Latest Commentary on Guangdong Free Trade Zone Foreign Investment Policies. Frontline Legal & Labor Affairs

Transcription

1 Frontline Legal & Labor Affairs Latest Commentary on Guangdong Free Trade Zone Foreign Investment Policies WANG JING & CO. (Shenzhen Branch) Attorneys: Pan Lidong, Zhang Sheng, Shi Linli The Chinese government has unveiled China s free trade zones as a new policy targeting further reform and opening up of the national economy. The aim is to create an environment for international commerce that is in line with international business practices and that is competitive in investment areas for both domestic and foreign businesses. Currently, four free trade zones have been established with the approval of the central government in Shanghai, Guangdong, Fujian, and Tianjin. With its location putting it at the front line in terms of promoting deeper cooperation with Hong Kong and Macau, the Guangdong Free Trade Zone has been officially launched and is topping the news on regional development in Guangdong this year. 1. Overview of the Guangdong FTZ Free trade zones refer to specific areas established within a nation state and/or region (excluding customs territories) wherein preferential tax policies and special administrative policies apply. Abbreviated as the Guangdong FTZ, the China (Guangdong) Pilot Free Trade Zone was officially launched on April 21, 2015 following its formal approval by the State Council on December 31, Covering a total area of square kilometers, the Guangdong FTZ comprises three areas: the 60-square-kilometer Nansha New Area of Guangzhou (including the 7.06-square-kilometer Guangzhou Nansha Bonded Port Area), the 28.2-square-kilometer Qianhai & Shekou Area of Shenzhen (including the 3.71-square-kilometer Shenzhen Qianhai Bay Bonded Port Area), and the 28-square-kilometer Hengqin New Area of Zhuhai. Following the April 8, 2015 publication of the Overall Plan for the China (Guangdong) Pilot Free Trade Zone by the State Council, a series of reform measures have been implemented in the FTZ, and the relevant laws and policies have been put into place. This article offers commentary on the foreign investment policies that apply in the Guangdong FTZ and their impact on foreign investors. 2. Unrestricted market entry for foreign-invested enterprises: the pre-establishment national treatment and Negative List management models (1) Pre-establishment national treatment 1

2 Pre-establishment national treatment allows foreign investors to enjoy parity treatment with domestic investors prior to investing and/or setting up a business in a particular country. Under conventional investment management models, foreign investors may enjoy national treatment once an investment project is fully established, in general. Meanwhile, pre-establishment national treatment extended the requirement to ensure parity treatment to the pre-entry stage and granted statutory and substantial parity treatment in respect of any governmental supervision and taxation, etc. Accordingly, the application of pre-establishment national treatment in the Guangdong FTZ gives foreign-invested enterprises the right to enter any industry that has been opened up to foreign investment in the FTZ though foreign investment access is prohibited or restricted in the Catalogue for the Guidance of Foreign Investment Industries or under other laws and regulations. (2) Negative List On April 20, 2015, the State Council issued the Special Administrative Measures (the Negative List) for the Access of Foreign Investment to the Pilot Free Trade Zones (hereinafter referred to as the 2015 Negative List ). In the past, all foreign investment was managed under the Catalogue for the Guidance of Foreign Investment Industries model (a document that explicitly states whether foreign investment in a particular category is encouraged, restricted or prohibited, under which foreign-invested enterprises are only permitted to operate within regulatory parameters); the Negative List, however, is a list of areas that the State has designated off-limits to foreign investment or in which foreign investment is restricted to a certain percentage. Under the Negative List, foreign investment is permitted in all areas that are not explicitly listed as prohibited to foreign investment or subject to specific restrictions. In short, all areas and/or industries not on the Negative List in which there is no legal ban on investment are open to foreign investors. This gives foreign-invested enterprises greater freedom when selecting a category for investment. The characteristics of the 2015 Negative List are outlined below. 1) Increased openness to foreign investors Compared to the two Negative List editions established in 2013 and 2014 for the Shanghai FTZ, the 2015 Negative List has further reduced the scope of restrictions and increased the levels of openness and visibility inside China s FTZs. The major differences are as follows: a) The Shanghai FTZ Negative List consisted of 16 sectors and 56 areas, as compared to 15 sectors and 49 areas in the 2015 Negative List. The construction industry has been removed from the list, and four special administrative measures have been deleted, including the requirement for majority Chinese investment on projects involving the construction and operation of mainline railroads. 2

