China’s legal system (excluding that of Hong Kong, Macau and Taiwan for the purpose of this article) is commonly accepted to be a civil law system.
China’s legislative framework is premised on its Constitution, which designates the National People’s Congress and its Standing Committee as the supreme source of legislation. Regulations are promulgated at the central level, as well as the local provincial or municipal levels, with national-level laws taking priority over provincial and municipal-level laws. Under China’s Constitution, the National People’s Congress and its Standing Committee may annul or override any laws promulgated by other administrative bodies.
The judicial system in China comprises the Supreme People’s Court (the final appellate court), local people’s courts (at provincial, municipal, district or lower-level) and special people’s courts (courts designated for military, intellectual property or financial matters). Notwithstanding that the Chinese legal system is commonly accepted to be more aligned with civil law frameworks with no principle of binding judicial precedent like in common law jurisdictions, the Supreme People’s Court has issued guidelines requiring lower courts to conform their judgments to the judicial interpretations of the Supreme People’s Court and the Supreme People’s Procuratorate. Such prior decisions are referenced in civil proceedings. The introduction of the Chinese Case Guidance System, to promote consistency in judicial decisions at various levels, may in the future increase the persuasive value of judicial precedent in Chinese legal proceedings.
FDI Review and Approval
During the past three decades, foreign investments have been subject to a case-by-case approval system. Consistent with the recent trend towards market liberalisation, the Foreign Investment Law of 2020 marked the evolution of China’s case-by-case approval system for foreign-invested companies to a system that does not distinguish between foreign-invested companies and local companies for the purposes of establishment and registration, except in a limited number of sectors regarded as highly sensitive. Going forward, both foreign and local-invested companies can submit application for their incorporation and establishment applications to the State Administration for Market Regulation of China or their local counterparts (AMR) without prior approval, except for very few sectors which are prohibited or subject to licensing requirements.
Negative List
Foreign investors have the same access as locally owned enterprises to the PRC market, except for sectors identified in the Special Administrative Measures for Market Access of Foreign Investment (Negative List), the latest version of which took effect on 1 January 2022, which has cut down the number of prohibited and restricted sectors in the 2020 version by approximately 10%. Foreign investment restrictions fall into the following two categories:
It is worth noting that China has announced its intention to remove all the restrictions on foreign investment in the manufacturing sector. Under the current effective Negative List, with respect to the manufacturing sector: (i) operations that print publications and (ii) production of the Chinese herbal medicines, as well as the confidential prescription products of proprietary Chinese medicines, are restricted and prohibited under the Negative List, respectively.
Based on data published by China’s central government, FDI in China for the first nine months of 2023 decreased by 8.4% from a year earlier. China’s GDP grew by 5.2% year on year for the first nine months of 2023.
The Chinese government has emphasised on several occasions its ongoing commitment to integrate with the global economy and to further liberalise the China market. This commitment has been supported through several initiatives in 2020 and 2021, including the promulgation of Foreign Investment Law and the opening up of the financial sector to allow full foreign ownership of certain financial services companies.
Also, there has been an increase in the volatility of China’s foreign and trade relations with the USA, Australia and India, which has led to several retaliatory and protectionist measures being promulgated by such jurisdictions. The heightened concern expressed by various countries about data privacy and espionage risks associated with Chinese manufactured telecommunications equipment – and the steps taken by certain countries to limit Chinese access to advanced technology – may continue to push China to focus on developing these technologies independently, and to take retaliatory or self-protective measures such as the recent promulgation of export control laws and data protection laws. Attracted by the low labour and operation costs, some foreign invested companies have moved their manufacturing plants in China to South-East Asian countries.
On 25 July 2023, the State Council of the PRC released Opinions on Further Optimising the Environment for Foreign Investment to Enhance the Attraction of Foreign Investment (Opinions), pursuant to which, to create a better business environment for foreign investment, 24 policies and measures have been proposed, including, without limitation, policies and measures to ensure national treatment of foreign-invested enterprises, to strengthen the protection of foreign investment on a continuous basis, and to improve the finance and taxation support to foreign investment. On 1 January 2022, the Regional Comprehensive Economic Partnership (RCEP) – a trade and investment treaty between ASEAN countries and six major economies, including China – took effect. RCEP represents 30% of the world’s economy. On 16 September 2021, China submitted an application to join the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP), a treaty between 11 Asia-Pacific economies representing 14% of the global economy.
Acquisitions in China can be structured as asset or share acquisitions, and such transactions are substantially similar to M&A deals conducted in other jurisdictions. Except for the prior review clearances and approvals mentioned under 3.2 Regulation of Domestic M&A Transactions, and the foreign ownership limits in certain industries, foreign acquisitions of Chinese business would not be subject to any other significant restrictions.
Acquisitions of Chinese public companies are subject to further regulation, as is customary in other jurisdictions, for change-in-control transactions. These trigger tender offer requirements.
For companies engaged in businesses in which foreign ownership is restricted or otherwise prohibited, certain deal structures – ie, the variable interest entity arrangements (the “VIE structure”) – have evolved to facilitate foreign investment in these businesses. These VIE structures typically involve investment by a foreign investor in an offshore entity that controls the onshore entity by way of contractual arrangements. These VIE arrangements are also typically used in companies listed outside China.
Investors should also be aware of the procedural issues involved in acquiring business held by Chinese parties, exiting from investments in China and remitting proceeds across the border. In most cases, disposal and offshore remittance involve the remittance bank’s examining of it to ensure it satisfies procedural requirements. These procedures would require equity transfer to be registered with the company registry before the payment can be made. Accordingly, the closing execution for investments in China and divestments of Chinese investments may differ from the standard closing procedures in other jurisdictions. Such procedural requirements also make it difficult to put in place a price adjustment mechanism in a cross-border transaction.
Investing in Public Companies
Investing in public companies is subject to approvals, as elaborated under 5.2 Securities Regulation, and may trigger disclosure or general tender offer requirements pursuant to the securities laws and listing rules.
Merger Control Review
Depending on the turnovers of the concentrating parties, an M&A transaction may require clearance from the competition authority. Please refer to 6. Antitrust/Competition.
National Security Review
Depending on the nature of the transaction, a national security review may be triggered. Please refer to 7. Foreign Investment/National Security.
Review and Approval by Sector Regulators
Prior approval from regulators may be required if the sector in which investment is made is regulated, as is the case with financial institutions.
State-Owned Asset Rules
If the target asset or company is deemed a state-owned asset, the transaction may fall within the purview of the State-owned Assets Supervision and Administration Commission (SASAC) or its local counterparts or delegates. It may then need to comply with certain requirements, such as asset valuations and appraisals, prior approvals or filings with SASAC or competitive bid requirements.
Under the PRC Company Law, companies may form as either a limited liability company (LLC) or a company limited by shares. Private companies may choose either of the two forms, but they typically form as LLCs, whereas public companies must form as companies limited by shares. LLCs are limited to a maximum of 50 shareholders, while the number of initial incorporators of a company limited by shares is limited to 200 shareholders.
