Reform of China Foreign Investment Legal Regime
Foreign invested enterprises (FIEs) are currently governed by the Wholly Foreign-owned Enterprise Law, the Sino-foreign Equity Joint Venture Law and the Sino-foreign Contractual Joint Venture Law, which were promulgated in the 1980s (the “Three Laws”).
With great changes to the Chinese economy, legislation as well as politics in the past 30 years, the Three Laws are no longer fully compatible with the current Chinese economic situation and legal regime.
Consequently, the Chinese Ministry of Commerce has circulated a draft of a new proposed Foreign Investment Law to solicit public opinions since January 2015, and it is believed to be submitted to the Standing Committee of the National People’s Congress for approval by the end of 2016. Should the proposed Foreign Investment Law come into effect, it will repeal the Three Laws.
Highlights of Proposed Foreign Investment Law (FIL)
A. National Treatment Principle
The FIL adopts a mechanism where, unless an FIE falls within a “negative list” (a list of industries where foreign investment is restricted or prohibited), foreign investors will enjoy national treatment.
The FIL states that Chinese Company Law will apply to both FIEs and domestic companies in terms of incorporation, corporate governance, liquidation and other corporate matters, and the “Three Laws” will be abolished.
B. Pre-approval Limited to Negative List
The FIL would abolish the pre-approval required for FIEs under the Three Laws. FIEs that are not on the “negative list” would just need to report the required information to the relevant authorities, instead of getting a pre-approval.
C. Information Reporting Requirement
If the FIL takes effect, it would require foreign investors to disclose relevant information on a regular basis. An initial report would be required before the establishment of an FIE or within 30 days after its establishment.
D. Broader Definition of Foreign Investment
The FIL provides a broader definition of foreign investment where an investment in the form of “contractual control” (an inherent feature of the Variable Interest Entity structure) by foreign investors would be regulated as a construed foreign investment. And any further investment through such “contractual control” needs to comply with the new foreign investment regime.
E. Extended Potential Application of National Security Reviews
Currently, the State Council has only required a national security review of mergers and acquisitions (M&A) by foreign investors. With China seeking to tighten regulations on foreign investment, the proposed FIL extends the potential application of national security reviews of foreign investments beyond M&A situations.
The FIL allows a foreign investor to voluntarily request such a review or the State Council to initiate an investigation of its own. Some grounds for a review listed in the FIL include telecommunications and internet security, influence on economic stability, control by a foreign government or access to technology crucial to national security. The list is open-ended and allows the State Council to investigate “any other foreign investment situations where it deems an investigation necessary”.
While bureaucracy remains in China, the FIL is expected to significantly reduce the barriers and formalities for foreign investors to invest in the country. And Chinese authorities are developing a series of measures to implement new changes in the FIL.
Meanwhile, China intends to continue leveraging on foreign investments to complement its own economic reforms and will therefore step up its scrutiny of foreign investments in areas that are considered sensitive or less favourable for the country.
Regulatory Update on Advance Pricing Agreements
China’s State Administration of Taxation (SAT) issued Notice 64 on 11 October 2016 to further develop its Advance Pricing Agreement (APA) system. Effective since 1 December 2016, it replaces Chapter 6 of Circular Guoshuifa  No.2 (“Implementation Measures for Special Tax Adjustments (Trial Implementation)”). Some key differences between Notice 64 and Chapter 6 of Circular Guoshuifa  No.2 are explained below.
Notice 64 aims to further improve the APA programme. There are six steps in the APA process: pre-filing meeting, discussion of intentions, analysis and evaluation, formal application, negotiation and conclusion of the APA, and monitoring of the APA’s implementation. Notice 64 does not specify the time periods between steps.
Unlike Chapter 6, Notice 64 does not permit an anonymous pre-filing meeting. Notice 64 states that a taxpayer should generally have had related party transactions in excess of RMB40 million for each of the past three consecutive years. While Chapter 6 also set an RMB40 million threshold, it did not specify that the transactions had to be continuous for three consecutive years.
