SAFE's new rules on foreign debt registrations
New rules on foreign debt registrations aim to clarify uncertainties in the Chinese foreign debt regime. The rules, published by the State Administration of Foreign Exchange (SAFE), aim to streamline SAFE's administration concerning foreign currency inflow and outflow.
The changes arise from, among others, SAFE's adoption of a new IT system, which allows it to be interconnected with systems of all banks in China. SAFE's new approach is to register a company's basic information in the centralised IT system, e.g. registered capital and total investment, and to have the other procedures handled by banks directly, e.g. opening a capital account, payment of contribution. As a result, SAFE will be less involved in routine registration of foreign debts, foreign direct investments (FDI) and outbound direct investments (ODI). The procedures handled by banks remain subject to other authorities' approvals, if applicable. More specifically, the main changes are:
- Companies no longer have to obtain SAFE approval for opening foreign debt accounts, registration for each withdrawal, converting foreign debts into RMB and repayment of the principal and interest. Only foreign debt agreement registration will be handled by SAFE, while the rest will be handled by banks.
- Certain requirements will be eased. For instance, a foreign invested enterprise (FIE) can now open more than one foreign capital account, also in places other than its place of registration.
- Previously, SAFE required approximately 20 business days to handle a single registration application. Under the new rules, SAFE should be able to handle an application within 5 business days.
Regulation reference: Circular on Administrative Measures on Registration of Foreign Debts (Circular No. 19); and Circular on Administrative Provisions on Foreign Exchange in Domestic Direct Investment by Foreign Investors and Relevant Supporting Documents (Circular No. 21)
Issuing authority: State Administration of Foreign Exchange
New tax treaty between China and the Netherlands
The People’s Republic of China and the Government of the Kingdom of the Netherlands signed a new double taxation treaty (DTA) on 31 May 2013. The new treaty - which still has to be ratified by both countries and has thus not yet entered into force - replaces the current treaty that entered into force in 1987. It is to a large extent modelled on the 2010 OECD Model Convention. The new treaty will further improve the economic ties between the Netherlands and China, providing a favourable basis for Dutch companies to enter or further expand their activities in China.
Distinctive features of the new DTA are:
- In accordance with the 2010 OECD Model Convention, the DTA provides that a building site or construction or installation project constitutes a permanent establishment only if it lasts more than 12 months. Under the current double taxation agreement such site or project already constitutes a permanent establishment if it lasts more than 6 months.
- The DTA provides for a reduction of withholding tax to 5% on dividend payments arising in one state and paid to a beneficial owner of the income concerned that is resident in the other state, if the receiving entity holds directly an equity interest of at least 25% in the in the paying entity. In all other cases each country may only levy 10% withholding tax. The People’s Republic of China's domestic dividend withholding tax rate is 10% and the Netherlands domestic rate is 15%.
- The DTA includes a specific anti-abuse provision disallowing a reduction of withholding taxes on dividends if the main motive, or one of the main motives, is to set up a specific structure to benefit from the DTA.
The right to tax capital gains is generally allocated to the jurisdiction of which the company realising the gain is a resident, but the other jurisdiction may – subject to certain limited exceptions – also tax such capital gains if they are derived from the alienation of either of the following:
- shares in a company deriving more than 50% of its value directly or indirectly from real estate situated in that other jurisdiction
- shares in a company if the company realising the gain directly or indirectly held at any time in the period of 12 months prior to the sale an equity interest of at least 25% in the company of which the shares are sold.
Regulation reference: Agreement between the Netherlands and the people's republic of China for the avoidance of double taxation
Issuing authority: The People's Republic of China and the Government of the Kingdom of the Netherlands
Lessons from recent MOFCOM merger decisions
The Ministry of Commerce (MOFCOM) recently decided on two merger filings: Glencore/Xstrata and Marubeni/Gavilon. These cases show that in global transactions involving commodities which are strategically important to China:
- MOFCOM can take significantly more time to review the merger filing than regulators in other jurisdictions
- MOFCOM is willing to find market power and to intervene at relatively low market share levels
- MOFCOM seems confident in taking a different approach than regulators in other jurisdictions, including imposing behavioural remedies without a stipulated termination date.
Glencore/Xstrata and Marubeni/Gavilon recorded the first and third longest review timelines among MOFCOM’s cases to date (13 and 10 months, respectively). Both involved the withdrawal and re-filing of the respective notifications. This emphasises the need for merger parties to plan and prepare the filing procedure with the utmost care.
