Hong Kong: China Revises Inbound Foreign Investment Laws

Last Updated: 14 September 2016
Article by Ian K. Lewis and Eileen X.D. Wang
Most Read Contributor in Hong Kong, September 2016

On 3 September 2016, the National People's Congress Standing Committee approved the amendments to the Laws on Wholly Foreign-Owned Enterprises (中华人民共和国外资企业法), the Laws on Sino-Foreign Equity Joint Ventures (中华人民共和国中外合资经营企业法), the Laws on Sino-Foreign Cooperative Joint Ventures (中华人民共和国中外合作经营企业法) and the Laws on the Protection of Investment of Taiwan Compatriots (中华人民共和国台湾同胞投资保护法) ("FIE Laws"), expanding the "negative list" regime currently applicable within the free trade zones (FTZs) of Shanghai, Guangdong, Tianjin and Fujian across the country starting from 1 October 2016 ("NPC Decision").

Nation-wide Regime

The NPC Decision will mean significant change in relation to the establishment of foreign invested enterprises (FIEs) and the structure thereof in China – it will not require the approval from the Ministry of Commerce (MOFCOM) or its local branches, as long as the business undertaken is not on a "negative list". In particular the NPC Decision will impact:

  • incorporation of FIEs;
  • changes to the structure of FIEs, including among other things, increase or decrease of registered capital, merger or division, termination, extension of business term, changes to capital contribution schedule; and
  • equity transfers relating to FIEs.

The above matters will only need to go through a record-filing procedure ("Filing Procedure").

Negative List

According to the NPC Decision, the State Council will issue or will approve the issuance of the nation-wide "negative list". However there is no specific timetable so far. Clearly until this is available the anticipated changes cannot be introduced.

MOFCOM Draft Measures

On the same day when the NPC Decision was issued, MOFCOM circulated the draft Tentative Administrative Measures on Record-filing of Establishment and Change of Foreign Invested Enterprises (外商投资企业设立及变更备案管理暂行办法(征求意见稿)) ("Draft Measures") for public consultation. The deadline for comments to be submitted by the public is 22 September 2016 and MOFCOM expects the Draft Measures to enter into effect on 1 October 2016 in order to allow the detailed implementation of the NPC Decision (subject of course to the "negative list").

Among other things, the Draft Measures clarify a number of issues that will be practically important to FIEs whose businesses are not on the "negative list":

  • When to file? – Record-filing with MOFCOM (or its local branches) can be undertaken either before or within 30 days after the issuance of business license by the Administration for Industry and Commerce (AIC). For changes to registrations, record-filing should be undertaken within 30 days after the changes occur.
  • How long will it take? – Record-filing should be completed within three working days from online submission, which is significantly shortens as compared with the time taken to complete the present approval procedures.
  • What documents are required to be submitted? – The main document is an online application form where key information on the investors and the FIEs should be provided. Note that FIEs' institutional documents, such as articles of association and joint venture contract, are no longer subject to review and approval by MOFCOM or its local branches.
  • Impact on the effectiveness – Unless otherwise stated in laws and regulations, for changes to FIEs' business (such as equity transfer), the effective date will not be subject to approval from MOFCOM, but the date on which the board of directors (of a sino-foreign joint venture) or the shareholder(s) (of a wholly foreign owned enterprise) approve such matters.
  • Impact on existing FIEs? – An existing FIE is not required to attend any formalities immediately. Rather, an existing FIE should complete Filing Procedures when there is a change in its structure and at such time the Certificate of Approval expires.
  • Extension of application – Any foreign owned investment company, venture capital investment company or equity investment enterprise will be deemed as a foreign investor, and the Draft Measures will apply in the event that such entity sets up business in China.
  • Impact on investors from Taiwan, Hong Kong and Macau – investments made by investors from Taiwan, Hong Kong and Macau will also be covered under the "negative list" regime with an exception for qualified Hong Kong and Macau service providers which will continue to follow the record-filing procedure under the CEPA Agreement on Trade in Services between the mainland China and Hong Kong/Macau (《内地与香港关于建立更紧密经贸关系的安排》 服务贸易协议/《内地与澳门关于建立更紧密经贸关系的安排》 服务贸易协议).

While the Filing Procedure is taking the place of the approval procedure, it needs to be noted that MOFCOM will more focus on its supervision role over the FIEs during their operations. The Draft Measures contemplate various circumstances under which FIEs will be subject to inspection and also contemplate the establishment of a public credit system for the FIEs.

Issues Remaining Unanswered

Revisions to the FIE Laws will make fundamental changes to the existing approval regime of foreign investment and will simplify and help facilitate the foreign investment process. While this is being welcomed there are still some outstanding issues remained to be answered:

  • Negative List

As discussed above, the nation-wide "negative list" is yet to be released. It is expected that the national list will be based on the current list of FTZs, however it remains to be seen whether and how it differs. Also, it is unclear whether the nation-wide "negative list" will replace the current Foreign Investment Industrial Catalogue.

In addition, it is unclear whether the "negative list" regime will cover foreign investors' acquisition of domestic companies (which are regulated by the Provisions on the Merger and Acquisition of Domestic Enterprises by Foreign Investors (关于外国投资者并购境内企业的规定). Under the current regime in FTZs, such type of acquisition is excluded by way of being set out in the FTZs' negative list.

  • Amendments to other regulations

There are a great number of regulations governing foreign investment which provide for MOFCOM approval requirements in respect of FIEs in various industries, including the implementing rules of the FIE Laws and the rules regulating FIEs equity transfer (among others). Following the effectiveness of NPC Decision, these regulations also need to be amended to reflect the introduction of the "negative list" regime. Before these regulations are amended, foreign investors should double check with local MOFCOM on their practice.

  • Role of AIC and other authorities

It needs to be remembered also that the structure of some FIEs will continue to be regulated by other authorities. It should not be assumed that businesses not on the negative list will be open to foreign investment without restriction. This also raises issues as to what checks the AIC will need to complete before issuing a Business Licence – it is possible that a more powerful AIC may emerge.

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This article provides information and comments on legal issues and developments of interest. The foregoing is not a comprehensive treatment of the subject matter covered and is not intended to provide legal advice. Readers should seek specific legal advice before taking any action with respect to the matters discussed herein. Please also read the JSM legal publications Disclaimer.

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