The modern Chinese legal system is defined as a socialist legal system with Chinese characteristics, which is based on the civil law model. The legislative system of China mainly consists of the Constitution, basic laws (and legislative interpretations), administrative regulations, and local laws and regulations. Among all these legislative documents, the Constitution has the highest legal authority, and no other laws or regulations may set up rules in conflict with the Constitution.
According to the Organization Law of the People’s Court, people's courts in China are divided into:
The primary people's courts normally hear cases of first instance, unless otherwise provided for by laws. China adopts a two-tier trial system for most court cases, which means a case shall be tried by two level of courts to become final and legally binding.
People's procuratorates are state organs for legal supervision, which have similar divisions to the people’s courts. Their duties include conducting criminal investigations for certain cases, reviewing criminal cases and deciding on the arrest of criminal suspects, deciding whether to initiate criminal legal proceedings, public prosecution, and legal supervision over litigation activities, the enforcement of judgments, etc.
The Supreme People's Court and the Supreme People’s Procuratorate may issue judicial interpretations of the laws and regulations during their application, which have legal effect in China. Court cases, on the other hand, do not have legal effect, but normally serve as practical guidance and points of reference in practice.
Generally, foreign investments in China do not require approval from the Chinese authorities unless they are in an industrial sector that is covered by the Special Administrative Measures (Negative List) for Foreign Investment Market Access (Version 2020) (the “Foreign Investment Negative List”), or where an approval is also required for a Chinese domestic investor investing in that same industry (ie, covered by the Negative List for Market Access (Version 2019)).
The Foreign Investment Negative List sets out limited scope of industries into which foreign investment is either restricted or prohibited. The prohibited industrial sectors include news publishing, the development and application of human stem cells, gene diagnosis and therapeutic technologies, etc. Sectors and industries that are restricted to foreign investment and subject to foreign investment approval include healthcare institutions, general aviation services sectors, etc. Approval needs to be obtained prior to initiating investment in these restricted sectors and industries.
For foreign investment in insurance, healthcare institutions and a few other sectors, there are specific rules governing investment and operation activities by foreign investors in China.
Relaxation of Financial Industries
First, all the restrictions in financial industry as provided in the 2019 version of the Special Administrative Measures (Negative List) for Foreign Investment Market Access have been lifted earlier than they were scheduled as follows:
There are no restrictions on the entry into the financial industry in the most updated Foreign Investment Negative List (which is to become effective on 23 July 2020), and any financial institution established thereafter shall obtain an industry license according to the principle of consistency between domestic and foreign investments and in accordance with the requirements of the Negative List for Market Access (Version 2019) issued by the National Development and Reform Commission and the Ministry of Commerce.
Second, the State Administration of Foreign Exchange decided to abolish the investment quota restrictions for qualified overseas institutional investors (QFII) and RMB qualified overseas institutional investors (RQFII) with the approval of the State Council on 10 September 2019. At the same time, restrictions on RQFII pilot countries and regions were also lifted; therefore, qualified overseas institutions all over the world may use overseas RMB to invest in China domestic securities.
Third, the past year sees some other relaxations on foreign-invested financial institutions, including:
China’s new Foreign Investment Law took effect on 1 January 2020. Generally, foreign investors in industrial sectors that are not listed in the Foreign Investment Negative List enjoy at least the same treatment granted to Chinese investors and, in many cases, they may submit application to the State Administration for Market Regulation of China or its local counterparts (ie, the company registration authorities) for establishment and registration of Chinese subsidiaries without prior approval. For foreign investment in China in the specific areas covered by the Foreign Investment Negative List, the foreign investor(s) shall seek approval by the Ministry of Commerce of China or its local counterparts before initiating the registration formalities at the State Administration for Market Regulation of China or its local counterparts.
There will be adverse consequences for foreign investors making investment in industrial sectors covered by the Foreign Investment Negative List without approval.
If an investment is made without approval in a restricted industrial sector under the Foreign Investment Negative List, the foreign investor will first be ordered to make corrections and take the necessary measures to meet the mandatory requirements for foreign investment, if any, and to obtain an approval within a prescribed period of time. If the foreign investor fails to do so, they shall be ordered to cease the investment activity and unwind their investment within a prescribed time limit.