3 b) The 2015 Negative List has been further updated to ensure integrity with the Catalogue for the Guidance of Foreign Investment Industries that went into effect on April 10, 2015 (the 2015 Revision). For example, the special administrative measure requiring mergers and/or partnerships in the growth and/or cultivation of ingredients used in Chinese medicine in the agriculture, forestry, stockbreeding and fisheries industries has been removed, as has that requiring a majority Chinese investment in the production of brewed alcoholic beverages and premium baijiu in the manufacturing industry. In addition, the requirements on equity percentages have been lifted and/or loosened in several service sectors, including e-commerce, chain store management, railway branch lines, subways, light rail transit systems, marine transportation and the operation of performance venues, etc. Moreover, the restrictions applying to direct marketing, mail order selling, the inspection and certification of import and export commodities, rail freight transportation, insurance brokers, finance firms, trust companies, and money brokers, etc., have been lifted. Unlike with these other sectors, additional administrative measures have been made in respect of the financial industry. The 2015 Negative List includes ten additional special administrative measures on the financial industry as compared to four in the 2014 Negative List for the Shanghai FTZ, and the measures are more compartmentalized. Where, for example, a foreign investor is investing in a banking financial institution, the 2015 Negative List states explicitly that such foreign investor must be either a financial institution or a specific type of institution and imposes eight additional requirements. 2) A shift in administrative methods A unified administrative approach applies to foreign-invested enterprises within the FTZ that are operating in areas not included in the 2015 Negative List. In principle, a system of record filing now applies in respect of foreign investment categories and enterprise establishment, thus making it easier for foreign investors to invest and furthering progress toward the completion of a new market system. Further details on this matter are provided below. 3) Completion of the market entry system The establishment of the 2015 Negative List has resulted in: the organization of various policies and regulations for foreign investment; the listing of provisions regarding the restrictions on foreign investment; the provision of a comprehensive guide to market entry to the foreign-invested enterprises that are considering investing in FTZs; an increase in the transparency of foreign investment policies; and the conformance of the policies with international rules. 3

4 4) Unification of all applicable regulations The 2015 Negative List is applied to four FTZs in Guangdong, Tianjin, Shanghai, and Fujian, and thus it effectively removes the risk of regulatory arbitrage. Using different lists for each FTZ would result in a flood of investment in the region offering the most favorable treatment and the loosest regulations; instead, by unifying its policy, China would ensure that the advantages offered by each of the FTZ are brought into sharper focus. Companies located in Guangdong, for example, now need not relocate to Shanghai to enjoy the FTZ preferential policies, but will be able to make good use of the resources available in Hong Kong and Macau to develop inside the Guangdong FTZ. Attention should be paid in case investments made by investors from Hong Kong, Macau, or Taiwan in the pilot FTZ are, depending on requirements, to be executed on the basis of the Negative List for Pilot FTZs. However, in the closer economic partnership arrangements and supplementary agreements (CEPA) that mainland China signed with the Special Administrative Regions of Hong Kong and Macau, in the Economic Cooperation Framework Agreement (ECFA) that mainland China signed with Taiwan, and in the free trade agreements that China has signed, if there are liberalization measures that are applied to the pilot FTZs and that are more favorable to eligible investors, such investment will be made pursuant to the provisions of the related arrangements and/or agreements. It can be said that the Guangdong FTZ has an advantage in this regard. (3) Trial Procedures for National Security Reviews The State Council issued the Measures for Trial Implementation of National Security Review of Foreign Investment in the Pilot Free Trade Zones at the same time as it released the 2015 Negative List, giving the government the authority to undertake security reviews of foreign-invested enterprises that may affect national security in the FTZs, and provided for the scope, content, operating rules and procedures of such reviews. These review measures serve as a supplement to the Negative List, and state that industries constituting a threat to national security that are not on the Negative List will be required to undergo a security review. This is consistent with international practice and is testimony to the increased emphasis on the security of investments by the Chinese government. 3. Reforms to foreign-invested enterprise establishment and alteration procedures: from approval to record filing On April 20, 2015, the State Council issued the Administrative Measures for the Record-filing of Foreign Investment in Pilot Free Trade Zones (for Trial Implementation). These measures provide for a system of record filing with the FTZ administrative authorities instead of the approval required in respect of foreign investment categories, or contracts and articles of association, in an attempt to simplify the procedures involved 4

5 in investing in areas and industries not included in the Negative List. The procedures further supplement the Negative List by promoting the principle of equality for domestic and foreign investment and giving greater freedom of foreign investment. The Administrative Measures are based on the Measures for Administration of the Filing of Foreign Investment Projects in the China (Shanghai) Pilot Free Trade Zone that were issued by the Shanghai Municipal People s Government for implementation in the Shanghai pilot FTZ, with commensurate adjustments made to reflect their expanded coverage. The measures mainly provide for the scope of record filing application, method of record filing, record filing procedures, information reporting, supervisory inspections, credit controls, etc. The specific details are shown as below. Scope of record filing application Record-filin g institutions Method of record filing 1. Areas not included in the Negative List 2. Firing of the incorporation, alteration, contracts and articles of association of foreign-invested enterprises FTZ administrative authorities 1. Prior to investment or within 30 days of investing 2. Registration on the FTZ website, with the relevant information to be filled in and submitted online Record filing procedures Documents required for record filing 1. Where the scope of the record filing is provided for by the Administrative Measures, record filing procedure is to be completed within 3 working days by the record-filing institution. 2. Where no provision is made, the foreign investor and/or foreign-invested enterprise is to be notified of the requirement to complete the formalities for examination and approval. 1. The notice on the preliminary approval of enterprise name 2. The Incorporation Declaration Form or Alteration Declaration Form signed and sealed by the foreign investor 3. The certificate of entity qualification or identification papers of the foreign investor and/or the actual controller The key points of the Administrative Measures are explained below. The filing of foreign-invested enterprise contracts and articles of association is no longer part of the process of enterprise incorporation and/or alteration of registration and is not a prerequisite for the registration of record filing. The introduction of an information reporting system requires all foreign-invested enterprises operating in the FTZ to submit an annual report. In short, all foreign-invested enterprises must file an Annual Report Form for the Investment and Operation of Foreign-invested Enterprises via the record-filing system by June 30 each year. The requirements covering the supervision and inspection of foreign investment have been 5

