Hong Kong-Invested Companies Expanding Sales in the Mainland: Compliance with New Reporting Requirements
03 June 2021
The mainland China passed and announced its 14th Five-Year Plan in March 2021, with an emphasis on expanding domestic demand, accelerating the domestic circulation and “dual circulation” development strategy, improving the business environment, and promoting further economic growth. In light of this, many Hong Kong businesses are becoming increasingly interested in tapping the mainland domestic market and are looking to set up companies in the mainland in order to capture the immense opportunities available there.
With the new Foreign Investment Law and the Implementation Regulations for the Foreign Investment Law coming into effect in early 2020, enterprises operating in the mainland that are backed by investment from Hong Kong or foreign investment (FIEs) are entitled to the same treatment (the national treatment) as domestic enterprises in terms of general business operation and taxation. In recent years, the mainland has been proactively introducing business system reform. For instance, where the establishment of general businesses is concerned, steps have been taken to revoke the examination and approval system and the minimum capital requirement. More recently, the nationwide one-stop e-government service platform has been launched to process most of the commercial, taxation and enterprise establishment formalities, making it much easier for Hong Kong companies to establish a presence in the mainland and penetrate the domestic market further.
However, Hong Kong companies still need to pay attention to the compliance requirements relating to establishing an enterprise in the mainland. In particular, following the implementation of the Measures for the Reporting of Foreign Investment Information and the Announcement on Matters Relating to Foreign Investment Information Reporting, the examination and approval/record-filing system and joint annual report system have been replaced by a foreign investment information reporting system. Under this new system, enterprises with investment from Hong Kong and other FIEs are required to submit an enterprise information report to the relevant commerce department promptly and regularly. The report must include information about the investors, ownership structure, directors, actual controllers, investment transactions and any relevant changes concerning the business, as well as its financial information.
Hong Kong companies must understand these compliance requirements clearly. Meeting the relevant legal obligations and regulations can help prevent them from being hit by damage to their credit records, operational restrictions and even administrative penalties. If and when necessary, they should seek professional help in dealing with the requirements so that they can devote more energy to running their business and developing the mainland market more effectively.
The ‘Dual Circulation’ Opportunity
Economic and trade relations between Hong Kong and the mainland have always been close. The mainland is Hong Kong’s largest export market and import source, and Hong Kong plays an important role in the mainland’s foreign trade. Hong Kong is also the mainland’s largest offshore direct investor and a major service platform for mainland enterprises seeking to “go out”.
In March 2021, the mainland announced its 14th Five-Year Plan for National Economic and Social Development and the Long-Range Objectives Through the Year 2035, which stated that during the 14th Five-Year Plan period (2021-2025) efforts will be made to propel high-quality economic growth. Action will be taken to build an effective system for expanding domestic demand, accelerate the pace of creating a complete domestic demand system, strengthen demand management, construct a vast domestic market, and become a ‘major magnet for global production factors and resources’ based on the domestic circulation system. The aim is to strengthen the leading role of domestic circulation and raise its efficiency and level to the basis of international circulation, thus promoting a positive interplay between domestic and international circulation. Against this background, many Hong Kong companies have shown great interest in developing the mainland market.
It is worth noting that in recent years the mainland has devoted continuous efforts to implementing business system reforms and optimising the business environment. According to the World Bank’s “Ease of Doing Business” rankings, mainland China’s “Starting a Business” ranking rose from 128th of 190 economies around the globe in 2015 to 27th in 2020. Many government departments in the mainland have introduced reform measures designed to streamline various administrative procedures, lower business costs, and make it easier to start a business. By the end of 2020, all provinces and cities in the mainland had launched the one-stop e-government service platform for starting a business, which allows enterprises to fill in one form online and collect all necessary documentation from one window offline. This service includes processing various business licences, helping to make company seals, collecting tax control equipment and VAT invoices, and handling social security and housing fund registration, which are all procedures and formalities that enterprises have to complete before starting business. The time needed to process enterprise establishment and registration has now been shortened to an average of four working days or less.