The Chinese authorities generally do not condition their approval of investment in China to certain commitments by the foreign investors. However, for certain specific industries, certain conditions must be met before the Chinese authorities will grant their approval. For example, a foreign investor that plans to establish a wholly owned bank in China must, among other things, be a commercial bank itself and have the capital adequacy ratio which complies with the laws and provisions of the country or region where the investor is located prior to its application to set up such a banking subsidiary in China.
As a general rule, an investor may challenge the Chinese authorities’ decision on an application for foreign investment through complaint mechanism, “administrative reconsideration” or “administrative litigation”. Complaint mechanisms provide an opportunity for foreign investors to seek co-ordinated solutions and settlement. An administrative reconsideration is conducted by the administrative organs of the Chinese government, while an administrative litigation will be handled by the Chinese court. In practice, however, it is rare for a foreign investor to formally challenge the authorities’ decision not to approve an investment.
The most commonly used type of corporate vehicle available to foreign investment is the limited liability company, which does not issue shares – rather, its shareholders own equity interests. A limited liability company may have one or more shareholders. A limited liability company has registered capital, for which there is no mandatory minimum amount, and shareholder(s) need to contribute within the time schedule provided in the limited liability company’s articles of association. The liability of shareholder(s) of a limited liability company is limited to the extent of the registered capital committed by the shareholder(s).
For the incorporation of a limited liability company invested in by foreign investors, an application shall be made to the local administration for market regulation (ie, the enterprise registration authorities) for company establishment. If everything is in order, a business license will then be issued when the limited liability company is formally incorporated. In the meantime, an initial report with information in relation to such foreign investor and its ultimate controlling owner shall also be submitted through the system provided by the Ministry of Commerce of China. Thereafter, various post-incorporation processes need to be completed, such as registration at the local tax authorities, engraving of the company chops, and opening bank accounts with a local bank (and through the local bank, at the foreign exchange authorities of China). The company can start to be operated only upon completion of the post-integration steps.
Private companies are subject to routine reporting and disclosure obligations under the Chinese law.
A limited liability company shall conduct an annual filing each year at the local administration for market regulation. In addition, when there is any change to the basic corporate information of a limited liability company, such limited liability company shall conduct filings at the local administration for market regulation regarding such corporate change(s).
Private companies wholly or partially owned by foreign investor(s) are also required to submit a change report through the system provided by the Ministry of Commerce of China when there is any change of foreign investor(s) or its ultimate controlling owner that does not require a filing to the local administration for market regulation.
As the most common legal entity for foreign investors in China, a limited liability company has a three-tier management structure.
The authority of a limited liability company is its shareholders’ meeting or, if it is owned by one shareholder, its sole shareholder.
A limited liability company shall also have a board of directors or an executive director, which shall report to the shareholders’ meeting or the sole shareholder. The board of directors or executive director may appoint a general manager of the company, who will manage the daily operations.
A limited liability company shall also have a board of supervisors, or one or two supervisors, who are appointed by the shareholders’ meeting or the sole shareholder. The supervisor is intended to safeguard the interests of the shareholders by supervising the finances of the company as well as the conduct of its directors and managers. A supervisor may not concurrently serve as a director or manager of the same company.
The Company Law of China contains the main rules governing the liabilities of directors, supervisors and officers of a limited liability company, who must comply with the provisions of laws and administrative regulations, as well as the articles of association of the company. They owe fiduciary duties to the company.
A director, supervisor or officer who violates the provisions of laws and administrative regulations or the articles of association of the company in their performance of duties and powers, causing damages to the company, shall bear the liability to fully compensate the company's loss.
For shareholders, the corporate veil may be pierced under certain circumstances and consequently a shareholder may be held liable for certain liabilities of the company.
The general requirements under the Chinese law are that the shareholder(s) of a limited liability company shall abuse neither the independent legal person status of the company nor the limited liability of the shareholder(s) to cause damages to the interests of the limited liability company’s creditors. Any shareholder who abuses the independent legal person status of the company and the limited liability of a shareholder to evade debts and cause damages to the interests of the creditors shall be held jointly liable for the debt of the limited liability company.
The establishment, performance, expiration and termination of the employment relationship between a company and an employee is mainly governed by the Employment Contract Law (ECL), the landmark national statute law that has been effective since 1 January 2008.