6 subdivided, and the penal measurements to be imposed on the problems in respect of inspection organizations, the method and content of such inspection, and the supervision and inspection have been explicitly stated. A system for archiving foreign investment credit documentation has been established, and the relevant credit information filed is to be shared by the competent departments. This is consistent with the credit information disclosure system that is being established for market entities in China and furthers its completion. The removal of the examination and approval requirements to open up foreign entry into China s FTZs and of the government restrictions on areas and industries not included in the Negative List not only facilitates the foreign investment process, but also has the potential to give foreign investors the opportunity to highlight their strong points, to foster innovation in management business categories and content, and to boost commercial activity inside the FTZs. 4. Simplification of commercial registration procedures for foreign-invested enterprises: the single certificate, single number and business license before other permits systems On April 20, 2015, the People s Government of Guangdong Province issued the Pilot Measures on the Administration of the China (Guangdong) Pilot Free Trade Zone to promote the introduction of measures to simplify commercial registration in the Guangdong FTZ, including the single certificate, single number system (which provides for a single certificate bearing a single number) and the business license before other permits system (which allows enterprises to apply for various necessary permits after obtaining a business license). (1) The single certificate, single number registration system The single certificate, single number system refers to a system that changes to the one-stop application of: (i) industrial and commercial business licenses issued by the industrial and commercial administration department; (ii) organization codes issued by the administration department of organization codes; (iii) tax registration certificates issued by the department of tax affairs; and (iv) licenses for making an official business seal issued by the public security department, all previously applied for separately by enterprises and all of which are now issued as a single document under the business license. Following the adoption of the single certificate, single number system in the Guangdong FTZ and in line with the principles of one-stop acceptance, one-stop examination, information-sharing, and mutual recognition, enterprises that are registered and incorporated in the Guangdong FTZ will be issued a with a single business license that states their industrial and commercial registration number, organization code, and tax registration 6

7 number. (2) The business license before other permits model The business license before other permits model that was adopted following the implementation of the commercial registration system applies in China s pilot FTZs. Resident enterprises may engage in ordinary production and management activities once they have obtained a business license. Where a resident enterprise will engage in production and management activities that require permits and approval, it is required by law to apply to the competent department and obtain approval before engaging in such activities. The business license before other permits model allows enterprises to get necessary preparations under way while they are waiting on the relevant approval and/or permits, thus saving considerable time in the start-up phase of their Chinese operations. and the resulting guarantee of the enjoyment of equal and fair treatment for domestic and foreign firms, state-owned and private enterprises have great significance. In order to establish a highly open and transparent, international, market-oriented, and lawful investment climate, it will be necessary that freedom in engaging in non-prohibited activities for investors and foreign-invested enterprises is ensured and that the government adheres to the principles of abstaining from activities that have no legal authorization and full observance of its legal responsibilities. 5. Conclusion China s FTZs are intended to promote institutional reform, and the Guangdong FTZ is spearheading this process. These institutional innovations, including the Negative List management model, reforms to foreign investment management system, and the simplification of commercial registration procedures, will undoubtedly provide a better business environment for foreign-invested enterprises. Especially, the attempt to increase efficiency and to lower business operating costs 7

8 Disclaimer & Confidentiality 1. Legal and accounting advice: The information contained herein does not incorporate advice on legal, accounting or tax issues. You should obtain your own independent professional advice on the legal, accounting and tax aspects of this information. 2. Confidentiality: The information contained herein is given for general informational purposes only and shall be kept strictly confidential. This information is intended for your company s internal use only, and the disclosure to any third party is strictly prohibited. 3. Copyright: The information contained herein is, as a general rule, the intellectual property of MHBK (China), and may not be copied, duplicated, quoted, reproduced, translated, or lent, in whole or in part, in any form or by any means for any purpose whatsoever without prior consent. 4. Limitation of liability: (a) The information contained herein was obtained from information sources deemed reliable by MHBK (China) but in no way is the accuracy, reliability or integrity of such information guaranteed. MHBK (China) disclaims any liability whatsoever for any damage arising out of or relating to this information. Moreover, the analysis herein is hypothetical and is not intended as an indication of the certainty or completeness of the results thereof. (b) Please note that information to be disclosed hereafter, appraisals, the opinions of credit rating agencies, and/or changes in the system and/or financial environment may necessitate substantial modification to the relevant processes and/or schemes, which may have the effect of rendering the analysis herein ineffectual. Further, this information is not intended to be an exhaustive statement of the risks to which your company is exposed. 5. The information contained herein does not constitute a solicitation or offer by MHBK (China) to buy or sell any financial instruments or to provide investment advice or service. 8