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LEGAL: Investment Approval and Record-Filing
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Investment Approval and Record-Filing

By Manual Torres(Managing Partner of Garrigues Shanghai)
& Lucy Luo(Associate of Garrigues Shanghai)

BT 201508 18 Legal 184060726General Introduction

The Chinese government is reforming its investment approval procedure in order to encourage foreign investment by providing a more transparent and stable environment. The incorporation of foreign invested entities (“FIE”) and the main changes to the FIEs (i.e. equity transfer, changes in registered capital, and form of the corporation) are subject to approval from MOFCOM and its local counterpart prior to commercial registration.

For test purposes, the government has carried out a different approach in 4 Pilot Free Trade Zones ("€œFTZ").For FIEs that intend to operate a business that'€™s listed on what's known as the "Negative List"€, the investment approval procedure is still applied. For FIEs whose business scope is not on the Negative List, commercial registration can be done directly with prior (sometimes, simultaneously) investment record-filing.

The draft Foreign Investment Law places the Negative List approach as a general rule for the foreign investment approval scheme, which suggests that such an approach may, in the future, be applied nationwide.

Currently, there are three valid foreign investment catalogues, which are applicable to FIEs.

BT 201508 15 Legal HL04Foreign Investment Industries Catalogue taken into effect on April 10th, 2015 shall apply to all FIEs except in the regions mentioned below. Under the Foreign Investment Industries Catalogue, foreign invested businesses are classified as either encouraged industries, restricted industries or prohibited industries.

BT 201508 19 Legal bigstock regulation 43521259For encouraged industries, FIEs enjoy preferential policies according to relevant laws and regulations, such as exemptions for tariffs. Please note that the involvement of Chinese investors in some encouraged industries is necessary. Some shall be controlled by Chinese shareholders by means of majority control or relative control; others shall be incorporated in the form of a Sino-foreign equity joint venture or Sino-foreign cooperative joint venture. For example:

- For companies that produce high energy batteries the proportion of foreign investment should not exceed 50%
- The company form in the track transportation equipment industry is limited to equity/cooperative joint venture
- A foreign invested company doing manufacturing of low and medium-speed diesel engines shall be controlled by Chinese shareholders
- Construction and operation of civil airports requires relative control by Chinese shareholdersThe chief partner of a foreign invested accounting firm must be Chinese For restricted projects, FIEs may face strict examination and approval and the competent authority may differ due to the investment volume

If the industry is listed as prohibited, then foreign investments are not allowed.

At the regional level, in order to encourage investment in Central and Western China, the Chinese government has released a Catalogue of Foreign Investment Advantage Industries for 22 provinces and autonomous regions.. The latest version took effect on June 10th, 2013. FIEs falling within this catalogue may enjoy same preferential policies.

BT 201508 13 Legal HL022015 Foreign Investment Industries Catalogue
The Foreign Investment Industries Catalogue has been reformed several times, the latest version replaces one from 2011.The key changes are as follows:

For restricted industries, it added 6 new items, they are:

- Processing of crude sugar
- For the manufacturing of automobile whole vehicles, special use vehicles and motorcycles, Chinese parties shall hold at least 50% of the shares; one foreign investor shall have no more than two equity joint ventures for the same category of whole vehicle products, but a merger of other domestic auto manufacturers with Chinese joint venture partners could be exempted from the two entities limitation
- For general aviation companies, sight-seeing tours shall be controlled by Chinese shareholders
- Institutions of higher learning should be limited to cooperative joint ventures led by Chinese parties
- Pre-school education institutions fall under the same requirements for institutions of higher learning
- Medical institutions are limited to equity/cooperative joint ventures

4 items are modified in this section:

- E-commerce is removed from restricted value-added telecommunications services
- Restricted conditions for the banking industry has been detailed
- The cap for the proportion of foreign investment in securities companies has been raised to49%
- Companies doing surveys of television and radio program ratings shall be controlled by Chinese shareholders

BT 201508 16 Legal img1964937 zarubezhnyie investitsiiThe 2015 Catalogue has also deleted restricted items in 11 sectors to further open Chinese markets to foreign investors. These cover a range of industries. 25 items in the manufacturing industries have also been deleted, while the real estate industry has beenremoved from the restricted list.

