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Foreign Investment Bulletin Aug-Sep, 2015

2015.10.30 MIAO, Qinghui (Catherine) 、PAN, Yiming、PENG, Huiying、MEI, Xinghong

The Ministry of Housing and Urban-Rural Development of the PRC (“MHURD”) and five other departments revised the regulations governing foreign-invested real estate enterprises (“FIREEs”) and real estate purchases by individuals provided in the Opinions for Regulating the Access by and Administration on Foreign Investment in the Real Estate Market (“Document 171”). The Ministry of Commerce of the PRC (“MOC”) issued the Opinion on Supporting the Innovative Development of Pilot Free Trade Zones (“FTZ Opinion”), which lowered the entry thresholds for foreign investment in some industries in the pilot free trade zones (“FTZ”). The State Administration for Industry and Commerce (“SAIC”) and other departments require new registration rules known as “3 in 1 and 1 code for 1 license” and “business license before permits”.


1. MHURD and five other departments revised Document 171 and lowered the entry thresholds for foreign investment in the real estate market


With the approval of the State Council, on 19 August 2015, the MHURD, the MOC, the National Development and Reform Commission (“NDRC”), the People's Bank of China (“PBOC”), the SAIC, and the State Administration of Foreign Exchange (“SAFE”) published the Notice of the MHURD and Other Departments on Amending the Policies Concerning Access by and Administration of Foreign Investment in the Real Estate Market (“Notice 122”), which revised the regulations governing FIREEs and  real estate purchases by individuals provided in Document 171 and, thereby, lowered the entry thresholds for foreign investment in the real estate market.


1.1 Background


On 11 July 2006, the Ministry of Construction (the predecessor of the MHURD), the MOC, the NDRC, the PBOC, the SAIC, and the SAFE published Document 171, which included tight regulations on the entry of foreign investment in the real estate market, the development and management of real estate by foreign-invested enterprises (“FIEs”), and real estate purchases by foreign institutions and individuals. The MOC, the SAFE, and the Ministry of Development subsequently promulgated auxiliary regulatory documents. According to these regulations, when an overseas institution and/or individuals intend to purchase real property in China, which is not for their own use, such investment and purchase shall comply with the principle of commercial presence and an FIE shall be established for the purpose; foreign investment in the development and management of real estate shall comply with the Principle of the Project Company; the establishments and changes of FIREEs shall go through the filing procedures of the MOC; and the foreign exchange authorities and banks shall not process the settlement and sale of foreign currencies for the capital of FIREEs that have not completed filings with the MOC. These regulations had a tremendous impact on foreign investment in real estate. 


On 13 March 2015, the NDRC and the MOC published the 2015 revised version of the Catalogue of Industries for Guiding Foreign Investment (“2015 Catalogue”), which relaxed controls on the entry of foreign investment in the real estate market. One of the revisions of note was the deletion of the entire real estate industry from the catalogue of restricted industries. 


On 19 August 2015, the MHURD, the MOC, the NDRC, the PBOC, the SAIC, and the SAFE published Notice 122 and, thereby, revised Document 171.


1.2 Legal Review


The long anticipated Notice 122 contained only four items and made the following revisions to Document 171:


(1) Adjusted the ratio of registered capital to total investment of foreign investment real estate enterprises


The Interim Provisions of the State Administration for Industry and Commerce on the Ratio of the Registered Capital to the Total Investment of a Sino-Foreign Equity Joint Venture Enterprise (“Interim Provisions”), was applicable to FIREEs before Document 171 came into force. Document 171 raised the required ratio of registered capital of an FIREE with total investment exceeding 10 million US dollars. The table below compares Document 171 to the Interim Provisions:


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Notice 122 abolishes the higher investment requirements and provides that the Interim Provisions apply to the ratio of the registered capital to the total investment of FIREEs. The registered capital will be significantly reduced for an FIREE with total investment exceeding 10 million US dollars. 


(2) Abolished the requirement that the registered capital must be fully paid in before taking any loan or making foreign exchange settlement for any foreign-currency loan


Document 171 provides that an FIREE shall not take out any loan, foreign or domestic, and the foreign exchange authorities shall not approve the foreign exchange settlement for any foreign-currency loan taken by such enterprise, if the registered capital of such enterprise has not been fully paid in, such enterprise has not obtained the State-Owned Land Use Certificate, or the capital for the development project of such enterprise is less than 35% of the total investment of the project. 


