AN INTRODUCTION TO THE REGULATORY REGIME OF THE CHINA (SHANGHAI) PILOT FREE TRADE ZONE

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1 OCTOBER AN INTRODUCTION TO THE REGULATORY REGIME OF THE CHINA (SHANGHAI) PILOT FREE TRADE ZONE On 22 August 2012, the State Council of the People s Republic of China officially approved the establishment of the China (Shanghai) Pilot Free Trade Zone ( PFTZ ). The PFTZ was officially opened on 29 September It comprises the following four sectors, covering a total area of about 28 km 2 : the Waigaoqiao Free Trade Area ( 外高桥保税区 ); the Waigaoqiao Free Trade Logistics Park ( 外高桥保税物流园区 ); the Yangshan Free Trade Port ( 洋山保税港区 ); and the Pudong Airport Comprehensive Free Trade Area ( 浦东机场综合保税区 ). The PFTZ is a new experiment in an effort to make long-promised structural changes as China attempts to change its economic model in the face of slowing growth. The detailed regulatory framework governing the PFTZ is not yet clear and we expect detailed regulations to be promulgated in the future. Highlights of the PFTZ are as follows: Foreign investment will be allowed in all business sectors except those contained in a negative list. Foreign investment will be subject to a record-filing system (as opposed to a prior approval system). National security review and anti-trust filing/review still apply. Subject to the requirements of specific industries, no minimum registered capital is required. There is no mandatory requirement as to the timing and manner of capital contribution. Limited tax incentives apply. Regulations Central government regulations At the central government level, the following regulations were promulgated to support the PFTZ: On 30 August 2013, the National People s Congress published the Decision Authorising the State Council to Suspend Administrative Approvals within the PFTZ ( 关于授权国务院在中国 ( 上海 ) 自由贸易试验区暂时调整有关法律规定的行政审批的决定 ) ( PFTZ Decision ). On 18 September 2013, the State Council published the Overall Plan of the PFTZ ( 中国 ( 上海 ) 自贸区总体规划 ) ( PFTZ Plan ).

2 OCTOBER Shanghai government regulations As at 29 September 2013, Shanghai People s Government has published the following regulations: Trade Zone ( 中国( 上海 ) 自由贸易试验区管理办法 沪府发 (2013)7 号 ) ( PFTZ Measure 7 ). Trade Zone on Record for Foreign Invested Project ( 中国( 上海 ) 自由贸易试验区外商投资项目备案管理办法 沪府发 ( 2013)71 号 ) ( PFTZ Measure 71 ). Trade Zone on Record for Offshore Investment Projects ( 中国 ( 上海 ) 自由贸易试验区境外投资项目备案管理办法 沪府发 (2013)72 号 ) ( PFTZ Measure 72 ). Trade Zone on Record for Foreign Invested Enterprises ( 中国 ( 上海 ) 自由贸易试验区外商投资企业备案管理办法 沪府发 (2013)73 号 ) ( PFTZ Measure 73 ). Trade Zone on Record of Offshore Investment Enterprises ( 中国 ( 上海 ) 自由贸易试验区境外投资开办企业备案管理办法 沪府发(2013)74 号 ) ( PFTZ Measure 74 ). Special Administrative Measures of the China (Shanghai) Pilot Free Trade Zone on Foreign Investment Access (Negative List) ( 中国( 上海 ) 自由贸易试验区外商投资准入特别管理措施 ( 负面清单 ) 沪府发(2013)75 号 ) ( PFTZ Measure 75 ). PFTZ Measure 71 and PFTZ Measure 73 came into effect on 1 October 2013 and will remain valid for three years. This Update provides an overview of the salient provisions of these new regulations. Opening Up Investment Sectors The Negative List approach Instead of allowing foreign investment in the specific business sectors set out in the Catalogue for Guidance for Foreign Investment (revised 2011) ( Catalogue ), foreign investment access in the PFTZ will be administered by a negative approach: Foreign investment will be allowed in all business sectors except those contained in the negative list set out in PFTZ Measure 75 ( Negative List ). Foreign investmaent not covered under the Negative List will not require prior approval but will be subject to a record-filing system described further below.

3 OCTOBER This opening of investment sectors only applies to companies incorporated in the PFTZ. The regulations do not clearly specify that a company registered in the PFTZ is allowed to do business outside it. However, the official website of the PFTZ does state that such a company is allowed to do business outside the PFTZ unless otherwise provided in the Overall Plan. Differences between the Negative List and the Catalogue The Negative List contains almost all the prohibited and restricted sectors set out in the Catalogue. The major differences between the Negative List and the Catalogue are set out below. Companies incorporated in the PFTZ are not exempt from national security review or anti-trust filing/review where applicable. Financial Services Financial services In the PFTZ, the following will be allowed in the area of financial services: Qualified private own/run financial institutions and the foreign financial institutions may jointly set up a Sino-foreign equity joint venture bank. Subject to certain conditions (to be specified later), limited banks (i.e., not full banks) may be set up. Subject to certain conditions (to be specified later), Chinese funded banks will be allowed to conduct offshore banking business. Foreign funded medical health insurance companies/institutions may be set up on a trial basis. There will be no minimum registered capital requirement for single aircraft or single vessel subsidiaries set up by financial leasing companies. Financial leasing companies will be allowed to engage in the business of commercial factoring. Transportation Transportation services In the area of transportation: Subject to detailed regulations from the Ministry of Transportation, the permitted percentage of foreign shareholdings in equity/cooperative joint ventures in the international transportation business will be further increased. Non-China flagged vessels owned by Chinese funded companies may carry foreign trade related containers between Shanghai and other ports of China on a trial basis. Wholly foreign owned enterprises ( WFOE ) may carry on an international vessel management business in the PFTZ.

