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New Policy regarding China (Shanghai) Pilot Free Trade Zone

(November 15th, 2013)

By ECOVIS Ruide China, Pingwen Hu

Since August 30, 2013 the twelfth session of the Standing Committee of the National People’s Congress in the fourth conference decided to authorize the State Council to set up China (Shanghai) Pilot Free Trade Zone (hereinafter referred to as ‘Shanghai FTZ’) upon Shanghai Waigaoqiao Free Trade Zone, Shanghai Waigaoqiao Bonded Logistics Park, Yangshan Bonded Port Area and Shanghai Pudong Airport Comprehensive Free Trade Zone, which drew worldwide attention to the detailed policies and development of the Shanghai FTZ, especially when Shanghai FTZ was officially listed on September 29, 2013.

First let us review a series of important documents relating to the foreign-invested enterprise.

1) On September 18, 2013 the State Council issued ‘the Circular on the State Council on Printing and Distributing the Overall Plan for China (Shanghai) Pilot Free Trade Zone’.
GuoFa [2013] No.38
2) On September 29, 2013 Shanghai Municipal People’s Government issued ‘the Circular on Ad-ministrative Measures of China (Shanghai) Pilot Free Trade Zone’.
Order No.7
3) On September 29, 2013 Shanghai Municipal People’s Government issued ‘the Circular on the Record Management Measures of foreign-invested Projects of China (Shanghai) Pilot Free Trade Zone’.
HuFuFa [2013] No.71
4) On September 29, 2013 Shanghai Municipal People’s Government issued ‘the Circular on the Record Management Measures of Foreign-invested Enterprises of China (Shanghai) Pilot Free Trade Zone’.
HuFuFa [2013] No.73
5) On September 29, 2013 Shanghai Municipal People’s Government issued ‘the Circular Special Management Measures on Foreign Investment Admission (Negative List, 2013) of China (Shanghai) Pilot Free Trade Zone’.
HuFuFa [2013] No.74
6) On September 26, 2013, the State Administration for Industry and Commerce issued ‘the Several Opinions on Supporting China (Shanghai) Pilot Free Trade Zone’.

Combined with the above mentioned policies and regulations as well as the relevant movement of the government status explanation session on the Free Trade Zone listing day, we would like to share several key points relating to the foreign-invested enterprise:

1) Main contents
1.1) Scope of Free Trade Zone
The free trade zone covers Shanghai Waigaoqiao Free Trade Zone, Shanghai Waigaoqiao Bonded Logistics Park, Yangshan Bonded Port Area and Shanghai Pudong International Airport comprehensive Free Trade Zone. The total area is 28.78 square kilometers.
1.2) Implementation date of Free Trade Zone
October 1st, 2013
1.3) The expanded service sector within Free Trade Zone: involves 6 sectors and 18 in-dustries.

Financial Service Sector  
1. Banking service
(1) Allow qualified foreign-invested financial institutions to set up wholly foreign-owned banks and jointly set up Sino-foreign equity joint venture banks with qualified private capital within the Pilot Zone. Where conditions are met, allow limited license banks to be incorpo-rated within the Pilot Zone when appropriate.
(2) Allow qualified Chinese-invested banks to develop offshore busi-ness under improved related administrative measures and enhanced effective supervision.
2. Specialized health insurance Set up pilot foreign-invested specialized health insurance institutions.
3. Financial leasing
(1) Impose no minimum registered capital requirements on a sin-gle-aircraft or a single-ship subsidiary set up by financial leasing companies within the Pilot Zone.
(2) Allow financial leasing companies to concurrently offer commercial factoring business related to their primary business.

Shipping Service Sector  
4. Ocean cargo transportation
(1) Relax foreign equity proportion limitations for Sino-foreign equity joint venture and Sino-foreign cooperative joint venture international shipping enterprises. The competent transport authority under the State Council shall formulate relevant tentative administrative meas-ures.
(2) Allow foreign ships owned or indirectly owned by Chinese-invested companies to pilot the coastal shipping business of foreign trade import and export containers between domestic coastal ports and Shanghai Port.
5. International ship manage-ment Allow the establishment of wholly foreign-invested international ship management enterprises.

Commerce and Trade Ser-vice Sector  
6. Value-added telecommuni-cations
To the extent of protection of security of the network information, foreign-invested enterprises are allowed to engage in specific val-ue-added telecommunication services. Approval by the State Council is required if limitations exist in administrative regulations.
7. Sales and service of game console and entertainment machine Allow foreign-invested enterprises to engage in the manufacturing and sales of game console and entertainment equipment. The game console and entertainment equipment with contents passing the censorship by the competent culture authority may be sold in the domestic market.

