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2014 Changes Affecting Foreign Investors

Date:2020-05-11 19:07:03

2014 was a year of significant change in Chinese law and policy and foreign direct investment was strongly affected by many of these changes. This paper summarizes a number of the changes that took place in 2014 in Chinese law that affect current and future investments.

I.    Project Approval
 
On June 17, 2014 the Administrative Measures for Approval and Record-filing of Foreign Investment Projects (外商投资项目核准和备案管理办法) (“Project Approval Measures”) came into force and overhauled project approval in China. Project approval is a step prior to filing for approval for the establishment of a company that needs to be completed for all projects that involve fixed assets. Prior to the Project Approval Measures, almost all such projects had to file for approval with either the National Development and Reform Commission (“NDRC”) or a provincial/local Development and Reform Commission (“DRC”). The Project Approval Measures, create a new system wherein only projects above a certain threshold (in terms of Total Investment Amount) need such approval, all other projects need only be filed for the record with the local DRC. Four months later, on October 31, 2014, the Catalogue of Investment Projects Subject to the Approval of the Government (2014 Version)(国务院关于发布政府核准的投资项目目录(2014 年本)) (“Project Approval Catalogue”) was updated and the thresholds initially set were increased. The specific thresholds depend on the industry of the project and how that industry is categorized in the Catalogue of Industries for Guiding Foreign Investment (Revised in 2011) (外商投资产业指导目录(2011 年修订))(“Foreign Investment Guidance Catalogue”).1 As of February 6, 2015 the current thresholds are:
 
Category Threshold Requirement



Encouraged
Total investment is USD 1 billion or more and requires Chinese party to have a controlling share. Requires approval from the NDRC. Note that if the total investment is above
USD 2 billion, record-filing with the State Council is also needed.
Total investment is less than USD 1 billion but requires Chinese party to have a controlling share.
Requires approval from the local DRC.
All other. Record-filing with the local DRC.
Permitted All Record-filing with the local DRC.



Restricted

Total investment is USD 100 million or more (excluding real-estate projects).
Requires approval from the NDRC. Note that if the total investment is above
USD 2 billion, record-filing with the State Council is also needed.
Total investment is less than USD 100 million or the project is a real-estate project. Requires approval from the provincial level DRC.

II.    Companies

A.    Registered Capital

On March 1, 2014 the Company Law of the People's Republic of China (Revised in 2013) (中华人民 共和国公司法(2013 年修订)) (“Company Law”) came into force and dramatically changed the registered capital requirements for companies in China. At the time this law was promulgated (December 28, 2013), however, it was unclear if these changes would affect FIEs. However, amendments to the implementing regulations for EJVs,2 CJVs,3 and WFOEs4 as well as the Circular of the Ministry of Commerce on Improving Foreign Investment Review Administration (商务部关于改进 外资审核管理工作的通知) (promulgated on June 17, 2014 with immediate effect) clarified that FIEs would also benefit from the looser restrictions on registered capital. As such, both FIEs and domestically owned companies can benefit from the cancellation of:

•    General minimum registered capital requirements
•    A minimum percentage of the registered capital that must be paid in upon registration.
•    A minimum percentage of the registered capital that must be paid in cash.
•    A specified a term within which all registered capital must be paid in.
•    A review of the registered capital to ensure it is paid in accordance with the articles of association.

However, there are four points worth noting:

1.    The requirement for registered capital, capital payments, etc… agreed upon in the articles of association must still should be followed;
2.    There registered capital is still printed on the business license and is often used by companies in China as one factor in judging a company’s strength;
3.    In certain industries and for some bidding projects, a minimum amount of paid-in capital is required;
4.    If other laws or regulations have registered capital or paid-in capital requirements for particular industries, types of companies, etc… these restrictions will still apply.

B.    Cancellation of Annual Inspections

Previously all enterprises in China had to go through annual inspections from the enterprise registration organs. However, since February 7, 2014 the Circular of the State Council on Printing and Issuing the Reform Proposals for the Registered Capital Registration System (国务院关于印发注册资本登记制度改革方案的通知) came into force, China started to move to a system of “enterprise annual self reporting and publicity” administered by the State Administration For Industry & Commerce (SAIC) and the Local Administration For Industry & Commerce below it.
 
Under the new system, companies must file two types of reports: (1) annual reports; and (2) periodic reports within 20 days of certain information being generated (e.g. changes in capital contribution subscriptions, administrative penalties, etc…). These reports are submitted through an online system and they are available to everyone. The accuracy of the reports is enforced through random inspections (which can lead to more in-depth reviews if something is found to be amiss) as well as through social supervision. A failure to accurately report as required can lead to blacklisting of the company, administrative penalties, compensation to harmed parties, and possible criminal liability.

III.    Environmental Law

On April 4, 2014 the Standing Committee passed Environmental Protection Law of the People's Republic of China (Revised in 2014) (中华人民共和国环境保护法(2014 年修订))(“Environmental Protection Law”) which came into force on January 1, 2015. This momentous law is a massive update of the two and half decade old 1989 Environmental Protection Law. The new law adds 23 articles including a new Chapter, number V, on “Information Disclosure and Public Participation” and creates a stronger system of environmental protection. It also potentially creates new opportunities for enterprises.

