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LEGAL: The New Era on Administration of Foreign-Invested Enterprises - Part II
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The New Era on Administration of Foreign-Invested Enterprises - Part II

By Manuel Torres (Managing Partner of Garrigues China) & Cindy Pan (Senior Associate)

BT 201701 LEGAL 023. Significance of record-filing regime

The reform from approval regime to record-filing regime has been considered as a nationwide revolutionary change in the administration of FIEs. Its significance can be seen from the following aspects:

3.1 Nature of record-filing regime

Article 5 of Interim Measures provides that record-filing for incorporation of FIEs can be made either prior to or within thirty (30) days after the issuance of business license. Article 6 provides that record-filing for amendment of foreign-invested enterprise shall be made within thirty (30) days upon the occurrence of change via comprehensive administrative system online. Article 20 provides that upon completion of record-filing, a “Record-Filing Receipt” may be issued to the foreign-invested enterprise upon request.

Therefore, unlike administrative permission, we understand that record-filing regime is supervision and administration informative in nature. Hence, it shall not be treated as a pre-condition to incorporation and/or amendment of the FIEs.

BT 201701 LEGAL 013.2 Requirement of penetrating management

It is required in Articles 5 and 6 of Interim Measures and its Annexes, the Application Form for Establishment of FIEs and Application Form for Amendment of FIEs that the information of ultimate controller of FIEs and ultimate controller of FIEs’ investors shall be disclosed.

The term "ultimate controller" means a natural person, enterprise, government agency or international organization that is ultimately controlled directly or indirectly by means of shares, contracts, trusts or other means (in short exhaustively possible), i.e. the actual controller needs to be traced back to the legal subject at the uppermost level. If the ultimate controller is from oversea, he shall be traced back to overseas listed companies, overseas natural persons, foreign government agencies or international organizations (including government fund); if the ultimate controller is domestic, he shall be traced back to domestic listed companies, domestic natural persons or state-owned/collectively-owned enterprises.

It is noted that due to information sharing between the record-filing authority and tax authorities, if the non-resident enterprise indirectly transfers the equity of FIEs and results in changing the ultimate controller of FIEs, the tax authority will determine whether the indirect transfer of FIEs is with reasonable commercial purposes. If it does not have a reasonable commercial purpose, the tax authority has the right to re-determine the nature of indirect equity transfer which could be recognized as a direct transfer of FIEs equity and therefore enterprise income tax may be imposed on the income of equity transfer.

3.3 Post-mortem supervision mechanism

In order to enhance post-mortem supervision, Interim Measures requires that the competent commerce departments and relevant administrative departments of public security, state-owned assets, customs, tax, industry and commerce, securities and foreign exchange should closely cooperate and coordinate to strengthen information sharing. If competent commerce departments find, in the process of supervision and inspection, any illegal behaviours of FIEs or their investors which do not fall within the scope of their administrative responsibilities, they should promptly inform the departments concerned.

It is important that integrity information of FIEs and their investors found out in the process of supervision and inspection by the competent commerce departments and other responsible departments shall be kept in the foreign investment integrity records system of the Ministry of Commerce. Among others, in case of any failure to carry out record-filing, any inauthentic record-filing, lack of cooperation concerning supervision and inspection, or refusal to implement administrative penalty decisions made by the competent commerce departments, the competent commerce departments shall disclose the integrity information via foreign investment information disclosure platform of the Ministry of Commerce.

3.4 Legal liability

Article 24 of Interim Measures provides that if the FIEs or its investor violate the obligation of record-filing regime, the FIEs shall be ordered to make correction within the limited time. If circumstances are serious, it shall be fined not less than one time but not more than three times of illegal income, but no more than RMB 30,000.

Furthermore, Articles 25 and 26 of Interim Measures provide spaces for concurrent penalties if the FIEs or its investor engage in business in limited or prohibited business sectors without obtaining prior approval, apart from the measures indicated in Article 24. In case of violation of other laws and regulations, the relevant departments shall investigate the corresponding legal liabilities.

4. Conclusion

When Interim Measures takes effect, the administration of FIEs has entered into a new era which is under the mode of national treatment plus Negative List management mechanism. The record-filing regime has been considered as an important measure taking into account the new steps of China’s reform and opening-up of domestic market, which shows that China has undertaken its responsibilities as one of the largest developed countries in the course of global integration.

Although China has made a significant step on the administration of FIEs, we are still far away from the legislative aim of unified rules on FIEs administration. We hope this reform will provide impetus to the release and implementation of Foreign Investment Law in the near future.

As always, Garrigues will keep close eyes on the practice and further development of the FIEs administration laws and regulations and keep you posted.


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