China Tax Center. China Tax & Investment Express. Business circulars

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1 Issue No Oct 2016 China Tax Center China Tax & Investment Express (CTIE) * brings you the latest tax and business announcements on a weekly basis. CTIE provides a synopsis of each announcement including a weblink that leads you to the full content of the announcement (in Chinese). Please feel free to contact your Ernst & Young client service professionals for further assistance if you find the announcements have an impact on your business operations. This CTIE does not replace our China Tax & Investment News* which will continue to be prepared and distributed to provide more in-depth analyses of tax and business developments in China. * If you wish to access these previous issues of CTIE and China Tax & Investment News, please contact us. Business circulars Provisional Administrative Measures on Record Filing for Establishment and Alteration of Foreign Investment Enterprises (FIEs) (MOFCOM Order [2016] No. 3) Scope of foreign investments subject to special access control (NDRC/MOFCOM Bulletin [2016] No. 22) Notice regarding issues related to business registration after implementing the record filing management for FIEs (Gongshangqizhuzi [2016] No. 189) Synopsis On 3 September 2016, the Standing Committee of the National People s Congress (NPC) has approved the amendments to four laws, i.e., the Law of the People s Republic of China (PRC) on Wholly Foreign Owned Enterprises (WFOEs), Law of the PRC on Sino-foreign Cooperative Joint Ventures (CJVs), Law of the PRC on Sinoforeign Equity Joint Ventures (EJVs) (WFOEs, CJVs and EJVs hereby collectively called Foreign Investment Enterprises FIE s), and the Law of the PRC on Protection of Investments by Taiwan Compatriots through Chairman Order [2016] No. 51 ( Order 51 ) that became effective on 1 October The amendments added a specific article in each of the abovementioned laws to stipulate that the establishment/alteration of FIEs and companies established by Taiwan compatriots, except for those that are subject to special access control (i.e., in the negative list), shall be subject to record filing instead of administrative approval. (Please refer to CTIE for details of Order 51.)

2 To cope with the new regulatory regime for foreign investments, i.e., the record filing system, the relevant central government authorities released the following circulars to detail the relevant implementations matters: The Provisional Administrative Measures on Record Filing for Establishment and Alteration of FIEs (hereinafter referred to as the Provisional Measures ) released by the Ministry of Commerce (MOFCOM) on 8 October 2016 through MOFCOM Order [2016] No. 3 (The MOFCOM released a discussion draft on the Provisional Measures to seek for public opinions. Please refer to CTIE for details of the discussion draft and Order 51.) NDRC/MOFCOM Bulletin [2016] No. 22 ( Bulletin 22 ) released by the National Development and Reform Commission (NDRC) and the MOFCOM on 8 October 2016 regarding the scope of foreign investments subject to special access control Gongshangqizhuzi [2016] No. 189 ( Circular 189 ) released by the State Administration for Industry and Commerce (SAIC) on 30 September 2016 regarding issues related to business registration after implementing the record filing management for FIEs Key features of the aforementioned circulars are summarized as follows: Scope of applications that subject to record filing Bulletin 22 determines the scope of establishment/alteration of FIEs and companies established by Taiwan compatriots that are subject to special access control (also known as the negative list) as follows: Restricted foreign investment industries as prescribed in the Foreign Investment Industrial Guidance Catalogue (Revised in 2015) (hereinafter referred to as the 2015 Catalogue ) (Please refer to CTIE for details of the 2015 Catalogue.) Prohibited foreign investment industries as prescribed in the 2015 Catalogue Encouraged foreign investment industries with specific restrictions of foreign investment ratio (e.g., design of civil aircraft), or the selection of the top management (e.g., audit services) as prescribed in the 2015 Catalogue Applications categorized as being part of the negative list shall remain subject to the administrative approval system which disregards the scale or forms of the investments, i.e., approvals from the local commerce departments under the MOFCOM (hereinafter referred to as the commerce departments ) or directly from MOFCOM would be required before applying for business licenses. Except for those that are listed in the negative list, establishment/alteration of FIEs shall be subject to the record filing system. However, Bulletin 22 also emphasizes that the establishment/alteration of FIEs due to merger and acquisition (M&A) by foreign capital shall still be subject to the prevailing rules, e.g., MOFCOM Order [2009] No. 6 ( Order 6. i.e., Provisions regarding Foreign Investors to Merge with or Acquire Domestic Enterprises), etc. Nature of the record filing system According to the Provisional Measures, for establishment of FIEs that are subject to the record filing requirements, upon completion of company name reservations, the representatives or agents of the investors may fill in and submit the required record filing forms online for FIEs establishment before issuance of business licenses (ex ante record filing). As an alternative, the representatives or agents of the FIEs are also allowed to complete the aforementioned record filing formalities within 30 days after issuance of business licenses (ex post record filing). 2