Notice 122 abolishes the requirement that the registered capital must be fully paid in before an FIREE takes any loan or makes any foreign exchange settlement for any foreign-currency loan.


We noted that the SAFE abolished the requirement for an FIREE to have its registered capital fully paid in before complying with the foreign debt registration and foreign exchange settlement for foreign debts provided in the Notice of the SAFE on Repealing and Revising the Normative Documents concerning the Reform for Registered Capital Registration System. Such notice was published on 4 May 2015, before Notice 122 came into force. It should be noted that an FIREE must still meet the requirements of obtaining the State-Owned Land Use Certificate and having at least 35% of the total investment of the project as capital for its development project.


(3) Abolished the requirement that foreign individuals must work or study domestically for more than one year before purchasing any traded real property for own use or residence 


Document 171 provides that foreign individuals who have worked or studied domestically for more than one year may purchase traded real properties that are suitable for their actual needs of their own use or residence.


Notice 122 abolished the one-year requirement. In cities where housing purchase restrictions have been adopted, however, foreign individuals shall comply with local policies when they purchase real properties. 


We noted that Notice 122 did not change the requirement set forth in Document 171 for the purchase of real properties by foreign institutions. Domestic branches and representative agencies of foreign institutions (other than enterprises that are permitted to carry on the real estate business) may purchase traded real properties for their own use or residence and may not purchase traded real properties for purposes other than for their own use or residence.


(4) FIREEs may make foreign exchange registrations relating to foreign investment directly at banks

According to Notice 122, FIREEs may make foreign exchange registrations relating to foreign direct investment directly at banks pursuant to the relevant foreign exchange regulations. 


In the Notice of the SAFE on Further Simplifying and Improving the Policies of Foreign Exchange Administration Applicable to Direct Investment (which was published on 28 February 2015, before Notice 122 came into force), the SAFE required that, from 1 June 2015 onwards, the foreign exchange registration and approval for direct investment shall not be conducted by foreign exchange authorities and that banks shall be in charge of the relevant approval and registration. Notice 122 only restated the content of this notice.


It should be noted that, according to the Notice of the SAFE on Further Simplifying and Improving the Policies of Foreign Exchange Administration Applicable to Direct Investment, when making foreign exchange registration, FIREEs are still required to submit proof of filing with the commerce authorities.


1.3 Next Step


A foreign investor shall remit full payment with its own funds in order to acquire a domestic real estate enterprise through a transfer of shares or other methods. Domestic branches and representative agencies of foreign institutions (other than enterprises that are permitted to carry on the real estate business) purchasing domestic traded real properties shall comply with the principles of actual need and the owners’ use or residence. Foreign institutions that have not set up any domestic branch or representative agency may not purchase traded real properties. Whether these rules, which were also provided in Document 171, will be further revised or abolished after the promulgation of the 2015 Catalogue and Notice 122 is worth our continued attention. 


2. MOC promulgated the FTZ Opinion and lowered the entry thresholds for foreign investment in some industries


On 25 August 2015, in order to facilitate the development of the FTZ, the MOC issued the FTZ Opinion to the commerce departments in Tianjin City, Shanghai City, Fujian Province, and Guangdong Province. The MOC thereby provided guidance in respect of promoting the upgrade and transformation of foreign trade, the lowering of investment entry thresholds, and the enhancement of the market competition environment. 


2.1 Legal Review


The following items of the FTZ Opinion are worth noting:


First, the requirement for FIEs to be permitted to engage in the direct sales business was relaxed. The FTZ Opinion abolished the requirement set forth in the Regulations on Administration of Direct Sales that a foreign investor must have at least three years of experience in direct sales activities outside of the PRC. 


Second, foreign investors are permitted to establish pawn enterprises in the FTZ. The FTZ Opinion provides that the rules concerning the requirements for founding a foreign-invested pawn enterprise and the supervision thereof shall be consistent with the rules applicable to domestic-invested pawn enterprises and their administration shall follow the Administrative Measures for Pawning. 


Third, the FTZ Opinion permits foreign investors to engage in the construction and operation of gas stations, free from restrictions on the number of stores, through their wholly-owned enterprises established in the FTZ.


Fourth, the Guangdong FTZ was encouraged to further abolish or relax the entry restrictions in respect of qualification requirements, stockholding, and business scope under the framework of the Arrangement for the Establishment of Closer Economic and Trading Relationship Between Mainland China and Hong Kong/Macau. 


