Evaluating the Changes Made to China’s FIE Establishment Procedures

Critical amendments to the establishment of foreign invested enterprises (FIEs) in China came into effect on October 1, 2016, essentially replacing the previous administrative approval process with a simplified filing system that reduces processing times from around 12 working days to 3. Mostly conducted online, the scheme was originally piloted in China’s free trade zones and will now be rolled out nationally.

The amendment affects four separate laws, namely those relating to Sino-foreign equity joint ventures, contractual joint ventures, wholly foreign owned enterprises, and investments made by Taiwanese entities. The Ministry of Commerce (MOFCOM) issued provisional measures for the new filing system on October 8, which defines and governs the main features of the system.
 
Previous approval system

The previous system consisted of a two-step approval and registration process, among other administrative procedures. An entity’s incorporation documents were firstly subject to approval from MOFCOM, following which a business license was required to be obtained from the local Administration of Industry and Commerce (AIC). The process often proved to be lengthy, especially where revisions to incorporation documents were required midway through the application process.
 
New filing system 

Now, FIEs can be incorporated by means of the simplified filing process with their local MOFCOM branch. Eligibility for the new procedure hinges on whether or not the scope of business is restricted by the Negative List for Foreign Investment. The filing procedure is carried out online via a dedicated information system, with required documentation cut down to include an application form, letter of undertaking, business license, and power of attorney appointing the representatives to make the application.

Although the application procedures have undoubtedly been streamlined, the new system is somewhat stricter regarding supervision: FIEs that do not meet the filing requirements will be subject to tougher supervision by the Commerce Committee, which is more partial to conducting random checks and inspections. Moreover, FIEs are required to provide more information concerning shareholders and the actual controlling persons of the FIE. After establishment, if the FIE wishes to make any changes to fundamental features such as change of address, business scope, registered capital, legal representative, etc., a filing application must be made within 30 days after the change.

That said, FIEs will benefit from application certainty and efficiency: under the previous system, most FIE transactions were subject to approval of district and prefecture level MOFCOM divisions. In many cases, district division MOFCOM personnel displayed inconsistent understanding of the laws and regulations, resulting in many applications being left unapproved. Because the new system shifts the application process to provincial-level MOFOCM divisions, personnel will only serve to perform a preliminary review, meaning a more uniform treatment and reduced risk to applications. As long as submitted documents are all in order and do not fall under the scope of the negative list, the filing will only take three working days to process.
 
Key takeaways

As the FIE amendment rules are still in the early stages of enactment, there are issues that are not yet fully clarified. Firstly, because the negative list has not yet been published, the actual scope of the new filing system is not apparent. The new negative list is expected to be published by the State Council in the near future. In addition, the provisional measures do not touch on mergers and acquisitions, so it is still unclear if the new filing system will apply to the M&A process. However, if the scheme is indeed wholly based on the Shanghai free trade zone scheme – which served as its model – M&As will be included in the negative list, and will be subject to MOFCOM approval. Nevertheless, it is important for foreign entities to be aware of the uncertainties at this point when going ahead with their establishment applications.
 
Since its establishment in 1992, Dezan Shira & Associates has been guiding foreign clients through Asia’s complex regulatory environment and assisting them with all aspects of legal, accounting, tax, internal control, HR, payroll and audit matters. As a full-service consultancy with operational offices across China, Hong Kong, India and emerging ASEAN, we are your reliable partner for business expansion in this region and beyond.
 
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