China will set up seven new free trade zones, bringing the total number to 11 free trade zones across the country.
Authorities including the National Development and Reform Commission and the Ministry of Commerce jointly released a revised draft for public comment of the Catalogue of Priority Industries for Foreign Investment in Central and Western China.
The 22nd session of the Standing Committee of the 12th National People's Congress of the People's Republic of China adopted the Decision of the Standing Committee of the National People's Congress on Revising Four Laws including the Law of the People's Republic of China on Wholly Foreign-owned Enterprises. Accordingly, October 1, 2016 marked the implementation of a new model for applying “National Treatment”[1] and “Negative List” regulations on inbound foreign investment.
In order to regulate the services and activities related to mutual market access between the stock markets of Mainland and Hong Kong, the China Securities Regulatory Commission issued the Several Provisions on Mutual Market Access Mechanism between the Stock Markets of Mainland and Hong Kong and relevant implementation rules.
The Ministry of Commerce decided to abolish sixteen departmental provisions including those related to foreign investment in commercial fields and foreign investment in conference and exhibition companies.
1 China Will Set Up Seven New Free Trade Zones
According to a news report by Xinhua, following the previously established FTZs in Guangdong and Fujian Provinces as well as Shanghai and Tianjin, China will set up seven new free trade zones (the “FTZs”) in Liaoning, Zhejiang, Henan, Hubei, Sichuan and Shanxi Provinces as well as the municipality of Chongqing, bringing the total number to 11 FTZs[2].
1.1 Background
In 2013, the State Council launched the first FTZ in Shanghai. In 2015, the State Council launched three more FTZs in Guangdong and Fujian Provinces as well as Tianjin. The main purpose of these four FTZs is to explore new management patterns, as well as to facilitate trading and investment. The success of these four FTZs will now be introduced across the country step by step.
1.2 Legal Review
The State Council has not yet announced the overall plan for the seven new FTZs. As reported, the new FTZs will have different focuses. For example, the FTZ in Zhejiang Province will mainly focus on developing Zhoushan free trade port zone, promoting free trade of bulk commodities and improving the capacity to allocate bulk commodities across the globe; the FTZ in Henan Province will mainly focus on establishing a modern multimodal transportation system and a modern logistic system, linking up the north and the south as well as the east and the west.
1.3 Next Steps
The State Council issued specific overall plans when setting up the FTZs in Guangdong and Fujian Provinces, as well as Shanghai and Tianjin, providing detailed rules on issues such as scope, major targets and measures of the FTZs. We await the content of the overall plan for the seven new FTZs.
2 Call for Public Comment on the Revision of the Catalogue of Priority Industries for Foreign Investment in Central and Western China
On September 14, 2016, authorities including the National Development and Reform Commission (“NDRC”) and the Ministry of Commerce (“MOC”) jointly released a revised draft for public comment of the Catalogue of Priority Industries for Foreign Investment in Central and Western China.
2.1 Background
The Catalogue of Industries for Guiding Foreign Investment and the Catalogue of Priority Industries for Foreign Investment in Central and Western China serve as the basis of applicable policies for guiding the examination and approval of foreign investment projects and foreign-invested enterprises. The first catalogue applies nationwide while the second catalogue only applies to 22 provinces, autonomous regions and municipality in central and western China, each of which issues a specific catalogue for the locale. Foreign-invested enterprises engaging in businesses covered by the Catalogue of Priority Industries for Foreign Investment in Central and Western China may enjoy preferential policies for “encouraged” industry open to foreign investment.
The Catalogue of Priority Industries for Foreign Investment in Central and Western China was implemented on June 16, 2000 and revised in 2004, 2008 and 2013. The current version has been in force since June 10, 2013.
2.2 Legal Review
Set out below are two highlights of the latest revision of the Catalogue of Priority Industries for Foreign Investment in Central and Western China:
Firstly, new foreign investment projects which do not appear in the Catalogue of Industries for Guiding Foreign Investment have been added in the Catalogue of Priority Industries for Foreign Investment in Central and Western China. Some of the newly-added projects show the country’s attempt to encourage upgrading industry in central and western China. For example, development and application projects for new generations of information technology such as cloud computing, big data and mobile internet were added to the local catalogues of Guangxi Autonomous Region, Chongqing Municipality, Guizhou, Yunnan and Hainan Provinces; research and manufacturing projects of new generations of wearable smart devices and VR/AR devices were added on local catalogues of Liaoning, Jiangxi and Sichuan Provinces; research and manufacturing projects of smart robots are added to the local catalogues of Liaoning, Heilongjiang, Anhui, Jiangxi, Sichuan Provinces as well as Chongqing Municipality.