Due to China’s imbalanced development, the understanding and implementation of the national laws vary in different localities (usually at a provincial scale). As such, local regulations, rules, policies and judicial practices should be considered when incorporating or operating a company. For example, in Shanghai, when the employment contract expires and the employer decides not to renew, the employer does not need to give prior notice to the employee, while in Beijing the local rule requires the employer to provide the employee with 30 days’ prior notice.
Unlike some civil contracts which can be concluded verbally, employers must conclude written employment contracts with employees, or there could be legal consequences of monetary compensation and even making the term of the employment contract open-ended.
Employment contracts are classified into fixed-term contracts, open-ended contracts and project-based contracts. Under certain circumstances (eg, when an employee has worked continuously for the same employer for a period of at least ten years, or when renewing a fixed-term employment contract that has been concluded twice consecutively), an open-ended employment contract must be concluded, unless the employee proposes a fixed-term contract.
The employment contract should include the name, location and legal representative or primary responsible person of the employer, the employee’s information, term, job description, working place, working hours, rest and leave, remuneration, social insurance, labour protection, working conditions and protections against occupational hazards, etc.
In China, there are three kinds of working hour systems: the standard working hour system, the comprehensive working hour system, and the flexible working hour system. Different working hour systems have different arrangements for working hours, rest patterns and overtime pay rules.
The standard working hour system is the most common, and sets the daily working hours for each employee not in excess of eight hours and the average weekly working hours not in excess of 40 hours. In addition, the employer unit shall ensure that every employee has at least one rest day each week.
Outside of production and business operations, an employer may extend the working hours after consulting with the trade union and the employees, although the overtime shall in general not exceed one hour per day; in special circumstances where an extension of working hours is required, the overtime shall not exceed three hours per day under conditions that ensure the health of the employees, and the amount of overtime worked shall not exceed 36 hours per month. The overtime pay rules are summarised as follows:
In general, “unilateral termination at will” by the employer is not applicable in China. The Chinese law imposes stringent restrictions on the termination of employment contracts. Employers must have a legal cause to terminate an employee, even during the probationary period.
Unilateral termination by the employer can only be carried out for statutory grounds, or for a breach of specified terms under the employee handbook, the code of conduct or policy of the company.
Grounds for Termination
The main statutory grounds for termination include contract expiration without renewal in the following circumstances:
In addition to the legal causes of termination, employers must also pay attention to the procedures of termination. For instance, where an employer that has established a trade union intends to unilaterally terminate an employee, such employer shall first notify the trade union in writing of the termination ground and consider the union’s opinions, if any.
Note that due to the COVID-19 pandemic, the Chinese governments at various levels are positively taking measures to stabilise the employment relationships and discouraging layoffs. In light of this, in 2020, companies should have solid evidence when initiating a unilateral termination.
When it comes to massive layoffs, the Chinese law also has strict requirements on both the substantial and procedural sides. First of all, the retrenchment number should reach 20 or more employees, or a number of employees fewer than 20 but comprising more than 10% of the enterprise's workforce. Secondly, the employer must have statutory circumstances, such as undergoing a bankruptcy restructuring, suffering serious difficulties in manufacturing or operations, etc. Thirdly, the employer must issue a statement to the trade union or to all employees giving 30 days’ prior notice, and must consider the opinion of the trade union or employees, and file a workforce reduction plan with the local labour authority.
The ECL provides the employees with legitimate severance under certain circumstances based on the service years of the employees (normally one month’s salary for each full-service year; any period of more than six months will be counted as one year, and any period of less than six months will be counted as half of one year), such as contract expiration without renewal decided by the employer.
In accordance with the Rules on the Democratic Management of Enterprises (the “Rules”), effective since 2012, for all kinds of enterprises, employee representative congress is the organisation through which employees exercise their power of democratic management, and is the basic form of democratic management in the enterprises. Due to the low legal hierarchy of the Rules, the enforcement of the Rules is not strict. Most of the enterprises that establish and implement the employee representative congress are state-owned enterprises.
In China, wages, salaries, bonuses, year-end bonuses, labour dividends, allowances, subsidies and other income derived by individuals in relation to their position or employment are subject to statutory social security deduction and individual income tax (IIT).