3 In addition, for alteration matters of FIEs (e.g., change of basic information of FIEs/investors, change of shareholdings, mergers and acquisitions, liquidations), the authorized persons of FIEs should fill in and submit the required record filing forms online within 30 days after the changes occurred. Upon the completion of the record filing, the FIEs or investors may collect the receipts for record filing from the commerce departments instead of the previous approval certificates for FIEs. In this respect, it is clear that the record filing requirement is not a prerequisite for the application of business license or formalities with other government authorities. Unlike administrative approvals, the record filing only serves the purpose of notifying the commerce departments. Applying for business licenses with local administrative bureaus for industry and commerce under the SAIC (hereinafter referred to the AICs ) According to Circular 189, AICs are required to adopt a unified standard for verification and examination for applications for foreign investments and domestic investments, while strictly implementing the prescribed procedures for business registrations. The AICs shall directly accept applications for the establishment/alteration/de-registration of FIEs that are not subject to special access control; the receipts for record filing released by the commerce departments for FIEs establishment or alteration are not required. For applications that are still subject to the special access control, the applicants are required to submit approvals/approval certificates to the AICs for establishment/alternation/de-registration of FIEs. The AICS shall update the checklists for business registrations for FIEs accordingly. Non-compliance The Provisional Measures detail the comprehensive supervision and inspection as well as legal liabilities. The subjects of liabilities mainly refer to FIEs and their investors. Where they fail to complete the record filing within the prescribed time limit, complete the record filing with significant negligence/misleading information, engage in businesses of prohibited or restricted sectors without proper approval, etc., the FIEs or their investors may be subject to a penalty of up to RMB 30,000 and legal consequences on violation of laws and regulations. Effectiveness Based on Order 51, the new record filing system became effective on 1 October 2016 as of the effectiveness of the aforementioned laws. However, the Provisional Measures were released and became effective on 8 October Investments by Hong Kong/Macau and Taiwan investors that are not covered in the negative list shall refer to the Provisional Measures as well. However, record filing requirements for Hong Kong/Macau service providers shall refer to MOFCOM Bulletin [2016] No. 20, i.e., the Administrative Measures on Record Filings for Investments by Hong Kong and Macau Service Providers in Mainland China (Trial)). (Please refer to CTIE for details of Bulletin 20.) Our observations The implementation of the record filing system for foreign investments signifies a new era of simplified administration in China s foreign investment regulatory regime. For most applications related to establishment/alteration of FIEs, the procedure for record filing would be more efficient than the approval procedures, which generally would take one to four weeks and are now replaced by the record filing procedure that only takes three working days. 3

