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Foreign Investment Bulletin Oct-Nov, 2015

2015.12.24 MIAO, Qinghui (Catherine) 、PAN, Yiming、FANG, Xiaotong

To regulate development of internet reservation taxis, the Ministry of Transportation (“MOT”) has issued the Guidance on Further Reform on Healthy Development of the Taxi Industry (“Taxi Guidance”) and Temporary Measures on Internet Taxi Reservation Operations and Services (“Internet Reservation Taxi Measures”), and is seeking public opinion on these matters. The State Council decided to launch pilot projects on the market access negative list. The Ministry of Commerce (“MOFCOM”) issued the Decision of the Ministry of Commerce to Revise Certain Rules and Regulatory Documents where provisions in 29 rules and regulatory documents relating to the reform of registration system of registered capital are revised. The MOFCOM and State Administration of Foreign Exchange (“SAFE”) have cancelled the filing and publication procedures of foreign investments in real estate on MOFCOM website. The People’s Bank of China (“PBOC”) and the SAFE has jointly issued the Operating Guidelines for the Administration of Cross-border Issuance and Sales of Securities Investment Funds between Mainland China and Hong Kong (“Operating Guidelines”) to regulate the administration of cross-border issuance and sales of securities investment funds. The State Administration of Industry and Commerce (“SAIC”) contemplates to change the registration authority of foreign enterprises engaging in production and business within the territory of China from the SAIC to provincial level of administration of industry and commerce authorities.


1. Ministry of Transportation will regulate the management of internet taxi reservation 


The MOT issued the Taxi Guidance and Internet Reservation Taxi Measures on 10 October 2015, and opened for public opinion on the matter.  The Internet Reservation Taxi Measures sets out stringent access requirements for foreign-funded internet taxi reservation operations and services. In addition to maintaining servers in mainland China and adherence to the relevant rules regarding national security review on foreign investments, foreign-funded operators are required to hold a value-added telecommunication business operating license. 


1.1 Background


Since July 2014, some internet enterprises began providing internet taxi reservation services, which subsequently caused legal issues to arise, including the unclear responsibilities of entities involved, involvement of non-operational vehicles, a lack of protection for passenger’s safety, rights and interests, and unfair competition. 


Provisions in the Administration of Taxi Business Operations and Services, effective since 1 January 2015, regulates Taxi Reservation Operations and Services (“TROAS”): TROAS is defined as the business activities of passenger vehicles with no more than seven seats providing driving services through reservations and being driven at passengers’ will, with fares calculated according to travelling mileage, time or other calculating mechanisms. TROAS providers are required to obtain Administrative License of Taxi Operations, Permit on Road Transportation Operations and Road Transportation Certificate which specify they are reservation taxis, and the colors and markings shall be distinguishable from regular taxis. Drivers of reservation taxis shall only provide operations and services through reservations, picking up passengers at a designated location, and are prohibited from soliciting passengers when driving around. 


With these changes, MOT aims to further regulate internet taxi reservation operations and services, and opened for public opinion on the Internet Reservation Taxi Measures on 10 October 2015. 


1.2 Legal Review


The Internet Reservation Taxi Measures establishes detailed rules for internet taxi reservation operation providers, cars and drivers providing internet reservation taxi services, operations of internet reservation taxis, supervision and inspection, and legal responsibilities. 


“Internet reservation taxi operations and services” means business activities of providing reservation taxi operations and services (not driving around) through services platforms built by virtue of internet technology which contain information of qualified cars and drivers and match the supply with the demand. 


Foreign-funded internet reservation taxi operations must meet the following requirements: 

a. Own legal personality;

b. Possess a fixed place of business, relevant institutions and abilities to provide services;

c. Own an internet platform and the ability to exchange and process information and data with servers located in mainland China;

d. The internet service platform database shall be connected to the local road transportation administrative authority taxi surveillance platform at the location where services are provided;

e. Those who use electronic payment systems shall enter into a payment and settlement service agreement with banking or non-banking payment institutions;

f. Establish sound and adequate administration systems;

g. Comply with relevant rules regarding national security review on foreign investments.