Social security includes insurance for unemployment, medical, occupational injury, maternity, pension and housing funds. While contribution requirements vary from place to place, both the employee and the employer are required to pay for the social security, which may respectively amount to around 10% and 35% of the salaries and wages. Furthermore, the calculation basis is subject to a minimum of 60% and a maximum of 300% of the local average monthly salary. Due to the COVID-19 pandemic, micro, small and medium-sized enterprises may be exempted for the employers’ portion of social security contribution for certain period, subject to the regulations issued by the local governments.
Employees are also liable for IIT on their wages and salaries, which is levied at a progressive rate of 3% to 45%, subject to a general deduction of RMB60,000 per year and deductions of other allowed items, including the employee’s contribution payment to statutory social security.
An employer is obliged to withhold and deduct the payable amounts of the employee’s social security contribution and IIT before making payments to the employee.
Tax resident companies include companies established under the laws of China and companies that are established under the laws of other jurisdictions but have their effective management located inside China, and are subject to the corporate income tax (CIT) in China, with a general rate of 25% on their taxable profits. Lower tax rates may be applicable as tax incentives to certain qualified companies.
Non-tax resident companies are those that are established under the laws of other jurisdictions and have their effective management outside China. Non-resident companies having establishments in China are liable for 25% CIT on the China-sourced profits attributable to such establishments. If the non-resident company does not have any establishment in China but derives income from China, or if there is an establishment but the China-sourced income has no connection with such establishment, then the non-resident company only needs to pay Chinese CIT at 10% on the China-sourced income (also known as the “withholding tax”). The withholding tax generally applies to passive income received by the non-resident companies, including dividends, interests, royalties and capital gains, and can be lowered or exempted under the applicable tax treaty entered into by China.
In addition to the CIT, the sale or importation of goods, the provision of services and the sale of intangible properties and immovable properties are also subject to value added tax (VAT), at the following rates:
VAT exemptions and other VAT incentives are available for qualified taxpayers.
A general VAT taxpayer can credit the input VAT derived from its sourcing of goods and VAT-able services against its output VAT on its sales of goods or provision of VAT-able services. For the export of goods and zero-rated services, taxpayers may be entitled to a credit or refund of the input VAT incurred.
Other taxes, as the case may be, include consumption tax, customs duties, land appreciation tax, real estate tax, stamp duty and local surcharges.
For CIT, reduced tax rates are usually available for qualified hi-tech enterprises, advanced services enterprises (although qualification is not easy) and enterprises that are active in encouraged sectors in the Central and Western regions. Super-deductions of R&D expenses, accelerated depreciation and foreign tax credit are also available for qualified companies.
For VAT, exemption treatment may be applicable to qualified services provision, such as educational, medical, religious or culture-related services, certain financial services, technology-related services, and certain exported services, etc. Accordingly, the relevant input VAT incurred cannot be credited or refunded for these VAT-exempted sales.
Due to the COVID-19 pandemic, China granted certain tax relieves to companies and business that were seriously impacted during the pandemic, such as the extension of the loss carryforward period from five years to eight years, VAT exemption on the service provision income, etc.
Only branch companies as dependent legal entities are allowed to file the CIT with the headquarters on a consolidated basis. Independent legal entities, such as companies, are not allowed CIT consolidation.
According to the CIT laws and regulations, loans from related parties would need to comply with the thin capitalisation rules in China – namely, the loan/equity investment ratio for a company in China cannot exceed the prescribed ratio, which is 5:1 for financial companies and 2:1 for other companies. Otherwise, the interests derived therefrom may not be deductible by the Chinese company for CIT purposes, unless the borrower can justify that the excessive lending is at arm’s length.
The transfer pricing regulations in China require transactions between related parties to follow the arm's length principle, meaning the transactions need to be conducted on the same or similar terms as if the parties were not related. Two parties can become related parties either by way of shareholding percentage or by way of “control” – for example, through loans, IP licensing, business operations and management, etc.
When the volume of related-party transactions reaches the threshold prescribed by law, the company shall prepare the contemporaneous documentation, with detailed analysis of the functions and risks of the related parties and the comparable prices. Furthermore, companies could apply to the Chinese government and implement the advance pricing arrangement in China.