4 However, it will also bring significant changes to the practices regarding administration of foreign investments. In this respect, the FIEs and foreign investors should pay close attention to the following matters: M&A Bulletin 22 emphasizes that the establishment/alteration of FIEs due to M&A by foreign capital shall still be subject to the prevailing rules. Which, according to the official interpretation for the Provisional Measures by the MOFCOM (hereinafter referred to as the MOFCOM Interpretation ), the M&A of non-fie domestic companies by foreign investors would generally be covered by Order 6, while that involves M&A of domestic listed companies shall refer to MOFCOM/CSRC/SAT/SAIC/SAFE Order [2005] No. 28 ( Order 28, i.e., Administrative Measures on strategic investments to listed companies by foreign investors). In sum, M&A of non-fie domestic companies by foreign investors are still subject to administrative approval as prescribed under Order 6 or Order 28. However, after completion of M&A of non-fie domestic companies by foreign investors, such companies would become FIEs and thereafter, their alteration matters, except for those subject to the special access control, would be subject to record filing system instead of administrative approval. The MOFCOM Interpretation also specifies that the following alteration matters related to foreign investment listed companies and FIEs listed in the National Equities Exchange and Quotations are only required to complete record filing: The alteration involves accumulated increase/decrease of foreign shareholding ratio over 5%; The status of controlling interest (relatively controlling interest) held by foreign investors is changed. Re-investments by FIEs in China The MOFCOM Interpretation reiterates that FIEs are considered as foreign investors from the perspectives of inbound investments in the PRC. According to the previous regulations, enterprises established by FIEs in the PRC are also considered as FIEs which shall be required to obtain approval from the commerce departments. According to the Provisional Measures, re-investments by FIEs (including China holding companies or venture capital companies) would be subject to the Provisional Measures, i.e., the record filing system instead of the prior administrative approval (endless for investments covered in the negative list). However, the MOFCOM Interpretation also points out that re-investments by FIEs should still meet the criteria as prescribed in MOFTEC/SAIC Order [2000] No. 6 ( MOFTEC Order 6, i.e., Provisional Measures regarding inbound investments by FIEs). Negative List Upon the issuance of Order 51, it was anticipated that the central government authorities would release a specific list of foreign investments subject to special access control (i.e., a negative list), such as the Special Administrative Measures for Admission of Foreign Investments in Pilot Free Trade Zones released via Guobanfa [2015] No. 23 ( Circular 23 ). Instead, Bulletin 22 clarifies that the scope of foreign investments subject to special access control shall refer to the respective contents of the 2015 Catalogue. In this respect, the 2015 Catalogue may serve as the purpose of a negative list for foreign investment admission for a certain period of time subject to the ongoing international negotiations and China s further commitments for foreign investment admission. Ultimate effective controllers ( 最终实际控制人 ) of FIEs/foreign investors According to the Provisional Measures, information of ultimate effective controllers of FIEs/foreign investors is required to be provided in the record filing forms for establishment/alteration of FIEs (i.e., Attachments I and II of the Provisional Measures). According to the MOFCOM Interpretation, the ultimate effective controllers refer to natural persons, enterprises, government authorities or international organizations who directly/indirectly own the FIEs/foreign investors by way of shares, contracts, trusts or other means. 4

5 While the effective controllers are residing overseas, the ultimate effective controllers should be traced to overseas listed companies, natural persons overseas, foreign government authorities (including government funds) or international organizations. While the effective controllers are residing in China, the ultimate effective controllers should be traced to domestic listed companies, domestic natural persons, state-owned/collectivelyowned enterprises. Among which, although not literally specified, the ultimate effective controllers should not be domestic private companies (no such an option shown in the record filing form). As the Provisional Measures fail to provide a clear definition for the ultimate effective controllers, this may be an uncertainty for private domestic companies with diversified shareholding status to identify and report their ultimate effective controllers. The new negative list administration for foreign investments is no doubt a ground-breaking reform. However, to be consistent with the adoption of the new record filing system, certain prevailing foreign investment regulations and practices of the relevant government authorities (e.g., administration bureaus for foreign exchange) would still be subject to amendments. Especially for the local AICs, it is possible that they would need to adopt a more a cautious approach in handling the applications for business licenses for FIEs that are exempt from approval. In case the foreign investors and FIEs intending to apply for establishment/alteration come across any practical uncertainties, consultation with professionals is always strongly recommended. You can click this link to access the full content of the Provisional Measures: You can click this link to access the full content of the MOFCOM Interpretation: You can click this link to access the full content of Bulletin 22: You can click this link to access the full content of Circular 189: You can click this link to access the full content of Order 51: You can click this link to access the full content of the 2015 Catalogue: You can click this link to access the full content of Order 6: You can click this link to access the full content of Order 28: You can click this link to access the full content of Bulletin 20: You can click this link to access the full content of MOFTEC Order 6: Notice regarding certain policies and measures for promoting the healthy development of private investments Synopsis On 12 October 2016, the NDRC released a notice regarding policies and measures to promote the development of investments from private sectors (hereinafter referred to as the Notice ) 5

