Jurisdiction - China
Reports and Analysis
China – Foreign Investment Bulletin.

18 February, 2015

 

 
The PRC Ministry of Industry and Information Technology (“MIIT”) decided to further lift control over shareholding percentage of foreign investors in the companies that provide online data processing and transactions processing services (E-commerce) in the China (Shanghai) Pilot Free Trade Zone (“Shanghai FTZ”). The PRC Ministry of Commerce (“MOFCOM”) has been soliciting public opinions on the draft Foreign Investment Law which aims to reform the current foreign investment legal system. The State Council decided to expend the replicable experiences accumulated from the pilot reform in Shanghai FTZ nationwide.
 
1. Lift Control Over Shareholding Percentage Of Foreign Investors In The Companies That Provide Online Data Processing And Transactions Processing Services In Shanghai FTZ.
 
On January 13, 2015, MIIT decided to further lift control over shareholding percentage for foreign investors in the companies that provide online data processing and transactions processing services (E-commerce) in Shanghai FTZ. The foreign investors are now allowed to hold up to 100% shares in such companies1 .
 
1.1 Background
 
Online data processing and transactions processing services are covered in the Category one of the value-added telecommunication services. Pursuant to the Administrative Provisions on Foreign-invested Telecommunications Enterprises, the ultimately maximum shareholding percentage for a foreign investor in a foreign-invested telecommunication enterprise engaging in value-added telecommunication services is 50%.
 
On January 6, 2014, MIIT and the Shanghai government decided to lift control over shareholding percentage for foreign investors in foreign-invested telecommunications enterprises engaging in value-added telecommunication services in Shanghai FTZ. As a result, the foreign investors were allowed to hold up to 55% shares in those companies that provide online data processing and transactions processing services (E-commerce).
Aiming to promote the development of Shanghai FTZ and to accumulate experiences, MIITdecided to further lift control over shareholding percentage of foreign investors in the companies that provide online data processing and transactions processing services (E-commerce) in Shanghai FTZ. The foreign investors are now allowed to hold up to 100% shares in such companies.
 
1.2 Next Step
 
During the period from November 4, 2014 to December 3, 2014, the PRC government authorities had been soliciting public opinion on the Catalogue of Industries for Guiding Foreign Investment (“Catalogue”), which was jointly revised by the National Development and Reform Commission, MOFCOM and other governmental authorities on November 4, 20142 . It is notable that the restriction on the shareholding percentage of the foreign investors engaging in E-commerce is removed in the Catalogue.
 
As per MIIT’s decision and the Catalogue, it is predictable that the restriction on shareholding percentage for the foreign investors engaging in online data processing and transactions processing services (E-commerce) is likely to be removed nationally in the near future.
 
2. MOFCOM Circulated The Draft Foreign Investment Law.
 
On January 19, 2015, MOFCOM circulated the Foreign Investment Law to solicit public opinion3 .
 
2.1 Background
 
The Sino-foreign Equity Joint Venture Law, the Wholly Foreign-owned Enterprise Law and the Sino-foreign Contractual Joint Venture Law (collectively “Three Laws On Foreign Investment”) became effective since 1980’s. The current market environment is significantly different from the one when Three Laws on Foreign Investment were formulated. It becomes critical to revise the Three Laws on Foreign Investment to keep pace with the new market environment, therefore the revision of Three Laws on Foreign Investment has been included in the second category of legislative program, which refers to the legislative program on the fast track that will be considered once conditions are satisfied, under the five-year legislative schedule by the Standing Committee of the 12th National People’s Congress. Accordingly the MOFCOM prepared and circulated the draft Foreign Investment Law.
 
2.2 Legal Review
 
The draft Foreign Investment Law is to be a unified and fundamental law to regulate and promote the foreign investment, which will introduce the pre-establishment national treatment with the negative list approach to replace the current case by case approval system. According to the draft Foreign Investment Law, only the business which falls within the negative list will be subject to approval by the foreign investment authority, and the foreign investment authority will inspect the foreign investors and the investment rather than the joint-venture contracts and Articles of Association. Under the new approach, most of the foreign investments will not need to be approved by the authorities. Besides the market entry principle, the Foreign Investment Law also entrenches the legal systems of national security review, information reporting system, promotions and protections of investment etc.
 
Once the Foreign Investment Law comes into effect, it will repeal Three Laws on Foreign Investment. Accordingly the foreign-invested enterprises previously established will be required to adjust their organization form and corporate governance according to the Company Law within 3 years since the Foreign Investment Law takes effect.
 
