2016.07.27 LIU, Shijian (Jason)、HUANG, Shan、SUN, Piwei 、Runze LI、LIU, Xuan、WANG, Jiaying
The Law of the People's Republic of China on the Management of Activities of Overseas Non-Governmental Organizations within the Territory of China ("Management Law") was adopted at the twentieth session of the Standing Committee of the twelfth National People's Congress on April 28, 2016 and will go into effect as of January 1, 2017. The Management Law provides rules for the registration, operating activities, financial management, and punishment mechanisms, etc. of overseas non-governmental organizations’ ("Overseas NGOs") within the territory of China. Although the Management Law has not come into effect, nor have the competent authorities offered further ancillary or implementation rules, however, it can be expected that the implementation of the Management Law will have a profound impact on the activities of Overseas NGOs within China. Below is a brief forecast and analysis of the impact of the Management Law, focusing on certain questions that may concern Overseas NGOs.
I. The Management of the Overseas NGOs’ WFOE in China
Overseas NGOs have already been very active in China prior to the adoption of the Management Law. However, it has been difficult for Overseas NGOs to fully obtain legal identities. Currently the Civil Affairs Department or its local counterparts (the “Civil Affairs Departments”) mainly administrate the Overseas NGOs, i.e. handling applications from Overseas NGOs to establish representative institutions of foreign foundations, foreign chambers of commerce, and private non-enterprise units etc. However, since the representative offices of foreign foundations and the foreign chambers of commerce can only be established by certain types of institutions, and approval for establishment of private non-enterprise units cannot be easily obtained, it has been very difficult for an Overseas NGO to establish an entity institution with the Civil Affairs Departments. As an alternative approach, in order to secure legal status in employment, financial and taxation management, many Overseas NGOs have chosen to establish a wholly foreign owned enterprise1 (“WFOE”) or representative office2 with the Administration for Industry and Commerce.
To complete the registration under this alternative approach, the name of the WFOE is required to contain “Limited Liability Company” or “Limited Company”. The WFOE needs to have a certain amount of registered capital and to set a specific business scope (but it is barred from actually conducting business operations because of its identity as a NGO).
The emergence of this alternative approach is mainly a result of the difference in the definition of “enterprise” under Chinese laws and foreign laws. When examining an application to establish a WFOE by a NGO, the Chinese Commercial Departments relies on the legal status certificate of the NGO (which is similar to a business license, notarized by a public notary office of the country of origin of the Overseas NGO and certified by the Chinese embassy in that country). Many Overseas NGOs are registered overseas in the form of “LLC” or other forms that look like a “Company”. The Chinese commercial authorities may be unable to determine whether the Overseas NGO is a for-profit institution based on the legal status certificate provided by the NGO. In practice, the commercial authorities and the registration authorities do not make further inquiries during the approval/examination process, which makes it possible for an Overseas NGO to establish a WFOE or a representative office within China.
The Management Law is silent on whether the WFOEs established by Overseas NGOs before the implementation of the Management Law will be required to be closed or otherwise regulated. In the press conference for the 12th session of the Standing Committee of the National People's Congress, the relevant official only replied that the Public Security Departments will actively discuss with the Civil Affairs Departments and Industry and Commerce Departments, etc. with respect to the approaches for transition to ensure the activities of the representative institutions registered with the Civil Affairs Departments or Industry and Commerce Departments will continue uninterrupted until the Management law goes into effect. The Public Security Department will continue to have them registered if such representative institutions provide relevant supplemental materials in accordance with the law following the promulgation of the Management Law. The official did not mention any approaches for transitioning WFOEs.
It is worth noting that the current Chinese policies with respect to foreign-invested enterprises are made and implemented jointly by the Commercial Department, the National Development and Reform Commission, the Industry and Commerce Department, etc. To establish a foreign-invested enterprise, the approval of the Commercial Department needs to be obtained first (approval by or filing with the competent Development and Reform Commission will also be required for investments in construction projects), and then followed by the establishment of registration with the Industry and Commerce Department. WFOE, as one type of Chinese company, also needs to comply with the Company Law of the People’s Republic of China.
