China Relaxes Foreign Investment Rules for Shanghai Free Trade Zone

The Standing Committee of China’s National People’s Congress passed the “Decision on Authorizing the State Council to Temporarily Adjust the Administrative Examination and Approval Items under Relevant Laws in China’s (Shanghai) Free Trade Zone (hereinafter referred to as the ‘Decision’)” on August 30, which suspends several administrative approval items regulated under the relevant foreign investment rules. Detailed information can be found below.
 
According to the Decision, the State Council has been authorized to temporarily adjust relevant administrative examination and approval items regulated under the following three laws in the Shanghai Free Trade Zone:
 

• The Law of the People’s Republic of China on Wholly Foreign-Owned Enterprises (hereinafter referred to as the ‘WFOE Law’);
• The Law of the People’s Republic of China on Sino-Foreign Equity Joint Ventures (hereinafter referred to as the ‘EJV Law’); and
• The Law of the People’s Republic of China on Sino-Foreign Cooperative Joint Ventures (hereinafter referred to as the ‘CJV Law’).

The Decision is scheduled to take effect on October 1, 2013 and will be piloted for three years. Moreover, if the adjustment proves feasible in practice, the relevant laws will be revised and improved; otherwise, the relevant laws will be resumed.
 
The Decision stipulates that the following 11 examination and approval items will be suspended in the Shanghai Free Trade Zone starting from October 1, 2013, and the administration of record-filing will be carried out instead.
 
Item No. 1: Examination and approval for the establishment of WFOEs
 
It is provided in the WFOE Law that the application for the establishment of a WFOE shall be submitted to the department in charge of foreign economic relations and trade under the State Council or a body authorized by the State Council for examination and approval.
 
Item No. 2: Examination and approval for division and merger of WFOEs
 
It is provided in the WFOE Law that the division, merger, and other major changes of a WFOE shall be reported to the relevant examination and approval authority for approval.
 
Item No. 3: Examination and approval for the extension of the operating period of WFOEs
 
It is provided in the WFOE Law that the operating period of a WFOE shall be approved by the relevant examination and approval authority. Moreover, where the operating period of a WFOE needs to be extended, the application shall be filed with the relevant examination and approval authority at least 180 days in advance before the original operating period expires.
 
Item No. 4: Examination and approval for the establishment of Sino-foreign equity joint ventures
 
It is provided in the EJV Law that the agreement, contract, or articles of association of a Sino-foreign equity joint venture entered into by various parties shall be submitted to the department in charge of foreign economic relations and trade for examination and approval.
 
Item No. 5: Examination and approval for the extension of the operating period of Sino-foreign equity joint ventures
 
It is provided in the EJV Law that where the parties agree to extend the operating term of a Sino-foreign equity joint venture, an application shall be filed with the relevant examination and approval authority at least six months in advance before the original operating period expires.
 
Item No. 6: Examination and approval for dissolution of Sino-foreign equity joint ventures
 
It is provided in the EJV Law that where a Sino-foreign equity joint venture suffers any severe loss, or a party thereof fails to perform its obligations under the contract and articles of association, or in the event of force majeure, the contract may be terminated provided that such termination has received approval from the relevant examination and approval authority, and has registered with the State’s industry and commerce authority.
 
Item No. 7: Examination and approval for establishment of Sino-foreign cooperative joint ventures
 
It is provided in the CJV Law that when applying for the establishment of a Sino-foreign cooperative joint venture, the agreement, contract, articles of association and other relevant documents signed by the Chinese and foreign parties shall be submitted to the department in charge of foreign economic relations and trade under the State Council or a body authorized by the State Council for examination and approval.
 
Item No. 8: Examination and approval of major amendments to the agreements, contracts and articles of association of Sino-foreign cooperative joint ventures
 
It is provided in the CJV Law that where the Chinese or foreign parties to a Sino-foreign cooperative joint ventures agree to make any major change to the contracts of the joint venture through consultation within the duration of the cooperative joint venture’s operation, such changes shall be reported to the relevant examination and approval authority for approval.
 
Item No. 9: Examination and approval of assignment of rights and liabilities by Sino-foreign cooperative joint ventures
 
It is provided in the CJV Law that the assignment of rights and liabilities of a Chinese or foreign party of a Sino-foreign cooperative venture shall be reported to the examination and approval authorities for approval.
 
Item No. 10: Examination and approval for entrusting other parties with the operation and management of Sino-foreign cooperative joint ventures
 
It is provided in the CJV Law that where a Sino-foreign cooperative joint venture is handed over to a party other than the Chinese and foreign parties, such a change must be subject to the consensus of the board of directors or the joint management body, and shall be reported to the relevant examination and approval authority for approval.

Item No. 11: Examination and approval for the extension of the cooperation term of Sino-foreign cooperative joint ventures
 
It is provided in the CJV Law that where the Chinese and foreign parties of a Sino-foreign cooperative joint ventures agree to extend the duration of a cooperative joint venture’s operation, an application shall be filed with the relevant examination and approval authority at least 180 days in advance before such duration expires.
 
This article was first published on China Briefing.
 
Dezan Shira & Associates is a specialist foreign direct investment practice, providing corporate establishment, business advisory, tax advisory and compliance, accounting, payroll, due diligence and financial review services to multinationals investing in emerging Asia. Since its establishment in 1992, the firm has grown into one of Asia’s most versatile full-service consultancies with operational offices across China, Hong Kong, India, Singapore and Vietnam as well as liaison offices in Italy and the United States.
 
For further details or to contact the firm, please email info@dezshira.com or visit www.dezshira.com.