The Chinese CIT Law contains broad rules on anti-avoidance, thin capitalisation, transfer pricing and controlled foreign corporations. Among other things, the PRC tax authorities scrutinise and may apply anti-avoidance rules to assess tax in cases where taxable assets in China (including the equity of a Chinese company, real estate inside China and the assets of an establishment inside China) are indirectly transferred through the sale of the offshore holding company. If such indirect transfer is considered an abuse of organisational structure to evade PRC tax liability without a bona fide business purpose, the PRC tax authorities can deny the existence of the holding company and levy tax on the seller based on the principle of substance-over-form.
Procedurally, the seller, the buyer and the Chinese company of an indirect transfer may voluntarily report the transfer to the tax authority. As the withholding agent of the indirect transfer tax (if any), the buyer is encouraged to report the case voluntarily, so that if they fail to withhold the payable taxes on behalf of the seller and the transfer is later determined by the tax authority to be taxable in China, the buyer could then be relieved or exempted from the potential liabilities.
If a transaction leads to a concentration of undertakings that reaches the following thresholds, it shall be notified to the State Administration for Market Regulation (SAMR) for antitrust review:
A concentration of undertakings refers to:
The establishment of a joint venture with two or more shareholders having joint control over the joint venture will be deemed a concentration of the controlling shareholders.
Restructuring within a group is exempted from antitrust notification.
A notification shall be made after the execution of the concentration agreement and before the implementation of the concentration. The concentration agreement refers to the definitive agreement with binding effect – eg, a merger agreement, a sale and purchase agreement, a joint venture contract, etc. As for an acquisition of a listed company by tender offer, the report of the acquisition by offer could be deemed as the concentration agreement.
A full spectrum of merger review consists of three phases following the acceptance of a filing:
It generally takes SAMR one to two months to check whether a filing meets the documentation requirements before acceptance.
Currently, the clock for merger review will not be stopped after SAMR officially accepts a case. However, in practice SAMR sometimes may require undertakings to withdraw a notification and then refile, so as to further extend the review period technically. The draft amendments to the Anti-monopoly Law released in January 2020 indicate that stop-clock may be introduced into SAMR’s review process.
If a notification is qualified as a simple case, it will normally be cleared in Phase I, on average within approximately 15 days from acceptance.
Undertakings with a competitive relationship are prohibited from concluding the following horizontal monopoly agreements:
Undertakings are prohibited from concluding the following vertical monopoly agreements with their trading counterparts:
Monopoly agreements include agreements, decisions and other concerted conducts that are designed to eliminate or restrict competition.
There are exemptions for an agreement of undertakings to be deemed as a monopoly agreement, where they involve technology improvements, R&D of new products, improvements in the efficiency of small and medium market players, etc.
In practice, to crack down on monopoly agreements, SAMR adopts a doctrine of prohibition plus exemption, similar to per se violation. However, a court tends to adopts the rule of reason analysis.
To reach a monopoly agreement, without implementation, is subject to a fine of up to RMB500,000, which may be increased to RMB50 million according to the draft amendments. The implementation of a monopoly agreement may lead to a fine of 1% to 10% of sales revenue in the previous year and the confiscation of any illegal gains.
Undertakings with dominant market position (DMP) are prohibited from the following conduct:
DMP refers to a market position held by undertakings that are capable of controlling the prices or quantities of commodities or other transaction terms in a relevant market, or preventing or exerting an influence on the access of other undertakings to the market.
DMP is presumed in the following circumstances:
However, a presumed DMP could be rebutted if the undertaking has evidence to prove that it does not hold any DMP.
Abuse of DMP may lead to a fine of 1% to 10% of sales revenue in the previous year and the confiscation of any illegal gains.
Anti-Unfair Competition Law
In the past decade, the Anti-Unfair Competition Law has been one of the most frequently enforced laws in China, particularly regarding commercial bribery violations, advertisement violations, etc. The purpose of the law is to regulate unfair competition behaviour among market players. The Anti-Unfair Competition Law initially came into force in 1993, and has been amended twice – on 1 January 2018 and 23 April 2019. The first amendment included revisions of almost all of the provisions in the law, while the second amendment mainly enhanced trade secret protection and increased fines and damages for acts of unfair competition.
