Revisions to China’s regulations on Foreign Direct Investments (FDI)

Recently, the Chinese government authorities started implementing the Provisional Measures for Filing Administration of Establishment and Changes of Foreign Invested Enterprises (hereinafter referred to as “Provisional Measures”) which were promulgated by Ministry of Commerce (hereinafter referred to as “MOC”) on 8 October 2016 and came into effect on the same day. The Provisional Measures partly replaced the current laws and regulations in China on the establishment and changes of Foreign Invested Enterprises (hereinafter referred to as “FIE”s). The Provisional Measures apply to Wholly Foreign Owned Enterprises, Equity Joint ventures as well Contractual Joint Ventures.

The most important revision is that foreign companies wishing to invest in China no longer require prior approval from MOC or its local branches.  Instead the process now requires a standardized online registration, as long as the planned activities do not fall within the scope of the so-called National Negative List. The simplified registration will apply to initial formation of the FIE as well as changes in the FIE structures, such as management changes, ownership transfer and changes to the registered capital.

The National Negative List

A separate National Negative List has not been yet been issued as such, but regulators have indicated that the Negative List will consist of the activities currently listed as restricted and prohibited be the current Foreign Investment Industrial Catalogue, which categorizes foreign investment sectors as encouraged, restricted and prohibited. While 2015 Foreign Investment Industrial Catalogue has lifted a number of restrictions, several industries such as internet publishing services, certain kinds of mining, food processing and manufacturing activities still remain restricted and will therefore still require further approval procedures. The Provisional Measures 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 MOC or its local branches.

Additional Requirements

The Provisional Measures also introduce some additional requirements, most importantly MOC registration now requires the foreign enterprise to identify the persons who actually control the foreign investor. ”Control” in this sense does not only mean shareholding control, but also effective control of decision making. This is a new requirement which might be possibly intended to force foreign investors to reveal whether or not they are totally controlled by Chinese nationals in order to prevent illegal “round trip” investments by Chinese nationals.

Practical Implications

The procedure for setting up a FIE in the new system will require the following steps:

  1. File for a reservation for the intended business name with  the local Administration of Industry and Commerce (hereinafter referred to as “AIC”).
  2. If the planned activities are not restricted by the National Negative List,  an application with supporting document can be registered with MOC through the new online platform. If the registration is accurate and complete, a  registration notice will be issued within three days.
  3. After the registration notice has been issued, the FIE can be registered with the local AIC.  (Filing with the MOC’s online platform can also be at the same with the AIC registration or after AIC registration is completed according to the Provisional Measures)There is of yet no uniform procedure for AIC registration and as a result, requirements for registration with the local AIC might vary per district, and therefore this remains the most complicated step in the procedure.  Each local AIC will require compliance with local law and might demand  such as environmental impact statements, construction safety reports, energy usage reports, local employment impact reports, land usage reports.
  4. After issuance of the business license, the company must comply with  a number of other regulations such as required by  the tax agency,  customs, and banking & foreign exchange regulations, and others depending on the scope of business. These requirements may be local, provincial or national. Compliance with all these requirements is necessary before the company can formally start operations.

As can be seen above, while it is a small step in the right direction, in practice we expect that the actual benefit to companies in terms of time-saving is limited.  While the registration procedures with MOC are simplified, setting up a company in China still means complying with a large number of local rules regulations and procedures which may vary according to the district as well as business scope.

While now more than ever being present in China is a must for every internationally operating company, for the time being setting up company will remain a complex procedure that will need patience and careful consideration during each step.

If you are interested in expanding your business in China and would like to receive more information, do not hesitate to contact our China Practice specialists.