China Rolls Out A Negative List.

 

24 September, 2016

 

China has amended its foreign investment laws to introduce a negative list approach for all foreign investment from 1 October 2016. Under the new approach, approvals will not be required for most foreign investment enterprises (FIEs) in China. Rather, most FIEs will be set up following a record-filing process with the Ministry of Commerce (MOFCOM) or its relevant local branch, which can be conducted before or after issuance of the business licence (i.e., MOFCOM approval will no longer be a pre-condition for registration with the Administration for Industry and Commerce (AIC)). Only investment in industries or sectors included in a “negative list” will remain subject to approval processes. The new rules simplify, and shorten the time for, the establishment of most FIEs in China. A draft implementation regulation has also been issued. However, neither the amended laws nor the draft regulation addresses how the changes will apply to foreign-invested M&A activity. 

 

Amended laws

 

On 3 September 2016, the Standing Committee of the National People’s Congress adopted the Decision on Revising Four Laws including the Wholly Foreign-Owned Enterprise Law, the Sino-Foreign Equity Joint Venture Enterprise Law, the Sino-Foreign Cooperative Joint Venture Enterprise Law, and the Law on the Protection of Investment of Taiwan Compatriots (Decision).

 

The amended laws will come into effect on 1 October 2016.

 

Negative list and “national treatment”

 

The Decision introduces record-filing (instead of examination and approval) for the establishment and change of FIEs (including enterprises invested by investors from Taiwan). However, FIEs that are subject to special administration measures on access (i.e., the negative list) will still be subject to examination and approval.

 

The new nation-wide regime is an expansion of the “national treatment” that has been available in China’s free trade zones since late 2013. However, while most FIEs will be subject to record-filing process, they will still need to report to the relevant local branch of MOFCOM, a requirement that is not applicable to Chinese domestic investments.

 

Draft MOFCOM regulation

 

On the same day as the Decision was adopted, MOFCOM circulated for public comment the Draft Interim Measures for Record Management on Establishment and Change of FIEs (Draft). It is expected that the Draft will be implemented along with the Decision on 1 October 2016.

 

The Draft sets out the applicable scope, procedures for record-filing, supervision and inspection, and legal liabilities for foreign investment.

 

The main content of the Draft includes:

 

• Information for filing: The establishment and change of FIEs that are not subject to the negative list must be filed for record (instead of seeking examination and approval) at the relevant local branch of MOFCOM. Record-filing is not a precondition of an FIE registration.

 

Materials that must be filed for record include:

 

(i) For establishment, the certificate of pre-approval of the FIE’s business name;

 

(ii) Letter authorisation from the investors regarding incorporation or the change;

 

(iii) Relevant powers of attorney; and

 

(iv) Certificate of incorporation for corporate investors, or certificate of identification for individual investors.

 

Changes that will give rise to an obligation to file for record include:

 

(a) change of basic information of the FIE and its investors;

 

(b) any change of shareholder rights (including pledges of shares or equity);

 

(c) details of any merger, division or termination; and

 

(d) any mortgage of property rights.

 

Handling time: The main time limits imposed on filings are:

 

(i) Record filing for an FIE’s establishment must be processed before the establishment (i.e., after the pre-review of the enterprise name but before issuance of the business licence) or within 30 days after issuance of the business licence; and

 

(ii) Any change of the information required to be filed for record must be filed within 30 days of the FIE’s highest authority deciding or resolving the change.

 

• Procedures: Filings will be submitted online through the Comprehensive Management Information System for Foreign Investment. The local branch of MOFCOM, or the relevant local authority, has three days to process the filing.

 

• Supervision: The local branch of MOFCOM, or the relevant local authority, may inspect filings. In selecting which FIEs to inspect, they may rely on whistle-blowers, suggestions and reports from other departments or judicial authorities, or their own initiative.

 

The local branch of MOFCOM, or the relevant local authority, may cooperate closely, and share information, with other relevant administrative departments such as those for public security, state-owned assets, customs, taxation, industry and commerce, securities, and foreign exchange.

 

 

• Legal liabilities: The Draft specifies legal liabilities for FIEs (or their investors) that violate the record-filing obligations, operate a business in the negative list, or do not cooperate with supervision and inspection. In addition, the credit information of FIEs (or their investors) will be recorded into MOFCOM's Foreign Investment Credit File System, and disclosed publicly.

 

Looking forward

 

The amended FIE laws and the Draft expand nation-wide the negative list approach that has been under trial in China’s foreign trade zones. However, while promising national treatment, FIEs and their foreign investors will remain subject to record-filing with, and supervision by, MOFCOM.

 

Future developments to watch out for include:

 

• Nation-wide negative list: The negative list approach for foreign investment will be rolled out nation-wide from 1 October 2016. We can expect the detailed negative list to be available soon. The new negative list is likely to reflect the negative list currently applicable in China's free trade zones. However, in order to maintain the attractiveness of the free trade zones, the nation-wide negative list may not be as comprehensive as the current free trade zone negative list. Alternatively, new negative lists for the free trade zones may also be issued.
• M&A clarification: MOFCOM has previously issued regulations on the merger and acquisition of PRC domestic companies by foreign investors, and the conversion of FIEs into a PRC domestic companies. The Draft, however, is silent on how it will apply to such transactions. We anticipate clarification from MOFCOM shortly.
• Implementation: The Draft was circulated by MOFCOM only. Accordingly, it remains to be seen how other governmental authorities involved in FIE establishment and change (such as the AIC and the State Administration of Foreign Exchange) will change their practice once the Draft takes effect.
• Foreign investment law: In early 2015, China issued a draft Foreign Investment Law with a view to consolidating and streamlining the current fragmented regulatory framework on foreign investment. Because of its significance, and China’s legislative procedures, it might not pass as a law any time soon. The Decision and the Draft, however, can be seen as transitory measures on foreign investment while China continues its agenda with the Foreign Investment Law. The Foreign Investment Law, if and when promulgated, should reflect the changes introduced by the Decision and the Draft.

 

 

For further information, please contact:

 

Nanda Lau, Partner, Herbert Smith Freehills

nanda.lau@hsf.com