Update on the New Regulatory Regime for Foreign Investment in China

As reported in our newsletter of 14 September 2016, the three laws governing foreign invested enterprises in China, i.e. the PRC Law on Wholly Foreign-owned Enterprises, the PRC Law on Sino-Foreign Equity Joint Ventures and the PRC Law on Sino-Foreign Cooperative Joint Ventures (collectively “FIE Laws”) were amended on 3 September 2016. The amendments mainly refer to the change of the regulatory regime for foreign investment in China. I.e. starting from 1 October 2016, the approval and examination procedures for foreign invested enterprises (“FIEs”) shall be replaced by recordal procedures, if such FIEs are not listed in the so-called Negative List. 
On 3 September 2016, the PRC Ministry of Commerce (“MOC”) also published the Provisional Measures on Management of the Establishment and Changes of Foreign Invested Enterprises (Draft) (“Draft Provisional Measures”) which stipulate the rules for recordal procedures for establishment and changes of those FIEs whose industries are not included in the Negative List.

The current status of the reform is as follows: 

1. On 8 October 2016, the PRC National Development and Reform Commission and the MOC jointly issued theCircular (2016) No. 22 (“Circular No. 22”) to further clarify the above reform. 

According to Circular No. 22, the Negative List shall be referred to the Guideline Catalogue of Industries for Foreign Investment (2015 Version) (“Guideline Catalogue”). I.e. contrary to expectations, no separate Negative List was issued, but the regulators just refer to the existing Guideline Catalogue. The Guideline Catalogue distinguishes between industry sectors in which foreign investment in encouraged, restricted or prohibited. Foreign investment in industries which are not listed in the Guideline Catalogue is permitted. According to Circular No. 22, for those FIEs which do not fall into the prohibited or restricted categories and those FIEs in the encouraged category which are not subject to requirements on the shareholding ratio or senior management (“Applicable FIEs”), the examination and approval procedures shall be replaced by recordal procedures. Circular No. 22 does not expressly mention how to treat FIEs which fall into the permitted category. From the general structure, we understand that FIEs which fall into the permitted category of the Guideline Catalogue are also subject to recordal procedures. Based on the above, both establishment of Applicable FIEs as well as corporate changes in Applicable FIEs, such as capital increase, change of legal address, change of business scope, share transfer and liquidation are now only subject to recordal procedures and no longer to examination and approval procedures. However, Circular No. 22 expressly stipulates that this does not apply for mergers and acquisitions. I.e. in case of acquisition of shares and assets of a domestic Chinese company by foreign investors, the current examination and approval procedures still apply.

2. On 8 October 2016, the MOC also promulgated the Provisional Measures on Management of the Establishment and Changes of Foreign Invested Enterprises (“Provisional Measures”). The content, formalities and timeline of the recordal procedures provided in the Provisional Measures are the same as those of the Draft Provisional Measures. 

Establishment and corporate changes in Applicable FIEs shall now be handled as follows: the applicant shall upload the relevant application documents and fill in requested information through the online platform of the competent Authority of Commerce. The Authority of Commerce will complete the recordal procedures and issue the recordal certificate within three working days.

3. Further, on 30 September 2016, the State Administration for Industry and Commerce issued the Circular (2016) No. 189 (“Circular No. 189”) to provide guidance on the registration procedures after the above reform.

According to Circular No. 189, the recordal certificate issued by the Authority of Commerce is not a pre-condition for registration by the Administration for Industry and Commerce (“AIC”). The AIC accepts applications for registration of establishment or changes of Applicable FIEs without the recordal certificate being submitted. Therefore, for any establishment or changes of the Applicable FIEs, recordal with the Authority of Commerce and registration with AIC can be handled simultaneously.

Circular No. 22 and Circular No. 189 provide a clear guidance on the recordal and registration procedures of Applicable FIEs. The reform is a major step forward. It considerably shortens the timeline for establishment and corporate changes of FIEs, at least for those FIEs which do not fall into the Negative List.