On 5 June 2018, China’s National Development and Reform Commission (“NDRC”) published on its National Overseas Investment Management and Service Network System the Answers to Frequently Asked Questions on Overseas Investments (“Q&A”).
The Q&A to a large extent reiterates the relevant provisions embedded in the Administrative Measures for Overseas Investments by Enterprises (“Order 11”) and the Circular of the National Development and Reform Commission on Issuing Accompanying Templates for the Administrative Measures for Overseas Investments by Enterprises (2018 Edition) (“Circular 252”). However, there are a few new clarifications that are noteworthy.
Investors
Order 11 applies to overseas investments made by overseas enterprises controlled by domestic entities or domestic natural persons. In this regard:
- The Q&A states that the “domestic natural persons” under Order 11 shall mean “domestic natural persons with Chinese nationality”. Further, according to our telephone inquiry with NDRC, “domestic natural persons” refer to mainland Chinese citizens, regardless of their place of residence – this means that Order 11 shall apply to overseas investments made by overseas enterprises controlled by mainland Chinese citizens (even if such mainland Chinese citizens habitually reside outside of mainland China).
- The Q&A also indicates that to determine if an overseas enterprise is controlled by a domestic entity or individual, it shall be traced layer-by-layer in accordance with the “substance over form” principle.
For more information on outbound direct investments by Chinese individuals, please refer to our previous article.
Sensitive Industries
The Q&A gives detailed definitions of those industrial sectors included in the List of Sensitive Sectors for Overseas Investment (2018 Version):
- “Research, Manufacture, Production and Maintenance of Weaponry” mainly refer to research & development, manufacturing, repair, maintenance etc. of weaponry.
- “Cross-Border Water Resources Development and Utilization” mainly refer to exploitation and utilization of water resources on rivers flowing through two or more countries.
- “New Media” mainly refers to new establishment or M&A of overseas news agencies (including news websites), publishing houses, broadcasting and television institutions, etc. related to current affairs and having significant influence on national security.
- “Real Estate” mainly refers to (1) new establishment or M&A of residential property or commercial real estate projects and acquisition of land for construction of residential property or commercial real estate overseas with domestic assets, rights and interests or providing financing, security, etc. from within mainland China; (2) new establishment or M&A of the real estate enterprises overseas, making additional investments in existing overseas real estate enterprises, making investments in overseas real estate investment trusts, etc. with domestic assets, rights and interests or providing financing, security, etc. domestically. Excluding: (1) investing in property management and real estate intermediary services; (2) new establishment or M&A of self-used office space, staff dormitory, etc.; (3) investing in infrastructure construction and building development for industrial entities, such as industrial parks, science & technology parks, warehousing and logistics parks, etc.; (4) making minority investments in projects to be constructed by construction enterprises for the purpose of obtaining project engineering contract; (5) projects with approval document or record-filing notice obtained in accordance with laws and regulations from the development and reform authority but not yet completed; (6) projects not involving domestic assets, rights and interests nor provision of financing, security, etc. from within mainland China, but with all funds raised overseas.
- “Hotels” mainly refer to new establishment or M&A of star-rated hotels, tourism resorts, business hotels, ordinary hotels, etc. with domestic assets, rights and interests or providing financing, security, etc. from within mainland China. Excluding: (1) investing in hospitality management businesses not holding hotel property assets; (2) making investments in catering industry without accommodation; (3) projects with approval document or record-filing notice obtained in accordance with laws and regulations from the development and reform authority but not yet completed; (4) projects not involving domestic assets, rights and interests nor provision of financing, security, etc. from within mainland China, but with all funds raised overseas.
- “Cinemas” mainly refer to new establishment or M&A of overseas cinemas or movie theater companies.
- “Entertainment Industry” mainly refers to (1) new establishment or M&A of overseas indoor entertainment facilities (dance halls, video game halls, cyber café, etc.); (2) new establishment or M&A of overseas amusement parks, theme parks, etc.; (3) new establishment or M&A of overseas lottery companies.
- “Sports Clubs” mainly refer to new establishment or M&A of organizations, institutions, enterprises etc. that employ (or hire) athletes to engage in athletics competition, performance, training, coach and management.
- “Establishment of Overseas Equity Investment Funds or Investment Platforms with No Specific Industrial Projects” mainly refers to establishment of equity investment funds or investment platforms with no specific industrial projects overseas with domestic assets, rights and interests or providing financing, security, etc. from within mainland China. Excluding: (1) equity investment funds or investment platforms not involving domestic assets, rights and interests nor provision of financing, security, etc. from within mainland China, but with all funds raised overseas; (2) establishment of overseas equity investment funds or investment platforms with no specific industrial projects by domestic financial enterprises which have obtained approval from domestic financial regulatory authority.
Circumstances Not Regarded as Going Against “Macro-Control Policy”
Pursuant to Order 11, NDRC approval is required for overseas investments made by Chinese investors directly or through overseas enterprises under their control in sensitive countries/regions or sensitive sectors; one of the criteria for approving an overseas investment is that the project does not go against “macro-control policies” of China.
The Q&A points out that in general neither of the following two circumstances shall be regarded as going against “macro-control policies”: (1) the project is an inter-governmental cooperation project; (2) while the approval authority seeks opinions on the project, relevant industrial authorities and Chinese embassies abroad expressly support the project.
Credit Standing of Investor
Circular 252 requires the “credit standing of the investor in the recent two years” to be included in the application for approval/record-filling/reporting of an overseas investment project. What if the investor has been established for less than two years?
The Q&A makes it clear that in case an investor has been established for less than two years, then it may only disclose the credit standing since its establishment.
