Adjustment of Administrative Approval in China (Shanghai) Free Trade Trial Zone
On August 30, 2013, the Standing Committee of the National People's Congress (“Standing Committee”) issued a decision in which the State Council is authorized to temporarily adjust certain rules on administrative approval in relevant laws within China (Shanghai) Free Trade Trial Zone (hereinafter the “Decision”), which will enter into effect on October 1, 2013.
In order to accelerate the transformation of governmental functions, innovating the mode of opening the economy to the world, exploring the experience of deepening of reform and opening up, the State Council is authorized to execute such adjustment in Shanghai Waigaoqiao Free Trade Zone, Shanghai Waigaoqiao Bonded Logistics Park, Yangshan Bonded Port and Shanghai Pudong Airport Free Trade Zone established on the basis of China (Shanghai) Free Trade Trial Zone. The adjustment of administrative examination and approval shall be implemented within three years on a trial basis as of its effective date. If the Trial practice is proved feasible, relevant laws and regulations will be modified and improved. Otherwise, relevant laws and regulations will be recovered.
According to the Decision, the approval of establishment, registration changes, dissolution and other relevant activities with respect to foreign-invested enterprises, sino-foreign joint venture enterprises and sino-foreign cooperative joint venture enterprise stipulated in Foreign Invested Enterprises Law, Sino-foreign Joint Venture Enterprises Law and Sino-foreign Cooperative Joint Venture Enterprise Law shall be temporarily ceased and replaced by the filing management of the Chinese authorities within 3 years' period.
The specific items applicable to the adjustment are as follows:
1. Approval of the establishment of foreign-invested enterprises (Article 6 of Foreign Invested Enterprises Law);
2. Approval of division, merger and other critical registration changes of foreign-invested enterprises (Article 10 of Foreign Invested Enterprises Law);
3. Approval of operation period of foreign-invested enterprises (Article 20 of Foreign Invested Enterprises Law);
4. Approval of the establishment of sino-foreign joint venture enterprises (Article 3 of Sino-foreign Joint Venture Enterprises Law);
5. Approval of the extension of operation period of sino-foreign joint venture enterprises (Article 13 of Sino-foreign Joint Venture Enterprises Law);
6. Approval of the dissolution of sino-foreign joint venture enterprises (Article 14 of Sino-foreign Joint Venture Enterprises Law);
7. Approval of the establishment of sino-foreign cooperative venture enterprises (Article 5 of Sino-foreign Cooperative Joint Venture Enterprise Law);
8. Approval of the critical registration changes of cooperative agreement, contract, articles of association of sino-foreign cooperative venture enterprises (Article 7 of Sino-foreign Cooperative Joint Venture Enterprise Law);
9. Approval of the transfer of the contractual rights and obligations of sino-foreign cooperative venture enterprises (Article 10 of Sino-foreign Cooperative Joint Venture Enterprise Law);
10. Approval of the transfer of the contractual rights and obligations of sino-foreign cooperative venture enterprises (Article 10 of Sino-foreign Cooperative Joint Venture Enterprise Law);
11. Approval of the extension of cooperation period of sino-foreign cooperative venture enterprises to the third party (Article 24 of Sino-foreign Cooperative Joint Venture Enterprise Law).
General Remarks
The State Council of China approved the establishment of China (Shanghai) Free Trade Trial Zone on July 3, 2013. Although the formal general plan/framework of this free trade zone has not been published, according to the information from the Chinese government, within this trial zone, at least financial market, international trade, ocean transportation will be further opened. For instance, goods may be imported, processed and re-exported without the intervention of customs authorities. Moreover, there will be the financial innovation in respect of RMB free exchange, exchange rate marketization, opening of finance market, etc.
China (Shanghai) Free Trade Trial Zone will be the first free trade zone on the Chinese mainland. It will take about three years to build to meet international standards. It is expected to help Shanghai to cut costs of trade, improve efficiency and promote financial services.
New Regulations on Exit and Entry of Foreigners
On July 12, the State Council issued the PRC Administrative Regulation of Entry and Exit of Aliens (the “Administrative Regulation”) which took effect on September 1, 2013. The promulgation of the Administrative Regulation aims to specify the exit and entry rules in the PRC Exit-Entry Administrative Law (the “Exit-Entry Administrative Law”) which came into force on July 1, 2013, and facilitate the management of the exit and entry of foreigners in the practical areas.