Since the central government published the Outline Development Plan for the Guangdong-Hong Kong-Macao Greater Bay Area in February 2019, Guangdong, Hong Kong and Macao have been actively implementing the development plan, creating joint development opportunities for the economic growth of the three places. The measures introduced so far have made it easier for Hong Kong companies to do business and seek growth in the Greater Bay Area (GBA) and to identify other market opportunities in the GBA and the rest of the mainland. In recent years, moreover, the market regulation department in the mainland has combined with financial institutions, including Bank of China (Hong Kong), to launch services allowing Hong Kong investors to submit applications in Hong Kong for the establishment of Hong Kong-funded enterprises in certain cities in Guangdong province . This has greatly helped Hong Kong enterprises looking to venture north to do business and to reduce investment costs.
As a result, many Hong Kong companies are now eager to tap the domestic market in mainland GBA cities as well as regions outside the GBA. They are also keen to set up Hong Kong-backed enterprises in the mainland in order to build distribution and logistics networks there which can directly promote Hong Kong products and services, using the GBA as the springboard for penetrating deeper into the domestic market.
New Law Helps Hong Kong Companies Venture North
Mainland China’s new Foreign Investment Law and its Implementation Regulations, which came into effect in January 2020, have also made it easier for Hong Kong companies to set up a presence in the mainland directly. Hong Kong and Macao investors investing in the mainland can do so in accordance with the Foreign Investment Law and its Implementation Regulations. The law states that all foreign investments are subject to “pre-establishment national treatment”, negative list administration, and the foreign investment information reporting system. Details include:
- Market access: “Pre-establishment national treatment” plus negative list
“Pre-establishment national treatment” means granting foreign investors and their investments the same treatment as mainland domestic investors and their investments at the stage of establishing a business. “Negative list” refers to the special administrative measures implemented by the state prohibiting or restricting the access of foreign investment in designated sectors. While foreign investors are not allowed to invest in sectors where foreign investment is prohibited in the negative list, they can invest in sectors where foreign investment is restricted in the negative list provided they meet the conditions set out in the list. For sectors outside the negative list, national treatment is granted to foreign investment.
However, under the latest Special Administrative Measures (Negative List) for the Access of Foreign Investment (2020 Edition) which came into effect on 23 July 2020, the number of areas in which foreign investors may not invest has been reduced from 40 in the 2019 edition to 33. The mainland has further liberalised or removed restrictions on foreign investment access in sectors such as financial services, infrastructure, commercial vehicle manufacturing, radioactive mineral smelting, processing, nuclear fuel production and agriculture. As well as the national negative list, the mainland authorities have also promulgated Special Administrative Measures (Negative List) for Foreign Investment Access in Pilot Free Trade Zones (2020 Edition), in which the number of items on the negative list was cut from 37 in the 2019 edition to 30. All pilot free trade zones across the country have introduced pilot measures, such as allowing foreign investment in the production of processed Chinese herbal medicine, and allowing the establishment of wholly foreign-owned vocational education institutions. In the circumstances, Hong Kong-backed enterprises and other FIEs can currently enjoy the same treatment as their mainland domestic counterparts in the majority of commercial sectors, including general trade, wholesale and retail.
- Full implementation of foreign investment information reporting system
The mainland China has fully implemented the foreign investment information reporting system, whereby the establishment and change of FIEs are no longer subject to case-by-case examination and approval but to information reporting instead. In the early days of the mainland’s reform and opening-up, following the implementation of the so-called “three foreign investment laws” (governing wholly foreign-owned enterprises, Sino-foreign equity joint ventures and Sino-foreign co-operative joint ventures), the government exercised strict control over the access of foreign investment and adopted a case-by-case examination and approval system.
All matters pertaining to the establishment and change of FIEs needed prior examination and approval from the competent commerce department in the past. FIEs could only apply to the market regulation department for registration or record-filing once approval had been granted by the commerce department. Generally speaking, it was only after approval had been granted by the commerce department that the relevant documents (such as joint venture contracts, articles of association, and equity transfer agreements) of the FIE could become effective.
