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GC Agenda China: May 2018
Practical Law UK Articles w-014-9821 (Approx. 7 pages)
GC Agenda China: May 2018
by Brad Herrold, Consultant and Practical Law China
| Law stated as at 30 May 2018 • China |
A look back at the most recent legal developments for general counsel (GC) and their advisers working on China-related matters. GC Agenda China identifies and analyses the key issues that affect businesses, provides insight from leading legal practitioners and professionals, and gives specific and actionable guidance in response to these issues.
NPC Standing Committee releases 2018 legislative plan
On 17 April 2018, the National People's Congress (NPC) Standing Committee released its 2018 legislative work plan (全国人大常委会2018年立法工作计划). The plan is divided into sections on different categories of specific legislative projects, with the last part addressing guiding principles for implementing the plan.
The lists of legislative projects include unfinished projects carried over from previous years, new projects, and preparatory projects that will be drafted and scheduled for deliberation in 2018 or later. The guidelines stress the primacy of the Communist Party of China with President Xi Jinping at its core and the rule of law.
New and unfinished projects scheduled for deliberation by the NPC Standing Committee this year include:
- The draft E-commerce Law (see Legal update, NPC Standing Committee circulates second draft of E-commerce Law).
- The draft Foreign Investment Law (see Legal update, Draft Foreign Investment Law open for comment until 17 February 2015).
- Various sections of China's new Civil Code (see Legal update, China enacts general provisions of civil code).
Preparatory legislative projects in the plan include revisions to existing laws such as the Securities Law, Copyright Law, Workplace Safety Law and Tax Collection Law, as well as new laws such as the Export Control Law, Encryption Law, Futures Law and Real Estate Tax Law.
The NPC Standing Committee normally releases its annual legislative work plan in early May. The State Council also prepares its own legislative plan annually in conjunction with the NPC Standing Committee's plan, but normally releases the same around March. For information on the 2018 State Council plan, see Legal update, State Council releases 2018 legislative plan.
Market reaction
Paul McKenzie, Partner, Morrison & Foerster, Beijing and Shanghai
"Various legislation in the NPC's plan is potentially very significant for international businesses. The Foreign Investment Law seemed to lose momentum after a draft was issued for public comment in 2015. It is therefore notable that the NPC plan contemplates that the draft will be progressed by December. An area of legislative work that has had scant attention from foreign commentators is the drafting of the sections of China's new civil code, following the coming into effect last October of the General Provisions of the Civil Code. That work will have a profound impact on the development of Chinese law."
Action items
This development does not require specific action by GC, though counsel for all businesses in China will want to review the new legislative plan to identify any relevant pending legislation and work with business and government relations colleagues to attempt to influence, and develop compliance measures in response to, the final rules.
CBIRC further relaxes market access restrictions on foreign banks
On 27 April 2018, the China Banking and Insurance Regulatory Commission (CBIRC) issued the Notice on Matters Related to Further Relaxing Market Access for Foreign Banks (关于进一步放宽外资银行市场准入有关事项的通知), which follows a series of recent announcements aimed at easing foreign investment restrictions in the financial sector (see Legal updates, Xi Jinping announces economic reform measures and China to further open financial markets). The CBIRC was created through the merger of China's banking and insurance regulators under the State Council institutional reform plan announced in March 2018 (see Legal update, NPC approves State Council institutional reform plan).
Key measures in the notice include:
- A foreign bank's China branch, or a wholly foreign-owned bank, or a Sino-foreign joint venture bank may act as an agent for the issuance, acceptance and underwriting of government bonds (including bonds issued in China by foreign governments) without prior administrative approval, provided the bank acts lawfully and reports to its regulator within five business days after commencing business.
- Where a foreign bank has multiple branches in China and the branch that performs administrative functions for the group in China is approved to engage in Renminbi or derivatives business, the other branches also may engage in that business, provided the administrative branch assesses the qualifications of the other branches, authorises the qualified branches, completes related preparatory work, and reports to the competent local office of the CBIRC in advance.
- The minimum capitalisation requirements applicable to a foreign bank will be treated on a consolidated basis; when a new branch is established and where the aggregate capital allocated by a foreign bank to all branches in China meets the legal requirements, the foreign bank may authorise one or more of its domestic branches to allocate working capital to the new branch.
Market reaction
Shirley Wang, Partner, Zhong Lun Law Firm, Beijing
"Following other recent policies and announcements in the financial sector, the CBIRC's latest notice is a solid step forward in further opening China's finance industry market and more foreign banks are expected to expand their presence or business activities in the sector."
CSRC eases restrictions on foreign investment in securities companies
On 28 April 2018, the China Securities Regulatory Commission (CSRC) issued the Measures on the Administration of Foreign-invested Securities Companies (外商投资证券公司管理办法), which replaced the 2012 Rules on the Establishment of Securities Companies with Foreign Equity Participation (2012 Rules) (外资参股证券公司设立规则), with immediate effect.
The measures significantly relax restrictions on foreign investment in securities companies and follow recent high-profile government commitments (Commitments) to further open the financial sector to foreign competition (see Legal updates, Xi Jinping announces economic reform measures and China to further open financial markets).
The measures raise the foreign ownership cap (that is, the aggregate percentage of the registered capital held directly or indirectly by foreign firms and individuals) on China-registered securities firms by reference to the Commitments, to 51% from 49% generally and to 51% from 25% for listed securities companies specifically. The measures also remove the ownership cap (20%) on any single foreign investor in listed securities companies under the 2012 Rules. Under the Commitments, China has committed to eliminate all caps on foreign ownership in this sector by 2021.
The measures also:
- Allow a newly established joint venture securities company to gradually expand its scope of business according to its own circumstances, provided the initial business scope corresponds to the securities experience of its controlling shareholder or largest shareholder.