Key Points of Administrative Regulation are as follows:
1. Category of Ordinary Visas of China
Exit-Entry Administrative Law regulates the ordinary visa as one kind of visas to China but no specific category is mentioned. Administrative Regulation specifies the category of the ordinary visas applicable to foreigners coming to China, which include 12 types as follows:
a. C visa – for international transportation workers;
b. D visa – for permanent residents (settlement);
c. F visa – for person conducting exchange activities, visits and investigation;
d. G visa – for transiting persons;
e. J1 and J2 visas – for journalists;
f. L visa – for tourists (travelling);
g. M visa – for businessmen (commerce);
h. Q1 and Q2 visas – for family members or relatives of Chinese citizens or foreigners with permanent residence permit in China;
i. R visa – for high level foreign talents required by China;
j. S1 and S2 visas – for family members and relatives of persons dealing with personal affairs in China;
k. X1 and X2 visas – for persons studying in China (study);
l. Z visa – for persons working in China (employment).
The Administrative Regulation expands the category of ordinary visas from 8 types to 12 types which include 4 new types – M, Q, R and S visas besides old 8 types regulated in the Exit-Entry Administrative Law.
The Administrative Regulation clarifies application documents required for different types of visas. For instance, i) for F and M visas, the applicant shall provide the invitation letters issued by the Chinese entities or partners, among others; ii) for Q and S visa, the applicant shall provide relationship proofs, among others; iii) for Z visa, the applicant shall provide the work permit, among others.
2. Management of Stay of Foreigners in China
2.1 Renewal, Replacement or Reissuance of Visa
The Exit-Entry Administrative Law regulates that foreigners shall apply for the renewal, replacement or reissuance of his/her visa or for the issuance of a stay permit with the exit-entry department of the police station, and the Administrative Regulation reaffirm this rule. Moreover, the Administrative Regulation specifies the following two issues:
a. Specify documents for renewal, replacement or reissuance of visa including application form, valid passport, photo, statement and other relevant documents.
b. Specify the time limit for the review of the application – 7 days.
2.2 Residence Permit
Besides different types of visas, foreigners can also apply for the residence permits which are valid for at least 90 days (maximum of 5 years). Comparing to visas, residence permits have a long period of effective periods.
The Administrative Regulation specifies the following issues regarding residence permits:
a. Types of Residence Permits
i. Residence permit for employment;
ii. Residence permit for study;
iii. Residence permit for journalists;
iv. Residence permit for family members and relatives;
v. Residence permit for personal affairs.
b. Documents for Application of Residence Permit
The Administrative Regulation also clarifies application documents required for different types of residence permits. For instance, i) for employment residence permit, the applicant shall provide work permit, among others; ii) for residence permit for family members and relatives, the applicant shall provide relationship proofs, among others; iii) for study residence permit, the applicant shall provide the letter with study period issued by institution recruiting him/her, among others. If the applicant applies for a residence permit valid for one year or more, he/she shall submit a health certificate as required. Such a health certificate is valid for six months as of the date of issuance.
c. Feedback of Application of Residence Permit
The Administrative Regulation specifies the time limit for the review of the application by the exit and entry department of police – 15 days.
3. Management of International Students
According to the Administrative Regulation, international students are permitted for off-campus work or internships in China. When a foreign student holding a residence permit for study works or interns off-campus, besides the approval of his/her school in advance, he/she must apply for the filing of working/internship place and specific period in his/her residence permit with the entry-exit department of the police in China. Otherwise, the foreign student may not take a part-time job or internship off- campus.
Summary
The Administrative Regulation specifies many rules of the Exit-Entry Administrative Law with respect to main issues mentioned above. Compared with the old regulations, the Administrative Regulation together with the Exit-Entry Administrative Law stipulates more complete and practical regulations in details in order to provide a clear guideline for the visa/residence permit application of foreigners.
China Simplifies Rules on Foreign Exchange Administration of Foreign Direct Investment
On May 10, 2013, State Administration of Foreign Exchange (“SAFE”) released the “Regulations on the Foreign Exchange Administration of Domestic Foreign Direct Investment” (hereinafter the “Regulations”), which came into effect on May 13, 2013.
The promulgation of the Regulations aim to further simplify and clarify the foreign exchange administration of foreign direct investment (“FDI”) into China, following the Notice on Further Improvement and Revision of Foreign Exchange Regulatory Policies concerning Foreign Direct Investment (the “Notice”) issued by SAFE on November 19, 2012, which simplified dramatically procedures and examination concerning the foreign exchange administration for FDI (see previous post http://www.ub-co.com/media-room/news/76/2012-11-19/notice-on-further-improvement-and-revision-of-foreign-exchange-regulatory-policies-concerning-foreign-direct-investment/).
