The Flanders-China Chamber of Commerce (FCCC) organized an interesting in-person event titled, 'China's New Company Law and its Impact on Foreign Investors' at our office in Ghent with keynote speaker Philippe Snel, Lawyer & Managing Director, DaWo Law Firm Shanghai.
Legal and administrative compliance has become a major concern for business operators in China. Positive is the sign of maturity and of progress of the “rule of law”. It is impacting domestic and foreign-invested companies in the same way, so a level playing field is gradually coming about. The government maintains a “pragmatic” approach, but the cost of compliance can be substantial. Operators are more and more aware of their rights and of the obligations of other operators. There are several challenges in managing compliance. Awareness is rising but management is not sufficiently informed nor trained to handle compliance matters. Enforcement is essentially based on information provided by whistleblowers, who not always act in good faith. Local administrators are not always equipped to handle sometimes complex compliance matters. Application standards are sometimes blurry and vary regionally and in time. It is important to maintain good contacts with the local authorities.
The new PRC Company Law is a major overhaul with substantial impacts on the governance and daily operations of companies, becoming effective in July 2024. There are important changes to the capitalization system. Shareholders' rights and obligations are better defined. The corporate governance structure is refined with increased liability of directors and managers. An exit mechanism is provided and liquidation is stricter. The directors and executives must exercise a higher level of diligence during their service and demonstrate independent judgment in their decision making, taking responsibility for their actions and consequences. Companies need to tailor-make their Articles of Association to clearly delineate the different powers of the shareholders' meeting, the board of directors, and the managers, so as to prevent power struggles and corporate deadlock. Law firms, accounting firms, and other agencies can be entrusted by shareholders with independent investigative rights to inspect and copy relevant materials concerning the company and its wholly-owned subsidiaries.
The 12th Amendment to the PRC Criminal Law came into force on March 1, 2024; signaling a crackdown on corruption crimes in private enterprises, strengthening of the punishment for economic crimes, in particular for bribery and internal corruption; and strengthening the protection of the legitimate rights of private enterprises and their shareholders; providing support for enterprises to fight internal economic crimes and a more powerful grounding for anti-corruption compliance. The 12th Amendment to the PRC Criminal Law raises an increased need for compliance management of businesses: formalizing board and management decisions and interactions; enhancing compliance awareness at management level; and optimizing governance structure, requiring more transparency. Contract management and business partner review is a must; and there are emergency response and whistleblower mechanisms. The risks for executives such as directors and managers or employees in sensitive positions such as finance will be upgraded – nevertheless, criminal liability will remain individual, as there is no statutory criminal liability. There is a change of approach: rather than working to recover assets that were stolen by management/shareholders, the focus shifts to an internal anti-corruption system to avoid/limit the risks for fraud. Enterprises must upgrade their compliance monitoring construction, including risk prevention and timely and orderly response to violations. It is expected that reports of fraud or breaches by “whistleblowers” will increase. Enterprises, as the victim, must respond to the reports in a timely manner. A systematic approach must be put in place so that any reported compliance breaches are acted upon, but without surrendering the company to blackmailing practices by repeat “whistleblowers”.
The PRC Foreign Investment Law came into effect on January 1, 2020, replacing the original Law of Chinese-Foreign Joint Ventures, the Law of Foreign-Funded Enterprises and the Law of Chinese-Foreign Cooperative Enterprises. The 5-year transitional period (1.1.2020~31.12.2024) will come to end and all foreign-invested enterprises are expected to have adapted their Articles of Association and registration information in accordance with the FIE law before January 1, 2025. The unified legal framework include the principle of national treatment; strengthened investment protection; simplified administrative procedures; and long-term commitment and stability.
In recent years, the negative list for foreign investment has been continuously shortened, and more industries and fields are open to foreign investors, allowing foreign investors to hold a higher proportion or even wholly-owned shares. Some industries that used to restrict or prohibit foreign investment, such as some financial services, value-added telecommunications services, and medical devices, have been gradually removed or relaxed. While the restrictive items are reduced, through positive encouragement lists and other ways, foreign investment is also guided to invest in high-tech industries, green environmental protection, western development and other areas encouraged by the state.
Several laws on data and cyber security and personal information protection have come into force. Regarding the transfer of personal information, the new regulation represents a significant benefit for enterprises engaged in cross-border data transfers. Broadly speaking, the new regulation eases restrictions on cross-border data transfer, provides multiple exemption criteria for companies, and raises the threshold for the quantity of personal information required to be fulfilled under data obligations, thereby reducing the compliance burden for businesses. The two new editions of guides also streamline relevant requirements, making them more practicable for enterprises. The release of the new regulation and the two series of new edition guides mark a new stage in China’s data transfer supervision mechanism. Although some parts of the new regulation are still more principled and lack detailed explanations it is obvious that the administration is permitting the free flow of data for companies which can show they are compliant. Restrictions for enterprises registered in Shanghai’s free trade zone are loosened further.
In the past five years, China's advertising law sector has undergone significant changes, particularly with the rapid development of the digital economy, leading to increasing diversification of advertising forms and channels. Consequently, relevant laws and regulations have been continuously improved to adapt to market changes, protect consumer rights, and promote fair competition.