Foreign investors typically prefer to form LLCs in China because LLCs have greater flexibility in allocating corporate governance and shareholder rights as compared to a company limited by shares.
Before the Foreign Investment Law, foreign-invested enterprises (FIEs) could be incorporated in various forms. These included Sino-foreign equity joint ventures, Sino-foreign contractual joint ventures and wholly owned foreign enterprises. The corporate governance of these forms (especially joint ventures) was different from the corporate governance of domestic PRC companies.
Since 1 January 2020, foreign-invested and domestic PRC companies have been subject to the same corporate governance requirements under the PRC Company Law. There is no longer any corporate governance distinction between FIEs and domestic PRC companies. FIEs established using the historical forms before 1 January 2020 have a five-year grandfather period to convert into either an LLC or a company limited by shares.
On 29 December 2023, the Standing Committee of the National People’s Congress of the PRC adopted an amendment to the PRC Company Law (2023 Company Law), which will come into effect on 1 July 2024. The 2023 Company Law was amended with the aim to give investors more options to simplify corporate governance, strengthen shareholders’ obligations in order to provide more protection to creditors, enhance property rights protections and promote sound development of the capital market.
Shareholders of Chinese companies are protected under Chinese company law and, in the case of public companies, securities laws and the listing rules and regulations of the Chinese stock exchange on which the company is listed. Statutory shareholder protections under the PRC Company Law include:
Both domestic and foreign-invested companies are required to submit filings to the AMR (which functions as the company registry) when there are any changes to the company’s corporate information. This includes changes to shareholders and shareholding structure, changes to registered capital, operation operating term, business scope, registered address, directors, supervisors, legal representatives and general managers. The information will, in the case of foreign-invested companies, be forwarded by the AMR to the Ministry of Commerce (MOFCOM). Therefore, the foreign-invested company does not need to submit separate MOFCOM filings for these corporate change matters. In addition, FIEs are required to submit additional information (ie, changes) with respect to the ultimate beneficial owners to the foreign exchange control authority.
The two primary stock exchanges in Mainland China are those of Shanghai and Shenzhen. Historically, only companies incorporated in Mainland China can be traded in these stock exchanges. Red-chip companies, which refer to foreign-established companies, with an overseas shareholding structure, that have significant assets and businesses primarily in China, may also be listed on the Shanghai Science and Technology Innovation Board STAR Market, which commenced trading on 22 July 2019. On 15 November 2021, the third primary stock exchange in Mainland China, Beijing Stock Exchange, commenced trading. On 17 February 2023, China officially rolled out its across-the-board registration-based initial public offering system, with relevant rules coming into effect on the same day.
PRC companies have historically been listed on a variety of overseas securities exchanges, notably NASDAQ or NYSE and HKSE, in addition to the Chinese stock exchanges. With the promulgation of the Holding Foreign Companies Accountable Act by the SEC of the USA, which is said to be targeted at Chinese companies listed in the USA, it is expected that more companies will choose HKSE over NASDAQ and NYSE as the forum for listing. It is noted that, on 17 February 2023, the China Securities Regulatory Commission (CSRC) issued the Trial Administrative Measures of Overseas Securities Offering and Listing by Domestic Companies (Measures) accompanied by five supporting guidelines (collectively, the “New Rules”). The New Rules took effect on 1 March 2023 and establish a new filing regime that promotes consistency for overseas offering and listing of securities involving PRC companies (Overseas Offering and Listing). Under the New Rules, PRC companies, by way of either direct or indirect overseas offerings and listings, should file with the CSRC within three business days after the application documents for Overseas Offering and Listing have been submitted to the overseas securities exchanges.
Based on the latest data published by the People’s Bank of China, the principal source of funding for Chinese enterprises is still considered to be bank loan financing. However, capital market funding has grown as an alternative source of capital.
Companies listed on the securities exchanges of the PRC are subject to the Chinese Securities Law, in addition to the listing rules and regulations of their home securities exchange. The CSRC has oversight over the PRC securities markets and listed issuers.
In general, foreign investors are not subject to PRC securities laws unless the foreign investor intends to invest in a PRC company listed on the securities exchanges of the PRC. If a foreign investor is a strategic investor, the investor must meet qualification requirements for strategic foreign investors. These include thresholds on total assets and sound financial management capability. The strategic foreign investor is also required to hold no less than 10% shares in the company and subject to a lock-up period of three years.
A new draft of regulations for foreign strategic investors in public companies was released for comment on 18 June 2020. The draft contains lower investment thresholds, eliminates MOFCOM’s prior approval requirement and relaxes the minimum shareholding percentage requirements. The draft regulations have not yet been passed. In practice, stock exchanges would still require foreign strategic investors to obtain a confirmation from MOFCOM confirming that such investment is no longer required to be approved by MOFCOM.
Non-strategic foreign investors may also invest via QFII (Qualified Foreign Institutional Investor) status; the thresholds for QFII qualifications were lowered in November 2020 to encourage further foreign investment in the PRC.
Foreign investment funds investing in PRC-listed public companies are generally required to invest as a QFII and are accordingly subject to compliance with the QFII-related requirements to invest. The QFII requirements also include post-investment obligations, such as the obligation to make certain information reports to the CSRC.
Foreign investment funds investing in non-listed PRC companies are not subject to the QFII requirements. However, if the fund establishes a domestic fund in the PRC or if a domestic fund has overseas investors, it will be designated a “Qualified Foreign Limited Partner” (QFLP) and the establishment of the fund will have to be approved by the finance office of the local government in the fund’s domicile. The rules governing QFLPs vary between cities and are not centrally regulated. It is worth noting that the Opinions also require in-depth implementation of pilot projects of domestic investment by QFLPs.
China has a “pre-notification” merger control regime. Under the PRC Anti-monopoly Law (AML), a “concentration of undertakings” that meets certain turnover thresholds must be notified to the State Administration for Market Regulation (SAMR) for merger control clearance and may not be implemented without SAMR’s approval. On 1 August 2022, the amendments to the AML came into effect (Revised AML) following almost two years of public consultation. The Revised AML provides several key changes to the merger control regime in China, including:
Following the amendment of the AML, SAMR published the Regulation of Review of Concentration of Business Operators (the “Merger Review Regulation”), updating the former Interim Regulation of Review of Concentration of Business Operators (published in 2020). The Merger Review Regulation came into effect on 15 April 2023.
Concentration of Undertakings
The following types of FDI transactions may constitute a concentration of undertakings for the purpose of merger control notification:
Definition of “Control”
There is no explicit definition of “control” under the Revised AML. SAMR has broad discretion in determining control by considering a wide range of factors. A draft version of the Merger Review Regulation set out examples of governance rights that would confer control over another business (Strategic Rights), including:
While the list of Strategic Rights was ultimately removed in the final version of the Merger Regulation, it offers insights into SAMR’s regulatory approach.
