The Reforming of China’s Foreign Invested Enterprise (FIE) Laws
China has recently made changes to the laws and statutes governing foreign invested enterprises (FIEs) in China. Specifically, changes were made to laws concerned with establishing and making changes to wholly foreign owned enterprises (WFOE) and joint ventures (JV). Generally speaking, there were three key changes, which are:
- MOFCOM Approval No Longer Required – As of October 1, 2016, approval from the Ministry of Commerce (MOFCOM) or its local counterparts is no longer required to establish or make changes to an FIE. Instead, companies must now simply follow an online registration process. The exception to this is if the industry in which the FIE operates is on the Negative List, which is discussed below.
Impact: Although MOFCOM approval is generally no longer required and this one aspect of the registration process has been simplified, the overall process is still largely unaffected and is still rife with bureaucratic red tape. In fact, point 3 below has potentially made MOFCOM registration an extremely cumbersome process.
- Foreign Investment Catalogue Replaced With The Negative List – Until April 11, 2016, the Foreign Investment Catalogue classified industries as either encouraged, restricted, or prohibited to foreign investment. After April 11, 2016, the Foreign Investment Catalogue has been replaced by the Negative List. The Negative List is a list of the restricted and prohibited industries; this list is the same one found in the previous Foreign Investment Catalogue.
Impact: Overall, the impact of the Negative List is minimal. As stated above, the list consists of industries previously found on the restricted and prohibited categories of the Foreign Investment Catalogue.
- Investor Identification Required – The revisions to the Foreign Investment Laws now require that the controlling person or persons of the foreign invested entity is identified. The actual controlling person is defined as either those person or persons who 1) collectively have 50% ownership in the foreign investor that will establish the FIE in China or 2) the persons who actually control the foreign investor through means other than owners (e.g. control over the decision making).
Impact: Under the new requirements, special purpose vehicles (SPVs) and other structures used to hide the identity of investors will no longer be a viable option for investing in Chinese entities. This is intended to prevent “round-tripping” – where Chinese individuals invest in overseas companies that reinvest in China – but it will effect most companies investing in China and potentially create a significant amount of additional documentation requirements. Unless the investor in an FIE is a publicly traded company, the individuals that have control must be identified. Since control of many private companies is purposefully decentralised, all individuals that collectively control the investing entity will need to be identified.
As with many regulatory overhauls in China, it will take some time before the effects of the changes to the FIE laws are clear. Based on the current understanding though, the registration process overall has become more cumbersome with the identification of individual investors or those individuals exercising control over the investing entity.
For more information on these changes, please contact our Shanghai office.
Staying current in China and abroad
While many companies will conduct initial research or an initial assessment prior to entering a new market, ongoing assessment of the changing business environment and making adjustments to growth plans and strategy is often neglected. This is dangerous in markets that are rapidly developing or changing, and especially dangerous in markets such as China, where the market is constantly in flux. Therefore, it is important for companies to stay current on their industries and the markets they serve.
The following are some practices employed by successful foreign invested enterprises in China:
- Regular review of current and emerging customer trends – While many companies will conduct initial research or an initial assessment prior to entering a new market, ongoing assessment of the changing business environment and making adjustments to growth plans and strategy is often neglected. This is dangerous in markets that are rapidly developing or changing, and especially dangerous in markets such as China, where the market is constantly in flux. Therefore, it is important for companies to stay current on their industries and the markets they serve.
This can be accomplished through surveying your current customers and customer industries, either yourself or through a professional third party, or by conducting renewed market analysis in order to identify new potential customer segments.
- Involvement with industry and trade associations – industry and trade associations not only provide a platform for networking with similar companies, but also provide access to relevant industry information. Additionally, many associations will constantly analyze new regulatory changes and explain their implications.
Not all industries have associations in China. When none exist, you can look to professional organizations or the various chambers of commerce.
- Competitive benchmarking – Regular competitive benchmarking not only allows an organization to see where it “stands” in the market but also identify innovative best practices that can be adopted. Every year new companies enter and other companies exit the market. It is an important practice to help companies respond to changes in the competitive landscape and to identify under served market niches.
Conducting competitive benchmarking can be done internally if there are dedicated resources, but it is usually best to have an independent third party to conduct the competitive intelligence on your behalf.
Although ongoing research, assessment, and planning may seem daunting, a professional market research & consulting firm can assist foreign invested enterprises through periodic market updates and regular competitive benchmarking on product / service offerings, organizational practices, market mix, and so on – ensuring that decision makers stay current with a constantly updated and accurate view of the market.