In both cases, the parties did not reach a significant combined market share. In Glencore/Xstrata, the parties' combined market shares in the relevant markets for zinc, lead and copper concentrates were lower than 18%. In Marubeni/Gavilon, Marubeni’s market share in the imported soya bean market in China was approximately 18% and Gavilon’s share is estimated to be less than 9%. Despite these low market shares, each transaction was subject to a long review process and remedies.
In both decisions, MOFCOM referred to China’s dependence on the import of the relevant products. In Glencore/Xstrata, imported copper concentrate, zinc concentrate and lead concentrate accounted for 68.5%, 28.7% and 27.3% respectively of the total supply of the three products in China in 2011. In Marubeni/Gavilon, 80% of soya beans sold in China were imported in 2012 and MOFCOM even defined the imported soya bean market as a distinct product market. Although MOFCOM did not explicitly present China’s reliance on imports as a concern, its decisions are nonetheless indicative that transactions involving strategically important industrial and agricultural raw materials, the import of which China relies heavily on, may be subject to stricter scrutiny by MOFCOM.
The conditions imposed by MOFCOM indicate its confidence in taking a different, if not stricter, approach to remedies as compared to those taken by other major regulators. Also, MOFCOM continues to demonstrate a willingness to accept various types of remedies.
The Marubeni/Gavilon deal was unconditionally cleared in every other jurisdiction. MOFCOM, however, imposed a complex hold-separate behavioural remedy for the third time, requiring the parties to establish two separate and independent soya bean trading subsidiaries to handle their respective soya bean exports to China. MOFCOM's decision remained silent as to how long the hold-separate provisions are to remain in place. The Glencore/Xstrata deal was cleared in Europe with behavioural remedies and the divestiture of a minority shareholding by Glencore. MOFCOM imposed both structural remedies (divestiture of Glencore's Peruvian Las Bambas copper mine) and behavioural remedies (guaranteed minimum amount of offer with a benchmark price for a period of eight years). In requiring the divestiture of the Las Bambas copper mine project, MOFCOM also for the second time adopted the ‘crown jewels’ approach, a mechanism that requires parties to dispose of an alternative set of assets if they fail to divest of the original asset package on time. If Glencore fails to find a suitable buyer for Las Bambas within the designated timeframe (i.e. 30 September 2014), MOFCOM will require it to sell an alternative copper mining asset in Latin America or South-East Asia without a reserve price.
New MOFCOM guidelines on simple mergers and on remedies
MOFCOM has released two draft regulations for public comments, aimed at streamlining and clarifying its merger review process. The first is the Simple Mergers Regulation, which addresses the types of mergers which would be considered as raising little or no significant competition issues. The second is the Restrictive Conditions Regulation, which addresses structural, behavioural and hybrid remedies for concentrations.
Simple Mergers Regulation
The Simple Mergers Regulation is a first step towards the creation of a simplified procedure for cases that are not likely to raise competitive concerns. The transactions that will be regarded as "simple" are:
- Mergers between competitors if the combined market share is below 15%
- Mergers in which parties have a vertical relationship, and their combined market share in the relevant upstream and downstream markets is below 25%
- Mergers in which parties have no horizontal or vertical relationship, and their combined market share in any market is below 25%
- Creations of off-shore joint ventures or acquisitions of off-shore targets with no business in China
- Reductions of the number of controlling shareholders of a joint venture.
These thresholds are similar to those used for simplified procedures in the EU. There are, however, significant exceptions that provide MOFCOM with the discretion to perform an in-depth review, for example when it is difficult to define the market or where a merger may harm Chinese national economic development. Also, it is not fully clear what benefits a simple merger will actually enjoy since the Regulation does not provide for e.g. a shorter or simplified notification form.
Restrictive Conditions Regulation
The Restrictive Conditions Regulation provides guidance for merging parties to propose remedies. MOFCOM's remedy procedures are similar to the remedy procedures in the EU and the US, although MOFCOM seems to maintain a broader discretion in assessing, modifying and enforcing remedies. The Regulation clarifies a number of important aspects in the remedies process, especially with respect to behavioural and hybrid remedies. Based on recent decisions, MOFCOM does not seem to have a general preference for structural remedies (unlike the EU and the US). The Regulation does not provide detailed guidance on the procedures and timeline with regard to implementation.
Regulation reference: Regulations on Standards Employed for Simple Concentrations of Undertakings
Issuing authority: Ministry of Commerce
Regulation reference: Regulations on Imposing Restrictive Conditions on Concentrations of Undertakings
Issuing authority: Ministry of Commerce
Chinese Government expands RMB qualified foreign regime
The Chinese government has always held a tight grip on the cross-border movement of Renminbi (RMB), but over the last years it has been slowly easing restrictions. The latest step in this process is a revised RMB qualified foreign regime which permits offshore-raised RMB to be invested in Chinese companies by Chinese private equity funds and managers.
