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In previous years, foreign-invested enterprises (“FIEs”) and their branches in China had the certainty that they would need to undergo the annual inspection filing with the business registration authority between March to June each year, and if they passed, they would be deemed to be in “good standing”. This year, in most cities, joint ventures, wholly foreign-owned enterprises (“WFOEs”), and their branches faced a new uncertainty as the annual inspection exercise of the Administration for Industry and Commerce (“AIC”) has been replaced by a new “annual reporting” system. This is all part of the corporate reform heralded by the relevant amendments to the PRC Company Law, which took effect from March 1, 2014. The AIC’s annual reporting and public disclosure system is currently evolving across the country. The implementation does vary depending on the city, and it will add to the annual compliance burden of FIEs to get up to speed with the local timing and differences that have been introduced. 1. What is required to be disclosed? The annual reporting to the AIC and information disclosure system (年报及信息公示制度) is likely to be widely announced from October 1, 2014. At present, among the major cities that we surveyed, only a few cities have implemented the annual reporting system. We expect Beijing and Shanghai will announce its arrangements soon. We summarize some of the requirements based on the recently published regulations and circulars.

No. Information to be available on the AIC information disclosure system and accessible to the Public Responsible party Timeline Remarks
1. (i) the company or branch’s information registered and filed with the AIC(ii) movable mortgage registration(iii) share pledge registration(iv) administrative penalties imposed by the AIC(v) other information AIC 20 days after occurrence
  • It appears that administrative penalties will be publicized by the AIC.
  • Items (ii) to (v) that took place before October 1, 2014 will not be publicized.
2. (i) contact information(ii) whether the enterprise is dormant or operational(iii) capital investment(iv) registered capital contribution(v) shareholding change(vi) online portal and internet stores run by the enterprise (vii) the number of employees and the financial information including total assets, total liabilities, sales proceeds, revenue from main business, profit and profit forecasts, total amount of taxes paid and owner’s equity to be provided by the company general rule: January 1 to June 30 every year, the same as the period for the AIC annual reporting; exception: The timeline for reporting with respect to the fiscal year of 2013 is from October 1, 2014 to June 30, 2015, but in some locations, the AIC has set a different time line. The information is required to be reported to the AIC annually.The company can choose not to publicize Item (vii) which would be regarded as confidential information.
3. (i) shareholders’ capital contribution(ii) shareholding change(iii) obtaining, amending and renewing an administrative permit(iv) intellectual property pledge registration(v) administrative penalties (no requirements for level of detail)(vi) other information to be provided by the company 20 days after occurrence It is not mandatory to publicize relevant information prior to October 1, 2014.
4. (i) granting, amending and renewing an administrative permit(ii) administrative penalties imposed(iii) other information other relevant government agencies no specific timeline It is unclear whether the AIC online information system will be actively shared with other government departments to aid information sharing and enforcement actions.

The AIC has upgraded its computer systems, and it is anticipated that in time, public access to some of the detailed information will be fee based. This would be in line with other jurisdictions and will help local governments to fund the development of the system. It is interesting to note that when Shenzhen first launched the AIC reporting system in April 2014, information regarding the financial information of the FIE and its branches was made available. After complaints, the AIC modified the system so that the financial information is not publicly available.  2. Consequences of inaccurate disclosure or failure to disclose Under the new set of AIC regulations, failure to disclose the required information on a timely basis, or providing false or inaccurate information, or not being reachable at the registered address could have potentially serious implications. A FIE or its branch can be put on the AIC’s Blacklist of “Abnormal Management” Enterprises (企业经营异常名录), along with other punitive measures that can be taken depending on the seriousness of the matter. The Blacklist will be publicized by the AICs. Only after rectification occurs can the FIE or the branch request the AIC to remove it from the Blacklist. If the FIE or branch has not been removed from the Blacklist for three consecutive years, it will then be added to the AIC’s Blacklist for Serious Non-Compliant Enterprises (严重违法企业名单). The legal representative of the FIE or the responsible person of the branch will be banned from serving as the legal representative or the responsible person of other entities in the subsequent three years. It is possible that some AIC officials will check the Blacklist before they process legal representative, director and officer changes in future. There are potentially other implications associated with being on the Blacklist. The company can be disqualified from local government tenders relating to project engineering, government procurement and land grants. A company may also be disqualified from applying for local government incentives although it will take time for local AICs and their counterparts in other government departments to formulate their approach. 3. More supervision on virtual offices and dormant companies Although the Company Law amendments suggested that an applicant can register a company by just providing a certificate for the lawful use of a business domicile (场所合法使用证明), in practice, it is still not possible to use a virtual office as a registered address even though it is possible to provide such certificate. In the case of a virtual office or even a dormant company, if the AIC cannot contact the company, it may fail to pass the annual AIC reporting and be placed on the AIC Blacklists. In smaller cities, we understand that after a change of address, AIC sub-district officers may conduct a site visit or write to the company or branch to confirm the contact information. China (Shanghai) Pilot Free Trade Zone has also issued regulations which suggest that virtual offices are not permissible within the zone. 4. New format business license Effective from March 1, 2014, all entities can apply for a new format business license. The new format no longer shows the following information: For a company with legal person status (e.g. WFOE)

  1. paid-in registered capital;
  2. shareholders;
  3. the item of the business scope that will be subject to special licensing requirements; and
  4. records for previous AIC annual inspections.

