CBL Team’s Introduction

CBL’s translation of the Market Regulation and Commerce ministry joint briefing on the rulemaking process and intent behind foreign investment reporting procedures introduced to govern FDI into China.  The rules, introduced under Article 34 of the Foreign Investment Act, were intended to introduce national security protections, loosely based on the American CFIUS system.  The briefing is particularly insightful as it provides information about how the FDI regulator intends to use the rules to protect Chinese national security interests.

Town Hall Meeting on Foreign Investment Information Reporting Procedures, held by Ministry of Commerce and State Administration for Market Regulation

The Ministry of Commerce and the SAMR jointly issued the Foreign Investment Information Reporting Procedures (Ministry of Commerce, 2019 Notice 2, hereinafter referred to as the “Procedures”) on December 30, which took effect on January 1, 2020. The new rules by the MOC and the SAMR add specificity to the foreign investment information reporting management system and is an important step in the implementation of reporting requirements under the Foreign Investment Act of the People’s Republic of China (hereinafter referred to as the “Foreign Investment Act”) and the Foreign Investment Law Implementing Regulations (hereinafter referred to as the “Implementing Regulations”).
The MOC followed the administrative rule-making process while drafting the Procedures, solicited the opinions of foreign investors and chambers of commerce, and requested comments from the public via www.chinalaw.gov.cn and the MOC and SAMR websites in late 2019. In general, stakeholders agree with introducing agency rules to add detail to the foreign investment information reporting system, and also recommended several revisions to the Procedures. These rules were revised and improved following extensive research and consideration of the suggestions.
Administrators from the MOC and the SAMR recognize the importance of ensuring the proper application of the Procedures and subsequent administration of foreign investment information reporting. To facilitate these goals, they answered the following questions on the Procedures raised by journalists.
1. What led to the issuance of the Procedures?
The Second Session of the 13th National People’s Congress voted on and approved the passing of the Foreign Investment Act on March 15, 2019. The Foreign Investment Act is now the statutory law governing foreign investment that supplants the Law of the People’s Republic of China on Joint Ventures Using Chinese and Foreign Investment, the Wholly Foreign-owned Business Law, and the Law of the People’s Republic of China on Chinese-Foreign Contractual Joint Ventures, and establishes a new legal institution framework for foreign investment in China. With a purpose to encourage a new round of high quality internationalization, the Foreign Investment Act mandates national treatment and negative list administration while repealing the original foreign owned entity registration and change review and filing requirements.
The Foreign Investment Act also modernizes foreign investment administration through the implementation of major legal systems like the foreign investment information reporting system, in addition to improving investment attraction and protection. Article 34 of the Foreign Investment Law provides that “the State has implemented a foreign investment information reporting system, and foreign investors and foreign owned entity must submit investment information to jurisdictional commerce agency via the business filing system and the National Business Credit Lookup System.” The newly issued Implementing Regulations establish more rules on the foreign investment information reporting system. The foreign investment information reporting system supersedes the current approval, filing, and joint annual reporting systems for foreign owned entities.
The Ministry of Commerce (MOC) and the SAMR jointly prepared the Procedures to provide specific rules for the foreign investment information reporting system to facilitate the implementation of the related Foreign Investment Act and Implementing Regulations, all of which took effect together on January 1, 2020.
2. What is the basis of the information reporting system? Is information reporting a prerequisite for foreign investors and foreign owned entities to complete other procedures?
The foreign investment information reporting system is an administration created under the foreign investment law institutional framework. Its mission is to provide information support for foreign investment policy formulation, service quality enhancement, and attraction and protection of foreign investment.
The Procedures specify how foreign investors and their business entities should file investment information: foreign investors and their entities are required to file investment information in a timely manner as required by law, while being valid, accurate, and complete. Those who fail to submit information in compliance with the requirements are subject to full penalty of law. Foreign investors and their entities are not required to file investment information to register their businesses or complete any other procedures, nor is it an administrative review and approval procedure targeted at new foreign investors and their entities.
3. Which foreign investors and foreign owned entity type does the foreign investment information reporting system apply to?
The Foreign Investment Act provides that foreign investment refers to direct or indirect investments by foreign investors in China and that foreign investors and their entities should submit their investment information to the jurisdictional commercial agency via the business filing system and the National Business Entity Credit Lookup System. Based on the above, the Procedures further provide that foreign investors and their entities must submit foreign investment information reports under the following circumstances: 1. Direct investment by foreign investors forming companies or partnership entities in China (particularly, those involving banking, securities, insurance, and other financial industries); 2. Foreign entities engaging in production and business activities in China; 3. Foreign entities setting up a local representative office for production and business activities in China; and 4. Foreign owned entities forming Chinese entities through reinvestment (including reinvestment through intermediaries).
It should be noted that the Administrative Regulations provide that investment by investors from the Hong Kong, Macau, and Taiwan Special Administrative Regions, and Chinese citizens resident overseas are governed by the Foreign Investment Act and the Administrative Regulations, including the information report system.
4. How should foreign investors and their business entities submit their investment information? Specifically, what investment information has to be submitted?