In 2002, the Qualified Foreign Institutional Investor (QFII) scheme was introduced to enable specified types of foreigners to use their offshore foreign currency for investment in the Mainland’s securities market. In 2011, the RMB Qualified Foreign Institutional Investor (RQFII) scheme was introduced as a modified version of the QFII scheme, which facilitates the use of RMB held outside the Mainland for investment in the Mainland’s securities market. The recent changes to the QFII and RQFII rules harmonise the two schemes to a large extent, and expand their scope.
The key changes under the revised rules in 2013 are the following:
- The scope of eligible applicants has been expanded to include Hong Kong subsidiaries of Chinese commercial banks and insurance companies, and financial institutions which are registered in Hong Kong and with principal places of business in Hong Kong.
- The scope of permitted investment has been expanded to include stock index futures and fixed income products traded on the inter-bank bond market.
- SAFE has imposed stringent requirements on RQFIIs other than open-ended funds (e.g. investment deadline, recycle of investment quota, lock-up period, repatriation restrictions).
- RQFIIs are required to set up separate designated accounts with onshore custodian banks for trading in domestic stock exchanges and the inter-bank bond market, and for trading of stock index futures.
Regulation reference: The Pilot Measures on Securities Investment in Mainland China by Renminbi Qualified Foreign Institutional Investors
Issuing authorities: China Securities Regulatory Commission (CSRC), People's Bank of China (PBOC), and State Administration of Foreign Exchange (SAFE)
Regulation reference: The Provisions on the Implementation of the Pilot Measures on Securities Investment in Mainland China by Renminbi Qualified Foreign Institutional Investors
Issuing authority: China Securities Regulatory Commission (CSRC)
Update on the CIETAC dispute
The persistent internal struggle between the China International Economic and Trade Arbitration Center (CIETAC) and its Shanghai and South China sub-commissions has reached a new phase, now that the sub-commissions have split off into the Shanghai International Arbitration Center (SHIAC) and the Shenzhen Court of International Arbitration (SCIA). Although various questions remain with respect to existing arbitrations and arbitration clauses, the new developments do clarify how to address arbitration clauses in new contracts.
The secession of the Shanghai and Shenzhen sub-commissions is the result of a dispute that started in early 2012, when CIETAC introduced a new set of arbitration rules. In response to their dissatisfaction with the new rules, the Shanghai and Shenzhen sub-commissions declared themselves to be independent arbitration commissions, on 30 April 2012 and 16 June 2012 respectively. We previously reported on this in the August 2012 China Update.
This is the current situation:
- For new arbitration clauses to be executed, parties can select to submit their disputes to one of the three arbitration institutions by copying a clause to that effect from the respective Model Arbitration Clauses. Alternatively, parties can refer their disputes to any other arbitration institute in China by using the relevant clauses as prescribed by those institutes.
- For existing arbitration clauses which designate CIETAC Shanghai or CIETAC South China as arbitration institution, the situation is unsure. SHIAC and SCIA are willing to accept referrals to CIETAC Shanghai or CIETAC South China, respectively. Local regulators support this view. CIETAC Beijing, however, has strongly opposed to such interpretation. If feasible, parties should therefore amend and clarify the contract. If modification is not feasible, parties run the risk that wherever they instigate arbitration proceedings the other party will challenge the submission.
- On-going cases that have been submitted to CIETAC Shanghai (now: SHIAC) or CIETAC South China (now: SCIA) prior to the start of the "jurisdictional turf war" will also remain subject to debate. This has been proven by two local Chinese courts making opposite rulings on the same issue. On the one hand, a local court in Shenzhen has upheld a decision of the SCIA where the agreement designated CIETAC South China. On the other hand, a local court in Suzhou ruled that SHIAC, after its separation from CIETAC, had no right to continue to hear and render an award over a case in which the agreement designated CIETAC Shanghai. This stresses that a tailored approach is required for any arbitration at these institutes.
China Supreme Court clarifies enforcement of non-compete covenants
Employers in China are under a statutory obligation to compensate employees for observing non-compete obligations after termination of the employment. Until recently, it was uncertain how much compensation the employer was required to pay. Some local regulations provided for indicative percentages, but most did not. A new interpretation from the Supreme People's Court of China now provides that if a non-compete covenant is agreed, but the labour agreement or confidentiality agreement does not provide for compensation, the court can award compensation up to 30% of the employee's salary.
