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A View from China: China Simplifies its Foreign Direct Investment Regulatory System

On Sept. 3, 2016, the Standing Committee of the National People’s Congress issued its decision to amend the four statutes regarding enterprises funded by foreigners and Taiwanese investors, namely, the Foreign-Invested Enterprise Law, the Foreign-Sino Equity Joint Venture Law, the Foreign-Sino Contractual Joint Venture Law, and the Investment Protection Law for Taiwanese Compatriots. The amendment, taking effect from Oct. 1, 2016, will formally replace the existing approval regime with a filing system in respect to the establishment, certain changes and dissolution of foreign-invested enterprises (FIE). Also on Sept. 3, to enforce the proposed filing system, the Ministry of Commerce (MOFCOM) published its for-comment draft of the Interim Administrative Measures on Filing of Establishment and Change of Foreign-Invested Enterprises (the Draft Measures). Comments on the Draft Measures were accepted by MOFCOM until Sept. 22, 2016. A few key points of the Draft Measures are highlighted below.

  • Reduced Paperwork and Shortened Time for Filing

Under the existing approval regime, foreign investors must obtain approval from MOFCOM in advance of obtaining a business license from the Administration of Industry and Commerce (AIC). At this time MOFCOM reviews and approves various paper documents submitted by the investors, including joint venture contracts and the articles of association of the FIE. The whole process may take up to a few months. In contrast, under the proposed filing system, investors are permitted to complete the filing either before obtaining a business license from AIC, or within 30 days after obtaining the business license from AIC, and the filing can be done through an online system. According to the Draft Measures, MOFCOM shall complete the filing within 3 business days. In the past three years, a trial filing system was already in place for both foreign investors investing within the “free trade zones” of Shanghai, Tianjin, and the Guangdong and Fujian provinces, and for Hong Kong investors investing in the Guangdong province. The trial programs, according to a MOFCOM representative during a news conference shortly after the release of the Draft Measures, has saved 90 percent of paper materials and shaved more than two weeks off the process for the benefit of foreign investors.

  • Scope of the Filing System and the Proposed Negative Sheet

The proposed filing system will apply to the establishment of any corporations wholly or partially owned by foreign investors, as long as the investment does not fall within the Special Administrative Measures for Market Access, i.e., the “negative sheet” to be published by the State Council. Investment projects falling under the scope of the “negative sheet” will nevertheless be subject to MOFCOM’s examination and approval. However, no such negative sheet has been published in association with the amendment or Draft Measures, and it is speculated that the “negative sheet” contemplated under the Draft Measures will duplicate or resemble the list published by the State Council in April 2015, applicable to the “free trade zones” (FTZ Negative Sheet). The FTZ Negative Sheet sets out 49 specific industries under which foreign interest is prohibited, restricted to the form of joint ventures with Chinese investors, or is limited to a certain percentage.

Filing System Applicable to FIE Changes

The Draft Measures further require an FIE to file with MOFCOM changes to the following within 30 days after such change has occurred:

i.The FIE’s basic information, including its name, address, registered capital, composition of constituent institutions;

ii.The investor’s basic information, including its name and nationality, way and time of capital contribution, change or pledge of equity interest or shares, merger, acquisition, and termination;

iii.Transfer or pledge of corporate assets;

iv.Earlier retrieval of investment by investors from contractual joint ventures; and

v.Entrusted management of contractual joint ventures.

It is noteworthy that the Draft Measures mandate investors to disclose the “ultimate controller” of an FIE and file with MOFCOM any change thereof. However, the Draft Measures do not provide a definition or guideline to identify such “ultimate controllers.”

Enforcement of Filing System and Punishment

MOFCOM promised to enhance post-filing supervision of FIEs. The Draft Measures authorize MOFCOM to randomly select FIEs through a lottery system for inspection, which can include requesting and examining related materials of the FIEs. The FIEs who fail to comply with the filing requirements will be compelled to complete the filing, or in cases of repeated contraventions or other extreme scenarios, will be subject to a monetary fine of no more than RMB 30,000. The FIEs who violate the restrictive and prohibitive provisions under the negative sheet will be subject to a fine of no more than RMB 30,000 and the prohibited/restricted activity will be discontinued.

Despite the simplification, the amendment and the Draft Measures leave many other issues unanswered, such as whether the filing system will apply to a foreign investor’s acquisition of existing domestic corporations, whether the Catalogue of Industries for Guiding Foreign Investment will be repealed, and how to define and identify the “ultimate controller” of an FIE. To answer such questions, MOFCOM is expected to promulgate new regulations and alter, and even repeal, certain existing regulations concerning the FIE regulatory system in the near future.

  • Decision of the Standing Committee of the National People’s Congress to Amend the Four Statutes including the Foreign Invested Enterprise Law of the People’s Republic of China

  • 务委员会关于修改《中华人民共和国外资企业法》等四部法律的决定

    Issuing Authority: the Standing Committee of the National People’s Congress

  • Date of Issuance: September 3, 2016 / Effective Date: October 1, 2016

  • Interim Administrative Measures on Filing of Establishment and Change of Foreign-Invested Enterprises (Draft for Comment)

  • 资企业设立及变更备案管理暂行办法(征求意见稿)

  • Issuing Authority: Ministry of Commerce
  • Date of Issuance: Sept. 3, 2016 / Deadline for Comment: Sept. 22, 2016