In September 2016, the NPC Standing Committee passed the Decision of the Standing Committee of the National People's Congress on Amending Four Laws Including the Law of the People's Republic of China on Wholly Foreign-Owned Enterprises, while the Ministry of Commerce announced the Interim Measures for Record-filing Administration of the Establishment and Change of Foreign-invested Enterprises on the same day. Under the provisions of the documents, which came into effect on 1 October 2016, foreign investment across the country was no longer subject to pre-establishment national treatment and negative list management, with the negative list replacing the case-by-case examination and approval system. Under this management model, the establishment and change of FIEs not on the negative list no longer needed prior examination and approval from the competent commerce department, and FIEs could apply directly to the market regulation department for registration of change before completing the record-filing procedures for establishment or change via the foreign investment integrated management system of the commerce department. However, when it comes to foreign investment in sectors subject to special administrative measures, prior case-by-case examination and approval by the competent commerce department still applies. By 2020, as a result of the ongoing liberalisation of measures governing the access of foreign investment, over 97% of the cases of establishment and change of FIEs were subject to record-filing administration.
With the introduction of the new Foreign Investment Law and its Implementation Regulations in January 2020, as well as the implementation of the Measures for the Reporting of Foreign Investment Information and Announcement on Matters Relating to Foreign Investment Information Reporting, the foreign investment information reporting system has now replaced the previous examination and approval and record-filing system as well as the joint annual report system. From 1 January 2020, records concerning the registration of establishment and changes of foreign investors or FIEs no longer have to be filed separately with the competent commerce department. Instead, they can be registered and filed directly with the market regulation department, and by reporting to the enterprise registration system, all the relevant investment information can be submitted to the competent commerce department.
Before the introduction of the information reporting system, even FIEs subject to record-filing administration had to submit information via two channels - the commerce department’s integrated foreign investment management information system and the market regulation department’s enterprise registration and enterprise credit information publicity system. Following the launch of the information reporting system, these two channels of information submission have been merged into one. Now foreign investors and FIEs only need to submit their investment information to the commerce department via the enterprise registration and enterprise credit information publicity system. This is much more convenient for FIEs. Under the foreign investment information reporting system, prior examination and approval by or record-filing with the commerce department is no longer required. This has not only simplified the registration procedures for FIEs and significantly streamlined the content and scope of information submission, but has also facilitated information sharing among various departments and reduced the burden of information reporting on businesses.
However, it should be noted that under the information reporting system, enterprises are required to submit their investment information promptly and bear responsibility for the truthfulness, accuracy and completeness of the reports. At the same time, the commerce department must now tighten its supervision over the information reported and explore the feasibility of cross-department joint supervision. The FIEs must comply with the relevant regulations in their daily business management and information reporting and fulfil their obligations regarding the submission of information under the information reporting system.
Complying with Information Reporting Requirements
Foreign investors who carry out investment activities directly or indirectly within the territory of the mainland China can be divided into four categories: (1) foreign investors who directly establish companies and partnerships (including in banking, securities, insurance and other financial sectors) in the mainland; (2) foreign businesses which engage in production and operational activities in the mainland; (3) foreign businesses which establish permanent representative offices engaged in production and operational activities in the mainland; and (4) FIEs which invest in establishing enterprises (including multi-level investment) in the mainland . All four categories must comply with the requirements on information reporting. In accordance with the Announcement on Matters Related to Foreign Investment Information Reporting (MOFCOM Announcement No. 62 ), the types and content of the reports to be submitted include:
- Initial Report
A foreign investor establishing an FIE in the mainland China or engaging in equity mergers and acquisitions (M&A) in a domestic non-foreign-funded enterprise must submit an initial report through the Enterprise Registration System. The report must contain basic information about the enterprise, the investor, its actual controller and investment transaction.
- Foreign investors acquiring shares, equities, property shares or other similar rights in enterprises in the mainland by way of merger, acquisition or other channels are one type of foreign investment governed by the Foreign Investment Law. Currently, foreign investors’ M&A activities are regulated mainly by the Foreign Investment Law and its Implementation Regulations, Provisions on Mergers and Acquisitions of Domestic Enterprises by Foreign Investors, and Measures for the Administration of Strategic Investment in Listed Companies by Foreign Investors.