According to the Regulations, SAFE has simplified the foreign exchange administration procedures with respect to the registration, account openings and conversions, settlements of FDI-related foreign exchange, as well as fund remittances.
The main issues of the Regulations are as follows:
1. Definition of “Domestic FDI”
According to Article 2 of the Regulations, “domestic FDI” refers to the establishment of foreign-invested enterprises (FIEs) or projects in China by means of new setup, mergers and acquisitions, or other methods, through which foreign investors acquire the ownership, control rights, or operation and management rights, or other rights and interests.
2. Authorities in Charge
SAFE and its branches are in charge of foreign exchange administration registration and supervision.
3. Foreign Exchange Registration
The following FDI-related activities require the registration with SAFE and its branches.
- Remittance of pre-operation expenses for establishing FIEs;
- Establishment of FIEs;
- Foreign investors’ capital contribution to FIEs in the form of foreign exchange, equity, tangible and intangible assets (including domestic lawful profits), as well as payment of consideration to the Chinese shareholder when acquiring its equities in a domestic enterprise;
- Changes of FIEs such as capital increase, capital decrease, equity transfer;
- Deregistration of FIEs or transformation of FIEs to non-FIEs;
- FDI-related activities conducted by domestic and foreign institutions and individuals, such as equity transfer, domestic re-investment;
- Remittance of funds abroad due to capital decrease, liquidation, recovery of investment in advance, or transfer of equities held by foreign investors in FIEs.
4. Form of Bank Accounts for FDI
After the registration, FIEs may open one or more bank accounts as follows according to the actual requirements:
- Pre-operation expenses account;
- Capital account;
- Asset conversion account
5. Annual Inspection
SAFE and its branches conduct the annual inspection of FIEs based on relevant regulations, and are entitled to conduct on-site or off-site inspections where they discover abnormal or suspicious activities of FIEs.
6. Supervision and Management
The supervision and management of SAFE and its branches applies to both FDI-related activities conducted by foreign investors/FIEs and banking services provided by corresponding banks.
On one hand, activities such as investment fund remittance, settlements, use of FIEs’ capital after settlements, changes of foreign investors’ rights and interests, opening and changes of FIEs’ bank accounts, shall be supervised by SAFE and its branches.
On the other hand, corresponding banks are required to register or report service information regarding the opening of and changes of accounts, fund remittances, and foreign exchange settlements relating to FDI with SAFE and its branches.
7. Others
The Regulations also apply to the establishment of financial institutions in China, and cover investors from Hong Kong, Macau, and Taiwan.
In addition, the Regulations abolish 24 foreign exchange administrative regulations that are out of date or no longer applicable.
Comments
The trend of improvement and reform of foreign exchange administration of FDI indicates that the new leadership of the Chinese government follows policies of the previous government in order to further simplify the foreign exchange administrative procedure and loosen the strict control in this regard.
The Regulations together with the Notices will surely facilitate the operation of FIEs regarding the foreign exchange matters and attract more foreign investment entering into China market, which will probably help to reverse the persistent weakening of the Chinese economic since early 2012.
Adjustment of the Standard of Social Security Payment
Shanghai Human Resources and Social Security Bureau issued the New Standard of Social Security Payment in Shanghai (the “New Standard”) on April 3rd, 2013. The New Standard has come into effect on April 1st, 2013 and will expire on March 31st, 2014.
The New Standard increases the payment base (the “Base”), which refers to the number used to calculate the amount of the social security payments.
The new standard regarding the upper limit and the lower limit of the Base are summarized as follows:
1. The Base
The Base of the social security payments should be the actual salary of the employee, however, the upper limit is RMB 14,076 and the lower limit is RMB 2,815. In other words, if an employee’s actual salary is over RMB 14,076, his/her Base of the social security payments should still be RMB 14,076, and if an employee’s actual salary is below RMB 2,815, his/her Base should still be RMB 2,815.
2. The Cost
The cost of the social security payments should be born divided as follows:
Born by the employee: 11% of the Base;
Born by the employer: 37% of the Base.
The amount of the social security payment is a percentage of the Base. Since the Base is increased every year, the social security payment will be increased accordingly.
The People's Supreme Court Issued Interpretation IV on Certain Issues Regarding Applicable Laws in Labor Dispute Cases
The People’s Supreme Court (“Supreme Court”) released the Interpretation IV on Certain Issues regarding Applicable Laws in Labor Dispute Cases (hereinafter the “Interpretation”) on December 31, 2012, which came into effect on February 1, 2013.