The Anti-Unfair Competition Law mainly regulates the following types of business activities:
SAMR and its local counterparts have the authority to investigate violations of the Anti-Unfair Competition Law and impose administrative penalties according to the law, including monetary fines, the confiscation of illegal gains, orders to cease the wrongdoings, the revocation of a business licence, and/or recording the violation in the enterprise's credit systems.
The pillars of IP protection in China are the Patent Law and its implementing regulations, the Trademark Law and its implementing regulations, the Copyright Law and its implementing regulations, and the Anti-Unfair Competition Law.
The Patent Law affords protection to inventions and creations, including inventions, utility models and designs. An invention is a new technical scheme for a product or process, or the improvement thereof. A utility model is a new and practical technical scheme for the shape and/or structure of a product. A design is an aesthetic new design applicable to industrial use for the shape and/or pattern of a product, and the combination of colour, shape and pattern.
An invention patent is valid for 20 years and a utility model or design patent is valid for ten years, all starting from the date of application.
There are three ways to file a patent application in China:
In cases of infringement, patent owners can either file complaints with the Intellectual Property Office for administrative action or file lawsuits in court. Statutory damages for patent infringement are between RMB10,000 and RMB1 million.
Registered trade marks in China include commodity trade marks, service marks, collective marks, and certification marks. Any mark that can distinguish the goods/services of one seller or provider from those of others, including any word, device, letter, number, 3D mark, colour combination, sound, or any combination of said elements, can be registered as a trade mark in China.
A trade mark registration is valid for ten years from the date it is approved. The registrant can file a renewal application within 12 months before the end of each successive ten-year period following the date of registration, or within a grace period of six months thereafter.
It usually takes one year for a trade mark application to be approved. An applicant can claim priority within six months after the same application is filed outside of China or the mark is used in an exhibition recognised by the Chinese authority. There are two ways to file a trade mark application in China:
In cases of infringement, trade mark owners can either file complaints with the Administration for Market Regulation for administrative action or file lawsuits in court. Sometimes criminal charges are also an option. Administrative penalties include no more than five times the illegal turnover or no more than RMB250,000 fines if the illegal turnover is less than RMB50,000. The maximum statutory damages for trade mark infringement are RMB5 million.
The Patent Law protects industrial design as a design patent, along with inventions and utility models. Currently, a design patent is valid for ten years from the date of application. In order to accede to the Hague Agreement, the latest draft Patent Law is increasing the validity period for design patents to 15 years.
Industrial design can also be protected by other laws. Given its creative and aesthetic nature, an industrial design can be regarded as a work under copyright law, consisting of device, shape, colour or the combination thereof. In addition, a unique design can identify the source of a product and distinguish the seller or provider, or can be used for such purpose, in which case such design can be regarded as a trade mark and therefore protected as one. Last but not least, a design can be the packaging and trade dress. When the product has enjoyed a certain degree of fame, it can be protected by the Anti-Unfair Competition Law.
Copyright is the exclusive right of authors in literary, artistic and scientific works. In China, works protected by copyright include the following:
The author’s right of authorship, right of revision and right to preserve the integrity of work are not restricted in time. The right of publication and other statutory copyrights of an individual are valid for the life span of the author plus 50 years. If it is a work of a legal person, then said rights are valid for 50 years after the first publication. In the case of film works and works created using methods similar to film making, the right of publication and other statutory copyrights are valid for 50 years after the first publication.
Copyright arises upon the creation of the works, and does not need to be registered. Nevertheless, one is allowed to register the copyright, which can be used as evidence of ownership in case of enforcement. In the case of a commissioned work, the commissioned party owns the copyright, unless agreed otherwise.
In the case of infringement, copyright owners can either file complaints with the Copyright Office for administrative action or file lawsuits in court. Sometimes criminal charges are also an option. Administrative penalties include no more than three times the illegal turnover or no more than RMB100,000 fines if the illegal turnover is not available. Maximum statutory damages for copyright infringement are RMB500,000.
Software is mostly protected by copyright. Software can also be protected through an invention patent, such as industrial control software, internal performance enhancement software, and external data processing software. Last but not least, software can also be protected as a trade secret.