Other relevant factors in evaluating “control” include the purpose of the transaction, the target’s shareholding structure, shareholders’ reserved matters, board composition and the voting mechanism at board and shareholders’ meetings.
In practice, “control” could refer to:
As there is no de minimis shareholding for the definition of control, the ability to veto any of the Listed Strategic Rights will likely be sufficient to confer control even with a minority shareholding.
Turnover Thresholds
Where an FDI transaction constitutes a “concentration of undertakings”, the transaction is notifiable if the undertakings to the concentration also meet the following turnover thresholds:
Special rules apply to the calculation of the turnover of undertakings in the financial sector.
On 27 June 2022, SAMR proposed revision to the notification thresholds:
The proposal also sought to strengthen regulatory review over “killer acquisitions”, namely transactions where an established large player acquires an innovative target to stunt the target’s development and pre-empt future competition. A new set of thresholds has been proposed in this regard and transactions meeting these thresholds must also be notified:
The second limb of the above threshold captures transactions in which the target, despite not having a turnover exceeding CNY800 million, has a relatively high market value and a significant portion of business in China.
The new thresholds have been approved by the Standing Committee of the State Counsel on 29 December 2023, and are currently subject to final sign-off by the Prime Minister. It is expected that the finalised new thresholds will be announced soon in January 2024.
The Revised AML reiterates SAMR’s right to review transactions that do not meet the turnover thresholds, provided that there is evidence that the transaction may have the effect of eliminating or restricting competition.
No Possibility of Exemptions for Foreign Investors or Investments
Where the merger requirements are met, no exemption is available for foreign investors or investments.
Process and Timeline
The merger review procedures in China include the simplified procedure (ie, expedited merger review procedure for certain types of transactions unlikely to raise concerns in China) and the normal procedure (ie, standard procedure for the remaining types of notifiable transactions).
Upon notification, all transactions enter a pre-acceptance phase where SAMR may request further information about the transaction and the notification. There is no statutory time limit for the pre-acceptance phase; the actual duration depends on the questions and time needed to collect the requested information. In our experience, the pre-acceptance phase generally lasts four weeks on average under the simplified procedure, and four to eight weeks under the normal procedure. A notification will only be accepted once SAMR considers the information it receives to be complete and satisfactory.
Once the case is accepted, it will enter into a three-phase review period. Most cases undergoing the simplified procedure are cleared within Phase I (ie, 30 days upon case acceptance).
For cases undergoing the normal procedure, if the transaction does not raise competition concerns it is usually cleared within the review period for Phase II (ie, 90 days).
For transactions with competition concerns, the review extends to Phase III (ie, 60 days). In practice, SAMR’s review of cases with significant competition concerns may exceed the maximum statutory period of 180 days for the three phases. In these cases, the parties will need to discuss with SAMR the withdrawal and refiling of the notification, which restarts the review – this is known as “pull and refile”. According to SAMR’s public record, some conditionally cleared cases have been pulled and refiled more than once.
The Revised AML introduced a “stop-the-clock” mechanism whereby the statutory merger control review period can be suspended under three scenarios, namely:
There is no maximum time limit for SAMR to suspend the review time under the “stop-the-clock” mechanism.
Clearance and Transaction Closing
Merger clearance must be obtained before the closing of the proposed FDI transaction which, in the case of a greenfield JV, refers to the incorporation of the JV and, in the case of an equity or asset transfer, the registration of the equity or asset to be acquired.
Delegation to Local Authorities
SAMR announced a pilot programme to delegate the review of certain simple case filings to five local authorities in Beijing, Shanghai, Guangdong, Chongqing and Shan’xi Provinces during a three-year pilot period commencing on 1 August 2022. Based on SAMR’s guidance, a transaction can be delegated to one of the five Local AMRs where it has one of the following nexus to the relevant city or province:
Substantive Review of the Transaction
The Chinese merger control regime involves a substantive overlap and competitive assessment of the investment. The substantive test involves:
Remedies
SAMR may conditionally clear a concentration on remedies, including structural, behavioural or hybrid remedies, based on a case-by-case assessment.
Structural remedies
Similar to the EU and US competition authorities, SAMR may require merging parties to commit to divest a business, assets or minority interests within a specified time frame post-closing. An example of such a remedy imposed by SAMR was Danfoss/Eaton on 24 June 2021.
Behavioural remedies
Compared to the EU and US competition authorities, SAMR is more receptive to behavioural remedies, despite them being more difficult to implement and monitor than structural remedies. Behavioural remedies can include “hold separate” remedies that require the transaction parties to operate independently for a period of time until the remedy is lifted, FRAND commitments and commitments restricting tying and bundling.
In 2023, SAMR imposed behavioural remedies on three transactions. In April, it conditionally approved the acquisition of Yantai Juli Fine Chemical by Wanhua Chemical Group. SAMR expressed concerns that the transaction could restrict competition in China’s toluene diisocyanate (TDI) market, as it could enhance market control of the merged entity, leading to heightened market concentration, increased barriers to entry, and reduced the bargaining power for downstream clients. SAMR has imposed conditions including maintaining or reducing TDI prices, expanding TDI production, ensuring fair supply practices, and avoiding exclusive purchase demands or tie-in sales. After five years, the merged entity can apply to SAMR to lift the conditions.
In July 2023, SAMR conditionally approved the acquisition of semiconductor manufacturer Silicon Motion Technology Corp by US-based MaxLinear. SAMR’s concerns centred on the deal potentially enhancing market concentration, increasing customer dependence on a single supplier, raising entry barriers, and disrupting competition in the highly concentrated Chinese NAND flash memory master control chips market. To mitigate potential negative impacts on market competition, SAMR mandates that MaxLinear must continue to supply NAND flash memory master control chips in China on a FRAND basis, maintain Silicon Motion’s existing business model and relationships, keep Silicon Motion’s R&D business in Taiwan, retain its field application engineers in China, and ensure no malicious code is added to the chips sold in China. The remedies are valid for five years and expire automatically.
In November 2023, SAMR conditionally approved semiconductor manufacturer Broadcom’s proposed acquisition of software production company VMware. Recognising the neighbouring relationships between the parties and their high market shares in various markets, SAMR expressed concern about potential anti-competitive behaviours, such as engaging in tying/bundling, limiting interoperability, and unfairly using other market players’ commercially sensitive information. To mitigate these competition concerns, SAMR imposed behavioural remedies, which include prohibiting unjustified tie-in sales and discrimination, ensuring the interoperability of VMware’s software with third-party hardware products, and enforcing strict protection of third-party manufacturers’ confidential information.