The Interpretation includes the following major issues:
1. Jurisdiction of Labor Dispute Litigation
The court has the power to censor whether the labor dispute arbitration authority has the jurisdiction over the labor dispute.
If the labor dispute arbitration committee refuses to accept to deal with the labor dispute case with the reason of no jurisdiction and the applicant brings it to the lawsuit, the court shall deal with such case under the following rules:
a. If the arbitration committee has no jurisdiction over the case, the court shall inform the applicant to apply for the arbitration to the competent arbitration committee;
b. If the arbitration committee has the jurisdiction over the case, the court shall inform the applicant to apply for the arbitration to this arbitration committee. If this arbitration committee still refuses to deal with the case, the applicant has the right to bring the case to the lawsuit and the court shall accept to hear it.
2. Arbitration Decision
The arbitration decision shall be issued in writing. If the arbitration decision doesn’t clarify whether the decision is final and the employer brings the case into lawsuit, the court shall hear the case under the following rules:
a. If the arbitration decision is not final, the count shall accept to hear the case;
b. If the arbitration decision is final and the court refuses to hear the case, the court shall inform that the employer has the right to apply for the revocation of the arbitration decision to the intermediate court;
c. If the court has already heard the case, it shall reject the lawsuit.
3. Working Period of the Employee
For reasons not attributed to the employee, arrangement is made for the employee to work for a new employer, if the original company hasn’t paid the compensation to the employee, when the employee terminates the labor agreement with the new employer or the new employer terminates the labor agreement with the employee, the working period of the employee with the original employer shall be taken into account and included in the whole working period.
“For reasons not attributed to the employee” mentioned above refer to the following circumstances:
a. The employee works in the same position and working places but the employer is changed;
b. The work of the employee is changed by the employer in the form of appointment or dispatch;
c. The work of the employee is changed due to the merger, division of the employer;
d. The employer and its subsidiaries sign the labor agreement with the employee in turn;
e. Other reasonable circumstances.
4. Non-Competition
If the labor agreement or non-disclosure agreement includes the non-competition clause but excludes the compensation to the performance of non-competition by the employee after the termination of the agreement, when the non-competition is executed, the employee may request the compensation equivalent to 30% of average monthly salary of previous 12 months before the termination of the agreement. If this compensation amount is less than the minimum monthly salary amount in the place where the labor agreement is executed, the minimum monthly salary shall be paid by the employer for the compensation.
If the labor agreement or non-disclosure agreement includes the non-competition as well as the compensation clause, when the agreement is terminated, the employer has the right to request the non-competition to be performed by the employee. However, the employer shall pay the compensation after the employee finishes the performance of the non-competition. If the employer fails to pay the compensation for three months, the employee has the right to release the responsibility of non-competition.
During the term of non-competition, the employer may terminate the non-competition agreement and the employee has the right to request three months’ compensation.
Even If the employee has paid the penalty to the employer due to the violation of non-competition clause, the employee shall continue to perform the responsibility of non-competition.
5. Change of Labor Agreement
If the labor agreement is changed verbally and has been actually performed for more than one month, and the revised agreement complies with the Chinese law, regulations, national policy, public order and good custom, this new labor agreement shall be regarded as effective by the court.
6. Expiration of Business Duration of the Employing Legal Entity
If the labor agreement is terminated because the duration of the employing legal entity is expired and the employing legal entity will not continue to do business, the employee has the right to request the relevant compensation.
7. Foreign Employees without Work Permit in China
If a foreign employee or stateless person or a resident from HK, Macao or Taiwan signs the labor agreement with the employer within the territory of China but hasn’t obtained the work permit in China, the labor relationship is not established,
Conclusion
The Interpretation regulates how the court shall handle labor dispute cases regarding specific issues which have not been regulated in the applicable labor laws and regulations. It facilitates the judgment of the court for the labor cases and improves the labor laws and regulations of China. On the other hand, the Interpretation also clarifies the rights and responsibilities of parties involved in the labor disputes.
However, there are some issues that cannot be resolved under the Interpretation as follows:
a. The compensation amount borne by the employee who breaches his obligations of non-competition clause is unclear if this amount is not regulated in the non-competition clause of the labor agreement or non-disclosure agreement;
b. The terms of the compensation to the employee are unclear if the labor agreement is terminated due to the expiry of the duration of the employing legal entity.
