In June 2014, the Ministry of Commerce (“MOFCOM”) and the State Administration of Foreign Exchange (“SAFE”) jointly promulgated the Circular Concerning Improvement of Filing Process for Foreign Invested Real Estate Enterprises (“Circular 340”), effective August 1, 2014. Pursuant to Circular 340, MOFCOM delegates to its provincial counterparts (collectively, “COFTEC”) the authority to review filing applications for foreign invested real estate enterprises (“Real Estate FIEs”), and simplifies the filing process. While how the simplified filing process will work at any particular COFTEC remains to be seen, we expect that the filing process for Real Estate FIEs to be significantly expedited in the near future.
Overview of Existing Filing Requirements for Real Estate FIEs
On July 24, 2006, six ministries of the People’s Republic of China (including MOFCOM and SAFE) jointly issued the Opinions on Regulating the Access to and Administration of Foreign Investment in the Real Estate Market (“Circular 171”). Circular 171 requires that foreign investors set up Real Estate FIEs to acquire real estate investments in China.
On May 23, 2007, MOFCOM and SAFE jointly issued the Circular on Further Strengthening and Regulating the Examination, Approval and Supervision of Foreign Direct Investment in the Real Estate Industry (“Circular 50”). Circular 50 requires the relevant COFTEC branch that approves a Real Estate FIE to transmit a copy of such approval to MOFCOM for filing, and states that MOFCOM may take corrective measures with respect to improper local approvals. This filing requirement effectively gave MOFCOM the power to substantively review and control COFTEC approvals of Real Estate FIEs.
On July 11, 2007, SAFE issued the Circular on the Issuance of the List of the First Group of Foreign-funded Real Estate Projects Approved by MOFCOM for Record by the General Affairs Department of SAFE (“Circular 130”). Under Circular 130, Real Estate FIEs were not permitted to convert foreign currency into RMB (or vice versa) without completing the MOFCOM filing requirements.
On June 13, 2008, MOFCOM issued the Circular Concerning Administration of Filing for Foreign Investment in the Real Estate Industry (“Circular 23”). Under Circular 23, MOFCOM authorized COFTEC to conduct substantive review of Real Estate FIE filing documents. After such review, a filing form, chopped by COFTEC and provincial government authority, was to then be submitted to MOFCOM for its filing.
From a practical standpoint, the foregoing requirements meant that a Real Estate FIE did not receive its MOFCOM/COFTEC approval until the relevant COFTEC filing had been accepted by MOFCOM. The acceptance of such filing was not merely an administrative matter, but represented another necessary Real Estate FIE approval.
Summary of Circular 340
- Simplified Filing Process
- Under Circular 23, although the relevant COFTEC branches were empowered to conduct substantive Real Estate FIE filing review, a provincial government authority sign-off was necessary and, more importantly, MOFCOM’s acceptance for filing was required as the final step for any Real Estate FIE to receive government approval. Under Circular 340, however, MOFCOM delegates to the relevant COFTEC branches the power to review filing materials submitted by Real Estate FIEs – if the relevant COFTEC branch determines that the filing materials are in order, such COFTEC branch can directly complete the Real Estate FIE filing without approval, acceptance or sign-off of either the provincial government authority or MOFCOM.
- After the relevant COFTEC branch completes a Real Estate FIE filing, Circular 340 simply requires such branch to transmit the electronic data in respect of such Real Estate FIE to MOFCOM via their internal online system, as opposed to filing a paper form as previously required under Circular 23.
As a practical matter, it is exceedingly unlikely that a COFTEC branch will reject the filing application of any Real Estate FIE with respect to which that COFTEC branch has granted approval. Therefore, after the August 1, 2014 effectiveness of Circular 340, we expect that the Real Estate FIE filing will become merely an administrative matter, instead of the approval that it currently is.
- Random Check by MOFCOM
- MOFCOM will, on both a weekly and quarterly basis, perform a random check on Real Estate FIEs which have passed filings with the relevant COFTEC.
- Real Estate FIEs which have been filed by COFTEC, except for those which fail to pass MOFCOM’s above-referenced checks, will be published on the official website of MOFCOM and, thereafter, will be permitted to convert foreign currency into RMB (or vice versa).
Prior to the promulgation of Circular 340, it was not uncommon for it to take six months or longer to complete the MOFCOM filing in respect of the establishment of, or a capital increase or transfer of an equity interest with respect to, a Real Estate FIE. In certain cases we are aware that parties have canceled prospective transactions given the uncertainty of either completing the MOFCOM filing or the expected length of time for completion, notwithstanding the receipt of approval from the relevant COFTEC branch.
Circular 340 significantly simplifies the filing requirements for Real Estate FIEs, removing both the provincial government’s sign-off and the MOFCOM acceptance for filing requirements. This is positive news for foreign investors in Chinese real estate, and appears to be a signal from the Chinese central government to the market that existing restrictions on foreign real estate investments are being loosened.