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1 November, 2016
China’s Ministry of Commerce (“MOFCOM”) issued the Interim Measures on Administration of Filing for the Establishment of and Changes in Foreign-invested Enterprise (“New FIE Rules”) on 8 October 2016. These New FIE Rules enable formal implementation of the new nationwide negative list approach for foreign investment in China. The New FIE Rules also clarify that foreign-invested M&A in China remains subject to approval and will not benefit from the negative list approach. The previous Foreign Investment Industrial Guidance Catalogue has also been re-designated as an interim negative list, with the effect that the regulatory changes do not grant foreign investors greater access to China’s regulated industries.
The draft New FIE Rules were first circulated for public comment in September 2016, and the finalized New FIE Rules as issued are almost identical to the circulated draft. Please refer to our e-bulletin dated 26 September 2016, “China Rolls Out A Negative List” for an introduction to the draft and the corresponding record-filing procedures for FIEs outside the negative list.
Below we update you the salient points in the New FIE Rules that were not in its consultation draft.
Negative List
Surprisingly, the Chinese regulators did not issue a new nation-wide “negative list” similar to the one applicable in China’s free trade zones. Instead, they have indicated that the negative list will be the current Foreign Investment Industrial Catalogue (“Catalogue”), which categorizes foreign investment sectors as encouraged, permitted, restricted and prohibited.
Also on 8 October 2016, MOFCOM and the National Development and Reform Commission jointly issued a circular (Circular 22), which clarified that the special administrative measures (i.e., the “negative list”) will comprise:
- the restricted and prohibited industry categories of the Catalogue; and
- the encouraged industry categories of the Catalogue that have shareholding or other limitations prescribed in the Catalogue.
Accordingly, foreign investment not included in the Catalogue (i.e., sectors permitted for foreign investment) and sectors encouraged and without restrictions for foreign investment in the Catalogue will only need to go through a record-filing procedure with the local branch of MOFCOM either before or after the registration procedures with the State Administration for Industry and Commerce (“SAIC”).
According to MOFCOM Assistant Minister Tong Daochi in a recent press release, the ultimate goal is to grant “pre-establishment national treatment” to foreign investors and to adopt a “negative list” management system that treats domestic and foreign investment equally, guaranteeing fair competition and attracting more foreign investment. It remains to be seen, however, whether China will issue a negative list more closely aligned with the list used in China’s free trade zones.
Foreign-invested M&A not covered
The New FIE Rules also clarify that it will not apply to the foreign-invested M&A of Chinese domestic companies. Accordingly, such foreign-invested M&A activity will remain subject to review and approval by MOFCOM or its local branch.
Observations:
Since the New FIE Rules were issued, we have observed a lot of practical questions (regarding, for example, procedures and specific documentation requirements) being addressed to the local branches of MOFCOM for clarification. These local branches, however, are themselves in the process of becoming familiar with the new approach. As a result, practices in different locations have differed even more than usual (due to different expertise levels and different interpretations). Accordingly, foreign investors are advised to make enquires with local branches of MOFCOMs well before any deadline so that proper steps can be taken and proper documentation prepared. We expect this situation to last for a while.
Although MOFCOM record-filing is not a pre-requisite to SAIC registration, it is advisable to complete the MOFCOM filing first. This is because if an AIC registration is completed first and then a local branch of MOFCOM takes the view in the subsequent record-filing that the investment should have been reviewed and approved, then the investor may be deemed to have breached the New FIE Rules and may well be liable for penalties.
Although the New FIE Rules, and the new “negative list” in particular, do not open more of China’s sectors to foreign investment, the new approach will make the setting up of foreign investment enterprises easier for many foreign investors. Significantly, implementation of the negative list approach lays the foundation for future liberalization and the introduction of the forthcoming PRC Foreign Investment Law.
For further information, please contact:
Nanda Lau, Partner, Herbert Smith Freehills
nanda.lau@hsf.com