Some of the newly-added projects reflect local economic features in the central and western regions. For example, development and operations projects of smart logistic ports and inland ports are added to the local catalogue of Jilin Province; projects for processing green food are added to the local catalogue of Heilongjiang Province.
Secondly, some projects included as “encouraged” industry in the current Catalogue of Industries for Guiding Foreign Investment have been removed from the Catalogue of Priority Industries for Foreign Investment in Central and Western China, including projects for the internet of things and nursing homes.
2.3 Next Steps
The consultation period for the revised draft of Catalogue of Priority Industries for Foreign Investment in Central and Western China ended on 14 October 2016. We await the final content of the revised Catalogue of Priority Industries for Foreign Investment in Central and Western China.
3 The Implementation of the New Model for Applying “National Treatment” and “Negative List” Regulations on Inbound Foreign Investment
On September 3, 2016, the 22nd session of the Standing Committee of the 12th National People's Congress of the People's Republic of China adopted the Decision of the Standing Committee of the National People's Congress on Revising Four Laws including the Law of the People's Republic of China on Wholly Foreign-owned Enterprises (the “Decision”). According to the Decision, starting on October 1, 2016 for matters such as incorporation and changes of foreign-invested enterprises that do not involve special entry regulatory measures (the “Negative List”) implemented by the regulations of the state should be regulated by record-filings rather than by approvals as they have been previously. In short, new model for applying “National Treatment” and “Negative List” regulations on inbound foreign investment has been implemented. The MOC published the Interim Measures for the Record-filing Administration for the Incorporation and Change of Foreign-invested Enterprises (Draft for Comment) on the same day to solicit public comment.
On September 30, 2016, the State Administration for Industry and Commerce promulgated the Circular of the State Administration for Industry and Commerce on Properly Conducting Registration of Foreign-invested Enterprises Subject to Filing.
On October 8, 2016, the National Development and Reform Commission and the MOC jointly published the Announcement No. 22 of Year 2016 (“Announcement No. 22”), in which the scope of the “Negative List” was announced. On the same day, the MOC promulgated the Interim Measures for the Record-filing Administration for the Incorporation and Change of Foreign-invested Enterprises (“Record-filing Administration Measures”). The Announcement No. 22 and the Record-filing Administration Measures became effective on the date of their promulgation.
3.1 Background
Approval for each particular matter has for many years been the regulatory model for inbound foreign investment in China. That means, each particular matter of foreign-invested enterprises and Taiwan compatriot-invested enterprises (together as “FIEs” hereinafter) is approved in accordance with the Law of the People's Republic of China on Wholly Foreign-owned Enterprises, the Law of the People's Republic of China on Sino-foreign Equity Joint Ventures, the Law of the People's Republic of China on Sino-foreign Cooperative Joint Ventures and the Law of the People's Republic of China on the Protection of the Investments of Taiwan Compatriots.
In order to explore the practicability of the model for applying “National Treatment” and “Negative List” regulations on inbound foreign investments, since 2013, the Standing Committee of the National People's Congress has authorized the State Council to temporarily suspend the implementation of administrative approvals for matters such as incorporation and changes of foreign-invested enterprises and Taiwan compatriot-invested enterprises under the Law of the People's Republic of China on Wholly Foreign-owned Enterprises, the Law of the People's Republic of China on Sino-foreign Equity Joint Ventures, the Law of the People's Republic of China on Sino-foreign Cooperative Joint Ventures and the Law of the People's Republic of China on the Protection of the Investments of Taiwan Compatriots and to regulate such matters by record-filings gradually in the four FTZs in Shanghai, Guangdong, Tianjin and Fujian.
On September 3, 2016, the 22nd session of the Standing Committee of the 12th National People's Congress adopted the Decision and changed the method of regulating matters such as incorporation and changes of FIEs that do not involve the “Negative List” from approvals to record-filings. The Decision came into force on October 1, 2016.