2.3 Next Step
 
For the purpose of identifying the foreign investor, besides the nationality and registered address, the draft Foreign Investment Law also introduces the concept of “ultimate control”, which means that a domestic company ultimately controlled by foreign investor(s) will be treated as a foreign investor. But the draft Foreign Investment Law does not give details about how to identify such “control”. It is worthy to pay close attention to how the foreign investment authority may judge “control” in practice.
 
Meanwhile, MOFCOM will consider the public opinions and decides on how to regulate the Variable Interest Entities (“VIEs”) established before the effectiveness of the Foreign Investment Law, especially if the businesses run by such VIEs still fall within the prohibited or restricted category as per the Foreign Investment Law. Currently in academic and practical circles there are three different views on this issue: (i) Declaration Mode: the investors may declare that the business is actually controlled by Chinese investors and the VIE structure can remain unchanged; (ii) Application and Verification Mode: after receiving the application from the investors, if MOFCOM verifies that the business is actually controlled by Chinese investors, the VIE structure can remain unchanged; and (iii) Application for Entry Permit Mode: where the business is controlled by foreign investors, a market entry permit by MOFCOM will be required and MOFCOM will examine and decide based on the relevant factors. It is worthy to keep a watchful eye on which mode the MOFCOM may eventually adopt to regulate the existing VIEs.
 
3. To Expend The Replicable Experiences Accumulated From The Pilot Reform In Shanghai FTZ. Nationwide 
 
On January 29, 2015, the State Council decided to expend the replicable experiences accumulated from the pilot reform in Shanghai FTZ4 . nationwide.  
 
3.1 Background
 
Shanghai FTZ has been established for more than one year. It has accumulated replicable experiences, including the foreign investment administration system based on the negative list, the simplified trade supervision system, the financial innovative system to allow the foreign currency in capital account convertible and to open financial service market, and the government administrative function which changed from pre-approval mode into interim and ex-post supervision mode. With the approval of the State Council, these replicable experiences from the pilot reform in Shanghai FTZ can be expended nationwide.
 
3.2 Legal Review
 
The policies to be duplicated nationwide cover the fields of investment administration, trade facilitation, finance, services, government function of interim and ex-post supervision. The reform on investment administration includes thefiling system for foreign investors to establish advertising enterprises. The financial reform includes allowing foreign-invested enterprises to settle foreign exchange capitals at their discretion, and delegation of foreign exchange registration to the banks. The reform on service areas includes allowing foreign investors to set up foreign-invested credit standing investigation companies, foreign-invested joint-stock holding companies, as well as to engage in the manufacturing and trading of video game consoles, etc.
 
The reform which will be duplicated in the other special customs-supervision zones in China covers customs regulatory system and inspection and quarantine system. The customs regulatory system reform includes the customs supervision systems over the futures bonded delivery, and the financing lease. The inspection and quarantine system reform includes adopting the negative list administration on pre-inspection of imported goods, and quarantine inspection of animals, plants and their products.
 
3.3 Next Step
 
The State Council has made task tables for the authorities under the Sate Council and the provincial governments to implement the reform. The State Council requested authorities under the Sate Council and the provincial governments to work out the working plan, defining the specifictask, time points and the working results, and report to MOFCOM before January 31, 2015. Then, MOFCOM will consolidate and report to the State Council.
 
It is required by the State Council that by June 30, 2015, the following measures shall be implemented: the State Administration for Industry and Commerce shall implement the filing system for foreign-invested advertising enterprises; the State Administration of Foreign Exchange shall allow foreign-invested enterprises to settle foreign exchange in their capital accounts discretionarily, and shall delegate foreign exchange registration to banks; MOFCOM shall allow the establishment of foreign-invested credit standing investigation companies and foreign-invested joint-stock holding companies; the PRC Ministry of Culture shall allow foreign-invested enterprises to engage in the production and sales of game and amusement equipment.
 
It is worthy to pay close attention to how these reform will be implemented.
 
End Notes:
 
1 http://www.miit.gov.cn/n11293472/n11293832/n12845605/n13916928/164 07135.html
2 http://www.ndrc.gov.cn/yjzx/yjzx_add.jsp?SiteId=85
3 http://tfs.mofcom.gov.cn/article/as/201501/20150100871010.shtml
4 http://www.gov.cn/zhengce/content/2015‐01/29/content_9437.htm

 

Jun He 4
 
For further information, please contact:
 
Catherine Miao, Partner, Jun He
miaoqh@junhe.com
 
Vivian Pan, Jun He
panym@junhe.com
 

 

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