6 items have been added to the prohibited industries list:

-Nuclear fuel processing
- Wholesale and retail of tobacco products
- Internet publication services
- Auction houses and shops engaging in the auction of cultural relics
- Legal services The Chinese government also modified 2 items.Foreign investors are prohibited from investing in the construction and operation of certain kinds of generators.In the previous version of the catalogue, foreign investors were also prohibited from investing in the compilation of topographic maps and general maps.But the 2015 version details these types of maps, with new prohibitions for certain kinds of surveys.

Compared with the 2011 version, the following industries have been opened to foreign investors:

- R&D of genetically modified organisms
- Manufacturing Industries
1)Processing of green tea and other special Chinese teas
2)Certain types of batteries
3)Production of lacquer ware, enamel products, carcinogenic, teratogenic and mutagenesis products and persistent organic pollutants
- Operation of golf courses and villas

BT 201508 12 Legal HL01Special Administrative Measures (Negative List) for Foreign Investment Access to Pilot Free Trade Zones
In order to carry forward the reform of the foreign investment management system and create an internationalised and market-oriented business environment, China established the Shanghai FTZ in 2013. Since the first Negative List for the Shanghai FTZ was released in 2013 and revised in 2014, such an experimental approach seemed applicable elsewhere. Therefore, the Chinese government established three new FTZs in 2015 According to the Negative List, foreign investment approval is only limited to the investment explicitly indicated in the Negative list, which means, investment excluded in the Negative List requires record-filing before commercial registration or within 30 days after commercial registration.

According to the Decision of the Standing Committee of the National People’s Congress on Authorizing the State Council to Temporarily Adjust the Relevant Administrative Approval Items Prescribed by Law in four FTZs taken into effect on March 1st, 2015, adjustments to administrative examination and approval foreign investment industries in four FTZs shall be implemented on a trial basis for three years from March 1st, 2015 to February 28th, 2018.

BT 201508 17 Legal Reading NewspaperForeign Investment Industries Catalogue (Revised in 2015)
- Restricted and prohibited items plus encouraged items with EJV/CJV requirements
Most rules in the Negative List come from restricted and prohibited items in the Foreign Investment Industries Catalogue
For example, foreign investors are prohibited from running the business operations of domestic mail express delivery services both in the Foreign Investment Industries Catalogue and the Negative List.
Most encouraged items with EJV/CJV (Entity Joint Venture/Cooperative Joint Venture) requirements in the Foreign Investment Industries Catalogue are also included in the Negative List.

- Exceptions

There are some exceptions, which are restricted or prohibited by the Foreign Investment Industries Catalogue, but allowed by the Negative List, for example,

1)WOFE is permitted for motorcycle manufacturers while outside these FTZs such an industry requires no less than 50% of shareholdings be owned by Chinese investors.
2)Foreign majority shareholding is permitted for international shipping enterprises established within the Shanghai FTZ, whilethose established in the other three FTZs require control by Chinese shareholders.

Cited from other relevant laws and regulations
Except from the Foreign Investment Industries Catalogue, some items in the Negative List are cited from other relevant laws and regulations. Here are some examples:

- Cooperation on an Internet news information service is subject to national security evaluation. This rule is consistent with Article 9 of Provisions for the Administration of Internet News Information Services (September 25th, 2005)
- Exploration and development of exclusive economic zones and continental shelves is subject to the prior approval of the governmental authorities. This process is set by the Law on the Exclusive Economic Zone and the Continental Shelf of the People's Republic of China ( June 26th, 1998)
- The legal representative of a general aviation enterprise must be a Chinese citizen. This requirement is set by the Provisions on the Administration of Business Licensing for General Aviation (February 14th, 2007)

- Foreign investors are prohibited from collecting or purchasing wild plants that enjoy priority protection by the State. This prohibition is set by the Regulations of the People's Republic of China on Wild Plants Protection (January 1st, 1997).

New restrictions set up by Negative List
The Negative List itself has also added some new restrictions, such as foreign investors are prohibited from establishing and operating: (i) Humanities and social sciences research institutions; (ii) Intangible cultural heritage survey agencies.


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