Before approval of the APA application by tax authorities, the taxpayer needs to communicate and negotiate extensively with the tax authorities for a long time. The taxpayer also needs to be prepared to conduct a comprehensive analysis and provide a wide range of information during the process.
The issuance of Notice 64 reflects China’s desire to improve the transfer pricing dispute settlement process. Taxpayers should note that the SAT will continue to focus more on analysing the value chain and location-specific advantages.
China to Establish National Online Enterprise Name Database
The State Administration for Industry and Commerce (SAIC) has requested all local departments (or “AICs”) in each province or municipality to collectively establish a national online enterprise name database for seven categories, such as names of existing enterprises, original names of enterprises that have changed their names for not more than a year, and enterprise names that have been applied for but not approved yet.
All AICs are responsible for reserving enterprise names for investors who intend to set up new businesses and updating information in the different categories when necessary.
SAIC also requires the creation of separate online search engines for different types of entities, and documents such as application forms for pre-approval or change of entity names to be available online.
The establishment of a national online enterprise name database will greatly facilitate the process for investors as they may easily choose an unused entity name before applying to the local AIC to set up a new business. This is expected to save application time and cost for investors as it minimises the risk of rejections due to the use of inappropriate entity names.
Implementation of Five-in-One Business Licence in Shanghai
In September 2016, Shanghai Administration for Industry and Commerce (SHAIC), together with several other government authorities, issued a circular to implement a ‘Five-in-One’ business licence in Shanghai with effect from 1 October 2016. This replaces the previous ‘Three-in-One’ business licence that was introduced at the same time last year.
According to the circular, companies that already obtained the ‘Three-in-One’ business licence do not have to apply for the new ‘Five-in-One’ business licence again.
China and France Sign Bilateral Social Security Agreement
China and France recently signed a bilateral social security agreement in Beijing. Under the agreement, each side will exempt secondment personnel, crew, diplomats, consular officers, civil servants and government employees from the other working in its territory from social security contributions. The agreement, which took immediate effect, reduces the social security contribution burden of employers and employees from both sides and is expected to increase trade and personnel exchanges between China and France.
China also signed bilateral social security agreements earlier with Germany, South Korea, Denmark, Finland, Canada, Switzerland, and the Netherlands.
New Employment Certificate and Foreigner Work Permit Classification
On 1 November 2016, China launched a pilot programme in Hebei, Shanghai, Beijing, Tianjin, Shenzhen, and Chengdu that combined the employment licence and work permit into a single employment certificate. This new system will be implemented nationwide from April 2017 onwards.
Since 1 Oct 2016, China has also classified foreign workers into three categories — Class A, Class B and Class C — and issued them separate work permits according to each class in certain locations. This new system is currently on pilot implementation in major cities like Shanghai, Beijing and Tianjin as well as other areas such as Guangdong, Hebei, Anhui, Shandong, Sichuan, and Ningxia. It will also be implemented nationwide from April 2017 onwards. Once the work permit is issued, its classification will apply to the foreign worker permanently.
The new system seeks to better encourage, regulate and limit the entry of top-tier foreign professionals, other foreign professionals, and semi-skilled/unskilled workers respectively by removing impediments such as inconsistent administration and policies as well as inefficient communication between local authorities across different regions in China.
Class A work permit applicants are top-tier foreign professionals who are considered critical to China’s socio-economic development, such as scientists, technology leaders, international entrepreneurs, and those with special talents.
Class B applicants are foreign professionals in other positions open to foreigners under Chinese regulations and who also play an important role in China’s socio-economic development.
Class C applicants are semi-skilled or unskilled foreign workers required for temporary, seasonal, non-technical or service work in line with national policies.
To be issued their respective work permits, Class A and B applicants must either meet one of the criteria for auto qualification or achieve at least a minimum score under China’s point assessment system. Not applicable to Class C applicants, the point assessment system is implemented as an alternative for the majority of Class A and B applicants who do not meet the strict criteria for auto qualification.
The new system indicates a greater focus by the government on managing the quality of foreign workers beyond their quantity, comparable to similar programmes in Europe. It also helps to keep unemployment of citizens in check by limiting the arrival of semi-skilled/unskilled foreign workers in the domestic labour market.
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