Hybrid remedies
Often, SAMR imposes hybrid remedies, which are a combination of structural and behavioural remedies. In September 2023, SAMR announced its conditional clearance of the acquisition of Beijing Tobishi Pharmaceutical (Tobishi) by Simcere Pharmaceutical (Simcere). Simcere is the sole distributor of batroxobin API in China and Tobishi is the only producer of batroxobin injections in the country. SAMR also identified a horizontal overlap due to Simcere’s engagement in the research and development of batroxobin injection. SAMR identified that this acquisition could potentially limit competition within China’s batroxobin injection market. To address these concerns, SAMR required that Simcere divest its business related to the research of batroxobin injection. It also imposed behavioural conditions, such as requiring Simcere to terminate its exclusive supply agreement with China’s sole batroxobin API supplier, ensuring the supply of batroxobin API to the new owner of the divested business, reducing end-user prices of batroxobin injections, and ensuring an adequate supply to satisfy domestic demand. After six years, the merged entity can apply to SAMR to lift the conditions.
The Authority’s Ability to Block or Otherwise Challenge FDI
As described in 6.3 Remedies and Commitments, SAMR has the ability to challenge an FDI transaction (eg, impose remedies) before the investment is made, to the extent that the transaction substantially affects competition in China.
If conditions are not sufficient to address competition concerns, SAMR has the ability to block the transaction. Since the AML took effect in 2008, only three transactions have been prohibited by SAMR:
Possibility to Appeal and Timeline
Under the AML, a transaction party may appeal to SAMR for administrative review within 60 days of receiving the decision. The timeframe for administrative reconsideration is 60 days.
If a notifying party is not satisfied with an SAMR administrative review decision, it can bring an administrative action within 15 days of receipt of SAMR’s decision.
If still unsatisfied with the result of the administrative action, the party can seek judicial review within six months of the final administrative decision. However, to date, no court challenges have been brought against SAMR merger control decisions.
While appeal is legally possible, the writers are unaware of any case where a company appealed SAMR’s conditional approval decision so far.
Higher Penalty for Submitting False or Misleading Information
The Revised AML imposes higher penalties on the notifying parties for providing false disclosure or omissions in filings. For the notifying party, the fines have been increased from CNY200,000 to a maximum of 1% of the party’s turnover in the preceding financial year. Responsible individuals are also subject to a fine of up to CNY500,000 (increased from CNY100,000).
Sanctions for Closing Before Clearance
The AML prohibits parties from implementing a notifiable transaction before filing a merger control notification (failure to notify) and obtaining a merger control clearance (gun-jumping).
The Merger Review Regulation provides guidance on the relevant factors for determining whether a transaction has been implemented and may so constitute a failure to notify or gun-jumping. A non-exhaustive list of actions that may constitute gun-jumping includes:
The Revised AML increased the maximum fine for failure to notify and gun-jumping from CNY500,000 to CNY5 million where the transaction has no anti-competitive effect. Where the transaction has or may have anti-competitive effect, the maximum fine is 10% of the party’s turnover in the preceding year.
In addition to imposing fines, SAMR can order the transaction parties to undertake the following steps to restore the situation to the pre-transaction state:
In July 2021, SAMR issued a penalty decision against Tencent for its failure to notify an acquisition of a 61.64% stake in China Music Corporation. SAMR imposed the maximum fine of CNY500,000 (the maximum fine at the time) and imposed remedies to restore competition in online music broadcasting platforms through measures such as abandoning exclusive music copyright licensing arrangements. Tencent was also required to notify SAMR of future transactions, including those that fall below notification thresholds – a requirement that generally goes beyond the scope of remedies contemplated under the AML.
While the Revised AML notes that criminal liabilities may be imposed for breaches (including gun-jumping), the precise application of criminal liabilities on undertakings and individuals is expected to be clarified in amendments to China’s Criminal Law.
National Security Review (NSR) Overview
In China, FDI that has an impact or a potential impact on national security is subject to national security review, as stipulated in both the National Security Law and the FIL. The review regime is established in 2011 and updated in the Measures for Security Review of Foreign Investment (the “NSR Measures”) jointly published by the National Development and Reform Commission (NDRC) and MOFCOM on 19 December 2020 and effective from 18 January 2021.
NSR Industry Scope
China’s NSR regime targets foreign investments in two categories related to defence and national security in China.
FDI Types
The NSR regime applies to direct or indirect investments by foreign investors (including those in the regions of Hong Kong, Macau and Taiwan) in Chinese domestic enterprises, primarily in the form of (i) investment in a greenfield project or establishment of a foreign-invested enterprise in China, independently or jointly with other investors, and (ii) M&A (ie, asset or equity acquisitions). The NSR regime can be extended to other transactions such as contractual control, trusts, multi-layer investments, overseas transactions, leases or convertible bonds, created to achieve the same purpose as a direct share or asset acquisition.
In particular, foreign investors investing in offshore entities who (directly or indirectly) own equity in Chinese companies or assets located in China (also called “foreign-to-foreign” deals) are also covered investment transactions. However, recent practice demonstrates that “foreign-to-foreign” deals are less likely to require a formal NSR review or lead to any substantive national security concern.
For an FDI transaction originally not subject to NSR, NSR approval will need to be sought before the parties can make any changes to, for example, the business structure, business scope or identity of foreign controllers, that result in the FDI falling within the scope of the NSR. Likewise, if an FDI transaction has already received NSR approval but the parties contemplate making changes to the transaction, the parties must seek new NSR approval before they make the changes.
Control Determination
With regard to “Category B” investment, a foreign investor is regarded as a controller if:
Monetary Thresholds
There are no monetary thresholds for a transaction to be qualified for NSR review.
Changes to Existing Transactions
As well as new transactions, changes to existing transactions that may affect national security (eg, changes to the foreign investor’s contractual rights, the business scope of the foreign-invested entity, or the foreign investor’s identity) may trigger NSR notification obligations afresh.
Reviewing Authority
An interagency function called the “NSR Working Mechanism” is empowered under the NSR Measures to organise, co-ordinate and supervise the NSR review. This function, which is consensus-driven, is jointly led by NDRC and MOFCOM and, depending on the investment areas concerned, other ministries of the central government, such as the Ministry of National Defence (MOD), the Cyberspace Administration of China (CAC), the Ministry of Industry and Information Technology (MIIT) and the Ministry of Transport (MOT), may also be involved to give their opinions.
The Office of the NSR Working Mechanism (the “NSR office”), which comes under NDRC, carries out the day-to-day NSR functions, including accepting the notifications and handling all communications with parties to the NSR process.
Process and Timeline
The review process involves three phases, as follows.
The NSR office shall determine within 15 working days from its satisfaction regarding receipt of complete notification materials as to whether NSR review is required.
During the review process, the NSR office may request additional information and the review period shall be suspended (ie, stop the clock) while awaiting materials from the transaction parties.
NSR review will consider the FDI’s impact on national defence and security, including the production of national defence products and relevant equipment, national economic stability, basic social stability, the research and development of key technologies related to national security, national cultural safety and public ethics and national network security. However, no specific criteria have been published for the substantive assessment.
The NSR is a highly discretionary process and is subject to the opinion of the NSR office, in particular the specific industrial and regulatory authorities for the invested sectors.