6 The Notice encourages investors from private sectors to invest in the areas of civil airports, basic telecom operation, oil and gas exploration and development, electricity supply, and technologies related to national defense, etc. Accordingly, the Notice sets out several measures to improve the corporate finance services for qualifying companies. The Notice also calls for proper implementation of the Environmental Protection and Energy and Water Conservation Projects Qualifying for Corporate Income Tax (CIT) Preferential Treatment Catalogue (Trial) (hereinafter referred to as the Trial Catalogue ) and the Catalogue of Products and Services related to Recycling Businesses Qualified for Value-Added Tax (VAT) Preferential Treatment (hereinafter referred to as the Catalogue for Recycling Businesses ) in order to ensure that companies engaging in landfill gas power generation projects can enjoy the applicable CIT and VAT preferential treatments. (Please refer to CTIE and CTIE for details of the Trial Catalogue and Catalogue for Recycling Businesses.) You can click this link to access the full content of the Notice: You can click this link to access the full content of the Trial Catalogue: You can click this link to access the full content of the Catalogue for Recycling Businesses: Customs circulars Bulletin regarding issues related to the implementation of MOFCOM/GAC Bulletin [2016] No. 45 (GAC Bulletin [2016] No. 56) Synopsis Further to MOFCOM/GAC Bulletin [2016] No. 45 ( Bulletin 45, i.e., Bulletin regarding matters related to the cancellation of approval requirement for processing trade on a nationwide basis and the establishment of the interim and ex-post event supervision system), on 18 September 2016, the General Administration of Customs (GAC) released GAC Bulletin [2016] No. 56 ( Bulletin 56 ) detailing the implementation considerations of Bulletin 45 (Please refer to CTIE for details of Bulletin 45): Set up of processing trade handbooks Enterprises should submit the following documents to the supervising Customs for the set-up/alteration of processing trade handbooks, except for the approval certificate for engaging in processing trade ( 加工贸易业务批准证 ) or approval certificate for engaging in processing trade under online supervision ( 联网监管企业加工贸易业务批准证 ) which are no longer required: Certification of operation status and production capacity ( 加工贸易企业经营状况和生产能力证明 ) released by the commerce departments; Other documents as prescribed in GAC Order [2014] No. 219 ( Order 219, i.e., Measures of Customs of the PRC for the Supervision of Goods under the Processing Trade ) and GAC Order [2006] No. 150 ( Order 150, i.e., Measures of Customs of the PRC for the Online Supervision of Enterprises engaging in Processing Trade). (Please refer to CTIE for details of Order 219.) The period of validity of a processing trade handbook should be in accordance with the term of the corresponding processing trade contract. Generally, the validity of a processing trade handbook should not exceed one year or two years with approval from the supervising Customs. However, the validity of processing trade handbooks for the manufacturing of large scale equipment, e.g., aircraft, ships, etc. may be determined according to the actual terms of the corresponding processing trade contracts. 6