It is not clear from the interpretation whether the 30% compensation is meant to be a minimum standard of compensation or whether the parties can agree by contract to a lower compensation standard. Also, the interpretation does not apply if local regulations provide for higher standards. In Shenzhen, for example, the local protection provides for a minimum of 50% of the employee’s average monthly salary of 12 months prior to the employee’s leaving to be paid by the employer.
Regarding termination of the non-compete agreement, the interpretation clarifies that an employer may terminate the agreement during the non-compete period, but in that event the employee is entitled to claim an additional three-month compensation from the employer. An employee can request a court to remove his/her non-compete obligations, but only if the employer fails to pay the compensation for three months.
Regulation reference: Judicial Interpretation IV on Several Issues Concerning the Application of Law in Hearing Labor Dispute
Issuing authority: China Supreme Court
Chinese Government enhances data protection
Two recent moves indicate that China is taking significant first steps on enhancing personal information protection. The National People’s Congress adopted a Decision on strengthening online information protection and China’s first national Guidelines on personal information protection became effective.
The Decision, which has the force of law, provides principles and requirements for primarily internet service providers in collecting and using personal electronic information. These requirements include:
- explicitly indicating the purpose, manner and scope of collecting and using such information
- obtaining the consent of users whose information is collected
- publishing policies for collecting and using such information
- not divulging, distorting or destroying such information
- not selling or illegally providing others with such information
- adopting technological and other necessary measures to protect personal information.
The wording of the Decision suggests that its application is not necessarily limited to internet service providers, but may potentially also apply to entities in general to the extent that they collect or use individuals' electronic information during their business activities.
Violators and responsible individuals can potentially be subject to a ban on engaging in web-related business activities, as well as to administrative, civil and even criminal sanctions.
The Guidelines apply to all companies processing personal information and to a great extent mirror the European Privacy Directive. While the Guidelines do not have the force of law, they serve as an important guidance document for China’s future law-making.
According to the Guidelines, handling (including collecting, processing, transferring and deleting) of personal information must be for specific, clear and reasonable purposes, and must be subject to the permission of the user, who must be well informed in that respect. Information must be deleted once its intended use has been fulfilled.
Both the Decision and the Guidelines take a relatively restrictive position on the transfer of personal information between companies. This could create difficulties for multinational corporations relying on third-party data processing companies or routinely sharing information between affiliates. Companies will therefore need to give close attention to their compliance with regard to intra-company data transfers.
Regulation reference: Decision on Strengthening Online Information Protection
Issuing authority: Standing Committee of the National People's Congress
Regulation reference: Guide of Personal Information Protection on Information Security Technology
Issuing authority: The Government of the Republic of China
Domestic anti-bribery enforcement on the rise
Chinese anti-bribery efforts previously focused primarily on the bribe-taker. This is changing, as the focus is more on bribe-givers based on interpretations of China's anti-bribery law, as recently issued by the China Supreme Court. This development could affect foreign companies dealing with Chinese government officials.
The new interpretations deal with the punishment of bribe-givers. They also provide precise financial thresholds to guide local courts in determining the severity of a bribery offence. The key elements are the following:
- Any person who bribes government officials for RMB 10,000 or more will be investigated for criminal liabilities.
- A "serious" offender could be sentenced to 5-10 years. Circumstances that will be considered "serious" include giving a bribe ranging from RMB 200,000 to RMB 1,000,000, or giving a bribe ranging from RMB 100,000 to RMB 200,000 and coupled with certain specific circumstances which are described below.
- A "very serious" offender could be sentenced from 10 years to life imprisonment. Circumstances that will be considered "very serious" include giving a bribe exceeding RMB 1,000,000, or giving a bribe ranging from RMB 500,000 to RMB 1,000,000 and coupled with certain specific circumstances which are also described below.
- Specific circumstances include (a) bribing government officials in charge of administration of foods, drugs, product safety, and environmental protection, which seriously harms the public interest and jeopardises people's lives and properties, and (b) bribing government officials in administrative enforcement and judicial bodies which impairs the justice of administrative enforcement and judicial activities.
- The term "government officials" may include employees of state-owned enterprises and joint ventures in which state-owned enterprises participate.
- If an individual or company that commits bribery but voluntarily reports this bribery before being prosecuted, the punishment for the crime may be reduced.
Regulation reference: Interpretations of Several Issues Concerning the Specific Application of the Law in the Handling of Criminal Bribery Cases(Judicial Interpretation)
Issuing authority: China Supreme Court and the Supreme People's Procuratorate