. Enterprises must now submit their annual reports by June 30 of the following year and report, within 20 days, any major activities, including capital contribution, change in shareholding, receiving or modifying administrative licenses, and any administrative sanctions imposed.
On November 4, 2014, the National Development and Reform Commission (“NDRC”) issued the draft Amendment of the Foreign Investment Industrial Guidance Catalogue (“Draft Catalogue”), introducing a series of amendments to one of the most important regulations in China’s legal framework o f foreign direct investment. The Draft Catalogue keeps its basic structure of dividing the industrial sectors for foreign investment into three categories: encouraged sectors, restricted sectors and prohibited sectors, and it also relaxes foreign investment restrictions in some areas:
- It includes new encouraged sectors, which are subject to approval and may benefit from special tax policies.
- It greatly reduces the restricted sectors and lifts the restriction on the foreign shareholding proportion of many of them, giving foreigners easier access to the service and manufacturing industries. For example, manufacturing of several chemical raw materials and chemical products are removed from the restricted sectors, so after the Draft Catalogue comes into force foreign investors will be able to run businesses in these sectors by setting up wholly foreign-owned enterprises.
- It reduces prohibited sectors, opening to foreign investment sectors that have long been closed, such as the processing of green tea and other special tea with traditional Chinese techniques.
The period for gathering public opinions on the Draft Catalogue is over. Whether it will be enacted in its current draft form remains to be seen.
Regulations were approved in 2014 to facilitate overseas trade and investment and relax current policies. The Administrative Measures for Verifying and Registering Outbound Investment Projects, which took effect on May 8, 2014, remove the requirement to secure NDRC approval and verification for most out bound investment projects, except for (i) major projects with a Chinese investment exceeding USD 1 billion and (ii) sensitive projects involving sensitive countries, regions and industries. Outbound investment projects that do not fall within these two categories are now only subject to a record-filing process with the applicable authorities. Effective October 6, 2014, the updated Administrative Measures for Outbound Investment set out the approval and record-filing procedures and applicable authorities for outbound investment projects, further defining the sensitive countries and industries subject to approval and simplifying the formalities of approval procedures in comparison with the former rules issued in 2009.
The State Administration of Foreign Exchange (“SAFE”) issued the Notice on Relevant Issues Concerning Foreign Exchange Administration for Offshore Investment, Financing and Round-Trip Investment Undertaken by Domestic Residents via Special Purpose Vehicles (“SPV”), known as Circular 37, on July 14, 2014. Circular 37 updates SAFE’s 2005 Circular 75 and broadens the definition of SPV to include the use of Chinese residents’ domestic and overseas assets and interests to receive financing and carry out investments overseas. Circular 37 also simplifies the formalities for registering SPVs with SAFE branches.
In 2014, SAFE also enacted key Provisions on Administering Foreign Exchange for Crossborder Guarantees, effective June 1, 2014. These provisions establish a comprehensive legal framework and, for the first time, divide the crossborder transactions relating to crossborder guarantees into three categories: (1) overseas loans with domestic guarantees; (2) domestic loans with overseas guarantees; and (3) other forms of crossborder guarantees. They establish the filing and registration obligations of the different parties in the crossborder guarantees (lender, borrower and guarantor) at different stages of the transaction; for example, when the parties enter the loan agreement with a guarantee or when the guarantor performs the guarantee obligation. Domestic institutions giving or accepting other forms of crossborder guarantees not identified as overseas loans with domestic guarantees or domestic loans with overseas guarantees can enter into guarantee contracts at their discretion, without going through formalities with governmental authorities.
The Standing Committee of Shanghai Municipal People’s Congress enact ed the Provisions of China (Shanghai) Free Trade Zone (“FTZ”) on July 25, 2014, effective August 1, 2014, covering aspects such as the management system, investment opening - up, trade facilitation, financial services, taxation administration, comprehensive regulation, and the legal environment of FTZ, which are mostly introduced by the General Plan on FTZ issued by the State Council on September 27, 2013.
Aiming to regulate extensively China’s booming electronic commerce, on January 26, 2014, SAIC published the Administrative Measures for Online Trading, effective March 15, 2014. The measures establish the operators’ obligations to register with AIC and obtain business licenses to be displayed on their websites. They also limit unfair practices and ensure online consumers’ rights to return purchases within seven days of receipt without giving a reason, in line with the new Law on the Protection of Consumer Rights published in 2013, and online consumers’ rights to data protection. The measures also establish the supervising roles and obligations of third-party operators of online trading platforms, such as Taobao, Tmall and Amazon, as well as their non -compliance liabilities.
On November 4, 2014, China’s International Economic and Trade Arbitration Commission (“CIETAC”) issued its new arbitration rules, effective January 1, 2015. This is the first significant development since CIETAC’s former Shanghai and Shenzhen sub -commissions declared their independence. In addition to reducing any ambiguities on the choic e of arbitration institution following the split, their main update is the adoption of an emergency arbitrator procedure mechanism to keep in pace with other leading worldwide international arbitration institutions.
Finally, from a labor perspective, and as analyzed in our “Legal Flash - Special Edition 2013,” the first comprehensive rules standardizing labor dispatch activities in China came into force on March 1, 2014. Other labor developments include the Supreme People’s Court provisions on several issues concerning hearing administrative cases of work related injury insurance, which clarify several applicable concepts.