The Procedures specify who, what, and how information is reported: 1. When forming an entity that will have foreign investment or merging and acquiring an entity that does not yet have any foreign investors, the foreign investor must use the business filing system to submit a primary report that includes general information in addition to specifics on investors, ultimate beneficiaries, and investment transactions. 2. Entities that have foreign investors must submit a change report in the business filing system for any changes made to the information reported in the primary report. These change reports must include the changes made to the business’ general information and any changes made to the investors and the ultimate beneficiaries. 3. Entities that have foreign investors must submit their annual report for the previous year to the National Business Credit Lookup System between January 1 and June 30 of each year. The report must include general information about the business, in addition to specifics about, investors, ultimate beneficiaries, business operations, and business assets & liabilities. 4. The market regulator must report information on the dissolution or conversion of a foreign owned entity to a domestic business entity to the commerce agency for their jurisdiction. 5. Entities that have foreign investors companies invest in Chinese entities (including investments made through intermediaries) are not required to submit separate reports, and market regulatory agencies will submit all necessary information directly to the commerce agency for their jurisdiction.
Additionally, foreign investors that will not use a legal entity to structure their foreign investment in China must also report investment information pursuant to the Procedures that govern entities that have foreign investors.
Stakeholders commenting on the Procedures also recommended additional rulemaking for information required in foreign investment information reports. In response to these recommendations, we conducted thorough research and issued the Notice on Foreign Investment Information Reporting (Ministry of Commerce, 2019 Notice 62) on December 31, which defines what specifically is included in the primary report, change report, and annual report.
5. Will the implementation of the foreign investment information reporting system add unduly burden foreign investors and their entities? Stakeholder comments on the Procedures recommended that implementing the foreign investment information reporting system should not unduly burden foreign investors and their entities. In response to this recommendation, we did comprehensive research and optimizations. Instituting the foreign investment information reporting system will overall alleviate the burden on foreign investors and their entities.
First, major changes were made to the foreign investment administration system to simplify and optimize the foreign investment access administrative procedures. Furthermore, the jurisdictional commerce agencies all removed the review and filing system for foreign owned entity registration and changes and created the foreign investment information reporting system, which is required by the Foreign Investment Act and the new foreign investment legal system requirements. This is a major breakthrough in foreign investment administration to achieve the red tape reduction reform, which will significantly reduce the burden on companies.
Second, the type of information foreign investors and their entities need to fill in was simplified. An evidence-based determination was made for the type and extent of information required to be submitted based on necessity, effectiveness, and ease, and the data items collected during information reporting were streamlined, consistent with the Foreign Investment Law and the Implementing Regulations.
Third, duplicative submissions of information that could be shared between different government agencies are no longer required. The new information reporting system allows for nearly 30% of all data items to be shared between different government agencies, meaning that foreign investors and their entities no longer need to make duplicate sumissions. For instance, information filed by foreign owned entity with the market regulator can be shared with the commerce agency for their jurisdiction. All information related to foreign investment and foreign owned entity formation in China can be obtained through inter-agency sharing and does not need to be submitted separately.
Fourth, the information reporting process has been further consolidated and optimized. Foreign investment primary, change, and dissolution reports submitted to the Administration are shared with the market regulatory agency during business registration, amendment filing, and dissolution reporting. Moreover, the same annual report is used by both the Administration and the market regulatory agency, and a single report can be submitted to a single channel, meaning that foreign investors and foreign owned entities do not need to submit investment information reports to two separate agencies.
6. How can China’s new information reporting system ensure the authenticity, accuracy, and completeness of the information submitted by foreign investors and their entities?
Foreign investors and foreign owned entity are obligated to truthfully report investment information. Article 7 of the Procedures provides that foreign investors and their entities must promptly report authentic, accurate, and complete investment information, must not report false or misleading information, and shall not make any material omissions.
Second, foreign investors and their entities must proactively submit any corrections or supplemental materials, or as required by the jurisdictional commerce agency.
Article 19 of the Procedures provides that foreign investors and their entities must promptly submit any corrections or supplemental materials necessary to resolve any investment information errors or omissions discovered. The jurisdictional commerce agency shall notify foreign investors and their entities of any errors or omissions found in the investment information submitted, and require such investors or entities to submit corrections or supplemental materials within 20 business days.
Third, oversight will also ensure the authenticity, accuracy, and completeness of the information submitted. Article 20 of the Procedures provides that the jurisdictional commerce agency and other appropriate agencies may achieve oversight through spot checks, based on reports received, based on recommendations and reports from appropriate agencies or justice agencies, or may take appropriate action at their own initiative. Article 22 of the Procedures further provides that the jurisdictional commerce agency may acquire information from other agencies as necessary to provide oversight, and may also request or require an audit subject to provide the necessary information required by law.
Fourth, the Procedures expressly specify the liability for violating information declaration duties and reporting obligations. The jurisdictional commerce agency will require foreign investors and foreign owned entities who fail to submit corrections or supplemental materials after receiving notice of such to submit the necessary corrections or materials within 20 business days or face a penalty between 100,000 and 500,000 Yuan based on the severity of the circumstances. The jurisdictional commerce agency will also record any failures to fulfill legally required information declaration duties or reporting obligations discovered during the oversight and inspection of foreign investors and their entities, as well as any administrative penalties imposed, in the foreign investment information reporting system.
Additionally, stakeholders commenting on the Procedures recommended that foreign investors and their entities be given more time to submit their legally required change reports and any other supplemental materials and corrections required in the notice issued by the jurisdictional commerce agency. In response to this recommendation made in the request for comments, we have conducted extensive research and extended the deadline provided in the draft Procedures from 15 business days to 20 business days.