CBL’s Introduction
When a foreign investor does business in China, they must file a special report of their activities which is used by government regulators to determine whether your business may threaten China’s national security or interests. Non-compliance can subject you to large fines, blacklisting, and even asset forfeiture. Therefore, the investor needs to know how to proactively report information in full to regulators, so that the safe harbor provisions of China’s foreign investment law can protect you from these potential consequences.
The below information is translated from authoritative Chinese government guidance documents, and provides a clear guide on how you can navigate these regulatory requirements efficiently.
Contents
Specific Requirements for Reports
Special Corporate Law Requirements
1. Introduction to China’s Foreign Investment Reporting Requirements
The Foreign Investment Information Reporting Procedures implement Section 34 of the Foreign Investment Act, which mandates “The State shall establish a Foreign Investment Information Reporting System. Foreign investors or foreign owned entities must report their investment information to their jurisdictional commerce agency through the National Business Entity Filing System and the National Business Credit Lookup System.”
Under the Procedures, foreign owned entities must file accurate investment information in the System and with the Commerce Ministry, otherwise shall be penalized, and this is separate from incorporation procedures. (see Section 7) All direct or indirect investments are covered; Macau, Hong Kong, and Taiwanese investors are treated as “foreign.” The Procedures also explicitly require a report in these circumstances:
- Foreign Direct Investments
- Foreign manufacturing and business activity
- Representative office setup
- Reinvestment to form a new entity
During the process, you must submit a primary report when forming an entity that intends to have a foreign investment. A foreign owned entity formed in China that makes investments in other Chinese entities need not file a separate report.
The primary report includes investors, transactions, and ultimate beneficiaries. A change report is required for any essential information, including investor and beneficial owner identity. The business registrar will reports dissolution and conversion information to the local government commerce department.
The reporting system used a single portal method intended to place a low burden on foreign investors because it is consistent with China’s red tape reduction policies, and duplicative information is shared between different government agencies, which totals about 30% of all information.
Foreign owned entities must promptly submit corrections to errors within 20 business days, otherwise are subject to a penalty between ¥100,000 to ¥500,000. The local commerce agency may perform compliance inspections in response to a report or of its own initiative, and will make a legal record of any discrepancies between reported information.
2. Specific Requirements for Filing Reports
The information report is required during formation or amendment of a foreign owned entity in China (See Foreign Investment Information Reporting Procedures). If you have Chinese investors, reports are also automatically shared with the interested government agencies.
After submission, you can view reports at the Ministry of Commerce’s online portal after 48 hours. If you made an errors while submitting, you can correct it with a supplemental report in the electronic filing system. Amendments are not required to change your permitted business activities or statutory representative. If you lose the certificate of approval for the foreign investment, you do not need to request a new copy.
Annual reports must be submitted through the National Business Credit Lookup System between January 1 and June 30 and can be freely amended to correct errors and omissions prior to the deadline. Late annual reports can be filed through the Ministry of Commerce. No further Commerce Ministry reporting is needed when shutting down a company or dissolving a joint venture.
A report is required when acquiring or merging with a Chinese owned company. The Foreign Takeover Rules defines a foreign owned entity’s acquisition or merger with a Chinese-owned business as a reportable foreign takeover/merger, and will place the entire combination under the Foreign Investment Act Administrative Regulations jurisdiction.
Foreign Investors’ Rights
The Commerce Ministry will analyze the report, and there is even indirect investment where merely a part of the production process is on the Foreign Investment Access Exceptions List, foreign investment approval shall be denied.
Foreign owned manufacturers in good standing with monthly transport volumes over 50 tons between Hong Kong and Macau are eligible for relaxed transport approval requirements. Request may be made to the Ministry of Commerce.
3. How Investment Information Reports Work in Practice
When filing a report, you will need to go to the local government online portal for business filings and indicate that the entity being formed in China is foreign owned, at which point you will fill in the out the basic information, statutory representative, shareholders, and management information. You must also sign a Commitment Letter covenanting that you are not in violation of the Foreign Investment Access Exceptions List.
If you need to change information you can log into the local government business registrar portal to make a business filing in China and select an option to make a “Change Filing” and select “Foreign Investment Information Report.” Contact information can be changed without making a filling. The market regulatory agency for the province will review your reports, share it with interested agencies, and send back a notification about whether you’re improved. The local government commerce department can be contacted to get a confirmation that your report was received. You will get an SMS notification from the commerce agency if there is a problem with the report.
Annual reports are filed on a different government portal online, the China National Business Credit Lookup System, between January 1 and June 30 of each year. Reported information can be looked up at the Ministry of Commerce’s online portal.
Penalties for violations are provided under Section 19 of the procedures, and involve a ¥100,000 to ¥300,000 fine for non-compliance, after which point you will be given a notice from the Chinese government to correct within a time limit. A heightened ¥300,000 to ¥500,000 penalty can apply in the event the violation is willful, repeat, or severe. Such violations will also be reported in your business credit viewable online. Local government is authorized to publicize instances of violations.
4. Some Corporate Law Requirements Also Apply to Foreign Investors During this Process
The same entity formation process is used for foreign owned entities in China as is for domestic owned entities, except where the Exception List restricts capital contribution proportions and permitted nationality of statutory representative (or chief executive) Expedited review can be gained on request from the local government commerce department.
The request for approval of the business entity’s name is submitted simultaneously with the foreign investment information report. Foreign investors from overseas lacking a local address can use the Commerce Ministry as their initial registered agent, which requires signing a separate agreement. You’ll also typically need an agent-principal agreement for the agency that forms the entity on your behalf. Some jurisdictions require printed filing materials.
A foreign investor will be required by most local government business registrars to provide a certificate of good standing and identifying documents from the country of the applicant’s residence. Consular legalization is required, unless you are a foreign permanent resident of China. These documents must be translated into Chinese. Any Chinese investors must also submit business licenses or registration certificates.
Conclusion
This set of government guidance translated by CBL provides a map for navigating China’s regulation of foreign investors and avoiding potential fines. In these publications, we learned that the government expects foreign investor information to be transparently provided during any corporate law activities which would involve establishing an investment in China. The government wants to know who will be investing, who is in control, and what the business activities will be.
Sources
This guidance was consolidated from four government publications explaining China’s foreign investment laws. The User Centered Translation approach has the same meaning as the original, but makes changes to grammar, word order, and semantics to be understandable. Sources are abridged, but without changing the meaning. You can use machine translation on the original sources below to see a word-for-word version.
Guidance 1: https://m.mofcom.gov.cn/article/ae/sjjd/202001/20200102927607.shtml
Guidance 2: https://swj.zhuhai.gov.cn/hdjl/cjwtzsk/tzyw/content/post_2903204.html
Guidance 3: https://y.qianzhan.com/yuanqu/detail/610/210105-91c3f73f.html
Guidance 4: https://qh.sz.gov.cn/tzqh/tzzn1/wzzr/content/post_10551249.html