2.2 Next Step


It is worth observing how the commerce departments of Tianjin City, Shanghai City, Fujian Province, and Guangdong Province will implement the FTZ Opinion through the promulgation of relevant regulations. 


3. Two new registration systems “3 in 1 and 1 code for 1 license” and “business license before permits” were launched on 1 October 2015


On 7 August 2015, in order to implement the “3 in 1” registration system (the “3” refers to business license, organization code certificate and tax registration certificate), the SAIC issued the Notice of the SAIC and Other Five Departments on Implementing the Opinions of the General Office of the State Council on Accelerating the “3 in 1” Registration System Reform and decided to launch the new registration model “3 in 1 and 1 code for 1 license” across the country on 1 October 2015.


On 27 August 2015, in order to reduce the burdens imposed by the registration system, the SAIC revised the Administrative Provisions on Business Scope Registration for Enterprises, effective on 1 October 2015. 


3.1 Launch of the new registration model “3 in 1 and 1 code for 1 license”


Under the new registration model, all levels of administration for industry and commerce (“AIC”) in the country will issue business licenses containing the Unified Social Credit Code Of Legal Entity And Other Institutions (“Unified Code”) to newly established enterprises, farmers’ cooperatives (collectively “Enterprises”), and Enterprises making change registrations. The organization code certificates and the tax registration certificates of Enterprises will no longer be issued.


The SAIC requests that the transition from the current registration model to the “3 in 1 and 1 code for 1 license” registration model be completed as soon as possible in all parts of the country. For Enterprises making change registrations that have already received organization code certificates, the AIC shall issue business licenses containing the Unified Code, which consists of the previous 9-digit organization code of such Enterprises, and withdraw the previous business licenses, organization code certificates and tax registration certificates. If the said Enterprises have not received organization code certificates, the AIC shall issue business licenses containing the Unified Code and withdraw relevant certificates in accordance with the “3 in 1 and 1 code for 1 license” registration model. The previous certificates may continue to be used during the transition period. When the transition period ends, only business licenses containing the Unified Code shall be issued and used, and all previous certificates will be invalid.


We noticed that rules on whether the new registration model is applicable to representative offices of foreign enterprises, foreign-invested partnership enterprises and branches of foreign enterprises vary by location. For example, with respect to the representative office of foreign enterprises, while the new registration model is applicable in Beijing, it will only be applicable near the end of 2015 in Jiangsu Province and is not currently applicable in Guangdong Province. In addition, rules on the end date of the transition period vary by location. In most locations, the end date is 31 December 2017. However, in Beijing, the end date is 31 December 2020.


3.2 Implementation of the newly revised Administrative Provisions on Business Scope Registration for Enterprises


The purposes of such revision are to reduce the burden imposed by the registration system and to put into practice the requirements of the State Council, i.e. “business licenses before permits”. The term “business licenses before permits” means that, except for certain businesses for which permits are required before obtaining business licenses, all Enterprises shall apply for and obtain business licenses before obtaining the required permits for their business scopes.


Set out below are the highlights of the revised Administrative Provisions on Business Scope Registration for Enterprises:


(1) The limits on the wordings used to describe the business scope of the Enterprises are loosened. Investors or Enterprises will have the discretion to choose wordings from the Industrial Category for National Economy to describe their business scope. As for new industries, such wordings may be borrowed from policy documents, industry practice or professional publications.


(2) Registration procedures will vary depending on whether prerequisite permits are required for the intended business. If prerequisite permits are required, Enterprises shall obtain such permits prior to obtaining business licenses. If the prerequisite permits are not required, the “business licenses before permits” rule will apply. Business registration authorities shall include a note next to the business scope text specifying that “(businesses that are required by the law to obtain permits shall only be carried out after obtaining permits from relevant authorities)”, and the Enterprises will only be allowed to carry out such business after obtaining required permits for the intended business.


(3) Enterprises shall timely publicize to the general public, information about the acquisition and variation of government permits through the enterprise credit information publication system.


(4) The provisions on investigating and punishing Enterprises that operate their businesses beyond their registered business scopes are deleted.


3.3 Next Step


The legislation and procedures for implementing the “3 in 1 and 1 code or 1 license” new registration model in different parts of the country is worthy of attention.

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