Labor Contract Law Revision: Stricter Regulation over Labor Dispatch
On December 28th,2012, Standing Committee of the National People's Congress (NPC) approved a Decision on the Revision to the Labor Contract Law of the People's Republic of China (hereinafter referred to as the “Decision”) which shall come into force on July 1st, 2013.
The Decision focused on the provisions related to labor dispatch and was designed to strengthen the administration of labor dispatch agencies and protect the rights and interests of the dispatched employees.
Main Content
1. Four Amendments
According to the Decision, Article 57, 63, 66 and 92 of the current Labor Contract Law will be amended. Details of the four amendments are as follows:
1.1. Higher Threshold for Labor Dispatch Agencies (Article 57)
A labor dispatch agency shall:
(1) have a registered capital of not less than RMB 2,000,000;
(2) own fixed premise(s) and facilities for business opreation;
(3) establish a system of labor dispatch management in accordance with laws and administrative regulations;
(4) meet other requirements provided by laws and administrative regulations.
As provided by law, a labor dispatch agency shall apply for an administrative license for operating labor dispatch business to the competent labor administrative department and shall go through the relevant registration formalities after obtaning the license. No entity or individual can provide labor dispatch services without the license.
1.2. Emphasis on the Principle of Equal Pay for Equal Work (Article 63)
The dispatched employees shall have the equal pay for equal work as that received by the employees who directly enter into labor contracts with the labor users (hereinafter referred to as the “directly-hired employees”). According to the principle of equal pay for equal work, the same method of remuneration distribution shall be applied to both dispatched employees and directly-hired employees who hold the like positions. If a labor user has no direct-hired employee in the like position, the remunerations shall be determined with reference to that paid to the employees who work in the place where the labor user is located and hold the same or similar positions.
The labor contract concluded between the dispatched employees and the labor dispatch agencies, the dispatch agreement concluded between the labor users and the labor dispatch agencies and the expressed or agreed remunerations shall be in accordance with the preceding clause.
1.3. Definitions for “Temporary”, “Auxiliary” and “Substitutive” (Article 66)
Labor contract is the fundamental employment model while labor dispatch is the supplemental employment model which shall only be used for temporary, auxiliary or substitutive positions.
A temporary position refers to the position of which the duration is no more than six months; an auxiliary position refers to the position regarding non-operating business which provides services to the positions regarding operating business; a substitutive position refers to the position in which the employee takes in place of the labor-user’s directly-hired employee who is not able to work for a certain period due to full-time study, vacation, etc.
1.4. Severer Punishment on Violation (Article 92)
Where a labor dispatch agency provides labor dispatch services without complying with the Labor Contact Law, the competent labor administrative department shall order it to cease its illegal activities, confiscate its illegal income and charge a penalty. The penalty shall be no more than 50,000 yuan or shall be not less than one time but not more than five times the illegal income, if any.
Where a labor dispatch agency or a labor user violates the provisions regarding labor dispatch, it shall be ordered to make ratification in a given period by the competent labor administrative department. If the ratification is overdue, it shall be fined at the rate of not less than 5,000 yuan but not more than 10,000 yuan per person and the labor dispatch agency shall have its administrative license for operating labor dispatch business revoked. If any damage is caused to the dispatched employee by the labor user, the labor dispatch agency and the labor user shall bear joint and several liability of compensation.
2. Retroactive Effect
2.1. The labor contracts and labor dipatch agreements which were concluded before the issuance of the Decision can continue to be executed till their dates of expiration. However, the content of those labor contracts and labor dispatch agreements shall be adjusted if it's not in accordance with the method of remuneration distribution under the principle of equal pay for equal work, as set forth in the Decision.
2.2. In order to carry on new business, the labor dispatch agencies which provided labor dispatch services before the date of implementation of the Decision shall obtain the above-mentioned license and go through the relevant registration formalities within one year from the date of implementation of the Decision. The detailed rules for implementation will be developed by state labor administrative department and other competent state department.
General Comment
After the Labor Contract Law came into force in 2008, many enterprises favored using dispatched employees because they brought advantages such as flexible employment relationships and cost savings. However, due to the ambiguity of wording and the lack of definitions in the Labor Contract Law (2008), the use of the labor dispatch model in China has increased —— to the point of “abuse” according to some voices.
The Decision limited the application of the labor dispatch model through stricter rules of labor dispatch business operation and clear definitions for “temporary”, “auxiliary” and “substitutive”. In addition, the Decision detailed the principle of equal pay for equal work in order to the protect the rights and interests of the dispatched employees.