Databases are principally protected by copyright, with an emphasis on “intellectual creation” when compiling the data. The protection of databases is also aided by the Anti-Unfair Competition Law and the Contract Law.
The protection of trade secrets can be seen in various laws, but principally in the Anti-Unfair Competition Law. Trade secrets are commercial information, such as technical information and business information, that is not known to the public and has commercial value, and which the rights holder has taken measures to keep secret. The misappropriation of trade secrets is subject to civil and/or criminal liabilities.
The laws and regulations applicable to data protection in China are fragmented across multiple pieces of legislation, including the Cybersecurity Law, the Constitution, General Principles of the Civil Law, and the Tort Law, mainly in the context of privacy and defamation actions. In 2020, the recently released Civil Code also provides a special section on privacy and personal information protection, addressing basic aspects in this area. Among all the laws and regulations, the Cybersecurity Law, promulgated in 2016 and effective in 2017, as the key data protection law in China, establishes a comprehensive legal regime applicable to cyber sovereignty, network security and data privacy protection. The Cybersecurity Law imposes various requirements and obligations on network operators and more stringent requirements on operators of critical information infrastructure (CII) in China.
The Cybersecurity Law lays out broad principles but leaves several key issues relating to law implementation unclear, a handful of supporting measures and guidelines are expected to fill in those gaps. For example, the Regulations for Internet Security Supervision and Inspection by Public Security Organs, issued in 2018, is applicable to security supervision and inspection by public security organs, and the Personal Information Security Specification, which is a national standard on personal information protection frequently adopted by the enforcement authorities.
China also protects personal data by various sector-specific laws. Relevant sectors include telecoms, banking, healthcare, e-commerce, postal service, etc. For example, the E-Commerce Law outlines how e-commerce operators collect, process, use and protect users' personal information, and what are the rights of users.
The Cybersecurity Law applies to the construction, operation, maintenance and use of the network, as well as the supervision and administration of cybersecurity within the territory of China. Therefore, if a foreign entity constructs, operates, maintains and uses networks within China through its subsidiaries or branch offices, those entities are subject to the jurisdictions of the Cybersecurity Law and other related laws and regulations.
From another perspective, if the subsidiaries or branch offices of a foreign company do not construct, operate or maintain networks within China, but instead use the networks provided directly by the foreign company, they are still subject to the jurisdictions of the Cybersecurity Law and other related laws and regulations, although there will be relatively fewer legal obligations under such circumstances.
Notably, cross-border data transfer between Chinese entities and foreign companies is usually involved for multinationals, which raises data compliance issues such as the absence of consent from the data subjects before transfer and lack of a data transfer agreement between the data exporter and importer. In addition, certain types of data (eg, human genetic resource data) are normally required to be stored domestically in China, and should be assessed or approved by competent government authorities before transferring outside of China.
The four major supervision authorities responsible for data protection are:
To be more specific, the CAC operates at both national and local levels. The Cybersecurity Law enumerates the major responsibilities of CAC, such as assessing data cross-border and personal information management relating to CII operators.
In the area of cybersecurity, the MPS is responsible for “directing and supervising local public security organs in safety monitoring work related to public information networks.” In registration work, the MPS assumes two important registration functions – namely, the registration for international networking and registration for classified protection. The MPS also has the power of Law Enforcement Patrols and the power to impose administrative penalties.
MIIT is an authority under the State Council, and is in charge of information affairs. Together with its subordinate local communications administrations and economic and information authorities at all levels, MIIT assumes part of the responsibility of maintaining internet security. MIIT has cybersecurity-related responsibilities, such as the building and management of the platform for the telecommunications network, the internet, and information security technology, cybersecurity protection, and the management and handling of emergencies.
SAMR is an authority established in 2018, which merges the functions of the former State Administration for Industry and Commerce and several other agencies. Together with its local authorities at all levels, SAMR performs supervision and management duties in accordance with the Cybersecurity Law, the E-Commerce Law, the Consumer Rights and Interests Protection Law and the Anti-Unfair Competition Law. SAMR has corresponding power to impose administrative penalties for illegal conducts such as violating the rules of personal information protection.
In addition, some other industry administration authorities also supervise and manage data protection in accordance with their respective responsibilities.