Professional Service Sector  
8 .Lawyer service
Explore the business cooperation pattern and mechanism between Chinese law firms and foreign law firms (inclusive of those in Hong Kong, Macao and Taiwan regions).
9. Credit information inquiry
Allow the establishment of foreign-invested credit information inquiry companies.
10. Travel agency
Allow qualified Sino-foreign equity joint venture travel agencies reg-istered in the Pilot Zone to engage in overseas tourism business, with the exception of tourism business involving in Taiwan region.
11. Talent intermediary service
(1) Allow the establishment of Sino-foreign equity joint venture talent intermediary institutions in which the foreign joint venture partner may hold equity of no more than 70%; allow Hong Kong and Macau ser-vices providers to set up wholly-owned talent intermediary institutions.
(2) The minimum registered capital requirement for foreign-invested talent intermediary institutions will be reduced from USD300,000 to USD125,000.
12. Investment management
Allow the establishment of foreign-invested joint-stock holding com-panies.
13. Engineering design Foreign-invested engineering design (excluding engineering survey) enterprises registered in the Pilot Zone to provide services for Shanghai Municipality may be exempted from the requirement on performance of investor in engineering design on initial application for relevant qualifications.
14. Construction service
Wholly foreign-invested construction enterprises registered within the Pilot Zone are not subject to restriction on investment proportion of Chinese and foreign investors when undertaking Sino-foreign joint construction projects in Shanghai Municipality.

Cultural Service Sector  
15. Entertainment artist agency
Remove the foreign equity proportion limitations for entertainment artist agencies. Allow the establishment of wholly foreign-invested entertainment artist agencies to provide service in Shanghai Munici-pality.
16. Entertainment facilities
Allow the establishment of wholly foreign-invested entertainment facilities to provide service in the Pilot Zone.

Social Service Sector  
17. Education and training, and vocational skills training
(1) Allow the establishment of Sino-foreign cooperative joint venture education and training institutions.
(2) Allow the establishment of Sino-foreign cooperative joint venture vocational skills training institutions.
18. Medical service
Allow the establishment of wholly foreign-invested medical institu-tions.

1.4) The trial implementation of subscription registration system of registered capital
The enterprise shall execute subscription registration system on trial, except there are special provisions on the paid-in registration of registered capital according to the law and ad-ministrative regulation. The AIC checks the registered capital instead of the paid-in capital. Except special provisions on minimum registered capital for particular industry according to the law, administrative regulation and the State Council, the following provisions are abolished: the provision of minimum registered capital of 30,000 RMB on limited liability company, the provision of minimum registered capital of 100,000 RMB on one-person limited liability company and the provision of minimum registered capital of 5,000,000 RMB on incorporated company. In addition, there is no limitation of initial amount of contribution and its contributive proportion, proportion of monetary contribution and period of investment.

1.5) The trial implementation of ‘license granted before certificate’ registration system
It can be divided into two conditions when the enterprise is engaged in licensed operating items. If operating items belongs to Pre-licensed project, the enterprise shall apply and receive business license at AIC after it obtains certificate or approved documents. For other operating items, before carrying out the business activities, the enterprise shall apply for relevant certificate or approved documents at competent department after it obtained business license.

2) Our understanding and suggestion
Supplementary specification to article 1.1) It means most our foreign-invested enterprise clients who have already registered within Waigaoqiao Free Trade Zone at present are counted in the free trade zone, and they shall comply with the new policy which would be introduced in succession. By far, all we know is that examination and approval system of corporate division and merger, the alteration of other relevant important matters and the extension of operation period is suspended. The recording system shall be applied.
.
Supplementary specification to article 1.3) Previously foreign-invested enterprise is restricted to invest in certain areas. Now company invested and registered within the Free Trade Zone can engage in the relevant business project, but it has to be noticed that as to the choice of business scope, the investor shall discern in advance whether the investment project is stated in ‘the negative list’ or not. The foreign-invested enterprise can free to choose any foreign investment area which is not in the negative list.

Supplementary specification to article 1.4) According to regulations of the industrial and commercial bureau of FTZ at present it is no need that the enterprise should entrust Chinese Certified Public Accountant to issue a capital verification report after funding registered capital within the Free Trade Zone. However, it should be noticed that although the investors can decide the amount of registered capital, they should fully take financial cash flow into consideration during the initial period of setting up a new company, for State Administration of Foreign Exchange has not introduced relevant detailed policies yet. The relevant operation steps and procedures are still not clarified, for instance we still do not know how to operate if overseas parent company directly gives support to subsidiaries on working capital.

Supplementary specification to article 1.5) The trial implementation of ‘license granted before certificate’ registration system will help the enterprise obtain entity qualification first. By using business license, it can apply for business qualification. Having the business license in advance, many matters such as opening bank account for the new company could be solved in time, and it is more convenient for the investor to pay the expenses and manage the accounts during the preparation of registration.

Special note: it is said that the income tax within the Free Trade Zone is 15%, while according to the government explanation session of the Free Trade Zone Listing Day, there is no such regulation existed.

The establishment of the Free Trade Zone has huge potential influence on Chinese economy, especially it is significant to Shanghai’s economic development. At present the government de-partment which has close connection to our foreign-invested enterprise clients like State Admin-istration of Foreign Exchange, the Customs and Tax Bureau has not issued relevant detailed implement measure rules and regulations yet. We would share the new policies of the Free Trade Zone in time later.

For more concrete operation rules and procedures, you can enter ‘the Investment and Service Train of China (Shanghai) Pilot Free Trade Zone’.
Website:http://zwdt.sh.gov.cn/shen3hall/zmq/index/index.jsp



Author:
Pingwen Hu
pingwen.hu@ecovis.cn
Office website

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