According to the Decision, labor dispatch agencies shall make necessary adjustment and obtain the license for operating labor dispatch business before they can carry on new business; enterprises that currently use the labor dispatch model to staff their workforces should take a proactive and thorough review of the functions of their dispatched employees so that they can successfully adapt to the changes.
Beijing and Shanghai Allow 72-hour Transit without Visa for Citizens from 45 Countries
Starting from January 1, 2013, foreign passengers from 45 countries/regions, with a third country visa and flight ticket, will be able to enjoy the new policy of "72-hour Transit Without Visa (TWOV)" when transiting through Beijing Capital International Airport (PEK), Shanghai Hongqiao Airport (SHA) and Shanghai Pudong International Airport (PVG). This new policy is designed to boost the tourism industry in Beijing and Shanghai.
The following is the list of the countries/regions that the "72-hour TWOV" policy is applied:
- Twenty-four European Schengen countries: Austria, Belgium, Czech Republic, Denmark, Estonia, Finland, France, Germany, Greece, Hungary, Iceland, Italy, Latvia, Lithuania, Luxembourg, Malta, Netherlands, Poland, Portugal, Slovakia, Slovenia, Spain, Sweden, and Switzerland;
- Seven other European countries: Russia, the United Kingdom, Ireland, Cyprus, Bulgaria, Romania and Ukraine;
- Six American countries: the United States, Canada, Brazil, Mexico, Argentina, and Chile;
- Two Oceania countries: Australia, and New Zealand;
- Six Asian countries: Korea, Japan, Singapore, Brunei, United Arab Emirates, and Qatar.
Notice on Further Improvement and Revision of Foreign Exchange Regulatory Policies concerning Foreign Direct Investment
On November 19th, 2012, State Administration of Foreign Exchange (SAFE) issued a Notice on Further Improvement and Revision of Foreign Exchange Regulatory Policies concerning Foreign Direct Investment (hereinafter referred to as the Notice) which shall be implemented since December 17th, 2012.
By improving the foreign exchange (FX) regulatory system concerning foreign direct investment (FDI) as well as nullifying and revising some relevant administrative licensing items, the Notice was designed to deepen the FX regulatory system reform, simplify the administrative examination and approval procedures and promote the investment and trade facilitation.
Key Points
The key points of the Notice are as follows:
1. Cancellation of Some FDI-related FX Regulatory Measures
1.1. Cancellation of the approval requirements for the opening of FDI-related FX accounts, FX receipts, FX settlement, FX purchase and FX payment;
1.2. Cancellation of the approval requirements for FX transfer from within China regarding FDI-related routine transactions;
1.3. Cancellation of the approval requirements for reinvestment of legitimate income which foreign investors derived from within China;
1.4. Cancellation of confirmation requests for capital verification involved in capital reduction;
1.5. Cancellation of FX registration and confirmation requests for capital verification regarding the reinvestment in China by foreign-funded investment companies.
2. Simplification of the Current FX Regulatory Procedures
2.1. Simplification of the categories of FDI-related FX accounts;
2.2. Simplification of the regulatory procedures regarding the settlement of capital funds;
2.3. Simplification of confirmation requests for capital verification and the foreign investment and FX registration on receipt of foreign exchange for share transfers;
2.4. Simplification of required documents and shortening of processing time.
3. Further Liberalization of the Using of FDI-related Funds
3.1. Relax the limits on the number of FDI-related FX accounts and the restriction on opening FX accounts in places other than the domiciles;
3.2. Relax the restriction on FDI-related FX purchase and payment from places other than the domiciles;
3.3. Relax the restriction on the fund sources of overseas loan and the loaner qualification, allowing the domestic enterprises to grant overseas loans with domestic FX loans and the foreign-funded enterprises to grant loans to their overseas parent companies.
General Comment:
Currently, the FDI in China faces restrictions by various Chinese regulatory authorities. According to SAFE data, FDI in China has been in decline for the fifth straight month. From January to October, the investment rate fell by 3.45 percent compared to the same period in 2011, totaling about $91 billion.
The Notice is aimed at attracting more foreign investment. In brief, 35 administrative examination and approval requirements will be nullified and 14 of these requirements will be either simplified or merged under the Notice. Such significant reduction in administrative licensing items will conduce to the decline of social costs, further promote the facilitation of trade and investment and contribute to the development of the real economy.
