This article provides an overview of legal developments relating to foreign investment in China in 2014.
2014 was a year highlighted by a challenging global investment environment and a slowdown in the local economy. Against this backdrop, the government announced measures to stimulate economic growth including further opening up to foreign investors and reforms in the foreign investment administration system. Foreign investment laws and regulations which were newly issued or amended in 2014 represent core features of “broadening the market entry and simplifying the administration”, and consist of the following in general:
reducing market entry barriers: further opening up the manufacturing and service sectors
simplifying foreign investment approval process: simplifying and streamlining administrative procedures for foreign investment, and to improve the efficiency and transparency of government approval system
Shanghai Pilot Free Trade Zone: granting “national treatment” to foreign investors during the market-entry phase, as well as revising and reducing the “negative list” for foreign investment
A summary of the newly promulgated or revised key laws and regulations is as follows:
Amended Company Law
The Amended Company Law, which took effect on 1 March 2014, overhauled the registered capital system, which has a significant impact on a number of other regulations in relation to foreign investment. In contrast with the Company Law 2005, key changes include:
from “paid-in capital” to “subscribed capital”: paid-in capital is no longer required to be registered with the government authority, and the requirement for paid-in capital verification is removed. The subscribed capital will be determined by the investors and set out in the articles of association.
no minimum registered capital requirement: the shareholders may determine the amount of subscribed capital as they deem fit, except for industries subject to special administration.
no timing restrictions for registered capital contributions: the requirement for paying the registered capital within a certain timeframe is removed.
no minimum cash contributions to registered capital: the requirement for minimum cash contributions making up 30% of the registered capital of a limited liability company is removed.
2014 Catalogue of Investment Projects Subject to Governmental Approval
On 31 October 2014, the State Council released the 2014 Catalogue of Investment Projects Subject to Governmental Approval, which further removes or simplifies the existing approval requirements for certain investment projects:
for 15 types of investments such as iron and steel, non-ferrous metals, cement, fertilizers, shipbuilding facilities and urban water supply, the current requirement to obtain approval from the projects approval authority is replaced by a filing requirement, unless foreign investments is in excess of a defined threshold;
for 23 types of investments, such as gas-fired power plants, thermal (non-coal) fired power plants, pumped-storage power stations, new ports, and new general aviation airports, approval can be obtained at the provincial level government authority or below, rather than at the central government level; and
outbound investments by Chinese investors are no longer subject to government approval, unless the project involves sensitive countries, regions or industries.
Simplification of the Approval Process
In order to streamline the approval and administration of foreign investment, the State Council, the National Development and Reform Commission (“NDRC”), the Ministry of Commerce (“MOFCOM”) and the State Administration of Industry and Commerce issued or amended a number of rules in 2014:
In May 2014, NDRC released the revised Administrative Measures for the Approval and Recordation of Foreign Investment Projects. The extensive approval requirements for foreign investment as provided in the previous regulations are abolished. Under the new measures, only limited types of foreign investment projects are subject to government approval (NDRC or local government approval), e.g. all restricted real estate projects are subject to provincial government approval, and the other projects are subject to filings with NDRC or local government only.
In June 2014, MOFCOM issued the Circular on Improving Foreign Investment Review Administration. The circular simplifies foreign investment review and relaxes certain restrictions on foreign investment: (i) removing the limitations or requirements on the amount of first capital contribution, amount of monetary capital contribution, and capital contribution timeframe for foreign-invested companies (investors may agree upon those terms and specify them in the articles of associations); and (ii) canceling the minimum registered capital requirement. However, foreign invested companies are still required to comply with the ratio requirements between the registered capital and total investment.
In July and October 2014, the State Council issued its decisions on cancellation or adjustments to certain administrative approval items, 103 administrative approval items were cancelled or delegated to lower level government authorities, 78 professional qualification licensing were cancelled, and 123 items previously subject to approval prior to incorporation were changed to require only post incorporation approval.
In August 2014, the State Council promulgated the Interim Regulation on the Public Disclosure of Enterprise Information. The annual inspection of enterprises is no longer required and is replaced by the requirement for public disclosure of annual reports and the enterprise credit information. Beginning from 1 October 2014, companies are required to submit the annual reports to the government authority, which are publicly available.
