The Administrative Measures on Overseas Investments (order No. 3) plays a major role in regulating commerce authorities’ filing and approval of overseas investments. Although the Ministry of Commerce (MOFCOM), together with six other ministries and commissions, issued the Provisional Measures on the Reporting for Filing (Approval) of Overseas Investments (document No.24) on 18 January 2018, this document was mainly intended to define the role and responsibility of each department, and the information sharing mechanism, and did not make any substantive change to order No.3.
Four years have passed since order No.3 was brought into effect, and although the approach to different issues by commerce authorities of different regions may vary, the same authorities at all levels have generally accumulated abundant experience through practice. The authors of this article aim to shed some light on the latest practices in respect of overseas investments of commerce authorities for the reference of interested enterprises.
Ultimate destination-based principle. The ultimate destination of overseas investments constitutes a critical part of the filing and approval by commerce authorities. The ultimate destination-based principle helps commerce authorities understand as to where the overseas investments actually flow. In fact, order No.3 in 2014 already made clear that the Certificate of Overseas Investments by Enterprises (certificate) issued by commerce authorities is proof that the overseas investments by an enterprise have obtained filing or approval, and shall be issued in accordance with the ultimate destination of the overseas investments.
Later on, the Notice by the General Office of the Ministry of Commerce of Effectively Conducting the Relevant Supervision Work of Overseas Investments (document No. 663) further clarified the method of determining an overseas enterprise at the ultimate destination.
In practice, the strictness of the approach by different commerce authorities varies when it comes to the issue of ultimate destination. In some regions, the authorities strictly adhere to order No.3 and document No.663, requiring domestic investors to disclose the complete transaction structure established to conduct the overseas investments, to explain where the investment used for projects, and continuous production and operation, flows to, and to clarify the condition of the project company.
Some other commerce authorities do not approach the issue in such a strict manner. Therefore, there are cases where some domestic investors completed the filing procedure by disclosing only the SPV (special purpose vehicle) company incorporated overseas without disclosing the ultimate destination.
Document No. 24 reiterated the ultimate destination-based principle, of which article 2 specifies that the overseas enterprises completing the filing or approval procedure are the enterprise at the ultimate destination, and that the ultimate destination refers to the location where the investment used for projects, and continuous production and operation, ultimately flows to.
According to the further interpretation by the staff in charge at MOFCOM’s Department of Co-operation, all the shell companies incorporated in the process of investing the enterprise at the ultimate destination will not pass the filing or approval procedure.
From the recent practice by commerce authorities it can be seen that enterprises should disclose the overseas investment pathway and all the shell companies involved in the documents prepared for filing or approval. It is almost impossible to successfully file a single invested overseas holding company that serves as a mere platform on the investment pathway.
Where an overseas platform company has already passed the filing procedure, if the domestic company ultimately invests to other countries by increasing capital at the platform company, commerce authorities will ask the domestic company to sort out the investment pathway, make clear the ultimate destination of investments, issue the certificate to the enterprise at the ultimate destination, and reclaim and cancel the certificate obtained by the platform company.
Isolation between pathway company and actual operating company. At the initial stage of cross-border mergers, Chinese enterprises tend to neglect the importance of transaction structure design. Some enterprises have not incorporated any overseas pathway companies, but invested in the ultimate destination directly through the domestic company. Some incorporated overseas pathway companies that also engage in actual business and operation.
With the accumulation of experience in terms of “going global”, and given the factors such as tax and risk prevention, it has been a norm to have a multi-layer overseas SPV company structure. Some enterprises intend to make the pathway company engage in actual business and operation. However, commerce authorities have tightened their supervision on this issue after spotting many problems and risks, including avoidance of legal regulation, tax evasion, and tax avoidance.
Based on recent feedback the authors have received from MOFCOM, the principle is that the pathway company must be isolated from the actual operating company. In other words, pathway companies cannot conduct actual business and operation. The authors hold that this principle is applied to facilitate the supervision of commerce authorities. At present, no clear regulation searched through open sources states that the pathway company must be isolated from the actual operating company. Although pathway companies cannot conduct actual business and operation, they can serve as the pathway companies for multiple projects simultaneously.
Order No. 3 was issued several years ago, but the practices of overseas investments by Chinese enterprises have developed tremendously in these past years. Therefore, the interpretation and application of order No. 3 by commerce authorities are also changing continually to adapt to the current context. Before any amendment is made to order No. 3, enterprises should consult professional advisory bodies and maintain close communication with MOFCOM to complete filing or approval in a timely manner.
Wang Jihong is a partner and Liu Ying is a senior associate at Zhong Lun Law Firm