(By Bai Lituan) On August 30, 2013, the Standing Committee of the National People’s Congress enacted the Decision of the Standing Committee of the National People’s Congress on Authorizing the State Council to Temporarily.
Adjust the Administrative Examination and Approval of Relevant Laws in China (Shanghai) Free Trade Zone (the “DESIVISION”). The DESIVISION authorizes the State Council to temporarily adjust about 11 administration examinations and approval of the establishment and merger of foreign-capital enterprises including the wholly foreign-owned enterprises, Sino-foreign cooperative joint venture and Sino-foreign equity joint ventures in the Shanghai Pilot Free Trade Zone (the “FTZ”). Earlier reports once said that it would temporarily suspend the implementation of the Law on Wholly Foreign-Owned Enterprises, the Law on Sino-Foreign Cooperative Joint Ventures and the Law on Sino-Foreign Equity Joint Ventures in the FTZ. In effect, those three laws involve the establishment, business structure, foreign exchange management, labor and personnel, finance and accounting, dissolution and liquidation, etc. The DESIVION of the National People’s Congress just temporarily suspends 11 administration approvals and changes them into filling administration. The Law on Wholly Foreign-Owned Enterprises, the Law on Sino-Foreign Cooperative Joint Ventures and the Law on Sino-Foreign Equity Joint Ventures will still be enforced in the FTZ and be temporarily adjusted.
To accurately understand the above mentioned laws, pursuant to the DEVISION, when combined with the Company Law and other three foreign investment laws, we believe, establishment procedures of foreign-capital enterprises by foreign investors shall be greatly simplified and made applicable faster.
I. One-Stop Acceptance Service of the Authority for Industry and Commerce
Based on current knowledge, we may make sure that the establishment of foreign-capital enterprises will obtain a one-stop acceptance of the authority for industry and commerce in the FTZ. The documents or materials submitted in the FTZ by foreign business operators will not be substantive changes from that out of the FTZ, mainly including contracts (except the wholly foreign-owned enterprises) made by and between Chinese investors and foreign investors, the articles of association, resolutions of its shareholders, decisions of directories, identification of all directories, trading certificates of all investors and credit certifications. Among them, trading certificates of all investors shall be first notarized by the state notary offices of the investor’s home country and then authenticated by the Chinese consulate in that country.
When foreign-capital enterprises obtain the business license of an enterprise legal person, the administrative examination and approval of the authorities for industry and commerce shall be subject to filling administration to the departments of commercial administration through internal circulating procedure.
The simplification of the above mentioned administrative examination and approvals could be shortened to about 30 days for foreign-capital enterprises to obtain the business license.
II. Material Change of the Representation upon the Business Scope of Foreign-Capital enterprises
Before foreign-capital enterprises out of the FTZ obtain the business license of enterprise legal person in China, different kinds of administrative certificates of approvals, especially the applications for administrative licensing, shall be obtained in advance, and the process of applying for approvals takes an extraordinarily long time. Within the model of the FTZ’s negative list (meaning that the businesses in the negative list are prohibited), foreign-capital enterprises would be able to directly operate the businesses beyond the negative lists. In the FTZ, the authority for industry and commerce shall first provide the enterprise a primary qualification of entity. When the enterprise engages in detailed businesses which need administrative approvals, the enterprise will apply for different administrative approvals or market accesses. The enterprise can freely operate the businesses out of the negative list. That is to say, the businesses out of the negative list are the ones that the foreign-capital enterprises can operate in accordance with the principle of “absence of legal prohibition means freedom”.
Out of the FTZ, the provisions of the business scope for trading foreign-capital enterprises will be described like: “About some goods’ wholesale, import and export business and related supporting services.” Some business scope for trading foreign-capital enterprises in the FTZ will make significant adjustments, according to the experiences in Shenzhen and Beijing, and will be described like: “The business prohibited by the laws, administrative regulations and decisions of the State Council shall not be operated; The business permitted by the laws, administrative regulations and decisions of the State Council may be operated with approval of authorities; the business out of aforementioned content can be operated with independent choice.”
III. Simplifying Procedures of Foreign Exchange Registration and Opening Foreign Exchange Capital Accounts
In opening foreign exchange capital account out of the FTZ, the investors shall first determine a bank of deposit, secondly apply for foreign exchange registration to Administration of Foreign Exchange and finally open an account of the said bank with the approval sheet or card from the Administration of Foreign Exchange. The entire above procedures are rather lengthy and inefficient. However, the FTZ will implement free convertibility of foreign exchange in capital items. Therefore, the entire above procedures in the FTZ will be greatly simplified. We are preliminarily deeming that the foreign-capital enterprises can directly open an account of the said bank without the approval and examination of the Administration of Foreign Exchange, and that foreign exchanges will be in charge and summarized through the channel between banks and Administration of Foreign Exchange.
IV. Simplifying Accounting Firms’ Capital Verification Procedures
When accounting firms examine capital and issue capital verification report out of the FTZ, the accounting firms shall first receive an Administration of Foreign Exchange’s confirmation. This process will take about 3 to 7 days. However, in the FTZ, this process will be canceled.
V. Simplifying Procedures of Enterprises’ Merger and Splitting in the FTZ
When merging and splitting out of the FTZ, foreign-capital enterprises shall be under the examination, approval and coordination of different departments of commerce administration in accordance with the Provisions on Merging and Splitting of Foreign-Funded Enterprises. Actually this process is also rather lengthy. In the FTZ, pursuant to the DESIVION, this process will also be canceled and greatly simplified. It is noted that, if the foreign-capital enterprises’ merger and splitting are associated with the enterprises outside of the FTZ, it shall still perform the above mentioned procedures of examination and approvals in accordance with the Provisions on Merging and Splitting of Foreign-Funded Enterprises.
Government transition, expansion of the scope for foreign-capital investment, transformation of trade growth pattern and openness of financial are the four pillars of the FTZ. In all reform schemes, the first modification is the government transition. The creation of the methods of foreign-capital enterprises’ establishment just is the institutional innovation’s epitome of the FTZ. Therefore, we have reasons to believe that, within the development of the FTZ, more institutional innovation convenient and efficient to the investors, such as commitment to investment system for registered capital, will be further rolled out in the FTZ.
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