On 18 September 2013, the State Council issued the Notice regarding Publishing the General Scheme of the China (Shanghai) Pilot Free Trade Zone ("FTZ"), which for the first time provided more details of the general scheme of the FTZ (“General Scheme”). With the formal opening of the FTZ on 29 September 2013, the China Banking Regulatory Commission, the Ministry of Transport, the China Securities Regulatory Commission, the Ministry of Culture, the China Insurance Regulatory Commission, the State Administration for Industry and Commerce (“SAIC”) and the Shanghai People’s Government all respectively also issued circulars to support the implementation of the work in the FTZ.
Below we summarize the main key points of the General Scheme, the notices issued by the SAIC and the administrative measures issued by the Shanghai People’s Government. All of them apply to all foreign investments in the FTZ irrespective of their industry sectors. In addition, there are special measures relating to such sectors as banking and shipping. If you are interested in specific sectors, please feel free to contact us for tailor-made information.
1. Changes in Service Sectors
Six service sectors including financial services, shipping services, professional services, commercial and trading services, cultural services and social services are further opened up to foreign investments. Measures in general include suspending or cancelling qualification requirements of investors, cancelling restrictions on shareholding ratios, cancelling restrictions on business scopes, etc. Below please find a summary of the main items.
Qualified foreign financial institutions are allowed to set up foreign invested banks. Qualified private investors and foreign financial institutions are allowed to set up Sino-foreign joint venture banks.
Professional healthcare medical insurance
Foreign-invested professional healthcare medical insurance organizations are allowed within the FTZ.
Financial leasing companies are allowed to carry out commercial factoring business related to their financial leasing business.
Ocean cargo transportation
Restrictions on the shareholding ratio of foreign investments in Sino-foreign international shipping enterprises are to be loosened. Trial implementation measures are to be promulgated by the Ministry of Transport.
International shipping management
Wholly foreign-owned international shipping management enterprises are allowed within the FTZ.
Commercial and trading services
Value-added telecommunications services
Foreign investors are allowed to operate certain value-added telecommunication services (details are to be announced). In case such services involve content that conflicts with administrative regulations, they shall be subject to prior approval in advance by the State Council.
Credit investigation services
Foreign-invested credit investigation enterprises are allowed to be established.
Human resources intermediary services
Sino-foreign human resources intermediary companies are allowed, in which the shareholding ratio of the foreign party can be up to 70%.
The minimum registered capital of a foreign-invested human resources intermediary company shall be reduced from USD 300,000 to USD 125,000.
Engineering design services
For those foreign-invested engineering design companies (except for engineering survey) which provide services with Shanghai Municipality, the requirements on the investors’ engineering design performance achievements are cancelled when they apply for qualification licenses.
Wholly foreign-invested construction companies are allowed to undertake Sino-foreign construction projects within Shanghai Municipality.
Wholly foreign-owned entertainment venues which provide services within the FTZ are allowed.
Educational and vocational training
Sino-foreign cooperative profit making educational training institutions and vocational institutions are allowed within the FTZ.
Wholly foreign-owned medical service organizations are allowed within the FTZ.
2. Negative List Approach for Foreign Investments
Outside of the FTZ, foreign investments are subject to approval by the competent examination and approval authority. According to the General Scheme, for foreign investments in the FTZ, in contrast, a negative list approach is adopted. Negative list refers to a list specifying sensitive industries which are restricted or forbidden for foreign investment. For those industries which do not fall into the scope of the negative list, foreign investors can enjoy the same national treatments as domestic investors in terms of market entry in the FTZ, i.e. such foreign investments are no longer subject to prior approval, but the company establishment can be registered directly with the competent Administration for Industry and Commerce.
On 30 September 2013, the Shanghai People’s Government issued the 2013 version of the negative list (“2013 Negative List”). The content of the 2013 Negative List basically follows the 2011 version of the Foreign Investment Industry Guidance Catalogue. This is rather disappointing because the result is that despite the negative list approach, currently still most foreign investments in the FTZ will have to go through approval procedures. We assume that this lack of actual breakthrough is due to time constraints. After the opening of the FTZ a negative list had to be presented shortly. The 2013 Negative List is widely understood to be only valid till the end of 2013. There is room for hope that the next version of the negative list will cover less industries and bring a real breakthrough.
3. Some Detailed Corporate Implementation Measures
More detailed implementation measures are provided in two circulars issued by the SAIC, i.e. the Several Opinions regarding Supporting the Development of the China (Shanghai) Pilot Free Trade Zone (“Several Opinions”) and the Approval Reply regarding Approving the Plan of Adopting New Business License in China (Shanghai) Pilot Free Trade Zone (“Approval Reply”):
- The minimum registered capital requirements are cancelled unless laws and regulations stipulate otherwise for specific industries;
- Restrictions on the amount and percentage of the initial contribution of the registered capital are cancelled, i.e. it is no longer necessary to contribute at least 15% of the entire registered capital within 3 months upon issuance of the business license of the foreign invested enterprise;
- Restrictions on the percentage of cash contribution in the entire registered capital are also cancelled;
- The same applies for the time limit for the entire contribution of the entire registered capital;
- The investors can agree on the contribution amount, contribution method, contribution schedule etc. by themselves.
While bringing along important changes, the above stipulations, however, contradict with the existing stipulations regarding registered capital in the PRC Company Law. The Several Opinions are issued by the SAIC, while the PRC Company Law was enacted by the Standing Committee of the National People's Congress which is of higher level and thus, prevails. Therefore, strictly speaking, the legality of the Several Opinions still depends on confirmation of the Standing Committee of the National People's Congress.
4. Tax Reforms
The General Scheme stipulates that tax policies suitable to the FTZ will be further explored. The following preferential tax policies for the FTZ are particularly mentioned:
a) Where a FTZ enterprise and its individual shareholder use non-cash assets for investment purpose, the income tax payable for the capital gains based on the appraisal can be paid in installments within 5 years.
b) Where a FTZ provides share incentives to employees in order to attract talented people, the relevant individual income tax can be paid in installments.
c) Project-based subsidiary companies (located in the FTZ) of a FTZ financial lease company can enjoy export VAT refund for their financial lease business.
d) Domestic leasing companies and their subsidiaries established in the FTZ are entitled to preferential import duty treatment for importation of certain air-planes.
e) For goods processed or manufactured in the FTZ, if they are sold to other areas, import duty may be calculated based on the value of the imported materials.
f) Manufacturing companies as well as production-related service enterprises located in the FTZ can import machines and equipments (for self-use) in a duty free manner, unless such goods are particularly listed as non-qualified for duty exemption.
g) Tax policies to enhance outbound investment and off-shore business will be further studied.
Detailed regulations and rules are expected to be issued for implementation of the above.
The recent notices and circulars issued by various authorities are an important step forward in the implementation of the FTZ. However, for the time being, the preferential treatments offered by the FTZ still fall short of the expectations voiced in connection with the promotion of the new FTZ. We hope that additional implementation regulations will follow.