Obviously, the management of the foreign-invested enterprises and the management of the activities of Overseas NGOs within China are different, with each having its own system. In terms of their nature, a WFOE is a Chinese legal person which can bear civil liabilities independently; whereas a representative institution of an Overseas NGO is not an independent legal person and cannot bear civil liabilities independently (its legal liabilities shall be borne by the Overseas NGO). In terms of the purpose of establishment, a WFOE, as a company, is aiming to conduct business operations and make profits; whereas a representative institution of an Overseas NGO cannot engage in or fund profitable activities within China. In terms of the authorities in charge, a WFOE is managed by the National Development and Reform Committee and Commercial Department, and registered with the Industry and Commerce Department; whereas a representative institution of an Overseas NGO is managed jointly by the competent authorities and the Public Security Department, and registered with the Public Security Department.
To forecast solely from a technical perspective, the established WFOEs may be categorized by its function, nature and scope of business activities. Those WFOEs which meet the requirements of foreign-invested enterprises and are able to conduct normal operations may be preserved; while those WFOEs which do not meet the requirements for foreign-invested enterprises and the purpose of which are to conduct public good within China on behalf of the Overseas NGOs may be recommended to cancel their registration and the Overseas NGOs shall register with representative institutions. If an Overseas NGO keeps the WFOE but the WFOE engages in any activities which may only be carried out by a representative institution of an Overseas NGO or which are prohibited under the Management Law (such as raising funds within China in the name of the Overseas NGOs), the WFOE shall face compliance risk.
II. Fundraising Activities of Overseas NGOs
According to the Management Law, neither Overseas NGOs nor their representative institutions may engage in fundraising within China. Currently, funds for the activities of overseas NGOs within China include: (1) Funds legally obtained overseas (mainly overseas NGOs allocation); (2) Interest on bank deposits within the territory of China; (3) Other funds legally obtained within the territory of China. It may be concluded that the Management Law maintains the administration’s current way of management, namely, Overseas NGOs cannot engage in fundraising in China or collect donations.3 According to the responses offered by the relevant officials in the press conference for the 12th session of the Standing Committee of National People’s Congress, Overseas NGOs are not allowed to solicit contributions within China because only charitable organizations are qualified to solicit contributions under the Charity Law. Where charitable organizations engage in fundraising, they are required to obtain the qualification for public fundraising from the Civil Affairs Departments. The representative institutions of Overseas NGOs are not legal persons and their temporary activities are short-term, so they do not conform to the provisions on fundraising in the Charity Law, and are not allowed to engage in fundraising.
In practice, Overseas NGOs may engage in fundraising in the name of a domestic qualified entity. For example, an offshore fund “A” sets up fund “B” within China through its related parties. Fund “B” obtains the qualification for fundraising or collect donations following its incorporation. Fund “A” may carry out activities indirectly through fund “B”. On the surface, it seems that the arrangement is unproblematic (i.e. the fundraising is carried out in the name of a qualified entity). However, fund “A” might be considered engaging in fundraising if actual control is found to exist between fund “A” and fund “B”. Therefore, any such arrangement of this kind shall be carefully considered. The Management Law stipulates that an Overseas NGO is not allowed to carry out activities or carry out activities in disguised form within the territory of China if it does not register and establish with a representative institution or if it carries out temporary activities without record-filing. The Management Law prohibits any Overseas NGO from entrusting or funding any domestic entities or individuals, directly or in disguised form, to do so. Such restrictions also indicate that the above arrangement and the possible actual controlling relations may increase exposure to compliance risk.
Another common practice is for an Overseas NGO to set up a WFOE which will organize meetings and generate revenue from conference fees and other means. The proceeds shall be remitted abroad and shall be managed and applied by the Overseas NGO. Under this model, the risk of being recognized as fundraising within China will be much higher if the WFOE explains to the payees that the real motives of charging is to raise funds for the activities of Overseas NGOs when collecting the conference fees. If the WFOE makes no statement in this regard but treats it as its normal operating income and has it remitted abroad after fulfilling taxation obligations, the compliance risk may be mitigated to a certain extent.4
The Management Law does not restrict fundraising outside of China by the Overseas NGOs or their representative offices. In another words, Chinese natural persons, legal persons or other organizations are not ruled out to be donors for fundraising carried out abroad. Such fundraising will not violate the Management Law if it is carried out abroad. In determining whether the fundraising is carried out abroad, factors which will be jointly considered include identifying the site of collection for donation, the subject who accepts donations and its bank account and the provisions of the donation agreement. It should be noted that the donation remitted overseas shall be subject to foreign exchange control policies (such as donations above a certain amount cannot be freely remitted abroad, and it is necessary to provide the notarized donation agreement when remitted out of China5), and the donors will not be able to enjoy taxation deductions on these donations.
