Practical registration and reporting issues under new FIL regime

China’s new Foreign Investment Law (FIL) has established a new regime for setting up foreign invested enterprises (FIEs) and changing their registration. It aims to streamline the registration and reporting requirements for FIEs and to minimise the administrative burden on foreign investors. With the new regime now having been operating for just over a year, in this e-bulletin we set out some common practical issues and share our observations on the new law’s implementation.

A

MOFCOM online information reporting

Under the new regime, FIEs will only need to report certain information to the PRC Ministry of Commerce (MOFCOM) via an online reporting system. MOFCOM approval is no longer required for foreign investment.

What information needs to be reported?

Foreign investors and FIEs are required to report to MOFCOM in each of the following circumstances:

an initial report upon the establishment of an FIE, reporting basic information on the foreign investment project and each of its investors, such as:

• whether the investment falls within the negative list (which sets out the industries prohibited or restricted for foreign investment);

• the foreign investor’s ultimate controlling shareholder(s), which should be traced back to individuals, listed companies or governmental bodies;

• information on the legal representative, directors, supervisors and general manager of the FIE; and

• M&A transaction information such as the equity interest to be sold and the price;

a change report, to report any change to the information in the initial report;

an annual report, to be submitted between 1 January and 30 June each year covering the preceding year which includes information similar to that in the initial report, as well as certain information on business operations; and

a de-registration report, at the time an FIE is de-registered or converted into a non-FIE.

Where should the information be reported?

The FIL and its implementation regulations require FIEs to report such information to MOFCOM via the enterprise registration system and the National Enterprise Credit Information Publicity System (国家企业信用信息公示系统).

In practice, many localities have rolled out integrated online reporting platforms for both MOFCOM reporting and company registration with the State Administration of Market Regulation (SMAR registration, as discussed below). For example, Shanghai has introduced a new foreign investment information reporting system called “Government Online-offline Shanghai” (上海一网通) through which companies can report the required information online.

When should the information be reported?

Under the new regime, reporting to MOFCOM is not a pre-condition to SAMR registration or vice visa. In practice, it is usually carried out in parallel with the SAMR registration. However, in some localities (such as certain districts in Shanghai), the local SAMR office will require that the MOFCOM reporting must be completed before the SAMR registration. As the MOFCOM reporting process is relatively straightforward and normally takes only a couple of days, this generally would not have a material impact on the project execution timetable.

What evidence is provided to show reporting has been completed?

Under the old regime, an FIE could obtain a record-filing receipt from the local MOFCOM, and such receipt might be required for subsequent registrations such as foreign exchange registration. Under the new regime, as the reporting is online, no receipt or other document will be issued by MOFCOM to evidence completion of the reporting. If any evidence is required, the FIE can take a screen shot of the online platform's webpage that shows the MOFCOM reporting has been completed. 

B

SAMR registration

Under the new regime, the SAMR plays a more important role in foreign investment registration and will conduct a substantive review of the application documents (including, for example, the articles of association of an FIE). For decades, MOFCOM has been the centre for FIE administration and so local branches of SAMR have needed to get up to speed with the new regime. During the transitional period, there may be procedural uncertainties at the execution level at local branches of SAMR, which may prolong the registration timetable for foreign investment projects.

Tax payment as a pre-condition to SAMR registration

By law the payment of PRC tax in connection with an equity transfer of an FIE is not a pre-condition to SAMR registration. However, in some localities (for instance some cities in Guangdong province), the local SAMR office may require sight of a tax clearance certificate from the local tax authority evidencing the tax payment (or confirming that no tax is payable) before they will process the registration of an equity transfer. As the SAMR registration would normally be a condition precedent in an equity transfer agreement, this means that the transfer cannot be completed before obtaining tax clearance (which can be time consuming and not straightforward).

We suggest that parties communicate with the local tax authority and SAMR office at an early stage to understand their requirements, take this into account in the transaction documentation and plan a reasonable execution timeline.

Notarisation and legalisation requirements

When a foreign investor is registered as a shareholder in an FIE, it is common for the local SAMR office to require the notarised and legalised incorporation documents (such as the certificate of incorporation) of the foreign investor as part of the application documentation. The incorporation documents must be notarised by a notary public and legalised by the Chinese embassy (or consulate) in the investor’s home country.

The notarisation and legalisation process usually takes two to four weeks in normal circumstances. However, due to the impact of Covid-19, there can be unexpected logistical difficulties in some jurisdictions, and foreign investors should be prepared for delays. It is also crucial to confirm the specific requirements of the local SAMR office for the notarised and legalised documents to avoid any back and forth with the local SAMR.

Authorised representative of the foreign investor

Another practical issue often encountered by foreign investors is that the SAMR requires the foreign investor to authorise a representative to sign documents or take actions for and on its behalf in respect of the FIE. Generally, the local SAMR requires a power of attorney, shareholders’ resolution or board resolution to evidence the representative’s authority. The passport copy and specimen signature of the authorised representative will also be required. Some local SAMR offices may require such documents to be notarised and legalised in the investor’s home country. Again, the foreign investor should confirm the specific documentary requirements upfront.

Once the authorised representative of the foreign investor is recorded with the SAMR, the SAMR will check and ensure that all documents submitted to it that are required to be signed by the foreign investor (such as the articles of association of the FIE) have been signed by the authorised representative on record. If the foreign investor wishes to change its authorised representative, it must apply to the SAMR with the documentation mentioned above.

KEY CONTACTS

Nanda Lau 刘依兰

Head of Shanghai Office

Nanda.Lau@hsf.com

Gavin Guo 郭武汉

International Partner

Kewei (Shanghai)

Gavin.Guo@hsfkewei.com

Angela Zhao 赵秋丹

Senior Associate, 

Shanghai

Angela.Zhao@hsf.com

Alvin Zheng 郑天骅

Associate

Kewei (Shanghai)

Alvin.Zheng@hsfkewei.com

China continues its efforts to open up its capital markets

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