Foreign investors can amend the investment structure or commit to restrictive conditions to address NSR concerns. However, there are no specific rules or guidance on the types of concerns the NSR office may have and the restrictive conditions that may be required to address its concerns. The NSR is a highly discretionary process subject to the NSR office’s opinions in case-by-case assessments.
In the case of approval with conditions, the parties have a continuing obligation to perform and implement the conditions imposed under the approval decision.
NSR – Possibility to Block FDI
Where the FDI has impacted or will likely significantly impact national security and the effect could not be remedied by conditions, the NSR office may reject the investment. If the investment has already been implemented, the NSR office may unwind the relevant transaction.
Only a handful of investments have been blocked, according to public information.
Consequences for Investing Without Prior Notification to the Relevant Authority
The following consequences are possible.
Under the NSR Measures, there is no monetary penalty imposed on foreign investors for the failure-to-notify violation.
Foreign Exchange Control Regime
China has foreign exchange control regulations administered by the State Administration of Foreign Exchange (SAFE). Cross-border transactions are classified into two categories: capital items and trade items. Capital items – capital contributions, loans and dividend distributions – are subject to stricter scrutiny than trade items. SAFE has delegated most transaction review and oversight powers to PRC banks.
Outbound Direct Investment Regime
PRC enterprises, no matter whether foreign or domestically owned, must obtain approvals before investing overseas (ODI approvals). These approvals include those from NDRC, MOFCOM and SAFE. The procedures to obtain these approvals may take weeks or sometimes months.
Investment in Manufacturing
Domestic and foreign investment in manufacturing projects require additional governmental approvals, including from NDRC, which has oversight over manufacturing activities and production capacity nationwide. The project may also need to obtain EHS-related permits, zoning permits and construction permits.
Investment via Red-Chip Structure
A red-chip structure is a common holding structure used by Chinese companies to access overseas financing or to achieve a listing on offshore stock exchanges. It was used especially in the past when China’s domestic listing rules were more restrictive. In a typical red-chip structure, the holding company is incorporated in Hong Kong or Cayman and holds shares in the PRC subsidiaries.
If the target company engages in business restricted from or prohibited to foreign investment, a VIE structure is typically adopted. A VIE structure is a set of contracts that allow the foreign holding company to control target companies via contractual arrangements instead of holding shares in the target. PRC law has not recognised the VIE structure as a legitimate investment structure.
Investment in a red-chip structure sometimes allows foreign investors more flexibility in information reporting, share transfers, corporate governance and so on. This flexibility results from the investment in the overseas holding company not being considered as FDI. Thus, the filing and registration requirements for foreign investment in a PRC company are not triggered.
Sanction Regime
In June 2021, China passed the Law Against Foreign Sanctions answering to the sanctions imposed by foreign countries against Chinese companies. Persons that are associated with sanctioned persons declared by the Chinese government may be subject to penalties such as seizure of their assets in China.
Enterprise Income Tax
Enterprise income tax (EIT) is levied on the taxable income obtained by enterprises. Taxable income means the balance of gross income obtained by enterprises in a tax year, after deducting non-taxable income, exemptions, various deductions and losses carried forward from the previous five years.
Taxpayers are classified into resident enterprises and non-resident enterprises. Resident enterprises include enterprises incorporated in China, and those incorporated outside China based on foreign laws but with de facto management bodies in China. Non-resident enterprises are enterprises established based on foreign laws and with their de facto management bodies outside China.
Resident enterprises are subject to EIT on income sourced both in and outside China, while non-resident enterprises are subject to EIT on income sourced in China or on income attributable to permanent establishment (PE) constituted in China.
The standard EIT rate is 25%, while beneficial rates may be applicable to certain enterprises, including but not limited to qualified high-tech enterprises, advanced technology service enterprises, small micro-profit enterprises, integrated circuits enterprises, software enterprises and other qualified enterprises established and operated in special regions, such as Western China and Hainan Free Trade Port, etc.
Income derived by non-resident enterprises which do not have PE in China, or which have PE in China but the income derived is not effectively connected with the PE, is subject to EIT at 10%, unless a preferential tax rate is granted under the relevant double taxation agreement/arrangement (DTA).
If a company is organised as a partnership, the company is transparent for the purpose of EIT. Income/loss shall be calculated at the level of the partnership, while income tax shall be paid by the partners based on the respective conditions.
Value Added Tax
Value-added tax (VAT), which is levied on the turnover of taxpayers, applies to sale or import of goods, provision of processing, repair and replacement services, provision of services and transfer of intangible properties and immovable properties in China.
Taxpayers of VAT are divided into small-scale and general VAT payers based on annual turnover. General VAT payers are subject to VAT based on the general tax calculation method, under which input VAT may be credited against output VAT, and at the applicable VAT rate, including 6%, 9% and 13%, depending on the type of taxable activities carried out, while small-scale VAT payers, in general, are subject to VAT at the levying rate of 3% (currently reduced to 1% until 31 December 2027) on turnover.
Other Taxes
Enterprises may also be subject to other taxes such as consumption tax, land appreciation tax, real estate tax, stamp duty, etc, depending on the goods manufactured or sold, business activities or transactions carried out in China.
Non-resident enterprises are subject to EIT on dividends, interest and royalties obtained from resident enterprises, and the resident enterprises are obligated to withhold such EIT at 10% (as well as VAT, if applicable) from the relevant payments made to the non-resident enterprises (withholding taxes).
Preferential income tax rates may be provided by the DTAs concluded by China with other countries or regions. Non-resident enterprises, if qualified as the beneficial owner of the dividends, interest and royalties, may claim such benefits under the applicable DTAs and have the 10% EIT reduced to 5% or 7%.
Income Tax Deferral
Restructuring transactions, including debt-to-equity conversion, mergers and acquisitions, spin-offs, conducted by enterprises, upon fulfillment of the prescribed conditions, may be eligible for tax deferral treatment.
Reinvestments of dividends obtained by non-resident enterprises from resident enterprises for increasing the capital of existing resident enterprises, establishing new resident enterprises, acquiring the equity interests of resident enterprises from unrelated parties, are eligible for tax deferral. For this purpose, the scope of resident enterprises excludes public listed companies.
Super-Deduction of R&D Expenses
Expenses incurred by enterprises for R&D activities, upon fulfilment of the prescribed conditions, may be eligible for super-deduction at 200% of such expenses; intangible assets generated by R&D activities undertaken by enterprises may be amortised at 200% of the costs and expenses capitalised.
Accelerated Depreciation of Fixed Assets
Newly purchased equipment and appliances (excluding buildings and structures) with a unit value of no more than CNY5 million are allowed for quick deduction in a lump sum during the current period.
As to newly purchased equipment and appliances (excluding buildings and structures) with a unit value of more than CNY5 million, enterprises may opt for a reduced depreciation period or other eligible accelerated depreciation methods.
VAT Credits Refunds
Under qualified conditions, enterprises may apply to the tax authorities for refund of VAT credits that could not be recovered through sales.
