Since 1 October 2016, foreign-invested enterprises looking to establish in China have not needed to obtain government approval, but undergo an online filing process instead.
On 3 September 2016 China passed the Decision of the Standing Committee of the National People’s Congress on Revising Four Laws including the Law of the People’s Republic of China on Wholly Foreign-owned Enterprises (Decision) to foster greater openness with Foreign Invested Enterprises (FIE). The Decision eliminates the requirement to obtain government approval to establish certain FIEs, providing a simpler online filing process which took effect on 1 October 2016.
The amendment retains the current “Negative List” approach in the four pilot-free trade zones of Shanghai, Guangdong, Tianjin and Fujian. The list is dictated by the State Council circumscribing certain business activities that still require government approval prior to incorporation. If the business activity falls outside the scope of the list, the FIE would only need to undergo the filing process.
In tandem with the issuance of the NPC Decision, the Ministry of Commerce (MOFCOM) issued the Interim Measures for Record-Filing Administration for Establishment and Change of Foreign-Invested Enterprise (Draft Measures) to seek public comments on the implementation of the record filing system to be submitted before 22September 2016. The Draft Measures, finalised for promulgation on 1October 2016, clarify certain pertinent issues for interested businesses:
- Who can apply? All FIEs can apply for record filing, this includes wholly foreign-owned enterprises, foreign invested investment holding companies, foreign invested venture capital companies and foreign invested equity investment enterprises as well as enterprises invested by investors from Hong Kong, Macau and Taiwan.
- When should filing be carried out? For the establishment of an FIE, the Draft Measures allows foreign investors to undergo record filing procedures for the established enterprises before the issuance of the business license by the Administration for Industry and Commerce (AIC) or within 30 days after the issuance of the business license. Regarding changes to an FIE, the Draft Measures clarifies that record filing should be undertaken within 30 days after these changes occur.
- How long will record filing take? In contrast to the current approval system where approval could take between 10 to 20 working days, record filing should be completed within three working days from online submission.
- What documents are required for filing? The filing can now be done through a consolidated online information system for the purposes of administrating foreign investment. Under this system, the main document to be submitted is an online application form providing key information on the investors and the FIEs. Documents such as the articles of association, joint venture contract and feasibility study reports are no longer subject to review and approval by MOFCOM.
- Are there any additional submissions required? The Draft Measure envisions two situations which require additional submissions. These situations can occur even if the business activity is not within the Negative List.
Firstly, if the foreign investment involves antitrust matters, the investor may need to make additional submissions based on the relevant regulations. Secondly, when the application involves matters involving national security, the investor would have to make an application for national security review to the MOFCOM.
- What is the post-filing process? After the online form is submitted, the authorities will verify the completeness and accuracy of the information. If it falls within the scope of record-filing, it can be completed within three working days. If there are inaccuracies or incompleteness, the FIE shall submit the required information within 15 days. Failure to do so will result in a failed application.
- What are the consequences of wrongful filing? In the event of a breach of the record filing measures, a fine may be imposed ranging from one to three times the amount of illegal income, although it is capped at RMB 30,000. A breach covers situations such as, providing false or misleading information, conducting activities listed in the Negative List without prior approval or failing to make record filing on time.
- Do existing FIEs need to submit their records? With regard to existing FIEs, there is no obligation foisted on them to submit their records. However, if there is any change to the FIE, the existing FIE should complete online filing.
Despite the simplified procedures for establishing a FIE, the FIE still needs to retain some documents in order to be submitted to the AIC for registration and issuance of the business license.
The impact of the Draft Measures is illustrated in the table below:
Click here to view table.
The amendments indubitably ease the process of doing business in China for foreign investors and the working days required for record filing will be significantly shortened. This, however, does not take into account the possible time delay that could occur in the event of any incompleteness or inaccuracies of documents submitted.
During the transition period, the filing process can take longer than the prescribed period as the authorities require some time to adjust to the new system.