In addition, other regulations including the Regulations on Administration of Registration of Companies, Implementing Regulations on Sino-foreign Joint Venture Law, Implementing Rules on Sino-foreign Co-operative Joint Venture Law and Implementing Rules on Wholly Foreign-owned Enterprises Law were amended to accommodate the relevant changes in the amended Company Law.
Notification of Simple Merger Cases
MOFCOM issued the Interim Provisions on the Criteria Applicable to Simple Cases of Concentration of Undertakings in February 2014 and the Guiding Opinions on the Notification of Simple Cases of Concentrations of Undertakings (for trial) in April 2014. Highlights include:
criteria for simple cases: MOFCOM outlines six types of concentrations that may be treated as simple cases, on the ground of either low market share in relevant market or no domestic impact of the concentrations.
simplified information disclosure requirements: where simple case criteria are met, the parties may choose to file a simple case notification; otherwise it will be deemed an ordinary case. Simple case notification reduces the cost and burden on applicants, e.g. less information on the applicant’s affiliates, no need for submission of the business license (and the certificate of approval for foreign investment, if any) of all PRC affiliates of the applicant, and no need for information on the applicant’s customers and suppliers in the relevant market.
publication of simple cases: once MOFCOM has formally accepted a simple case notification following its preliminary review, it will publish it on its website for 10 days with the necessary details of the particular case. During such period, third parties may challenge the decision by raising an objection to MOFCOM.
Negative List 2014 of Shanghai Pilot Free Trade Zone
On 30 June 2014, the Shanghai municipal government unveiled a revised negative list (the “2014 Negative List”). Compared to its previous 2013 version, the 2014 Negative List further expands the sectors open to foreign investment and cuts down foreign investment restricted sectors from 190 to 139, including 110 restricted sectors and 29 prohibited sectors. Under the 2014 Negative List, restrictions in a number of sectors, including manufacturing, infrastructure, real estate, retail, transportation, and professional services, are either removed or relaxed.
In December 2014, the State Council approved the establishment of free trade zones in the provinces of Fujian and Guangdong and the Tianjin municipal government; meanwhile, it also approved the expansion of the scope of the Shanghai Free Trade Zone. The measures regarding investment, trade, opening up of financial and service sectors, which are being implemented for on a trial basis in the Shanghai Free Trade Zone, will be extended to the new free trade zones.
New Foreign Exchange Rules on Round-Trip Investment
In July 2014, the State Administration of Foreign Exchange (“SAFE”) released the Notice on Foreign Exchange Administration Involved in Offshore Investment, Financing and Round-Trip Investment by Domestic Residents through Special Purpose Vehicles (SPVs) (“Circular 37”). Circular 37 superseded Circular 75, which took effect about 10 years ago. Major features of Circular 37 are as follows:
Expanding the definition of SPVs to include both offshore financing as well as offshore investment.
Clarifying and simplifying capital outflow by Chinese residents seeking outbound investment and financing.
Expanding the definition of Outbound-Trip Investment to include round-trip M&A, green-field projects and other investment activities by obtaining ownership or controlling rights in projects.
For the first time permitting (not a mandatory obligation) SAFE registration of equity incentive plans issued by a non-listed SPV to directors, supervisors, senior management, and employees working in domestic enterprises directly or indirectly controlled by such non-listed SPV. This may provide solutions for many problems related to holding and exercising equity incentive awards of non-listed SPVs by Chinese individuals.
We expect that following the fundamental changes in the Amended Company Law, the existing foreign investment regime will continue to evolve in 2015 and beyond. We will monitor the updates and keep our clients posted.
Guohua (Annie) Wu
Mobile：86-138 1103 9659
Guohua (Annie) Wu, a senior partner of JinCheng TongDa & Neal, is a recognized authority on public and private acquisitions, corporate finance, joint ventures and finance matters.
Vincent Zhang is a partner of JinCheng TongDa & Neal. His practice focuses on foreign direct investment, cross-border mergers and acquisitions, joint ventures, antitrust and regulatory matters, and international dispute resolution.
This News Alert is intended merely for information of our clients and friends, and does not constitute any legal advice. The opinions expressed here are those of the authors and do not necessarily reflect the positions of the firm. If you wish to have further information or details, please contact one of your regular contacts.