Non-resident enterprises are subject to EIT at 10% on the capital gains derived from the transfer of equity interests in resident enterprises.
Special treatments may be specified by DTAs for such capital gains. Under most DTAs, China would not levy income tax on the capital gains derived by non-resident enterprises if they hold less than 25% equity interest in the resident enterprises transferred for the 12 months prior to the transfer; under certain DTAs, China would not levy income tax on the capital gains derived by non-resident enterprises.
Under the EIT regime, there are specific tax rules and regulations pertaining, respectively, to transfer pricing for related party transactions, cost-sharing arrangements, advanced pricing arrangements, thin capitalisation and general anti-avoidance.
Transfer Pricing
Business transactions between related parties must be made on an arm’s length basis; otherwise, the tax authority may apply special tax adjustments to the transactions by reasonable methods.
Thin Capitalisation
If an enterprise’s debt-to-equity ratio for related parties exceeds 2:1 (5:1 for financial institutions), the excessive interest expenditure will not be allowed for deduction when calculating EIT, unless the enterprise could prepare transfer pricing documentation to justify the arm’s length nature of the expense.
General Anti-avoidance Rules (GAAR)
The tax authorities shall have the discretion to make tax adjustments on arrangements adopted by enterprises that do not have reasonable commercial purposes but are mainly for the purpose of tax avoidance.
Specifically, arrangements adopted by non-resident enterprises for the indirect transfer of taxable assets in China, including equity interests of resident enterprises, immovable properties situated in China, if deemed to be lacking in sufficient commercial substance, will be subject to EIT at 10%, pursuant to the State Administration of Taxation Public Notice Regarding Certain Enterprise Income Tax Matters on Indirect Transfer of Properties by Non Resident Enterprises (Bulletin [2015] No 7).
In China, the employment relationship between an employer and an employee is mainly governed by:
Under the PRC Trade Union Law, a basic-level trade union committee should be established in any enterprise with 25 or more members but, in practice, not all enterprises establish these trade union committees. According to the 2021 China Statistical Yearbook, around 2.21 million basic-level trade union committees had been established in China by 2022. However, even in enterprises with trade union committees, collective bargaining is not common in practice in China.
Foreign investors should also pay attention to the immigration regulations in China, including work visa, work permit and residence permit requirements at national and local levels. Foreign investors who wish to initially establish representative offices instead of companies should note that PRC laws restrict representative offices of foreign enterprises from directly hiring local employees and require them to hire local employees through labour dispatch service providers.
Typically, employees in China are entitled to salary payments, statutory social insurance and housing fund contributions. Statutory social insurance contributions comprise basic pension, basic medical insurance, work-related injury insurance, unemployment insurance and maternity insurance.
Other benefits include statutory annual leave and certain benefits applicable to certain classes of workers. In addition, in tech and other start-up companies, equity-incentive compensation has also become rather common through employee stock options and restricted share awards.
Under PRC law, a change in the controlling investor or shareholder of an employer does not affect the validity or effectiveness of the employer’s employment contracts. Neither does it entitle employees to additional compensation as a matter of law unless employment is terminated, in which case severance based on law and mutual consultation may apply.
Generally speaking, unless there are changes to the employment relationship or arrangements following an acquisition, change-of-control or other investment transaction, employees will not be entitled to additional rights or severance payments. However, if the employer wishes to terminate an employee, the employee will be entitled at minimum to the statutorily prescribed severance based on the duration of employment and, in most cases, 30 days’ prior written notice. The employee’s salary and benefits terminate as of the termination date unless both parties agree otherwise.
The transfer of employment from one employing entity to a new entity requires mutual agreement between the employer and employee. In an asset or business sale, the employer and purchaser often offer employees the opportunity to transfer employment to the purchaser. If the employee agrees to the transfer, either the employer (ie, the seller) will pay the transferred employee’s severance based on the employee’s service years, with the employee then being deemed a new hire of the purchaser, or the purchaser will recognise the employee’s previously accumulated service years in the new employment contract.
Employers deciding matters directly affecting the immediate interests of employees are required to comply with consultation and notification procedures prescribed in the labour laws. These consultation and notification procedures include seeking comments from the employee representatives’ congress or all employees, discussing the comments with the trade union or the representatives nominated by the employees, and notifying all employees of the final decision.
In 2023, China has successively promulgated a series of policies, which distinctly showcase China’s evolving openness and receptiveness towards foreign investment, specifically in bolstering the integration of advanced intellectual property. Such policies, among others, include the Opinions on Further Optimizing the Foreign Investment Environment and Increasing the Attraction of Foreign Investment, and Several Measures to Further Encourage the Establishment of R&D Centers by Foreign Investors.
From the perspective of intellectual property, the PRC General Office of the State Council issued the Special Action Plan for Patent Commercialization and Utilization (2023–2025) on 19 October 2023. This action plan explicitly outlines the forthcoming strategies aimed at facilitating technology import and export. Simultaneously, it advocates the active involvement of overseas patent holders and foreign-invested enterprises in the commercialisation and implementation of patented technology on a voluntary and equitable basis.
Meanwhile, the PRC Ministry of Commerce released the draft amendments of the Catalogue of Technologies Prohibited and Restricted from Export for public consultation on 30 December 2022. The revisions notably reduce the restricted or prohibited items, specifying key points in respect of certain technical control, fostering an environment conducive to advancing cross-border technological collaboration.
In 2022, China continued with its development of knowledge innovation overall, while minor retractions were observed in some aspects. Compared with 2021, granted invention patents in China had increased by 14.7% in 2022, while those of foreign applicants had a year-on-year decrease of 7.2%. Trade mark registrations had a year-on-year decrease of 20.2%, while approved registrations of foreign geographical indication had increased by 5.6%. The number of layout-designs of integrated circuits announced and certified in 2022 had decreased by 30.4%. The amount of intellectual property pledge financing in 2022 was CNY485.9 billion, showing a year-on-year increase of 56.8%.
In the past year, several amendments of laws related to intellectual property (IP) were promulgated, demonstrating China’s overall legislative inclination towards stronger protection. In the realm of designs, China officially joined the Hague Agreement Concerning the International Registration of Industrial Designs in May 2023. This enables foreign design rights-holders to seek national design registrations in China. With regard to trade marks, on 13 January 2023, the National Intellectual Property Administration released the draft amendments of the Trademark Law for public consultation, not only emphasising the regulation of malicious trade mark registrations but also reinforcing obligations regarding trade mark use. In terms of the Anti-Unfair Competition Law, the State Administration for Market Regulation published a revision draft on 22 November 2022. This draft enhances rules concerning unfair competition in the digital economy, supplements existing forms of unfair competition conduct targeted to address significant issues in enforcement, and provides clearer rules in respect of liabilities.
