CHINA
FIE. Alternatively, the foreign investor of an FIE may appoint one person to serve as the FIE’s executive director in lieu of forming a board, and in this case, the executive director may serve as the legal representative of the FIE.
(d) The FIE is also required to set up a board of supervisors or appoint a supervisor.
3. Investment approval
3.1. For foreign investment approval (including national security review) explain the following: a) The regulator/s’ name, factors it must consider when making its deci- sions, and how much discretion it has; Government examination and approval for FDI can come from district, municipal, provincial or central-level government authorities, depending on the size and industry of the projects. Certain large-scale projects may require approval by the state council.
MOC is the major FDI regulator and is the governmental department charged with administering and ensuring that the FDI is in line with state policy. In practice, approval authority is often delegated to MOC’s subordinate local commissions (Coftecs). In order to promote regional economic growth, Coftecs tend to be more flexible in the approval process than MOC.
The National Development and Reform Commission (NDRC) and its local branches also exercise approval authority over certain foreign investment projects, typically those involving construction of plants or infrastructure. Apart from MOC and NDRC, various industry administrative authorities also claim jurisdictions on FIEs in their respective industries.
MOC is also in charge of merger control review and national economic security review.
b) Any investment caps and other legislative restrictions; Total investment is the total amount of funds required to establish an FIE, which includes capital (which must be paid in and is defined as registered capital) and loans. PRC law has certain requirements on a minimum ratio of registered capital vis-à-vis total investment in order to ensure that an FIE is not under-capitalised.
c) Which party must notify and when/if notification is mandatory or voluntary; After MOC/Coftec approval is obtained (as evidenced by an approval certificate), the investor must register with SAIC or its local branches) to obtain the FIE’s business licence, which step marks the formal establishment of an FIE.
Subsequently, the FIE must also register with various other government authorities, including those relating to organisation code, tax, statistics, finance, customs, and foreign exchange.
d)What information must be included with notification and what is the review fee; The primary documents required to establish an FIE generally include, among others, standard application letters and forms required by the government authorities, a feasibility study report, a joint venture contract (not required for WFOEs) and articles of association.
The review fee varies from locale to locale, but is generally not a significant amount. As an example, the government charges approximately Rmb2,000 for establishing a WFOE in Shanghai.
e) How long does the review and approval process take, and are there any fast-track options; It generally takes two to three months to establish an FIE. There is no statutory
30 IFLR REPORT | FOREIGN DIRECT INVESTMENT 2014
fast-track option, although such period could be shorter or significantly longer depending on a number of factors discussed above.
f) Is there the ability to consult on a named or unnamed basis; Yes, consultations can be made to the regulators on a named or unnamed basis, with the latter method being more commonly used due to the investors’ desire to preserve confidentiality before they make official applications to the relevant government authorities.
g) Does notification/review occur pre- or post-closing, and are there any pre- or post filing requirements unique to FDI; In terms of an M&A project, the MOC approval on the transaction, the anti- monopoly review (where applicable) and the national economic security review typically occur pre-closing. Registration with SAIC (or its local branches) could be structured pre-closing or post-closing, depending on the negotiations between the seller and the purchaser.
h) What is the position if no response is received on an application for approval and are there any rights of appeal from disapprovals? If no response is received on an application, it is generally deemed that for certain reasons the relevant government authorities are not willing to grant an approval.
Chinese administrative law permits a party wrongfully denied approval to seek review either through administrative appeal or by filing an administrative suit in the relevant Chinese court. Nevertheless, to our knowledge such lawsuits are rare in reality.
3.2. Briefly explain the investment restrictions for any special/restricted sectors. All FDI projects are subject to restrictions imposed by a catalogue released by MOC and NDRC, which divide FDI projects into four categories: (1) permitted; (2) encouraged; (3) restricted; and (4) prohibited. FDI projects under the latter three categories are specifically listed, and if an industry sector is not specifically listed in these categories, it is deemed to fall within the permitted category. However, the actual classification of any type of proposed business activity is subject to the discretion of the relevant approval authorities. Furthermore, in certain strategic industries, policy guidelines may limit foreign ownership in an FIE up to 50%, specifically forbid 100% ownership by foreign investors or require investment in the form of a joint venture with Chinese investors.
A number of the restricted or prohibited industries are worth mentioning here:
Telecommunication: the PRC law classifies telecom businesses into two types, basic and value-added. Prospective telecom operators are required to obtain a licence to engage in either type. Generally, basic refers to the provision of infrastructure facilities and basic voice and data transmissions, both domestically and internationally, while value-added refers to the provision of specialised services via the basic infrastructure facilities. Foreign shareholding cannot exceed 49% in an FIE engaging in basic telecom services or 50% in an FIE engaging in value-added telecom services.
Securities: foreign investors may invest up to 49% in securities companies and securities investment fund management companies.
Publication of books, magazines, and newspaper: this is classified as a prohibited industry.
It should be noted that, keen to tap into China’s capital markets, foreign investors have commonly used different means, including setting up a variable interest entity (VIE) structure, to achieve greater control over FIEs operating in the restricted or prohibited industries. That being said, there have been growing concerns about the future status of the VIE structure in China’s regulatory landscape given the negative attitudes of certain Chinese government authorities and courts towards the structure.
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