Logic and Practical Analysis of Foreign Investment Facilitation in the Shanghai FTZ

1(By Gong Lier) The China (Shanghai) pilot free trade zone (hereafter called ‘the free trade zone’) was officially launched in Waigaoqiao, Shanghai on 29th Sept. 2013. Attention should be paid to the news that the, i.e., the ‘Negative List’, of the free trade zone was issued at midnight on the same day, on which the five Shanghai municipal governmental rules were also implemented one after another, including the China (Shanghai) Pilot Free Trade Zone Administrative Rules (No.7 municipal government’s order) (hereafter called ‘the Free Trade Zone Administrative Rules’), the China (Shanghai) Pilot Free Trade Zone Foreign Investors’ Funded Projects Filing Rules (H.F.F.(2013) No.71) (hereafter called ‘the Foreign Investors’ Funded Projects Filing Rules’), the China (Shanghai) Pilot Free Trade Zone Overseas Investment Projects Filing Rules (H.F.F.(2013) No.72) (hereafter called ‘the Overseas Projects Filing Rules’), the China (Shanghai) Pilot Free Trade Zone Foreign Investors’ Funded Enterprises Filing Rules (H.F.F.(2013) No.73) (hereafter called ‘the Foreign Investors’ Funded Enterprises Filing Rules’), and the China (Shanghai) Pilot Free Trade Zone Overseas Invested and Incorporated Enterprises Filing Rules (H.F.F.(2013) No.74) (hereafter called ‘the Overseas Invested and Incorporated Enterprises Filing Rules’).

The same day also witnessed the publication of the ‘Several Suggestions on Supporting Development of China (Shanghai) Pilot Free Trade Zone’ and the ‘Implementation Plan of New Business Licenses in the China (Shanghai) Pilot Free Trade Zone’, which were approved on 26th Sept. 2013, and published on the website of the State Administration for Industry & Commerce of the People’s Republic of China.

The above-mentioned rules form the logical start of future foreign-funded enterprises in the free trade zone.

Methods of foreign investment in the free trade zone are analyzed according to the Foreign Investment Filing Rules, the Foreign Funded Enterprise Filing Rules and the two files issued by the State Administration for Industry & Commerce of the People’s Republic of China.

1. Foreign Investment Filing Procedures

Foreign investment filing is primarily filed within two categories: project filing and enterprise filing. The DeBund has previously provided a preliminary analysis of procedures on foreign funded enterprises’ investment within the free trade zone in its second issue of its special edition on the free trade zone. The implementation of the Foreign Investment Project Filing Rules, the Foreign Funded Enterprise Filing Rules and the Negative List will help the gradual realization of an accelerated transformation of governmental functions and expansion of investment scopes, which are the two most important parts of the overall plan of the free trade zone.

The Foreign Investment Filing Rules stipulate that the filing system instead of an approval system shall be applied by the free trade zone’s administration committee to such projects as Chinese-foreign joint investments, Chinese-foreign cooperation, sole foreign investments, foreign investment partnerships, domestic mergers and acquisitions by foreign investors, capital increase of foreign invested enterprises, etc., which are all excluded from the negative list. Please note that those investment projects the State Council reserves its right to approve are excluded from the projects applicable to the rules.

According to the foreign investment project filing procedures publicized on the free trade zone’s official website, foreign investment project filing applicants applicable to the filing system need only submit to the free trade zone’s filing department the following documents: 1. Project filing application form; 2. Investor’s profile; 3. Letter of investment intent or resolution by the board of shareholders on capital increase or merger and acquisition or relevant resolutions on capital contribution; 4. Certification on use of place; and 5. Others. Receiving the above documents, the filing department shall issue a letter of advice on the project filing within ten working days. Based on the letter of advice, the applicant can start approval procedures related to planning, land use, environmental evaluation, construction, etc. Therefore, the approval of foreign investment projects is changed to be subsequent to filing rather than before, thus simplifying project initiation procedures and facilitating foreign investment.

In addition, the above procedures are also applied to an amendment filing in case any changes have been made in relation to 1. Investors or equity owners; 2. Location; 3. Main contents, etc. occurring to the foreign investment project filed, or 4. The actual total investment exceeds twenty percent of the original investment filed, or 5. Others.

