14 October 2016

MOFCOM issues rules implementing new filing regime for foreign invested enterprises

The Ministry of Commerce (MOFCOM) has issued rules implementing the new filing regime for foreign invested enterprises (FIEs) which are in effect as from 8 October 2016.

The new implementing rules, with their nationwide scope, will have a significant impact on foreign investments in China. We recommend that multinationals active or interested in investment in China closely monitor how relevant authorities will in practice implement the new filing regime for FIEs.

Click here to read more about the recent major foreign investment reforms that these implementing rules are based on.

Scope of filing regime application
According to the implementing rules, the filing regime is applied to the incorporation of and to certain subsequent changes to FIEs that are active in an industry which is not on the negative list. However, against all expectations, the Chinese government has not yet published its nationwide negative list. Instead, MOFCOM and the National Development and Reform Commission (NDRC) published a joint announcement referring to the current catalogue in which industries are categorised as “encouraged”, “restricted” or “prohibited”. The announcement suggests that foreign investments in the following industries will continue to be subject to approval regime: (a) industries in the “restricted” or “prohibited” categories under the catalogue; and (b) industries in the “encouraged” category under the catalogue where there are restrictive requirements on the foreign shareholding ratio or senior management. It is currently not known when the expected nationwide negative list will be published.

Acquisitions of purely domestic Chinese companies by foreign investors are still subject to the approval regime. But after completion of the acquisition, the subsequent changes to the formerly domestic, but now foreign invested, entity will only need to be filed, not approved, unless the FIE is active in an industry which is mentioned in the negative list.

Filing change in ultimate effective control
The new implementing rules introduce a new requirement that a change in ultimate effective control over an FIE and its investors must be filed with MOFCOM. A person or entity exercising ultimate effective control means a natural person, enterprise, government agency or international organisation that ultimately directly or indirectly controls the FIE or its investors by means of shares, contracts, trusts or other means. This new requirement means that any party entering into a transaction that either directly or indirectly results in a change in effective control in an FIE must remember to file with MOFCOM. So even if the transfer of shares occurs outside China, in case the acquired entity has a subsidiary in China, the change in ultimate shareholder has to be notified in China.

It remains to be seen how MOFCOM will deal with and enforce the registration requirement if the change in ultimate effective control occurs higher up in the corporate structure and not at the level of the Chinese entity.

Connection with the FTZs
In view of the new implementing rules, the filing regimes previously applied in the four free trade zones (FTZs) in China have been abolished. This means that the implementing rules will be applied nationwide, including FTZs. However, since there is no nationwide negative list yet, the negative list applied in the FTZs still applies. That means foreign investments in and outside FTZs could face different administrative treatment. For example, certain foreign investments may be subject to a filing regime in the FTZs, but are subject to approval regime outside the FTZs, and vice versa.

Conclusion
Even though the nationwide negative list has not yet been published, the Chinese government seems determined to reform the administration of FIEs. The nationwide implementation of the filing regime for FIEs will remove administrative burdens and facilitate foreign investment in China. How the filing regime will be implemented in practice and when FIEs may fully enjoy treatment equal to domestic entities remains to be seen.