The Environmental Protection Law

•    Clarifies when environmental impact assessments are needed and specifies the consequences of not obtaining one when it is required.
•    Creates obligations of public disclosure for both enterprises and the government and creates a government maintained list of entities that violate environmental protection rules.
•    Allows for public oversight by creating whistleblower protection and by allowing qualified social organizations to bring cases against polluters.
•    Creates stricter penalties for non-compliance for government agencies, enterprises, and individuals responsible for pollution.
•    Opens the door for incentives for environmentally responsible/friendly institutions.

IV.    Labor

A.    Work Safety Law

On December 1, 2014 the Work Safety Law of the People's Republic of China (Revised 2014) (中华人民共和国安全生产法(2014 修订)) (“Work Safety Law”) came into force. It
made the following changes:

•    It consolidates the responsibility for worker safety with the enterprises and gave trade unions the right to opine on new work safety regulations.  It also requires certain types of enterprises to have full-time work safety management personnel and encourages all production and operation entities to hire full-time work safety management personnel.
•    It expands the scope of the object which the work safety regulatory departments and other departments responsible for the work safety shall seal up or detain.
•    It increases penalties for non-compliance and by creating new fines and increasing old fines. It also stipulates that if the main person-in-charge is liable for any serious or especially serious work safety accidents, he or she shall never be the main person-in-charge of any production or operation entities in the industry. Finally, it creates a “blacklist system” for work safety violations.

B.    Foreigners in China For Short-Term Work Assignments

On November 6, 2014 four authorities promulgated the Circular on Relevant Handling Procedures for Foreigners Entering China for the Accomplishment of Short-term Work Assignments (For Trial Implementation) (外国人入境完成短期工作任务的相关办理程序(试 行)) which came into force on January 1, 2015.  It relates to foreigners in China for 90 days or less for technical, scientific research, management or guidance work; training at a sports institution in China; shooting a film; fashion shows; engaging in a foreign-related commercial performance; and other circumstances recognized by the relevant human resources and social security department. The circular emphasizes that those who do not carry out the proper formalities or do not engage in the work they were authorized can be punished by the public security organs.

V.    Intellectual Property

A.    New Trademark Law


On May 1, 2014 the Trademark Law of the People's Republic of China (Revised in 2013) (中华人民 共和国商标法(2013 年修订)) (“Trademark Law”) came into force. This amendment has the following significant changes:

•    It added provisions making it illegal for trademark agents to aid in trademark privacy;
•    Sound marks can be registered;
•    A trademark application can cover multiple classes of goods and services;
•    Shorter timelines for trademark cases;
•    Stronger protection for well-known marks;
•    If an opposition to a trademark registration fails, the trademark can proceed immediately to registration instead of waiting for appeals in courts; and
•    Increased fines for violations.
 
On the same day, the Implementing Regulations of the Trademark Law of the People's Republic of China (Revised in 2014) (中华人民共和国商标法实施条例(2014 年修订)) came into force which, among other things, clarified certain issues and dealt with the international registration of trademarks in accordance with the Madrid Agreement Concerning the International Registration of Trademarks. A number of other regulations have been put out dealing with various issues related to the Trademark Law.

B.    Intellectual Property Courts
 
On August 31, 2014 the    Decision of the Standing Committee of the National People's Congress on the Establishment of Intellectual Property Courts in Beijing Municipality, Shanghai Municipality and Guangzhou City (全国人民代表大会常务委员会关于在北京、上海、广州设立知 识产权法院的决定) which established intellectual property (IP) courts in Beijing, Shanghai and Guangzhou. These courts have jurisdiction over first instance of civil and administrative cases with respect to intellectual property with high level of expertise and technology such as
patents, new varieties of plants, integrated circuit layout design, and technology secrets. The intellectual property courts in Beijing have jurisdiction over first instance administrative cases with respect to authorization and confirmation of intellectual property rights against the adjudication or decision of the administrative department of the State Council.  Appeals from these cases go through the regular court system.

VI.    Conclusion
 
This paper has attempted to summarize the key changes in Chinese law that took place in 2014 that will affect foreign investors. Any such summary is necessarily incomplete and there are a multitude of other changes that affect foreign investors, especially with laws and regulations that affect specific sectors. Nonetheless, two trends can be seen in 2014 that can be expected to continue in 2015.

The first trend is a liberalization of the economy. As China’s economy develops, barriers to conducting business are being lowered. This can be seen, for example, in both China’s liberalization with respect to project approval and the Company Law. If this trend continues, national barriers to entry in China will continue to decrease. However, it should be noted that: (1) it is not always advisable to take full advantage of the liberalizations; and (2) local regulations may not be as liberal as the national laws.

The second trend, however, is increased penalties for violating laws that protect the public interest. This can be seen, for example, with respect to safety laws for labor, environmental protection, and annual reporting. Thus, even as China reduces barriers to business, it is increasing penalties for violations.

In summary, the general trend of Chinese policy is towards allowing more business but ensuring that the business is conducted responsibly.

 
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