Foreign-funded internet reservation taxi operators shall obtain administrative license on internet reservation taxi operation, a permit on Road Transportation Operation with operation scope limited to reservation taxis, and besides, a value-added telecommunication business operating license. 


Vehicles engaged in internet reservation taxi operation shall obtain a Road Transportation Certificate for reservation taxis. Internet reservation taxi operators shall not engage other operational or non-operational vehicles. 


Drivers conducting internet reservation taxi services shall acquire a Qualification Certificate for Road Transportation Practitioners for reservation taxis. 


Internet reservation taxi operators shall reasonably fix transportation price for internet reservation taxis and state the price clearly and publicly, and shall not, for the purposes of excluding competitors, carry out unfair competition behaviors by providing operations and services at a price below cost. 


1.3 Next Step


The Internet Reservation Taxi Measures requires that foreign-funded internet reservation taxi operators shall obtain administrative license on internet reservation taxi operation and a permit on Road Transportation Operation with operation scope limited to reservation taxis, and besides, a value-added telecommunication business operating license, In addition to licensing, the Catalogue of Industries for Guiding Foreign Investment revised in 2015 states that conducting value-added telecommunication services has been classified as a restricted industry for foreign investment, and as such, foreign ownership in such business shall not exceed 50%. Solicitation of comments by MOT on the Internet Reservation Taxi Measures has attracted wide attention from the public, including foreign investors. Whether MOT will amend the Measures according to the feedback is worthy of attention. 


2. State Council will launch pilot projects on market access negative list


On 19 October 2015, the State Council issued the State Council’s Opinion on Implementing Market Access Negative List System (“Opinion on Market Access Negative List System”) and decided to conduct trials on market access negative list system in certain regions from 1 December 2015 to 31 December 2017 and formally implement an unified national market access negative list system in 2018.  According to news reports, China will conduct trials on market access negative list system in four free trade pilot zones in Shanghai, Guangdong, Tianjin and Fujian (“Four Free Trade Zones”) and their provincial administrative regions.  


The market access negative list system is a series of systemic arrangements where government authorities at all levels adopt administrative measures in accordance with a list issued by the State Council that designates the industries, sectors and businesses that are prohibited from investing and operating within the territory of People’s Republic of China. All market participants may access industries, sectors and businesses which are not listed on the market access negative list equally in accordance with the law. 


The market access negative list includes access-prohibited categories and access-restricted categories, which comprises investment and operation activities such as initial investment, expansion investment, merger investment and other behaviors of accessing the market. For industries and sectors related to national security, national layout of major productive forces, strategic resources development and major public interests, governments at all levels may adopt administrative measures such as prohibitions or restrictions on qualification of market players, equity ownership, business scope, operation types, business models, spatial layout and protection of national spatial development. 


The negative list mainly includes both market access negative list and foreign investment negative list. The market access negative list is a control measure equally applicable to domestic and foreign investors and sets out same requirements of market access management for all types of market participants. The foreign investment negative list is applicable to foreign investors’ investment and operation activities within China and it is a special control measure targeting access of foreign investment. Developing the foreign investment negative list should be considered with investment issues in foreign negotiation, relevant working arrangements of which should be regulated otherwise by relevant laws. Where bilateral and multilateral agreements (treaty) signed by China state otherwise, provisions of the relevant agreements (treaty) shall prevail. 


2.1 Legal Review


The most prominent highlights of the Opinion on Market Access Negative List System is that it is the first negative list management method introduced to the management of domestic market, and the list equally applies to state-owned and non-state-owned, domestic and foreign-invested enterprises.

