China Amends Its Foreign Investment Approvals : A New Era for the PRC Foreign Investment Regulation Regime (Ⅱ)
Ⅴ. Certain Features of the Record Filing System
- Scope of application
As noted above, the record filing system applies to the establishment of FIEs and their subsequent changes not captured by the negative list. It is worth noting however, that according to the joint announcement of NDRC and MOFCOM, foreign investors' acquisitions of domestic companies are still subject to the existing rules (mainly the Provisions on Merger and Acquisition of Domestic Enterprises by Foreign Investors, widely referred to as "Circular 10") and require prior approval from MOFCOM. This means that the record filing system is only available to the establishment of "green field" FIEs, but not to the formation of an FIE by foreign investors' acquisition of existing domestic companies. Nevertheless, once the acquisition is approved by MOFCOM, subsequent changes of the Sino-foreign joint venture so formed (for example, increase of equity stake by the foreign investors) no longer require MOFCOM's approval. - Timing of Filing
With respect to the establishment of an FIE and its subsequent changes, filing can be done both before and within 30 days after the establishment and/or change. The establishment and/or change shall become effective at the time of the relevant corporate resolutions, rather than upon completion of the filing. This is the most remarkable feature of this record filing reform, as it makes the record filing a "filing" in real sense instead of an abridged or disguised form of "approval". - NDRC's approval of investment projects?
Under the old approval regime, formation of the corporate entity of an FIE and its subsequent changes required MOFCOM approval, and undertaking of investment projects required NDRC approval. FIEs were inevitably formed for the purpose of undertaking certain "investment projects." Therefore, in practice, when applying for the establishment of an FIE, the foreign investor would typically need to obtain NDRC's approval of the investment projects[1] first before obtaining the MOFCOM approval, and subsequently, register with the Administration of Industry and Commerce, or AIC, and obtain a business license. With the record filing reform, the MOFCOM approval will no longer be needed for the formation of green field FIEs outside the negative list. What about the NDRC approval? According to relevant notices published by the AIC, we understand that foreign investors are allowed to proceed with registration with AIC directly without having to produce NDRC approval document as an ex-ante approval. To the extent any NDRC filing or approval is needed, this can be done after the establishment of the FIE.
After the establishment of an FIE, what kind of investment projects require NDRC filing or approval? Historically, investment projects of domestic companies in certain designated industries, and investment projects of all FIEs, required NDRC filing or approval. This is reflected in the 2014 version of Catalogue of Investment Projects Subject to Governmental Approval, which is also the version currently in effect. Nevertheless, we understand that this catalogue is now being amended, and we anticipate that after the amendment FIEs will be subject to essentially same approval requirement as domestic companies with respect to investment projects that they undertake.[2][3] - VIE?
Unlike the Draft FIL, this round of reformation does not introduce any new regulation towards the VIE structure. Therefore, all companies that are currently using a VIE structure should be able to stay status quo, and at least theoretically speaking foreign investors can enter into new VIE arrangement to control domestic companies in the industries restricted or prohibited for foreign investments, but they are advised to be mindful of the regulatory risks inherent in the VIE structure, including the risk that the PRC government's views towards VIE may change.
In this regard, we note that the Provisional Measures promulgated by MOFCOM have introduced the concept of "actual controller", and require that information of actual controller of all investors of an FIE be filed at the time of establishment, and that subsequent change of the actual controller of the FIE also be filed. "Actual controller" refers to the individual, enterprise, government authority or international organization that directly or indirectly controls the FIE or its investors via equity, contract, trust or other means. A reasonable inference can be made that the information gathered via the filing system will be used as basis for formulation of new laws and policies towards regulation of foreign investments that are actually controlled by PRC persons. Nevertheless, with the "pre-establishment national treatment" now enjoyed by foreign investors and the trend of reform, one can expect that the negative list will be further reduced in the years to come, thereby reducing the necessity of having to resort to a VIE structure.
VI. Looking Forward: Reform Not Yet Completed
As noted above, the record filing reform adopted represents a modest and practical approach that involves minimum changes to the existing set of laws and regulations. It is a highly efficient and practical way of eliminating approval requirements for most foreign investment activities and granting "pre-establishment national treatment" to foreign investors. Nevertheless, the reform is not yet completed. Numerous issues that the Draft FIL intended to address remain outstanding. FIEs are still subject to the Three FIE Laws in addition to the Company Law, leading to potential conflicts between the two sets of laws. Formation of FIEs by foreign investors' acquisition of domestic companies are still subject to MOFCOM approval, although there seems little reason why this needs to be treated differently than the formation of a green field FIE. A comprehensive set of rules with respect to national security review that applies to all foreign investments in China is still lacking.[4] We believe the enactment of a comprehensive foreign investment law that annuls the Three FIE Laws and the numerous departmental rules applicable to FIEs and addresses issues such as national security review, foreign investment facilitation and protection should still be the direction of the reform. Nevertheless, with the rollout of the record filing system, the urgency of the promulgation of such a law in the immediate future is alleviated, and the legislative body can release it at a more appropriate time when bilateral investment treaty negotiations are concluded and more experience is gathered from the implementation of the record filing system nationwide.
注释
[1] An exception is that, according to a Q&A posted by the NDRC in 2004, investments by foreign investors in the service and trading industries not involving fixed assets investments do not need to be approved by NDRC.
[2] It is worth noting that this is the position currently taken in the FTZs, where the application of NDRC approval requirement for FIE investment projects (other than those projects that are subject to approval even if undertaken by domestic entities) is suspended.
[3] Currently NDRC has separate rules for the approval/filing of investment projects undertaken by domestic entities and those undertaken by FIEs. Reform in this regard is also underway, and in 2015 NDRC published draft Management Measures for Investment Projects Subject to Government Approval and Filing and solicited public comments. If adopted, the measures will apply to all investment projects requiring governmental approval and filing, including onshore investment projects undertaken by domestic entities and FIEs, as well as outbound investments. This will further eliminate different treatments for domestic entities and FIEs.
[4] The current rule, Notice of the General Office of State Council on Establishment of Security Review System Pertaining to Mergers and Acquisitions of Domestic Enterprises by Foreign Investors promulgated in 2011 applies only to acquisitions by but not green field investments of foreign investors. In 2015 the General Office of State Council promulgated Trial Measures on National Security Review for Foreign Investments in Pilot Free Trade Zones, which apply to both mergers and acquisitions and green field investments within FTZs.