Interim Regulations on Capital Contribution by Equities in Foreign Invested Enterprises
Minister of Commerce (“MOFCOM”) released the Interim Regulations on Capital Contribution by Equities in Foreign Invested Enterprises (“FIE”) (hereinafter the “Interim”) on September 21, 2012, which came into effect on October 22, 2012.
The Interim was promulgated after the public comments collection in May 2011 and over one year’s research on relevant issues by MOFCOM. The Interim includes the major issues as follows:
1. Transactions for the Purpose of the Interim
Transactions that domestic or foreign investors execute for the establishment or change of a FIE (“Foreign Invested Company” ) in China by means of capital contribution of equities which they hold in a domestic company (“Equity Company” ) include:
a. Set up a new foreign invested company (“FIE”);
b. Transform a domestic company into a FIE by increasing the registered capital of the domestic company;
c. Change the equities of a FIE by increasing the registered capital of the FIE.
2. Restriction on the Equities to be Contributed
The Equity Company cannot be contributed under the following circumstances:
a. The registered capital of the Equity Company has not been fully contributed;
b. The equities to be contributed have been pledged;
c. The equities to be contributed have been legally foreclosed or frozen;
d. The equities cannot be transferred according to the articles of association or contract of the Equity Company;
e. The equities of the FIE cannot be contributed if the FIE doesn’t pass the annual inspection;
f. The equities of real estate company, foreign invested company for investment and foreign invested venture capital company cannot be transferred;
g. The share transfer has not been approved by the Chinese authorities;
h. Other circumstances.
3. Evaluation of Equities
The equities to be contributed shall be evaluated by domestic evaluation institutions. The final price of transaction and equity contribution may be negotiated by parties according to the equity evaluation report. However, the price of the actual equity contribution shall not be higher than the price of the equity evaluation concluded in the report.
4. Restriction on the Proportion of Contribution by Equities and Total Investment Amount
The total capital contribution by equities and other non-monetary properties shall not be more than 70%, which is consistent with the rule regulated in the Company Law of China (issued in 2005)
The total investment amount of Invested Company shall be calculated based on its registered capital (including contribution by equities) and following the same calculation formula in the regulations on the proportion for joint venture companies in China.
5. Application Documents for Transactions of Contribution by Equities
a. Application letter for the contribution by equities and the agreement;
b. Shareholding proof of the shareholder;
c. Business license copy of the Equity Company;
d. Approval Certificate of the Equity Company if it is a FIE and the proof of passing the annual inspection of FIE;
e. Equity evaluation report;
f. Legal opinion letter regarding item d and e above, which shall be issued by a law firm;
g. Other application documents for the establishment or change of the FIE;
h. Approval documents for the share transfer if necessary;
i. Other relevant documents.
6. Approval Authorities
MOFCOM and its provincial commercial departments shall be in charge of the approval regarding transactions of the contribution by equities.
If the approval authority is different from that of the Equity Company, when the Invested Company’s approval authority receives the application documents, it should inquire the opinions of the Equity Company’s approval authority. The Equity Company’s approval authority shall respond whether it accept the application or not within 20 days after receiving such inquiry. Any response over 20 days shall be regarded as the acceptance.
7. Registration Change of the Equity Company
After the application of the contribution by equities is approved, the Equity Company shall:
a. If the Equity Company is not a FIE, it shall apply for the change of the shareholder from the previous investor to the Invested Company according to Interim Regulations on the Investment in China by FIE (issued in 2000);
b. If the Equity Company is a FIE and it still has the foreign shareholder(s) after the equity contribution, it shall apply for the change of shareholder from the previous investor to the Invested Company with relevant authorities according to the Interim Regulations on the Investment in China by FIE and Regulations on Change of Equities of FIE (issued in 1997);
c. If the Equity Company is a FIE and it has no foreign shareholder after the equity contribution, it shall apply for cancelling or changing the Approval Certificate with relevant authorities according to Regulations on Change of Equities of FIE and Interim Regulations on the Investment in China by FIE.
8. Registration Change of the Invested Company
After the registration change of the Equity Company, the Invested Company shall also apply for the registration change by submitting the following documents:
a. Statement of the change of equity of the Domestic Equities;
b. Business license of the Equity Company after the change of equity;
c. Capital verification report of the contribution by equities issued by qualified verification institutions;
d. New Approval Certificate of the Equity Company if it is still a FIE after the change of equity;
e. Approval of re-investment in China of the FIE issued by the provincial authorities if the Equity Company is not a FIE but its business scope involves restricted areas according to Catalogue of Industries for Guiding Foreign Investment (latest version in 2011).
