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13 Sep 2016

Interpretation of the New Measures on Record-Filing Regime for the Establishment and Change of Foreign-Invested Enterprises

On 3 September 2016, the Standing Committee of the National People’s Congress (Standing Committee of the NPC) adopted the Decision of the Standing Committee of the NPC on Revising Four Laws including the Law of the People’s Republic of China (PRC) on Wholly Foreign-Owned Enterprises (Decision, effective as of 1 October 2016), changing the approval regime to a record-filing regime for the establishment and change of foreign-invested and Taiwan-invested enterprises which do not involve special investment restrictions prescribed in the Law of the PRC on Wholly Foreign-owned Enterprises, the Law of the PRC on Sino-Foreign Equity Joint Ventures, the Law of the PRC on Sino-Foreign Cooperative Joint Ventures, and the Law of the PRC on the Protection of the Investments of Taiwan Compatriots.

I. Background

For over 30 years, governmental approval had been required for the establishment and change of foreign-invested enterprises (FIEs). During this period, China also developed foreign investments through a negative list system in the four pilot free trade zones (FTZs) in Shanghai, Guangdong, Tianjin and Fujian, adopting a record-filing regime for the establishment and change of FIEs which do not trigger the state’s special investment restrictions. The Decision extends the record-filing regime that has been implemented in FTZs throughout the entire country, which is a significant step for the reform and decentralization of the national foreign investment management system, attracting significant attention and expectations.

II. Highlights of the Draft

In this context, the Ministry of Commerce (MOFCOM) issued the Interim Measures for Record-Filing Administration for Establishment and Change of Foreign-Invested Enterprises (Draft for Public Comment) (Draft), along with ancillary documents, for public comments and intends to implement such measures together with the Decision as of 1 October 2016. The main provisions of the Draft are as follows:

1. Application Scope. According to Article 2 of the Draft, the Draft applies to the establishment or change of any FIE which does not fall under special restriction measures (i.e., a negative list). Article 26 clarifies that if the foreign investment is prohibited by the state, no FIE may be established; if the foreign investment is restricted by the state, any establishment or change of a FIE must be approved by relevant authorities. Therefore, the record-filing regime is still not applicable to these enterprises.

2. Equity Change. According to the Application Materials for Record-filing of Change of Foreign-invested Enterprises issued by MOFCOM together with the Draft, the Draft is applicable to an equity transfer (including equity transfer of an FIE among foreign investors and equity transfer by foreign investors to domestic investors to transform the enterprise to a domestic one) of established FIEs. However, the Draft and ancillary documents do not mention foreign capital mergers and acquisitions (converting a domestic enterprise into an FIE), strategic investment in listed companies by foreign investors and equity investment by foreign investors. Therefore, the Draft is not yet applicable to the equity transfer mechanisms above, and such transfers still require approval from the competent branch of MOFCOM.

3. Record-filing Matters. Matters subject to record-filing as specified in Article 6 of the Draft are basically the same with those in the Administrative Measures for the Record-filing of Foreign Investment in Pilot Free Trade Zones (for Trial Implementation) released on 8 April 2015 by MOFCOM, with additional information required for filing including the industries, business type (such as domestic resident round-trip investment, investment in venture capital companies and investment in equity investment companies), the actual beneficial owner and other related matters, and thereby the Draft has made certain necessary amendments to the current record-filing regime in FTZs.

4. Record-filing Timing. For establishment of an FIE, the Draft allows its foreign investors to undergo record-filing procedures for the established enterprise within 30 days following the issuance of its business license. For any change of an FIE, the Draft clarifies that, unless otherwise provided by laws and regulations, the time when a resolution or official decision of such change is made by the highest authority of the enterprise will be deemed the time when such change occurs. FIEs may conduct record-filing within 30 days after such event. Under the current legal system, the effectiveness of legal instruments relating to the establishment and change of FIEs is generally conditional on the approval of relevant authorities, which has been completely altered by the Draft.

5. Completion Time Limit. According to the Draft, authorities in charge of record-filing should preliminarily review the matters, determine if the matters are within the scope of the record-filing and if so, complete the filing within three days, which significantly shortens the time limit for an establishment or change compared to the previous approval regime.  

III. Major Follow-up Issues

1. Amendment to Existing Approval Regime

The implementation of the Decision and the Draft will definitely necessitate significant amendment and revision to existing approval regime-based laws, regulations, judicial interpretations and other documents relating to foreign investment. In addition, the Draft expressly requires that the record-filing authorities closely cooperate with the Administration for Industry and Commerce (who is primarily responsible for the nationwide practice of consolidation of an enterprise’s five certificates into one), taxation, customs, foreign exchange, securities and other authorities to improve information sharing, and the specific methods of information sharing and joint supervision are still to be defined.

2. Negative List to be Published

As the Decision and the Draft are proposed to officially come into force on 1 October 2016, the national special administrative measures for foreign investment access (i.e., the negative list) will also be published before 1 October 2016 so that the Draft and the Decision can be enforced as scheduled.

3. Synchronization between the Record-filing Regime and the Foreign Investment Law of the PRC

The Draft and ancillary documents require that the actual beneficial owner, source of funds and other information should be provided when an FIE undertakes the record-filing procedures, which corresponds with the provisions of piercing the corporate veil of foreign investors to determine their actual identity as set forth for the first time in the Foreign Investment Law of the PRC (Draft for Public Comment) published by MOFCOM on 19 January 2015. The Foreign Investment Law of the PRC will certainly be promulgated accordingly based on the implementation experience of the record-filing regime in the future.

In conclusion, the Decision, the Draft and relevant follow-up regulations to be promulgated will serve as the main basis for the record-filing regime regarding foreign investment, and will have a significant influence on the management and promotion of foreign investment. However, how such provisions will be implemented across China remains to be seen. We suggest that foreign investors pay close attention to the relevant provisions and specific requirements of record-filing authorities.

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