Secondly, the Opinion on Market Access Negative List System indicates that, in addition to existing measures such as prohibitions or restrictions on qualifications of market players, equity percentage and business scope, more administrative measures such as operation types, business models, spatial layout, and protection of national spatial development may be adopted according to the law. Definitions and specific contents of management of the terms “operation types”, “business model” and “spatial layout” are to be further clarified.


Lastly, the Opinion on Market Access Negative List System requires that pre-approval matters shall be streamlined and the evaluation of qualification matters shall be reduced. Market access will not be restricted for all investment and operation activities, so long as such investment and operation activities are conducted at the free will of market participants and the relevant industries are not in the prohibited or restricted sectors according to laws, regulations and the State Council’s decisions.


2.2 Next Step


The provincial People’s Governments of the Four Free Trade Zones will put forward plans for the proposed pilot market access negative list system pursuant to the draft market access negative list (trial version) which is to be initiated, developed and examined by the National Development and Reform Commission and MOFCOM. Such a list will be implemented upon approval by the State Council. The content of the market access negative list of the Four Free Trade Zones as well as the reforms to the relevant administrative approval and supervision system of the negative list system is worthy of attention. 


3. Ministry of Commerce has revised rules and regulatory documents containing provisions relating to registered capital 


On 28 October 2015, MOFCOM issued the Decision of the Ministry of Commerce to Revise Certain Rules and Regulatory Documents revising 29 rules and regulatory documents in response to the reform to the registration system of registered capital.


3.1 Background


Following the revision to Company Law on 28 December 2013, and unless otherwise provided, the following changes have occurred: the system of registration of paid-up registered capital has been changed to the system of registration of subscribed registered capital; the system of minimum registered capital of enterprises has been cancelled; restrictions on proportion of initial contribution of the registered capital and on the proportion of monetary contribution had been cancelled; and the system of annual inspection of enterprise has been changed to annual reporting system.


To facilitate the reform of the registration system of registered capital, the State Council later issued the Notice of the State Council on Issuing the Plan for Reforming the Registration System of Registered Capital and Notice of the General Office of the State Council on Issues Concerning Accelerating and Promoting the Implementation of the Reform of the Registration System of Registered Capital.


According to these two notices, MOFCOM has sorted out the rules and regulatory documents relating to the reform of the registration system of registered capital and decided to revise certain provisions in 29 rules and regulatory documents.


3.2 Legal Review


The Decision of the Ministry of Commerce to Revise Certain Rules and Regulatory Documents have the following effect on 29 rules and regulatory documents:


a. Cancellation of requirements on minimum registered capital of enterprises


Requirements on minimum registered capital of RMB 30 million for foreign-funded stock limited companies and USD 30 million for foreign-funded companies, respectively, have been cancelled. Additionally, requirements on minimum registered capital of certain foreign-funded industries including auction houses, financial leasing companies, foreign-funded international freight agencies, wholesaling and warehousing of refined oil, sales and warehousing of crude oil, foreign contracted projects, logistics and commercial factoring have been cancelled. 


b. Cancellation of restrictions on time limit for payment of registered capital


Requirements regarding the time limit for payment of registered capital in several regulations have been removed, including requirements that initiators of foreign-funded stock limited companies shall pay in full its subscribed capital within 90 days of issuance of certificates of approval at one time; investors of startup investment enterprises that do not own legal personality shall pay their subscribed capital within 5 years, foreign investors shall pay in full registered capital of foreign-funded companies within 5 years and so on. 


c. Cancellation of restrictions on full payment of registered capital being a pre-condition of approvals


The following restrictions have been cancelled: full payment of registered capital by established and approved foreign-invested commercial enterprises when applying for additional outlets; full payment of registered capital before conducting mergers and spin-offs of foreign-funded enterprises; full payment of registered capital before re-investing in China of foreign-funded enterprises; full payment of registered capital before foreign-funded enterprises using shares as equity contribution. 


d. Joint annual inspection of foreign-funded enterprises is no longer a pre-condition for approval


Several previous regulatory documents stipulate that passing the joint annual inspection of enterprises is one of the pre-conditions for foreign-funded enterprises obtaining approval. Such inspections are no longer a pre-condition for approval, including on applications for additional stores by foreign-funded commercial enterprises, application for equity contribution by foreign-funded enterprises, and procedures for settlement and sale of foreign exchange in capital accounts by foreign-funded real estate enterprises. 