Moreover, the Foreign Funded Enterprise Filing Rules are applicable to investors who want to establish or make any changes of a foreign invested enterprise within the free trade zone. According to the rules, in order to establish a foreign invested enterprise, one should first obtain an enterprise name approval letter, as well as complete and submit an online application form on the No.1 foreign investment platform of the free trade zone. Once the online application has been received, the filing department shall approve the filing within one working day and send the investor and relevant departments an enterprise filing certificate through the Internet. The investor should then take its business license, along with its enterprise filing certificate and other essential documents within thirty days.

Also, the above online platform is used for an amendment filing in the case that the foreign invested enterprise 1. Changes (increases or decreases) its registered capital; 2. Transfers its equity or shared equity and interest; 3. Pledges its equity; 4. Amalgamates or separates; 5. Changes its business tenure; 6. Expires beforehand; or 7. Changes its mode and tenure of capital contribution, or finally, 8. The foreign investor of the Chinese-foreign funded enterprise withdraws its capital.

2. Capital-to-Be-Contributed Registration System

Please note that according to the free trade zone administrative rules, it is clear that the registered capital-to-be-contributed registration system is applied to enterprises in the free trade zone. In contrast to the legal capital system and the eclectic capital system enacted in the Company Law of 2006, the capital-to-be-contributed registration system stipulates that no paid-in capital is needed for potential business investors who may simply list the total amount of capital in the articles of association and can contribute capital according to the company’s operational demand. Similar to but different from the Shenzhen commercial business registration reform system, the capital-to-be-contributed registration system is applied not only to companies with limited liability but also to companies limited by shares according to the Several Suggestions on Supporting Development of China (Shanghai) Pilot Free Trade Zone (hereafter called ‘Several Suggestions’) provided by the State Administration for Industry & Commerce of the People’s Republic of China.

Shareholders or initiators need to provide the total amount of registered capital to be contributed or shares to be purchased (i.e., registered capital) rather than paid-in capital. The amount of paid-in capital, the mode of capital contribution, the tenure of capital contribution, etc. can be discussed by the shareholders (or initiators) themselves and concluded in the company’s articles of association.

Business licenses of companies applying to the capital-to-be-contributed registration system must specify that ‘capital to be contributed with shareholders taking limited liabilities to the company based on the amount of capital to be contributed or shares to be purchased’ in the item of registered capital.

Of course, business licenses of companies in the free trade zone obliged by relevant laws or rules to provide paid-in capital will specify ‘paid-in capital’ in the item of registered capital, but do not list an item of paid-in capital.

According to the Several Suggestions, the requirements that the minimum registered capital of RMB 30,000 Yuan for companies with limited liabilities, of RMB 100,000 Yuan for solely invested companies with limited liabilities, of RMB 5,000,000 Yuan for companies limited by shares are no longer implemented. Neither are limitations of shareholders’ (or initiators’) amount and proportion of initial capital contribution or proportion of shareholders’ (or initiators’) contributed capital in cash to the total registered capital or deadline of shareholders’ (or initiators’) full payment of capital to be contributed.

The above capital-to-be-contributed registration system grants absolute freedom to enterprises that can make full use of its capital and investors, who can then allot their capital more efficiently.

For the sake of supervision, shareholders (or initiators) should take responsibility for their promises of capital to be contributed, as well as its authenticity and safety. It’s a momentous reform for the Chinese government to change its mode of enterprise supervision from what it previously was to what it will be as the free trade zone begins to develop and mature.

3. Negative List

Investors can make independent decisions in regard to the business scope of projects not included on the negative list without being restricted by the previous foreign investment projects approval rules.

The negative list does not include preferential investment projects, many of which are only allowed to be invested through joint investment or cooperation, as specified in the Foreign Investment Guides (hereafter called ‘the Guides’). The negative list, however, specifies that foreign capital can be invested into any foreign investment projects excluded from the list in nearly any way. Projects included on the list can be invested through the relevant approval procedures according to the list.

However, it’s disappointing for the author to find out that the negative list has too many similarities to its original source, the Guides issued in 2011, and comparatively few creative points.


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