FIE reform scraps approval, streamlines regulation

Since foreign investment in PRC companies became permitted in 1979, the Ministry of Commerce (MOFCOM) and its predecessors were the frontline regulators in approving the establishment of foreign-invested enterprises (FIEs). This regime has been profoundly transformed by the Decision on Revising Four Laws, Including the «PRC Wholly Foreign-owned Enterprise Law» (NPC Decision) adopted by the Standing Committee of the People’s National Congress on September 3, 2016.

Since the NPC Decision came into effect on October 1, 2016, an FIE engaged in a business that is not subject to restrictions or “special administrative measures for access” does not require MOFCOM approval for its establishment or for subsequent changes. These non-restricted FIEs only need to record file with MOFCOM.

This development reduces the time and complexity of establishing a non-restricted FIE. Foreign investors need to focus on a different set of key considerations in structuring FIEs than under the previous approval regime, and pay close attention to MOFCOM’s remaining powers over businesses subject to special access administration and over antitrust and national security aspects of foreign investment.

A smoother path for FIEs

The NPC Decision only amends a single article in each of the laws governing the three traditional types of FIEs—the wholly foreign-owned enterprise (WFOE), equity joint venture (EJV) and cooperative joint venture (CJV)—which changed the approval regime to a filing regime. To implement the new filing process, MOFCOM adopted the Tentative Measures for the Administration of the Record Filing of the Establishment of, and Changes to, Foreign-invested Enterprises (Filing Measures), and jointly released with the National Development and Reform Commission (NDRC) Announcement [2016] No.22 (Announcement 22), which defines businesses subject to special access administration as being those (i) listed in the “restricted” or “prohibited” categories of the Foreign Investment Industrial Guidance Catalogue (Amended in 2015) and (ii) listed in the “encouraged” category but subject to foreign shareholding limits or requirements for senior management.

Filing requirement

Under the Filing Measures, filing with a local authority under MOFCOM will be required for specified matters in relation to WFOEs, EJVs and CJVs as well as foreign-invested companies limited by shares, foreign-invested investment type companies (holding companies), and foreign-invested venture capital investment and “equity investment” enterprises. Equity investment enterprises refer to onshore private equity and venture capital funds, which are often organized as foreign-invested limited partnerships. Although MOFCOM has no authority over the establishment of partnerships, which only need to be registered with the local counterparts of the State Administration for Industry and Commerce (SAIC), the Filing Measures apparently extend MOFCOM’s powers to cover partnerships as well.