In judicial practices, influential cases of IP infringement or unfair competition can be seen from time to time with substantially large amounts of damages granted by the PRC courts. For instance, in a case of trade mark infringement and anti-unfair competition, the Supreme Court fully upheld the plaintiff’s claimed compensation of CNY100 million, considering factors such as the trade mark value, the defendant’s subjective malice, scale of infringement, and product profit margins, etc. In another case, the Supreme Court awarded a compensation of CNY98 million because of the defendant’s refusal to provide relevant evidence and its bad faith. This is in line with the main tone of China’s continuous emphasis on the protection of IP rights.
It is also worth noting that the enforcement of IP rights for overseas companies will be more convenient in the future. With the 1961 Hague Convention Abolishing the Requirement of Legalisation for Foreign Public Documents taking effect in China on 7 November 2023, the time needed for preparing procedural documents in litigation is expected to be significantly reduced. This change will ensure more efficient IP protection in China for foreign entities.
Currently, China’s legal regime for data protection comprises three main legislations, namely the Personal Information Protection Law (PIPL), the Data Security Law (DSL) and the Cyber Security Law (CSL). The DSL and the PIPL came into force, respectively, on 1 September 2021 and 1 November 2021. Both the PIPL and the DSL propose clear extra-territoriality application to data processing activities that take place outside China.
The DSL regulates the security and protection of data processing activities, and the data in the DSL is defined broadly to include all categories of data including but not limited to personal data and non-personal data.
Many provisions of the PIPL seem to be inspired by the EU General Data Protection Regulation. These include hefty fines of up to 5% of a company’s revenue during the preceding year or CNY50million, and the legal ramifications also apply to an individual who processes personal data in breach of the PIPL. The regulators also have the power to suspend or terminate any mobile app or online service that illegally processes personal data. Those who are responsible for causing the violation may be disqualified from being directors, supervisors, general managers or personal data protection officers. There are, however, key differences, notably that the PIPL has a strong focus on consent by individuals as to how their personal data is processed. The concept of “legitimate interest” for processing personal data, which is widely used in the EU, is not recognised in the PIPL.
China’s primary data protection regulator, the Cyberspace Administration of China (CAC) issued various draft and finalised rules regulating cross-border data transfer, in particular the following.
Further, it is also required that the concluded Standard Contract should be filed at local CAC at provincial level within 10 working days since the effective date of the Standard Contract together with the data protection impact assessment report in the context of cross-border transfer of personal data.
Multiple Chinese regulators have been actively enforcing the data protection laws and their implementation measures. Areas of focus in these law enforcement actions include transparency and personal data protection, children’s privacy and consumer protection, implementation of security measures, protection of critical information infrastructure and illegal cross-border data transfer.
Privacy litigation has been on the rise in China, which may continue to be the case – particularly with PIPL lowering the bar for data subjects to bring claims against companies.
24/F, HKRI Centre Two
HKRI Taikoo Hui
288 Shi Men Yi Road
Shanghai 200041
China
+86 21 2208 1166
+86 21 5298 5599
email@fangdalaw.com www.fangdalaw.comForeign Investors Now Have Easier Market Access But Higher Compliance Costs
With the Foreign Investment Law taking effect at the beginning of 2020, China’s foreign investment regime has officially evolved from a case-by-case approval system – in place for over three decades – to a new system where foreign-invested companies and domestic companies are treated almost equally in terms of their establishment and corporate changes, with the exception of a small number of sectors under the negative list.
However, as China’s legal system has been evolving, compliance costs for many market players, including domestic enterprises and foreign-invested enterprises, have also increased. For example, the Chinese government is more serious about enforcing environmental and labour regulations. As a result, high-pollution industries and labour-intensive industries have been relocating to South Asia where compliance and labour costs are lower. In 2023 there was tremendous development of legislations in merger control, gender equality and data security. These new legislations, accompanied by tightened law enforcement, suggest increasing compliance costs for companies in the future.
Local policies on FDI have also become more selective on technology and new investment sectors in order to promote high-tech industries, representing a shift from quantity to quality.
New Trends in Investment
Against the backdrop of the sluggish capital market condition, investment activities slowed down in 2023. According to statistics published by China’s State Administration of Foreign Exchange, China’s FDI flow in 2023 turned negative for the first time since 1998. Under the tightening regulatory environment, some M&A financings in the TMT sector were suspended. Investors, especially overseas investors, have gradually become cautious, preferring to invest in more established target companies and focusing on semiconductors and intelligent hardware, EV OEM and related industries, newly emerging Metaverse and Web 3.0-related fields and new energy sectors. This is also consistent with the government’s determination to shift the focus of China’s economy to more innovative and sustainable industries.
China’s goal of achieving “carbon peak and carbon neutrality” has also generated new opportunities, such as green finance. More green, blue (financing ocean-related conservation projects) and sustainable development bonds have come to the market, expanding the range of products on China’s domestic debt markets. The promulgation of new panda bond guidelines and the roll-out of the pilot programme for social and sustainability panda bonds are expected to channel more funding into the green, social, sustainability (GSS) sectors and further open up the bond market.
Trends in New PRC Company Law
On 29 December 2023, the Standing Committee of the National People’s Congress of the PRC adopted an amendment to the PRC Company Law (the “2023 Company Law”), which will come into effect on 1 July 2024. The 2023 Company Law was amended with the aim to give investors more options to simplify corporate governance, strengthen shareholders’ obligations in order to provide more protection to creditors, enhance property rights protections and promote sound development of the capital market. The major amendments and improvements of the 2023 Company Law include:
Trends in Merger Control
On 1 August 2022, China’s revision of the Anti-Monopoly Law (AML) came into effect, introducing significant changes to the country’s merger control landscape. In March 2023, the State Administration for Market Regulation (SAMR) finalised the Regulation on Review of Concentration of Business Operators, further clarifying the law’s implementation. On 29 December 2023, the State Council also approved the proposed amendment to the filing thresholds, which (at time of publication of this guide) is currently subject to the final sign-off by the Prime Minister. The new filing thresholds are expected to be announced in January 2024.
Predictable timelines for no-issue cases and extended review periods persist for remedy cases
Since mid-2022, SAMR has delegated merger review of cases that qualify for the simplified procedure (simple cases) to five of its local branches. The support of local officials lent predictability to review timelines for no-issue cases: simple cases typically take around 6–8 weeks, while no-issue cases that fall under the normal review procedure took approximately 4–6 months.
The 2022 AML revisions introduced a “stop-the-clock” mechanism, which may be triggered:
Based on SAMR’s decisions, the “stop-the-clock” mechanism was employed in three conditional cases in 2023, namely MaxLinear/Silicon Motion, Simcere/Tobishi and Broadcom/VMware.
While this mechanism reduced the administrative burden where parties had to withdraw and refile their filing once the statutory timeline expired, it appeared not to have an actual impact on the overall review timeline for remedy cases. The review process for remedy cases remained a marathon, with timelines being long and unpredictable. This year’s three remedy cases took an average of 363 days for clearance, very close to the average review timeline of 364 days in 2022 but still significantly longer than the average timeline of 287 days in 2021. This trend underscored the unpredictable and lengthy nature of China’s review timeline for complex cases.