III. Business Activities
Before the adoption of the Management Law, there were no express rules, laws, or national standards for the management of Overseas NGOs. The Management Law sets forth express provisions on the activities of Overseas NGOs.
1. Scope of Activities: the Overseas NGOs shall carry out activities within their registered business scopes, including economy, education, science and technology, culture, health, sports, environmental protection and the public welfare work. The directory of the specific business scopes has yet to be promulgated.
2. Requirements for activity regions: the Overseas NGOs shall carry out activities within the registered area. Considering that the Ministry of Public Security under the State Council and public security organs of the people's governments at the provincial level are authorized as the administrative authorities for the registration of Overseas NGOs by the Management Law, and the activity region is one of the registration items, the representative offices of Overseas NGOs may be divided into two categories (national and regional) in the future. The national offices will apply to the Ministry of Public Security for registration and then carry out activities nationwide, while the regional offices will apply to the public security organs of the people's governments at the provincial level for registration and then carry out activities only within their registered activity regions. However, even if the geographical restrictions exist, an Overseas NGO may expand its business area by establishing more regional offices.
3. Competent Authorities: the Management Law states that the activities of Overseas NGOs will also be regulated by the competent business authorities apart from the Public Security Departments. The directory of the competent business authorities has yet to be promulgated. The absence of the directory of competent business authorities is one of the key reasons that Overseas NGOs have not been able to register as private non-enterprise units6 before the Management Law is enacted. The division of competent business authorities, the management of Overseas NGOs and their representative offices and the management of their temporary activities involve an intersection of powers and coordination among different departments. It is foreseeable that the initial directory of the competent business authorities probably will not cover every possible business scope of existing Overseas NGOs in China but only some typical business fields which have already been relatively clearly divided (such as education, environmental protection, etc.). For those sensitive or ambiguous fields, such as national security, religion, etc., we cannot rule out the possibility that no competent business authority will be included in the directory and thus forcing the Overseas NGO to face a rejection of their registration.
We understand that the Management Law is the result of years of management experience by the competent authorities. As a whole, the Management Law continues the existing policy, and clarifies the grey areas. In a practical respect, the Management Law also consolidates the existing legislation of the incorporation, management and the activities of Overseas NGOs.
Ancillary rules of the Public Security Departments and other relevant departments are needed for the implementation of the Management Law. This analysis is a hypothetical analysis based on the relevant provisions of the Management Law in the hopes of offering some helpful information on the activities of Overseas NGOs within China.
1. To facilitate the discussion, this article only analyzes WFOE. Sino-foreign joint venture enterprises and Sino-foreign co-operative enterprises may refer to this article’s conclusion.
2. As the representative office is smaller in scale and simple in structure due to the limitation on its number of personnel and range of activity compared with WFOE, it was not separately analyzed in this article.
3. For example, Regulations on Administration of Foundations states: “representative offices of foreign funds cannot engage in fundraising in China or collect donations.”
4. This method is only viable for situations lacking a clear distinction and explicit management requirements for the investors of WFOE in the Management Law and other relevant foreign investment laws. There is risk in this method also, if it is stipulated explicitly in the subsequent rules that the Overseas NGOs and the organization which is regarded as the Overseas NGOs are forbidden to establish a WFOE within China, and it is necessary to apply to the public security authorities for registration for their establishment of representative offices.
5. In practice, the number of notary departments that could transact this business is limited.
6. According to the requirements of the Civil Affairs Departments, the examination of opinions issued by the competent business authorities shall be submitted for the registration of private non-enterprise entities.