4 OCTOBER Other Service Sector Activities WFOEs in other service sectors WFOEs will be allowed to carry on the following businesses in the PFTZ: Certain value-added telecommunication services (subject to internet information security). The manufacture and sale of gaming machines for export outside China and, if approved by the relevant cultural administration authority, for export into China. Creditworthiness background investigations. Performance agency services (provided that the service is in Shanghai only). Entertainment services (provided that the service is in the PFTZ only). Foreign funded medical institutions. WFOEs in construction will be allowed to carry out Sino-foreign cooperative construction projects in Shanghai, regardless of the investment ratios in the project. Foreign HR recruitment agencies from Hong Kong and Macau may set up as WFOEs, and the minimum registered capital required has been reduced from US$300,000 to US$125,000. Non-WFOEs in other service sectors The PFTZ also allows for the following: Sino-foreign equity joint ventures in travel services may provide international travel services (except to Taiwan). Foreign invested design companies that provide services within Shanghai only are exempted from the requirements as to track record when applying for qualification. Sino-foreign cooperative joint ventures may set up commercial education training institutions and vocational training institutions. The permitted level of foreign shareholding in HR recruitment agencies has been increased to 70%. A foreign invested investment holding company may be structured as a company limited by shares. Filing and Record of Foreign investment in the PFTZ System of record filings As noted above, the foreign invested projects and/or the establishment or change of foreign invested enterprise in the PFTZ which are not covered in the Negative List will only be subject to a system of record filings, instead of that of obtaining prior approvals. This system is simpler and faster than the current application and approval procedures outside the PFTZ. This is expected to lower costs and clear up uncertainties in foreign

5 OCTOBER investment. The processes involved are set out below. Foreign Invested Enterprises Establishing a foreign invested enterprise An investor that wishes to establish a foreign invested enterprise in the PFTZ may make the record/filing online or go to the onestop government window of PFTZ after obtaining the Preregistration of Enterprise s Name. The authority in charge of record/filing will complete the record/filing within one working day and then issue a record certificate. The investor can apply for any further formalities with the record certificate and other required documents. The PFTZ official website promises four working days to complete all registrations. Changes to specified key particulars of the foreign invested enterprise must also be notified by filing a record of the change online. Foreign Invested Projects Procedures for foreign invested projects Foreign invested projects should submit the following documents and forms for record/filing: The incorporation license or business license of the investors. The proposal of investment signed by the investors or the board resolution of the acquired/target company or the relevant resolution of capital contribution (each as applicable). The relevant property documents (i.e., the property ownership certificate, the notice on the bid for land, the confirmation of the successful bid for land, the state-owned land use right granted contract, or the lease agreement). Any other documents required by the relevant laws and regulations. Issue of Comments on Foreigninvested Project Within 10 working days after receiving these documents, the authority in charge of record/filing will issue its Comments on Foreign-invested Project in the PFTZ ( 自贸试验区外商投资项目备案意见 ) if the application does not violate the laws and regulations and complies with China s industry policies. With this document, the applicant can apply for the planning, land usage, environment assessment, and construction approvals required, and deal with any other formalities. Changes as to the following matters need to be filed and recorded with the competent authority: share structure; project location; main purpose of the project;

6 OCTOBER increase in the total investment (but only if the increase is by 20% or more); and any other matters as may be required by the relevant laws and regulations or industry policies. Requirements as to Registered Capital No minimum registered capital required No requirements as to timing and manner of capital contribution Unless otherwise provided in the specific laws and regulations regulating a particular industry (for example, banks, financial institutions, insurance companies), the requirement in the Companies Act of a minimum registered capital of RMB30,000 is not applicable to companies registered in the PFTZ. Companies registered in the PFTZ are only required to register their subscribed registered capital and not their paid up capital. Their business licenses will, accordingly, not reflect their paid up registered capital. Furthermore, there are no requirements as to the manner and term of capital contribution for companies set up in the PFTZ. Shareholders may decide these matters, which should be set out in the articles of association of the company. The shareholders will be liable for the liabilities of the company to the extent of their respective subscribed (not the paid up) registered capital. Tax Incentives Limited tax incentives Tax incentives are not the main selling points of the PFTZ. The major tax incentives offered to companies registered in the PFTZ are as follows: Companies in the PFTZ may pay their income taxes in instalments over five years in respect of any taxes assessed on the appreciation in value of any non-cash assets injected as capital into the company. Highly skilled personnel and personnel in short supply may, with respect to any income tax assessed on gains derived from shares given by companies under incentive schemes, pay such tax in instalments.

7 OCTOBER If you would like information on this or any other area of law, you may wish to contact the partner at WongPartnership that you normally deal with or contact any of the following partners: Joseph He Joint Head China Practice DID: Click here to see Joseph s CV. Gerry Gan Joint Head China Practice DID: Click here to see Gerry s CV. CONTACT DETAILS Singapore 12 Marina Boulevard Level 28 Marina Bay Financial Centre Tower 3 Singapore Tel: Fax: /5722 China Beijing Representative Office Unit 3111 China World Office 2 1 Jianguomenwai Avenue, Chaoyang District Beijing , PRC Tel: Fax: Middle East Abu Dhabi Branch Al Bateen Towers Building C3 Office (P1) P.O. Box No Abu Dhabi, UAE Tel: Fax: contactus@wongpartnership.com Shanghai Representative Office Unit 5006 Raffles City Office Tower 268 Xizang Road Central Shanghai , PRC Tel: Fax: Licensed by the QFCA Office Amwal Tower, West Bay P.O. Box No Doha, Qatar Tel: Fax: wongpartnership.com