Guidelines for Chinese Investors Engaging in Outbound Direct Investments.
In recent times, there has been a notable increase in outbound investments from China, marking a prominent trend. Due to the seemingly abundance of opportunities offered by foreign countries, Chinese enterprises are increasingly expanding their investments overseas, seeking to capitalize on these advantageous prospects beyond their domestic market. This article examines the requisite conditions and procedures that Chinese Investors must adhere to when engaging in Outbound Direct Investments (ODI).
Requirements:
To engage in Outbound Direct Investment (ODI), Chinese enterprises must meet a set of rigorous requirements to ensure that only qualified and responsible companies participate in ODI, aligning with China's national interests and priorities. The requirements are follows:
Enterprises applying for ODI must be legally established in China, with a minimum of one year of operational history. A good credit record is essential, and the company must not have any history of illegal activities. This ensures that only reputable and law-abiding companies are eligible for ODI.
Investment projects must align with China's national industrial policy and encouragement direction. This means that projects should focus on industries and sectors that are prioritized by the Chinese government. Additionally, investment projects must not involve prohibited industries or sensitive areas, and they typically require a minimum investment amount, which varies depending on the department.
Companies must demonstrate that the source of funds used for overseas investment is legitimate. They must also show that they have sufficient funds or financing capacity to support the project. To verify this, companies must provide a third-party audit report from the previous year, which should not show a loss. Financial statements must demonstrate a return on net assets or earnings ratio and an asset-liability ratio.
Depending on the nature of the investment, companies may be required to submit additional documents, such as detailed business plans, feasibility studies, and national security reviews, especially for investments in sensitive industries. These documents help ensure that the investment aligns with China's national security interests and regulatory requirements.
Finally, companies may need to meet additional requirements specific to their project, such as environmental protection regulations, technology transfer agreements, and other industry-specific requirements. By meeting these requirements, Chinese enterprises can ensure that their ODI projects are viable, sustainable, and aligned with national priorities.
Procedure:
The major regulators of outbound investments in China are; The Ministry of Commerce (MOFCOM) the National Development Reform Commission (NDRC) and the State Administration of Foreign Exchange (SAFE). When a Chinese enterprise contemplates overseas investment, compliance with regulatory procedures mandated by the NDRC rules and other relevant regulations is crucial. This filing system serves to safeguard domestic investors’ rights, promote fair international competition, and provide legal protection for overseas investments. The following procedures must be followed:
The NDRC procedure: Provided for under Regulation No. 11
The determination of whether an investment project necessitates approval or mere notification to the NDRC is primarily dependent on three criteria: the project’s sensitivity, it’s classifications as a direct or indirect investment, and the investment volume. The potential sensitivity classification of a sector can be obtained from an official catalog published by the commission.
Regulation No. 11 outlines the requirements for obtaining approval from the NDRC for both sensitive and non-sensitive projects.
For sensitive projects, Chinese investors must obtain verification from the NDRC for both domestic investors and domestic investors through controlled overseas enterprises. This process involves a comprehensive review of the transaction’s merits, and the NDRC must make a decision within 20 working days.
In contrast, non-sensitive projects require Chinese investors to submit a record-filling at the NDRC, which is expected to process the filling notice with 7 days after accepting the relevant submission. Additionally, for non-sensitive projects exceeding USD 300 million, a project investment report must be submitted.
The approval and registration process with the Ministry of Commerce is the same as that of the NDRC. Therefore, the determination of the applicable procedure here also hinges on both the nature of the investment and the specific sector it is intended for.
The procedure at the Ministry of Commerce (MOFCOM)
Investors interested in engaging in outbound investments are required to obtain their “Outbound Investment Certificate for Enterprises” from the MOFCOM as a preliminary step.
This application is made online and upon submission of the application, the applicant must provide the original documents to the MOFCOM. Once the MOFCOM confirms the validity of all submitted documents, feedback regarding filling or approval will be provided within a week.
Following the registration process at both MOFCOM and NRDC, investors can proceed to register at the bank for outbound investment purposes and the opening of a special-purpose bank account. The bank will handle the SAFE registration process, serving as the representative of the SAFE. The subsequent cross-border transfers or payment must be conducted through the designated account.
In conclusion, the procedure for outbound investments in China involves obtaining necessary certifications from MOFCOM and NDRC, followed by registration at a designated bank for the management of funds and compliance with SAFE regulations. This structured process not only ensures regulatory adherence but also facilitates the smooth execution of investments abroad. By streamlining administrative procedures and offering clear guidelines, China’s outbound investment framework provides investors with greater certainty and access to opportunities abroad, ultimately fostering economic growth.
Franco Fornari
Senior Head of Department
Foreign Legal Affairs
Email: Fornari@wjngh.cn
Karen Chipita
Foreign Legal Affairs Department
Wang Jing & GH Law Firm
Email: Chipita@wjngh.cn
All the information provided is for general purposes only and may not cover all relevant topics. It is based on our experience as a law firm and is intended for informational sharing purposes only. Therefore, this information should not be considered a formal legal opinion or advice on PRC Law.