- The ultimate actual controller of the investor is any natural person, enterprise, government institution or international organisation which ultimately exercises control over an enterprise or organisation directly or indirectly through holding shares, equities, property shares, voting rights or other similar rights in the enterprise. If the actual controller is outside the mainland China, action should be taken to trace whether it is a foreign listed company, foreign natural person, foreign government institution (including government fund) or international organisation.
- Change Report
Where there are changes to information in an FIE’s initial report, a report on changes related to the basic information about the enterprise, the investor and its actual controller must be submitted through the Enterprise Registration System. Only items of change need to be submitted. If such changes does not involve changes in an enterprise’s registration (record-filing), the FIE must submit a change report through the Enterprise Registration System within 20 working days of the change being made.
- If the enterprise makes a resolution on the change according to its articles of association, the time when it makes the resolution shall be taken as the time when the change occurred; if other laws and regulations prescribe certain conditions for the change to take effect, the time when such conditions are met shall be the time when the change is deemed to have been made.
- Listed companies with foreign investment and companies listed in the National Equities Exchange and Quotations are only required to report information on changes to their investors and shareholders when the percentage of change in the foreign investor’s shareholding exceeds 5% cumulatively or the foreign party’s controlling or relative controlling status changes.
- Deregistration Report
A deregistration report submitted by an FIE or information about the conversion of an FIE into a domestic-funded enterprise must be forwarded by the market regulation department to the competent commerce department.
- Annual Report
FIEs must submit an annual report through the National Enterprise Credit Information Publicity System between 1 January and 30 June each year:
- FIEs established in the current year must submit an annual report starting the following year. The content of the report should include basic corporate information, information about the investor and its actual controller, information on the enterprise’s operation and assets and liabilities, and so on. Where an enterprise is subject to special administrative measures for foreign investment access, information on the relevant industry’s permission must also be submitted.
- Disclosure and Correction of Information
Regarding the submission of investment information, information required to be disclosed in accordance with the Interim Regulation on Enterprise Information Disclosure and information which foreign investors and FIEs have agreed to disclose must be made public through the National Enterprise Credit Information Publicity System and the Foreign Investment Information Reporting System. If a foreign investor or FIE has not reported, misreported or omitted to report the relevant investment information, it must promptly make a supplementary report or corrections. Where such information has not been reported, misreported or omitted in the initial report or the change report, the foreign investor or FIE must make a supplementary report or corrections through the Enterprise Registration System.
Before 30 June every year, if there is misreporting or omissions in the annual report, the foreign investor or FIE concerned must make a supplementary report or corrections through the National Enterprise Credit Information Publicity System. After 1 July, the foreign investor or FIE concerned must apply to the competent commerce department to make a supplementary report or corrections through the Foreign Investment Information Reporting System. After 1 July, a foreign investor or FIE which has not submitted an annual report before the time limit must go through the relevant procedures in accordance with the regulations of the competent commerce department and market regulation department for remedy.
Liability for Violations and Remedial Measures
Hong Kong businesses should study carefully the system of supervision and administration described above, as well as the relevant legal requirements on enterprises registered in the mainland. In accordance with the Measures for Reporting Foreign Investment Information, if investment information is found not to have been reported, or has been misreported or omitted, the competent commerce department will ask the foreign investor or FIE concerned to make a supplementary report or corrections within 20 working days. Spot checks will be conducted by law enforcement inspectors on a random basis. Matters covered in the spot checks and results of the inspections are made public through the Foreign Investment Information Reporting System. Supervision to ensure that a foreign investor or FIE has fulfilled its information reporting obligations will be carried out via regular random inspections.