3.3 Next Step 


Whether commerce authorities at all levels are able to adjust internally to implement the changes imposed by the Decision of the Ministry of Commerce to Revise Certain Rules and Regulatory Documents on 28 October 2015 in a timely manner is worthy of attention.  


4. MOFCOM and SAFE have cancelled the filing and publication procedures for foreign investments in real estate on the MOFCOM website


On 6 November 2015, MOFCOM and SAFE issued the Notice of MOFCOM and SAFE on Further Improving the Filing of Foreign Investment in Real Estate (“Notice on Further Improving Filing”) which cancelled the filing and publication procedures on the MOFCOM website.


4.1 Background


On 23 May 2007, MOFCOM and SAFE issued the Notice of MOFCOM and SAFE on Further Strengthening and Regulating the Approval and Supervision of Foreign Direct Investment in the Real Estate Industry, which required foreign-funded real estate enterprises approved for establishment by local approving authorities shall be timely recorded with MOFCOM pursuant to laws for the first time. 


On 10 July 2007, SAFE issued the Notice of the General Affairs Department of SAFE on Issuing the List of the First Group of Foreign-Funded Real Estate Projects Having Passed the Filing Procedures with MOFCOM, which further indicated that, for foreign-funded real estate enterprises (including newly established enterprises and enterprises with a capital increase) that have obtained the approval certificates issued by the commerce authorities and passed MOFCOM’s filing procedures after 1 June 2007, their applications to register and settle foreign debts shall not be accepted by the branches; and for foreign-funded real estate enterprises that have obtained the approval certificates issued by local commerce authorities but not passed MOFCOM’s filing procedures after 1 June 2007, their applications to register (or change) foreign debts and to sell and settle foreign exchange in capital accounts shall not be accepted by the branches (such Notice was abolished by SAFE on 13 May 2013).


In 2008, MOFCOM issued, one by one, the Notice of MOFCOM on Doing Well in Filing of Foreign Investments in the Real Estate Industry and the Notice of MOFCOM on Streamlining Procedures for Filing of Foreign Investments in Real Estate to streamline procedures for filing of foreign investments in real estate. MOFCOM has delegated to provincial commerce authorities the verification of filing materials of foreign investments in the real estate industry, and after provincial commerce authorities have completed reviewing such filing materials and affixed with their official seals on real estate filing forms, these forms will be directly filed with MOFCOM. Meanwhile, local commerce authorities will submit electronic information relating to establishment and changes or relevant enterprises to MOFCOM through the foreign investment examining and approving management system and MOFCOM will still publicize the list of enterprises which have passed the filing on the internet. 


On 24 June 2014, MOFCOM and SAFE issued the Notice of MOFCOM and SAFE on Improving the Filing of Foreign Investments in Real Estate to further streamline filing procedures of foreign investments in real estate. MOFCOM’s filing procedures were changed from paper filing to electronic data filing with interim and post filing random inspections.


On 6 November 2015, MOFCOM and SAFE issued the Notice on Further Improving Filing, which finally cancelled the filing and publication procedures of foreign investments in real estate on MOFCOM’s website. 


4.2 Legal Review


Since the Catalogue of Industries for Guiding Foreign Investment (revised in 2015) has deleted the real estate industry from the restricted catalogue of industries for foreign investments as a whole, MOFCOM and other authorities have gradually lowered the access threshold for foreign investments. After adjustments to regulations relating to foreign investments and personal purchase of real estate in the Opinions Concerning Regulating the Access to and Administration of Foreign Investment in the Real Estate Market issued by MOFCOM and other five state departments on 19 August 2015, MOFCOM issued the Notice on Further Improving Filing. Although there are only four provisions in the Notice, it finally cancels the filing and publication procedures of foreign investments in real estate on the MOFCOM website which lasted eight years. This marks a turning point in foreign investments in China real estate sector. 