7 Domestic sales of products Enterprises are not required to file approval certificates for domestic sales for bonded materials, end products, scraps, remaining parts, defects, disaster-damaged bonded goods under processing trade to the supervising Customs. In the meantime, Bulletin 56 also elaborates on the scope of commodities that are prohibited or restricted for processing trade as prescribed in Bulletin 45 which would require approval certificate from the MOFCOM, as well as the transition arrangements upon the effectiveness of Bulletin 45 for the period from 1 September 2016 to 31 August Enterprises engaging in processing trade should read Bulletins 56 and 45 carefully and stay alert to any related notices released by local supervising Customs. You can click this link to access the full content of Bulletin 56: You can click this link to access the full content of Bulletin 45: You can click this link to access the full content of Order 219: You can click this link to access the full content of Order 150: Bulletin regarding matters related to access of the uniform information management system for crossborder e-commerce imports (GAC Bulletin [2016] No. 57) Synopsis On 12 October 2016, the GAC released GAC Bulletin [2016] No. 57 ( Bulletin 57 ) to clarify the matters related to access of the uniform information management system for cross-border e-commerce imports (hereinafter referred to as the uniform system ). According to Bulletin 57, the uniform system is now available for all e-commerce companies engaging in crossborder e-commerce imports (hereinafter referred to as the e-commerce companies ). E-commerce companies or their agents may download the software for free via official website of China E-port and access the uniform system to input, revise, declare or inquire information based on the operation manual of the uniform system (i.e., Attachment II of Bulletin 57). In addition, Bulletin 57 also announced the standards for e-commerce companies or third-party platform to access into the uniform system (i.e., Attachment III). Bulletin 57 became effective on its promulgation date, i.e., 12 October You can click this link to access the full content of Bulletin 57: 7

8 Other business and tax related circulars recently announced by central government authorities: Bulletin regarding the publicity of companies that violated tax regulations for the issuance of unified invoices for sales of motor vehicles (SAT Bulletin [2016] No. 63) Notice regarding a list of 69 national university science and technology parks eligible for tax preferential treatments for year 2015 (Guokefagao [2016] No. 267) Opinions on lowering the leverage ratios of domestic enterprises (Guofa [2016] No. 54) Notice regarding matters related to business licenses for professional insurance agencies (Baojianfa [2016] No. 82) 8

9 Contact us For more information, please contact your usual EY contact or one of the following of EY s China tax leaders. Office Tax Leaders Martin Ngai (Beijing) martin.ngai@cn.ey.com Fisher Tian (Tianjin) fisher.tian@cn.ey.com Samuel Yan (Dalian/Shenyang) samuel.yan@cn.ey.com Lucy Wang (Qingdao) lucy-c.wang@cn.ey.com Joanne Su (Xi an) joanne.su@cn.ey.com Vickie Tan (Shanghai) vickie.tan@cn.ey.com Raymond Zhu (Wuhan) raymond.zhu@cn.ey.com Audrie Xia (Suzhou) audrie.xia@cn.ey.com Andrew Chen (Nanjing) andrew-jp.chen@cn.ey.com Patricia Xia (Hangzhou) patricia.xia@cn.ey.com Chuan Shi (Chengdu) chuan.shi@cn.ey.com Clement Yuen (Shenzhen) clement.yuen@cn.ey.com Rio Chan (Guangzhou/Changsha) rio.chan@cn.ey.com Jean Li (Xiamen) jean-n.li@cn.ey.com Tracy Ho (Hong Kong) tracy.ho@hk.ey.com Heidi Liu (Taipei) heidi.liu@tw.ey.com Service Line Tax Leaders Andrew Choy (International Tax & Transfer Pricing) andrew.choy@cn.ey.com Paul Wen (People Advisory Services) paul.wen@hk.ey.com Kenneth Leung (Indirect Tax) kenneth.leung@cn.ey.com Becky Lai (Tax Policy) becky.lai@hk.ey.com David Chan (Transaction Tax) david.chan@hk.ey.com Samuel Yan (Global Compliance & Reporting) samuel.yan@cn.ey.com Sector Leaders Henry Chan (Financial Services) henry.chan@cn.ey.com Alan Lan (Energy & Resources) alan.lan@cn.ey.com Martin Ngai (Technology, Media, Telecommunications) martin.ngai@cn.ey.com Vickie Tan (Life Science) vickie.tan@cn.ey.com Gary Chan (Real Estate) gary.chan@cn.ey.com Audrie Xia (Consumer Products) audrie.xia@cn.ey.com Walter Tong (Automotive & Transportation) walter.tong@cn.ey.com Raymond Zhu (Government& Public Sector) raymond.zhu@cn.ey.com Greater China Tax Leader Henry Chan henry.chan@cn.ey.com Author China Tax Center Jane Hui jane.hui@hk.ey.com 9

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