For a branch office without legal person status

  1. name of the parent company;
  2. the item of the business scope that will be subject to special licensing requirements; and
  3. records for previous AIC annual inspections.

Each new business license will have a QR code which can be scanned by the authorities in order to access the information on the entity. AICs have imposed different deadlines on companies to obtain the new format Business License and it is advisable for companies to check if this has been carried out. 5. Investment Certificate The Company Law amendments and a subsequent notice issued by MOFCOM in June 20142 have placed more prominence on the investment certificate which was not the case previously. In some cities such as Beijing now, some district commerce commissions have asked for a copy of the investment certificate after the shareholder(s) makes capital contribution to the WFOE. At a glance: Other Annual Compliance Requirements FIEs should also be aware of other annual reporting and inspection requirements. Just to name a few:

No. Annual Inspection or Reporting Requirements Responsible Government Agenc(ies) Timeline Applicability Compliance Requirement
1. Joint annual inspection local counterparts of the PRC Ministry of Commerce (“MOFCOM”), Ministry of Finance, State Administration of Taxation, State Statistics Bureau and State Administration of Foreign Exchange (“SAFE”) by June 30 every year all FIEs, but not their branches At present, it is unclear whether there will be any change to this requirement in 2015.
2. Annual foreign exchange reporting local counterparts of SAFE by August 31 every year all FIEs, but not their branches, not the subsidiaries of foreign invested holding companies The FIE will not be able to process any applications with SAFE relating to the capital items, e.g. capital increase and registering shareholder’s loan.
3. Customs declaration unit registration information annual reporting Customs office by June 30 every year all enterprises with Customs registration This is a new requirement. It is unclear what needs to be reported to the Customs office in 2015 when implementation commences.
4. Pollutant Discharge Reporting Environmental Protection Bureau (“EPB”) subject to notice by the EPB all manufacturing enterprises, inclusive of the branch offices
5. RMB bank account annual inspection Banks subject to notice by the bank ll enterprises with a RMB account Suspension of bank transactions.
6. Organization code certificate annual inspection local organization code administration centre or local technology and quality supervision bureau differs between localities in China all enterprises Not applicable in Beijing.
7. Finance annual reporting the district finance bureau end of May and subject to change all FIEs It is a Beijing specific reporting requirement.
8. Industry licenses Specific industry regulator annual requirement all FIEs and in some cases branches For FIEs engaged in value-added telecom services, non-vessel operating common carrier, etc.

The various annual reporting requirements listed above are for illustrative purposes only and is not intended to be exhaustive. To ensure that each China subsidiary meets the annual reporting and inspection requirements (some are locality specific and some are industry specific), companies will require a tailored corporate compliance calendar for each subsidiary that should be updated on a regular basis due to the ever-changing regulatory environment in China. The following Baker & McKenzie attorneys contributed to this article: Beijing Stanley Jia +86 10 65359393 [email protected] Scott Silverman +86 10 65353969 [email protected] Hong Kong Tracy Wut +852 2846 1619 [email protected] Nancy Leigh +852 2846 1787 [email protected] Grace Tso +852 2846 1536 [email protected] Shanghai Danian Zhang +86 21 6105 8585 [email protected] Michelle Gon +86 21 6105 8599 [email protected] Howard Wu +86 21 6105 8538 [email protected] Zhenyu Ruan +86 21 6105 8577 zhenyu.ruan[email protected] Cherrie Shi +86 21 6105 8511 [email protected] Chicago Bing Ho +1 312 861 7955 /+86 21 6105 8588 [email protected]

Author

Simon Hui is a partner and leads Baker McKenzie’s Dispute Resolution Group in Shanghai. Mr. Hui is ranked among the leading lawyers for dispute resolution/regulatory and compliance in China by Chambers Asia Pacific, Chambers Global and Legal 500 Asia Pacific. He has conducted complex internal investigations for a large number of multinational companies across a range of industries. He is also a skilled investigator and has experience in dealing with PRC government authorities and regulators such as PSB, SAMR, NSB and SPP. He has been interviewed by leading business media, such as the Financial Times, for his work on assisting the SOE in the establishment of compliance system as the country pushes for its SOEs to participate in the Belt & Road Initiatives.

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