4.3 Next Step


After cancelling the MOFCOM filing requirements pursuant to the Notice on Further Improving Filing, there is still a need for SAFE to further clarify whether foreign-funded real estate enterprises (including newly established enterprises and enterprises with a capital increase) are allowed to have foreign debts within the scope of “difference between total investment and registered capital”.


5. PBOC and SAFE issued operating guidelines regulating administration of cross-border issuance and sales of securities investment funds


To support mutual recognition of publicly offered securities investment funds between mainland China and Hong Kong (“Mutual Recognition of Funds”), the PBOC and SAFE jointly issued Operating Guidelines on 6 November 2015. The main content of the Operating Guidelines includes: SAFE shall only monitor the total limit for Mutual Recognition of Funds, rather than examining and approving limits for individual products or a single institution; fund-raising for cross-border fund issuance may be imported and exported in RMB or foreign currency, and if such import and export involve currency exchanges, procedures may be directly dealt with by the trustees or agents with banks; sales of cross-border issuances is encouraged to be calculated in RMB and cross-border receipt and payment of funds are encouraged to be denominated in RMB; the information reporting system is to be implemented, and information reporting of mutually recognized funds shall be handled by trustees (banks) or agents (banks or fund management companies); systematic data statistics and reporting procedures are to be established, without the need to manually complete forms or to submit reporting entity information and to open fund-raising accounts repeatedly. 


5.1 Background


On 14 May 2015, China Securities Regulatory Commission (“CSRC”) issued Interim Provisions on Administration of Recognized Hong Kong Funds to regulate qualifications, application procedures, operational requirements and regulatory arrangements of mutually recognized funds. These provisions were implemented on 1 July 2015.


On 22 May 2015, the CSRC and Hong Kong Securities and Futures Commission (“SFC”) jointly issued the Announcement to Develop the Mutual Recognition of Publicly Offered Securities Investment Funds between Mainland China and Hong Kong, and announced mutual agreements were achieved regarding the implementation principles, the mode and the operation scheme of the Mutual Recognition of Funds. The CSRC and SFC would, through setting reciprocal mutual recognition conditions, promote the development of the mutually recognized funds in both markets and achieve general balance of import and export of funds. The initial investment limit of the mutually recognized funds is set at RMB 300 billion for import and export of funds, respectively. Mutual Recognition of Funds would be formally implemented on 1 July 2015. On the same day, the SFC issued the Mutual Recognition of Funds between the Mainland and Hong Kong.


On 6 November 2015, the PBOC and SAFE jointly issued the Operating Guidelines. 


5.2 Legal Review


Before the issuance of Hong Kong funds registered with the CSRC in mainland China, the managers of such funds shall, through mainland agents of such funds (“Agents”), report relevant information via the capital accounts information system of  SAFE (“System”). Where the entity information of Hong Kong funds has been reported, the managers shall engage the Agent to open fundraising-specific accounts (denominated in RMB and/or foreign currency, hereinafter referred to as "fundraising-specific accounts") for each Hong Kong fund in the name of the Hong Kong fund manager in the designated sales bank by virtue of relevant business vouchers generated after information has been reported in the System. The funds in fundraising-specific accounts denominated in RMB and foreign currency may be transferred between both accounts after settlement and purchase of foreign exchange.


Before the issuance of mainland China funds recognized by SFC in Hong Kong, the mainland managers of such funds shall, through mainland trustees of such funds (“Trustees”), report relevant information via the System. Where the entity information of mainland funds has been reported, the mainland managers shall open fundraising-specific accounts (denominated in RMB and/or foreign currency) for each mainland fund with the trustee or the bank designated by the trustee by virtue of relevant business vouchers generated after information has been reported in the System. The funds in fundraising–specific accounts denominated in RMB and foreign currency may be transferred between both accounts after settlement and purchase of foreign exchange.