Continued scrutiny over semiconductor deals
Semiconductor deals have continued to be the centre of attention this year, in line with previous years’ trends. This focus mirrors the heightened geopolitical tension between China and the US, fortified by stringent US export control rules. One prominent case was MaxLinear’s proposed acquisition of Silicon Motion. After a prolonged review period of over ten months, SAMR conditionally cleared the transaction, imposing behavioural conditions, including an obligation on the merged entity to continue supplying NAND flash memory master control chips in China on a FRAND basis. However, MaxLinear announced its termination of the USD3.8 billion transaction shortly after the conditional clearance.
Another semiconductor deal that reportedly faced regulatory roadblocks was Intel’s planned acquisition of Tower Semiconductor. Intel terminated its USD5.4 billion acquisition plans after failing to secure approval from Chinese regulators before the final deadline.
Both transactions reportedly received unconditional clearances in other jurisdictions. The failed transactions highlight the challenging landscapes that semiconductor companies need to navigate amid escalating geopolitical tensions.
First below-threshold deal cleared conditionally
The revised AML formalised SAMR’s power to review transactions that fall below the relevant filing thresholds, provided there is evidence that the transaction restricts or eliminates competition.
In a novel move, in 2023, SAMR imposed remedies for the first time on Simcere/Tobishi, a below-threshold transaction. In this transaction, Simcere, China’s only distributor of the batroxobin API, proposed to acquire Tobishi, the sole manufacturer of batroxobin injections in China. Prior to the transaction, in 2021, SAMR fined Simcere CNY101 million (approximately USD15.6 million) for abusing its dominance when it refused to supply batroxobin API to Tobishi. Echoing its 2021 decision, SAMR expressed concerns that the merged entity might refuse to supply batroxobin API to downstream market players, potentially restricting competition in the batroxobin injections market in China. To alleviate its concerns, SAMR imposed hybrid remedies on the case. The decision signifies that, moving forward, SAMR may intensify its scrutiny of below-threshold transactions, particularly in highly concentrated markets or where the transaction parties have previously drawn regulatory attention.
Trends in Gender Equality
China has taken a step forward in 2023 on gender equality in the work environment. On 8 March 2023, six government departments including the Ministry of Human Resources and Social Security issued two reference templates, the Special Labour Protection Policy for Female Employees in the Workplace (Reference Text) (the “Reference Text on Females’ Special Protection”) and the Rules on Elimination of Sexual Harassment in the Workplace (Reference Text) (the “Reference Text on Eliminating Sexual Harassment”), as references for employers to develop policies to promote gender equality in the work environment. The two Reference Texts are made according to the PRC Law on the Protection of Women’s Rights and Interests, which stipulates that when hiring female employees, employers shall sign employment contracts or service agreements with them which contain provisions for the special protection for female employees, and employers shall formulate rules and regulations prohibiting sexual harassment.
The Reference Text on Females’ Special Protection further specifies the practical rules and requirements in protecting the interests of female employees and eliminating gender discrimination in aspects such as recruitment and employment, salary and other benefits, maternity, occupational safety and health, etc. The Reference Text on Eliminating Sexual Harassment provides the public commitment for employers to eliminate sexual harassment in the workplace, and the relevant supporting measures such as in-house publicity and training, the procedures on reports and complaints by employees, investigation and handling, and participation of trade unions in supervision.
What is worth observing is that the Reference Template on Eliminating Sexual Harassment has applied a radical definition on sex harassment. Article 2 specifies that, for the purpose of these Rules, the term “sexual harassment” means any act that, against another person’s will, causes discomfort with sexual associations to another person through language, expressions, actions, words, images, videos, voices, links or any other means, regardless of whether the person committing such act has the purpose or intent to harass or any other improper purpose or intent. Compared to what is stipulated in the PRC Law on the Protection of Women’s Rights and Interests, the Reference Template on Eliminating Sexual Harassment further rules out the offender’s mens rea in the recognition of sex harassment. Such an approach shows the government departments’ firm intent to promote gender equality in the work environment.
Trends in Taxation
In general, the trends and developments in taxation are characterised by key words such as digitisation, intelligence and globalisation, and taxpayers need to constantly learn and adapt to these changes to ensure tax compliance in an efficient and effective manner. Specifically, the following should be noted.
Trends in Data Protection and Privacy Legislation and Enforcement
In 2021, China passed two long-awaited significant legislations on data protection: the Personal Information Protection Law (PIPL) and the Data Security Law (DSL). Both the PIPL and the DSL have clear extra-territoriality application that will apply to data processing activities that take place outside China. The PIPL, the DSL and the Cyber Security Law (CSL) (effective since June 2017) together constitute the basic legal framework for data protection and cybersecurity in China.
During 2022, the Cyberspace Administration of China (CAC), which is China’s primary regulator for data protection, made significant progress in formulating various drafts and finalised rules on regulating cross-border data transfer, in particular the following.
Further, it is also required that the concluded Standard Contract should be filed at local CAC at provincial level within ten working days since the effective date of the Standard Contract together with the data protection impact assessment report in the context of cross-border transfer of personal data.
During 2023, the CAC continues to make progress in formulating draft rules on regulating cross-border data transfer, in particular the following.
The CAC also finalised the prescribed template for a cross-border data transfer agreement (the “China SCC”) as part of the Measures for the Prescribed Agreement for Cross-Border Transfer of Personal Information, effective from 1 June 2023 with a six-month grace period expiring on 30 November 2023. In contrast with the EU SCC, the China SCC is only applicable where the cross-border data transfer of concern does not trigger the security assessment requirement. The personal information handlers (PI handlers) must file its use of the prescribed agreement with the CAC’s provincial branch, along with a personal information protection impact assessments report prepared in accordance with the Filing Guidelines for the Prescribed Agreement for Cross-Border Transfer of Personal Information (v1.0), released on 30 May 2023, within ten working days of the effective date of the prescribed agreement.
Also, further to the reform plan issued by the State Council in May 2023, a newly established National Data Bureau (NDB) will co-ordinate and promote the construction of data-related infrastructure, the integration, sharing, development and utilisation of data resources, and the planning and construction of the “Digital China” strategy.
In terms of the enforcement trend during the past year, mobile apps and mini-apps based on WeChat, a popular social network software in China, have been strictly scrutinised for their personal data protection practices in many sweeping enforcement campaigns. In particular, the CAC has fined the ride-hailing platform DiDi Global Inc CNY8.026 billion (approximately USD1.2 billion) in July 2022 according to the PIPL, the DSL, the CSL, etc for its illegal processing of personal data. As the security assessment mechanism has been implemented and the rules regulating the cross-border data flow have been drafted, illegal cross-border data transfer is and will continue to be an enforcement focus in China.
24/F, HKRI Centre Two
HKRI Taikoo Hui
288 Shi Men Yi Road
Shanghai 200041
China
+86 21 2208 1166
+86 21 5298 5599
email@fangdalaw.com www.fangdalaw.com