Impacts on compliance operation of businesses include strict supervision over internet advertising; enhanced protection for minors; cracking down on false advertising; clarifying advertising language; and data protection and privacy. As an example, Apple got an administrative penalty two times in 2023. The stricter regulation of advertising reflects China's emphasis on protecting consumer rights and its commitment to combating unfair competition. Businesses must stay up-to-date with regulatory changes and ensure that they remain compliant in all their marketing activities. Regular compliance training is necessary to enhance employees' awareness within the organization. Companies need to conduct comprehensive compliance reviews of advertising content to ensure they do not cross red lines such as excessive language and false advertising, especially for new digital advertising and marketing activities. Once an advertising compliance crisis arises, businesses need to professionally and effectively respond to regulatory investigations, public scrutiny, and other accidental situations which may very rapidly adversely affect the reputation and market competitiveness.
The PRC Anti-monopoly Law was amended in 2022 and the new Anti-monopoly Law went effective on August 1, 2022. The original Anti-monopoly Law was issued in 2008, 14 years ago. China has intensified its enforcement efforts in the anti-monopoly field and imposed significant penalties on some cases. Mr. Snel gave some examples, including those involving CNKI, Alibaba, Meituan and Tencent. The new Anti-monopoly Law strengthens supervision of monopoly agreements, abuse of dominant market position and concentration of operators, and raises the fine limit for violations. The new law explicitly prohibits the use of data, algorithms, platform rules and other means to exclude or restrict competition. The responsibility for active reporting of “concentration of operators” has been tightened, and accordingly enterprises need to conduct stricter self-assessment before mergers and acquisitions. Enterprises are encouraged to establish an anti-monopoly compliance system, to set up compliance officers or departments, conduct regular compliance training, establish and improve internal risk prevention and control mechanisms, and taking the initiative to make reports when necessary.
In recent years China continued to introduce measures to reduce taxes and fees, increase tax incentives and reduce the burden of taxpayers. The state has also strengthened supervision and cracked down on tax evasion. Cases with huge amounts of fines are not uncommon. In practice, the most notable aspect of China's tax field is the rapid development of the use of advanced technology by the tax administration, such as data sharing among various departments (banks, AMR, tax, etc.), big data analysis, etc., making enterprises and individuals more “transparent” to the tax authorities. Important trend and impacts on businesses include digital and smart taxation; tax reductions; reform of individual income tax; deepening of value-added tax reform; targeted tax incentives; and coordination of the cross-border tax system. Notable perspectives regarding administrative supervision include tax avoidance by using “tax havens”; misuse of tax preferential policies; fake invoices; evasion of individual income tax; tax governance of digital platforms; and transparency of cross-border transactions. A more mature and efficient tax system is certainly favorable for good business. Real tax incentives such as VAT refund and high-tech benefits are available also to foreign invested businesses. Of course, risks are also higher for taxpayers who intentionally evade taxes, or those who rely heavily on unfamiliar local suppliers or partners. We have also seen examples being subject to regulatory measures because of tax offenses committed by partners without their knowledge. In any case, it is suggested that every taxpayer (enterprise or individual) pay attention to their tax-related behavior at all times and maintain timely and adequate communication with tax authorities.
Since the beginning of 2024, China has introduced a series of remarkable foreign exchange facilitation measures, with particular emphasis on improving payment convenience for foreigners in China and optimizing the foreign exchange process for cross-border trade and investment. Some key measures include: Guidelines for Foreign Exchange Business under Capital Account (2024 Edition); Bank Foreign Exchange Management Measures; and improvement of payment convenience for foreigners in China. In addition to these efforts, China has also implemented stricter supervision measures aiming at preventing financial risks and combating illegal foreign exchange trading, including crackdown on false trade; enhanced monitoring cross-border fund flows; strengthened individual foreign exchange management; and penalty cases.
The People's Bank of China and the State Administration for Market Regulation jointly issued the Measures for the Management of Beneficial Owner Information, which will take effect on November 1, 2024. This regulation requires companies, partnerships and branches of foreign companies to provide identity and other information about the ultimate beneficial owners (UBO) to authorities. New enterprises should report at the time of incorporations. Existing companies shall complete reporting within one year – before November 1, 2025. The ultimate beneficial owner refers to the natural person who ultimately owns or actually controls the filing entity, or enjoys actually control of the company and benefits from the final income of the filing entity. While introducing various facilitative measures promoting cross-border economic activities and easier foreigners’ experience, the state is simultaneously strengthening regulatory within its foreign exchange management – maintaining high-pressure stance against any illicit behavior. From our recent practical experience, it is clear that banks are becoming more cautious about forex related business. We recommend that the relevant documents and written communications of important transactions should be retained in case of necessary use in the future.
Recommendations include making compliance a management priority and regular reporting subject; raising awareness amongst your personnel by providing training at all levels; maintaining regular and good contacts with local authorities; adopting and publishing a whistleblower policy; limiting your risks of rogue reporting by maintaining “fair” relationships; and preparing a contingency plan in case of compliance breach/crisis. If a breach occurs, act fast and be transparent to authorities.
The session was followed by an interesting discussion and networking.