- Increase the prudential qualifications requirements for foreign investors in securities companies and update the qualifications requirements for Chinese partners in Sino-foreign joint ventures. A foreign investor must have a good international reputation, among other qualifications, while a Chinese joint venture partner is no longer required to be a financial institution.
- Clarify that where, after establishment, the actual controller of a domestic-invested securities company becomes a foreign investor, the company will be regulated as a foreign-invested securities company.
Market reaction
Natasha Xie, Partner, Junhe, Shanghai
"China is now speeding up its implementation of the opening-up measures. We expect more revised and new legislation to be promulgated by the end of this year. In addition, more applications are expected to establish joint venture securities companies, mutual fund management firms and futures brokerages or to amend the ownership structure of existing firms to increase foreign ownership up to the new 51% cap."
Action items
GC for foreign investors in China-registered securities companies should be aware of the new foreign ownership caps under the measures, as well as the revised prudential qualifications requirements and increasingly sophisticated treatment of the ultimate owners of a foreign-invested securities company, and remain watchful for additional changes as new and revised rules are rolled out later this year.
MOF, CBIRC and other agencies launch pilot tax-deferred commercial pension insurance project
On 2 April 2018, the Ministry of Finance (MOF), CBIRC and several other administrative agencies including the State Administration of Taxation, jointly issued the Notice on the Launch of Individual Tax-deferred Commercial Pension Insurance Pilot Project (关于开展个人税收递延型商业养老保险试点的通知).
According to the notice, individuals who reside in Shanghai, Fujian Province and Suzhou Industrial Park (and whose income is derived in that location) may open a designated pension account and deduct from their taxable income expenditures on qualified commercial pension insurance products purchased through the account.
The notice caps the available deduction at:
- 6% of the monthly amount (or RMB1,000 per month, whichever is lower) on wages, salaries and remuneration for continuous labour services (generally six months or longer for the same work unit).
- 6% of the annual amount (or RMB12,000, whichever is lower) on other income including income obtained from a sole proprietorship, by contracting and leasing the operations of enterprises and institutions, by investors in individually-owned enterprises, and by the natural person partners of partnership enterprises.
The proceeds from a commercial pension insurance policy are taxed as income when received by the insured individual, though up to 25% may be exempt and the remaining 75% may be taxed at a flat 10% rate.
In a related development, the MOF, CBIRC and other agencies also issued the Guidelines for the Development of Individual Income Tax-deferred Pension Insurance Products (个人税收递延型商业养老保险产品开发指引) on 25 April 2018, which sets out detailed rules on the development and administration of pension insurance products.
Market reaction
Jonathan Isaacs, Partner, Baker & McKenzie, Hong Kong
"This pilot is part of an ongoing effort by the government to encourage more companies to offer, and individuals to participate in, commercial pension plans to supplement the benefits provided by the government. While generally all employees are enrolled in the government-run social insurance system, including the pension fund, the government is concerned that the funds in the system may not be sufficient to cover people's retirement needs."
Action items
Counsel for companies in the pilot locations seeking to attract and retain top-tier talent may wish to review the notice and advise senior human resources and management personnel on the pilot project. Counsel for companies with a potential interest in developing pension insurance products will want to study the guidelines.
MOE circulates draft revised implementing rules for private schools
On 20 April 2018, the Ministry of Education (MOE) circulated for public comment the Implementing Regulations for the Law of the People's Republic of China on Promoting Private Education (Revised Draft) (Draft to Solicit Comments) (中华人民共和国民办教育促进法实施条例（修订草案）（征求意见稿）).
The revised draft follows the NPC Standing Committee's Decision on Revising the Law of the People's Republic of China on Promoting Private Education 2016 (全国人民代表大会常务委员会关于修改《中华人民共和国民办教育促进法》的决定), which ushered in a new regulatory regime for the private education sector by bifurcating the requirements and treatment of for-profit and non-profit private schools (see Legal update, NPC revises law on private schools).
The revised draft, if enacted, would significantly restructure the existing implementing regulations adopted in 2004 and help flesh out the new regime introduced in the 2016 reform. Important changes include:
- Not granting private schools running the nine-year compulsory or senior secondary school education the same student enrolment rights as public schools.
- Clarifying that non-degree training institutions offering culture or continuing education for adults or other quality education courses (including languages, arts, sports, technology and so on) can do business registration with a competent local office of the State Administration for Market Regulation directly without having to obtain a permit for running school (办学许可证) from a competent local office of the MOE.
- Requiring for-profit private schools to have a minimum registered capital of RMB200 million for offering higher education degrees, and RMB10 million for offering other types of degrees.
Foreign investment in the private education sector continues to be restricted under the revised draft. It specifically includes a prohibition on foreign-invested enterprises or social organisations which are ultimately foreign-controlled from providing nine-year compulsory education, and notes that providing other types of private education is subject to the relevant regulations on foreign investment (see Article, Investment in Chinese private education: opportunities and challenges: Remaining foreign investment restrictions).
Market reaction
Mo Haibo, Partner, King & Wood Mallesons, Guangzhou
"The government unveiled its proposal to strengthen oversight of the management of private schools in China a few weeks ago. The revised draft contains provisions regulating private school sponsors, governance, related transactions, and the system for registering private schools, but the revised draft is also intended to provide opportunities for the development of the private schools, including possibly listing on China's A-share market."
Action items
GC for clients in the education sector will want to closely study the changes in the revised draft and review the remaining restrictions on foreign investment. If appropriate, counsel may wish to assist senior management in re-evaluating the China market, especially where a non-profit approach is attractive. Counsel for existing private schools in China may wish to consider revising the relevant constitutional documents in view of the revised draft.