9. Transactions of Contribution by Equities which Involves Chinese Listed Companies and State Owned Enterprises (“SOE”)
Transactions of contribution by equities involving Chinese listed companies shall comply with corresponding regulations regarding security supervision, security transaction, security registration and settlement, etc.
If the foreign investor is involved in the orientate offer of shares or share transfer of Chinese listed companies by using its equities held in the Equity Company as the consideration, such transaction shall also apply the Measures for the Administration of Strategic Investment in Listed Companies by Foreign Investors (issued in 2006).
10. Merger and Acquisition (“M&A”) of Domestic Enterprises by Foreign Investors and Security Review
If the transaction of contribution by equities belongs to M&A transaction, it shall apply to Regulations on M&A of Domestic Enterprises by Foreign Investors (latest version in 2009) together with the Interim.
If transactions of contribution by equities involve circumstances mentioned in the Notice on the Establishment of Security Review System for M&A of Domestic Enterprises by Foreign Investors (issued in 2011), the foreign investor shall apply for the security review with relevant authorities.
11. Equity Swap
If the foreign investor conducts the equity swap with other investors by using the Equity Company, it shall comply with rules of restrictions on equities to be contributed and equity evaluation in the Interim, as well as Regulations on Change of Equities of FIE and Regulations for M&A of Domestic Enterprises by Foreign Investors.
Comments
Before the promulgation of the Interim, Measures on Management of Registration of Contribution by Equities (issued in 2009) were applicable for the management of such matters. Notwithstanding, the Measures only stipulated rules on transactions of contribution of equities into domestic enterprises rather than transactions related to FIEs. Now the Interim brings a new mechanism for the investors especially for foreign investors to establish legal entities for the development of business or expansion of businesses in China. The way of contribution by equities will provide more alternatives and flexibility for the investment in China, and it will release the burden of cash contribution for such investment. Meanwhile, the Interim also stipulates the specific documents for the application of contribution by equities and approval authorities.
However, even though the Interim provides the possibility of contribution by equities for FIE transactions, it is still not complete. At least the following issues are not clear or regulated in the Interim:
1. Timeline of contribution by equities during the establishment or registration change of the FIE;
2. The specific contents or requirements which shall be included in the capital verification report of contribution by equities issued by qualified verification institutions;
3. The official procedure of registration with different approval authorities regarding transactions of contribution by equities;
4. The remedy if the application of transactions of contribution by equities is rejected;
5. Priority of the authority’s approval if different authorities have opposite opinions on the same application.
Rules on such issues mentioned above need further clarification or supplement. Therefore, the Interim is expected to be further improved by the issuance of the formal regulations on capital contribution by equities in FIE and other relevant legislation shall be followed by other supplementary rules.
China's New Exit-Entry Administration Law
On June 30th, 2012, the National People’s Congress Standing Committee of People’s Republic of China issued the new Exit-Entry Administration Law (hereinafter referred to as the “New Law”) which is applicable to exit-entry of both Chinese nationals and foreign nationals and shall come into effect on July 1st, 2013.
Key Points
The New Law strengthens the enforcement over foreign nationals’ entry, employment and residence in China. Its key points are as follows:
- The New Law imposes harsher penalties on illegal entry, residence or employment of foreign nationals. For instance, monetary penalties will be imposed heavily on employers for illegally employing foreign nationals and the relevant income received by illegally employed foreign nationals will be confiscated.
- The New Law adds a sub-category of visa called “talent introduction” into the “ordinary visa” category in order to attract highly talented foreign individuals to work and live in China.
- The New Law draws a distinction between stay and residence. The longest duration of stay for qualified foreigners is no more than 180 days while the longest duration of residence for qualified foreigners is 5 years.
- The New Law allows foreign nationals who have outstanding contributions to China’s economic and social development or meet the existing permanent residence requirement to apply for permanent residence qualification.
- The New Law establishes an information sharing platform and increases transparency. As at present, the Ministry of Public Security, the Ministry of Foreign Affairs and other relevant departments have their respective information systems of exit-entry management.
- The New Law emphasizes the equal importance of service and management. The relevant enforcement department shall take practical measures to improve their management as well as their service.
General Comment:
In view of the increase in population of foreigners in China in recent years, the issues of illegal employment, illegal entry and overstay have been a huge concern in China especially in major cities like Beijing and Shanghai. The stricter regulatory framework of the New Law creates harsher punishments to prevent immigration law violations in China.
However, there are still uncertainties in the New Law. It is expected that relevant implementation rules and further details would be developed and released by various competent authorities accordingly.