A New Era of China's Foreign Investment Regime

On September 3, 2016, the Standing Committee of the National People’s Congress (NPC) adopted the Decision on Revising Four Laws, Including the Law of the People’s Republic of China on Wholly Foreign-Owned Enterprises (《全国人民代表大会常务委员会关于修改<中华人民共和国外资企业法>等四部法律的决定》) (NPC Decision). On October 8, 2016, China’s Ministry of Commerce (MOFCOM) further issued the Provisional Administrative Measures on the Establishment of and Changes to Foreign-Investment Enterprises (《外商投资企业设立及变更备案管理暂行办法》) (Filing Measures) which took effect immediately. On the same date, MOFCOM and the National Development and Reform Commission jointly issued Announcement [2016] No. 22 to further clarify the NPC Decision (Announcement 22, collectively with the NPC Decision and the Filing Measures, “New FIE Rules”).

Previously, establishment of an FIE and its subsequent corporate restructurings would require  MOFCOM or its local counterpart’s approval (MOFCOM Approval) and then a registration with the Administration for Industry and Commerce or its local counterpart (AIC) to obtain a business license or an updated business license. This two-tier review system may take two to three months to complete. MOFCOM’s substantive review of the application files or transaction documents for M&A deals would not only prolong the whole process but also add uncertainties to a transaction. These New FIE Rules lifted the MOFCOM Approval process for the establishment and corporate changes of foreign invested enterprises (FIE) in China, which had been in place for over three decades. The MOFCOM Approval process for industries that are not identified as restricted or prohibited to foreign investment has now been replaced with a new online filing system. This marks a new era of China’s Foreign Investment Regime. 

Highlights of these New FIE Rules include the following:

Scope of Application

• There is an important carve-out for the application of these New FIE Rules – known as the “Negative List”: those foreign investments in industries that are subject to special administrative measures, namely industries that are identified in the Foreign Investment Industrial Guidance Catalogue (2015 Revision) (《外商投资产业指导目录（2015年修订）》) as (i) restricted or prohibited to foreign investments, and (ii) encouraged to foreign investments but subject to minimum Chinese shareholding or management personnel requirements. This Negative List covers certain industries which are of great interest to foreign investors, such as telecommunication, medical and education institutions etc. All industries that are not identified on the Negative List are broadly covered by these New FIE Rules.

The New Record Filing Regime

• MOFCOM Approval is no longer required for greenfield investments in those industries that are not named on the Negative List. Instead, foreign investors are required to file through MOFCOM’s online system certain basic information relating to the FIE and its investors within 30 days after the issuance of the FIE’s business license at latest. As an FIE is generally able to conduct business after obtaining its business license, removing the MOFCOM Approval process would significantly reduce the time and uncertainty in putting up an FIE and get it running in China.
• The joint venture contracts (JVC) of an FIE and its articles of association (AOA) are no longer subject to the approval of MOFCOM before they can take effect. Previously, the JVC and AOA of an FIE typically looked like a standard format document because of the MOFCOM Approval requests. Anything not specifically mentioned by law or language that was inconsistent with MOFCOM’s standard language were likely to be pushed back. With the implementation of these New FIE Rules, we expect that foreign investors would have a lot more flexibility to structure their transaction documents.
• Corporate restructurings such as increase of registered capital, change of business scope, AOA amendment, dissolution, etc. are no longer subject to MOFCOM’s approval. These corporate actions would generally take effect upon the adoption of corporate resolutions. FIEs just need to make a filing through the MOFCOM online platform within 30 days after these corporate acts occur.
• The MOFCOM record filing process has been streamlined. MOFCOM will generally conduct a cursory review of the submitted paperwork to ensure their completeness and accuracy. This record filing will be completed within three business days after MOFCOM’s receipt of the full set of required documents. Note, however, MOFCOM may decide whether the transaction triggers a national security review. Also, MOFCOM has the discretion to conduct random spot checks to verify compliance. Findings of non-compliance may be shared with other regulatory authorities for FIEs, such as custom, tax, SAFE, AIC, etc. Violation of these New FIE Rules may result in an administrative penalty of up to RMB 30,000.   
• Required paperwork for the MOFCOM record filing has been simplified, but foreign investors must disclose their “ultimate controller” of the FIE. This is in line with the spirit in the draft PRC Foreign Investment Law which was issued in early 2015, aiming at looking through to the ultimate shareholder/controller of an FIE to determine foreign ownership. Additionally, the legal representative of an FIE must sign an affidavit certifying the completeness, authentication and accuracy of the submitted files, as well as compliance with PRC laws and regulations.

M&A Transactions 

• MOFCOM Approval is no longer required for acquisition of FIEs in China that are not covered by the industries named on the Negative List. Instead, the target company just needs to file relevant information via the MOFCOM online platform within 30 days after the acquisition. Note, however, for acquisitions of domestic Chinese companies, those government approval requests under the Regulation on Foreign Investors Merging with or Acquiring Domestic Enterprises (《关于外国投资者并购境内企业的规定》) shall still apply. This essentially means the transaction documents for the acquisition of domestic companies shall continue to be subject to the substantive review and approval by MOFCOM.

Conclusion

By reducing the burdensome MOFCOM Approval requests and implementing the simplified record-filing system nationwide, the New FIE Rules picture a new regime which is likely to lead to a more efficient and transparent legal system for FIEs in China. That said, there is a way to go to amend the existing conflicting regulations and for the various government authorities to align their practices to a truly streamlined process for FIEs’ establishment and corporate changes in China.