The most prominent highlights of the Operating Guidelines is the supervision by SAFE on total limit of Mutual Recognition of Funds. When the net export of funds of the issuance of all Hong Kong funds in mainland market or the net import of funds of the issuance of all mainland funds in Hong Kong market reaches RMB 300 billion, SAFE will release a public announcement on its website. Accordingly, Hong Kong (mainland) fund managers shall cease registration (recognition) of mainland (Hong Kong) funds and cross-border issuance and sales of funds until it is indicated in the export (import) monthly data published on SAFE’s official website that the net export (import) of funds is below RMB 300 billion.


5.3 Next Step


Implementation of the Mutual Recognition of Funds promotes the progress of convertibility of RMB capital accounts, as well as interconnection between domestic and foreign capital markets. On 18 December 2015, the first group of three Hong Kong mutually recognized funds was formally registered with the CSRC, and on the same day, the first group of four mainland mutually recognized funds was formally registered with the SFC.  Whether implementation of the Mutual Recognition of Funds between mainland China and Hong Kong would promote the establishment of regional asset management platforms and attract investors from other areas to conduct regional investments and assets management services on these platforms is worthy of attention. 


6. SAIC revised Measures for the Administration of Registration of Enterprises from Foreign Countries (Regions) Engaging in Production and Business within the Territory of China


The SAIC revised Measures for the Administration of Registration of Enterprises from Foreign Countries (Regions) Engaging in Production and Business within the Territory of China, where the registration authority for foreign enterprises engaging in production and business within the territory of China has been changed from the SAIC to provincial level of administration of industry and commerce authorities, and issued consultation papers on 17 November 2015 for soliciting public opinion.  


6.1 Background


Under the Measures for the Administration of Registration of Enterprises from Foreign Countries (or Regions) Engaging in Production and Business within the Territory of China, implemented on 1 October 1992, Article 2 states that “According to relevant laws and regulations, foreign enterprises, approved by the State Council and administrative authorities authorized by the State Council (hereinafter referred to as examination and approval authorities) and engaged in production and business with the territory of China, shall register with the SAIC or the local administrations for industry and commerce authorized by the SAIC (hereinafter referred to as the administrative authorities of registration). Foreign enterprises may commence operations once their applications for registration have been examined and approved by administrative authorities of registration and they have obtained a Business License of People Republic of China (hereinafter referred to as “Business License”). Foreign enterprises, who fail to be approved by the examination and approval authorities and whose applications for registration fail to be examined and approved by administrative authorities of registration, shall not operate in China”.


On 15 May 2013, the State Council issued the Decision of the State Council on Matters Concerning Cancellation of Administrative Approval Items and Delegation to Lower Levels where the authority to review the enterprises from foreign countries (or regions) engaging in production and business activities within China is delegated to provincial industry and commerce administrative departments. However, the SAIC still has not adopted any measures to revise relevant regulations pursuant to the above-mentioned decision made by the State Council in more than two years’ time.


6.2 Legal Review


According to the State Council’s decision, the SAIC revised Measures for the Administration of Registration of Enterprises from Foreign Countries (Regions) Engaging in Production and Business within the Territory of China, where the registration authority for  foreign enterprises engaging in production and business within the territory of China has changed from “the SAIC or authorized local administration of industry and commerce authorities” to “provincial level of administration of industry and commerce authorities” while other provisions remain unchanged. Once the consultation papers have been passed, it will facilitate registration procedures of foreign enterprises engaging in production and business within the territory of China.


6.3 Next Step


The revised Measures for the Administration of Registration of Enterprises from Foreign Countries (Regions) Engaging in Production and Business within the Territory of China was open for public opinion until 1 December 2015 and is expected to be issued and implemented within a short period of time.

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