China lays groundwork for more foreign investment

China’s outbound direct investment has gone up rapidly year by year. Not so its foreign direct investment. In 2016, China’s FDI growth dropped sharply from 7.9 per cent (in 2015) to 3.9 per cent. In response, the Chinese government rolled out a series of regulations further relaxing regulatory controls over FIEs (foreign-invested enterprises) and simplifying the administrative procedures around foreign investors starting up a business in China. FIE laws were amended and a simpler filing regime introduced.

Was it enough? The answer is no.

So in 2017 further actions were taken:

• The publication of the 2017 FDI Catalogue together with the long-awaited National Negative List (June 2017).
  Catalogue of Industries for Guiding Foreign Investment (2017 Revision) + Negative List for the Market Entry of Foreign Investment, published June 28, 2017
• A State Council Executive Meeting hosted by Premier Li Keqiang, urging more efforts to attract foreign investment (July 2017)
• Amendments to the MOFCOM Filing Measures (July 2017)
  Interim Measures on Administration of Filings in respect of Establishment and Change of Registration of Foreign-invested Enterprise, amended July 30, 2017, Ministry of Commerce. (Original measures effective from October 8, 2016.)

China’s position on FDI

1. Pre-approvals

Only the restricted and prohibited industries listed in the National Negative List are subject to ‘special management measures for market entry of foreign investment’, i.e. the current pre-approval regime. Foreign investment in any other industry is now subject to the filing regime outlined below.

2. Preferential tax treatment

Enterprise income tax
Since 2008, FIEs and domestic enterprises have been subject to the same enterprise income tax, set at 25 per cent, with preferential treatment available to high-tech FIEs in 31 designated cities. This is now to be made available to high-tech FIEs across the whole country.

Withholding tax
Where foreign investors reinvest profit derived from their existing investment in China into an ‘encouraged industry’, the withholding tax on that profit will be deferred.

3. Relaxation of restrictions: more incentives

New measures will remove foreign shareholding restrictions on certain manufacturing and service FIEs; will encourage foreign investors to set up regional headquarters outside Beijing and Shanghai and to acquire domestic companies; and will give IPRs better protection.

4. Support for development zones and special regions

National-level development zones are to be given more power to attract and manage foreign investment. More financial support will go to the western and north-eastern regions to encourage foreign investors to relocate their investment from developed regions. This applies particularly to science & technology and environmental protection.

5. Work permits

Foreigners have for a while been experiencing difficulties in obtaining work permits in China. By the end of 2017, this should be far less of a problem. Qualification requirements for work permit applicants are to be lighter, application procedures simpler and work permits to cover a longer period.

MOFCOM Filing Measures

The pre-closing approval requirements for the acquisition of domestic companies by foreign investors no longer apply. It will be possible to make a much simpler post-closing filing. There is an exception, and that involves the ‘round trip connected acquisition’. If a Chinese investor incorporates an investment vehicle outside China, the transaction will trigger the M&A Rules and require MOFCOM’s prior approval. Equally, if a Chinese investor uses an existing overseas subsidiary to acquire a domestic company (one with an interest in the Chinese investor or its overseas acquirer), the M&A Rules will then be triggered and MOFCOM’s prior approval required.

MOFCOM’s prior approval is no longer required for a strategic investment in Chinese listed companies by foreign investors or foreign-invested listed companies. They will need to make a filing either before the investment is registered with the stock exchange or within 30 days following registration.

Foreign investors may use shares (or equity interest) held in foreign companies as a means of contributing capital to an FIE in which they are investing for the first time. Equally, they may do so within an M&A transaction, in payment of the purchase price. The FIE or target company which will then hold an interest in a foreign company (as a result of the investment or acquisition) must have first obtained permission to make an overseas investment.

Find out more about the MOFCOM Filing Measures here.

Forecast

By the end of September 2017, all the various policies which will underpin the initiatives addressed by Premier Li should be in place. Implementation can start from that point. Already, the 2017 FDI Catalogue (with the National Negative List) has been published and the MOFCOM Filing Measures amended. From our own recent experience assisting clients to establish and restructure their investment in China, it would seem that the filing regime has been widely implemented and the process certainly eased by the online system. Foreign investors can reasonably expect more detailed rules and local policies to be released by central and local governmental authorities in the coming months. It will take a little longer to see whether and how these new rules will work in practice. But China clearly remains a significant destination for investment.