3.2 Legal Review
First, the Scope of the Applicability of the Record-filing System
The Decision absorbed the regulations in which the State Council was authorized to temporarily suspend the implementation of administrative approvals in the four FTZs and changed the method of regulating the following matters of FIEs that do not involve the “Negative List” from approvals to record-filings:
(1) the incorporation, division, merger or changes in other important matters or the extension of the duration of operation of a wholly foreign-owned enterprise;
(2) the incorporation, extension of the duration of a joint venture or dissolution of a Sino-foreign equity joint venture;
(3) the incorporation, material contract change, transfer of rights and obligations under the cooperative joint venture contract, entrusting the management to others or extension of the duration of cooperation of a Sino-foreign cooperative joint venture;
(4) the incorporation of a Taiwan compatriot-invested enterprise.
It should be noted that the Announcement No. 22 excluded the incorporation and changes of enterprises involving the merger or acquisition by a foreign investor from the scope where the record-filing system is applicable and expressly required that such matters should be regulated according to the existing regulations.
Second, the Scope of the “Negative List”
In contrast to the “Negative List” implemented in the four FTZs, the Announcement No. 22 does not enumerate, in an itemized fashion according to industry types, the special entry regulatory measures for foreign investment where the “National Treatment” principle is not applicable. Instead, the Announcement No. 22 generally stipulates that the special entry regulatory measures for foreign investment shall be implemented according to the Catalogue of Restricted Foreign Investment Industries, the Catalogue of Prohibited Foreign Investment Industries and the provisions containing requirements about shareholding or senior management personnel in the Catalogue of Encouraged Foreign Investment Industries, as set forth in the Catalogue for the Guidance of Foreign Investment Industries (Revised in 2015).
Record-filing for the Incorporation and Changes of a FIE
With respect to the incorporation of a FIE (for which the record-filing system is applicable), the investor may carry out the record-filing for the incorporation online either during the period after obtaining the enterprise name prior approval and before the issuance of the Business License, or during the 30 days after the issuance of the Business License.
Where any of the following changes occur to a FIE (for which the record-filing system is applicable), the FIE should carry out the record-filing for the change online within 30 days after the change occurs:
(1) changes in the basic information of the FIE, including changes in name, registered address, type of business, duration of operation, investment industry, business type, business scope, whether or not within the scope of tax exemption or reduction for imported equipment stipulated by the state, registered capital, total investment, organizational structure, legal representative, ultimate actual controlling person of the FIE, contact person and contact information;
(2) changes in the basic information of investors of the FIE, including changes in name, nationality/region or address (place of registration or registered address), license type and number, subscribed capital contribution, form of capital contribution, timing of capital contribution, sources of funds, the type of investor;
(3) changes in equity (shares) or cooperation interest;
(4) merger, division or dissolution;
(5) the FIE mortgaging or transferring its property rights and interests to others;
(6) early recovery of investments by foreign partners of a Sino-foreign cooperative joint venture;
(7) entrusted management of a Sino-foreign cooperative joint venture.
The record-filing authorities (i.e. the commercial authorities at various levels) will verify the completeness and accuracy in the form of the information filed and will check whether the reported matters fall within the scope of the record-filing system. If the matters fall within the scope of the record-filing system, the record-filing authority will complete the record-filing within 3 working days and will issue a proof of record-filing.
When the Record-filing Administration Measures became effective, the Administrative Measures for the Record-filing of Foreign Investment in Pilot FTZs (for Trial Implementation), implemented in the four FTZs, was repealed at the same time.
Registration of FIEs
In principle, the jurisdiction for the registration of incorporation and changes (record-filings) and de-registration for FIEs (for which the record-filing system is applicable) should be determined according to the locations. The bureau of the lowest level which is authorized to conduct FIE registrations in the place where the FIE is located should be responsible for the registrations of that FIE. Foreign investors may directly apply to the registration authorities for the registrations of incorporation and changes (record-filing) and de-registration for FIEs and do not need to submit the proof of record-filing issued by the commerce authorities.
3.3 Next Steps
The Announcement No. 22 does not repeal the “Negative List” currently implemented in the four FTZs. We think that the Announcement No. 22 may be merely a “Negative List” for the current stage and that the state may enumerate, in an itemized fashion according to industry types, the special entry regulatory measures for foreign investment where the “National Treatment” principle is not applicable on the basis of the trial results from the four FTZs as well as the Announcement No. 22. We should pay attention to the development of any further revisions to the “Negative List”.
to be continued
[1] The term “National Treatment” (in Chinese, 国民待遇) refers to an important principle of fairness, whereby foreign parties are subject to the same treatment as their domestic counterparts and neither enjoys an unfair advantage.
[2] http://news.xinhuanet.com/politics/2016-08/31/c_1119489130.htm