Under the information reporting system, a foreign investor or FIE is responsible for the truthfulness, accuracy, completeness and timeliness of the information in its report. Where a foreign investor or FIE fails to submit investment information as required, it will bear the legal responsibilities of that failure - such as making a supplementary report or corrections, paying a fine or having its violations publicised in the information system and included in the credit information publicity system. The details are as follows:
- Administrative Penalties
For those which fail to make corrections within 20 working days as ordered by the competent commerce department, a fine of RMB100,000 to 300,000 will be imposed. Failure to make corrections within the specified period and committing the following at the same time will result in a fine of RMB300,000 to 500,000:
- Deliberately evading the information reporting obligations or concealing the truth, providing misleading or false information in the report;
- Committing errors in reporting important information, such as whether the industry in which the enterprise operates is subject to special administrative measures on foreign investment access, or information on the enterprise’s investor and its actual controller;
- Committing violations again within two years of having had administrative penalties imposed for failing to submit investment information as required;
- Other circumstances deemed serious by the competent commerce department.
- Penalty Information Made Public
Those violating the information reporting obligations and administrative penalties imposed by the competent commerce department can have such violations publicised by the department in the Foreign Investment Information Reporting System and included in the credit information system in accordance with the relevant requirements of the state. Departments related to market supervision, foreign exchange, customs and taxation can share among them information on administrative penalties imposed on foreign investors and FIEs.
- Inclusion in List of Abnormal Businesses
If an enterprise fails to submit its annual report within the specified period or does not co-operate with the market regulation department in the latter’s spot checks on its annual report and where the circumstances are serious, the market regulation department will include the enterprise in the List of Abnormal Businesses and publicise it in accordance with the law. If an enterprise has not fulfilled its obligations after having been on the list for three years, it will be included in the List of Untrustworthy Enterprises with Serious Violations. The legal representative and person-in-charge of an enterprise put on the List of Untrustworthy Enterprises with Serious Violations is not allowed to take up the post of legal representative and person-in-charge of any other enterprises for three years.
- Restrictions on Business Operation
If an FIE has been subject to administrative penalties or included in the List of Abnormal Businesses or the List of Untrustworthy Enterprises with Serious Violations, joint sanctions and various restrictive and prohibitive measures will be taken against it by government departments and financial institutions. These will impact its daily business operations, including financing, loans, government procurement, project tendering and bidding, the import and export of goods, production permits, eligibility assessments, and so on.
- Removal of Violation Records
If an enterprise has had administrative penalties imposed on it for violating its information reporting obligations, records of these penalties will be made public on the Foreign Investment Information Reporting System, and will not be automatically deleted even after a fine is paid. As specified in the Measures for Reporting Foreign Investment Information, a foreign investor or FIE which has been penalised can apply to the local competent commerce department for the record to be deleted from the Foreign Investment Information Reporting System if it has paid the fine, made the necessary corrections and fulfilled the relevant obligations, and has not violated its obligations again within one year. After verifying the information, the competent commerce department can remove such records from the system. If an enterprise does not make such an application, the violation records will remain on the system, which may have a negative impact on the enterprise.
 Since 28 July 2017, the former Administration for Industry and Commerce of Guangdong Province, together with Bank of China (Hong Kong) and Bank of China Guangdong Branch, jointly launched Guangdong-Hong Kong Business Registration and Banking Services Connect, whereby Hong Kong individual or corporate investors wishing to establish foreign-invested enterprises in certain cities in Guangdong province (including Dongguan, Huizhou, Jiangmen, Zhongshan, Foshan and Shantou) can submit the application form and relevant information to Bank of China (Hong Kong). Moreover, Hong Kong investors can now use the “Shenzhen and Hong Kong Pass” Commercial Service offered by the Market Supervision and Regulation Bureau of Shenzhen Municipality jointly with Bank of China (Hong Kong), Chong Hing Bank and China Merchants Bank and Industrial and Commercial Bank of China to apply, through these banks in Hong Kong, for permission to establish Hong Kong-invested enterprises in Shenzhen’s Qianhai and Shekou free trade zones. The said Hong Kong banks can help them apply for business licence, open basic account, verify capital, and carve official seal.
 FIEs establishing an enterprise (including multi-level investment) in the mainland China do not need to submit a report separately. All information should be forwarded by the MSA to the competent commerce department.
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- Mainland China
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