22 March 2021

China regulatory and legal round up | January 2021

Foreign Investment and General Corporate

  1. Draft law for Hainan Free Trade Port

On January 4, 2021, China’s National People’s Congress released a draft Law of the Hainan Free Trade Port (“Hainan Free Trade Port Law”) (see here for the full text in Chinese).on its website. The draft Hainan Free Trade Port Law was available for public opinion from January 4, 2021 until January 29, 2021. The draft Hainan Free Trade Port Law has eight chapters and 56 articles, which cover trade, investment, financial and tax incentives, ecological and environmental protection, industrial development, and talent support. The main contents of the draft Hainan Free Trade Port Law are as follows:

  • Free Trade

The Hainan Free Trade Port will implement low-intervention, high-efficiency customs supervision. Enterprises operating within the Hainan Free Trade Port can freely carry out trade in goods and related activities in accordance with the Hainan Free Trade Port Law

  • Free Investment

China will relax market access to the Hainan Free Trade Port. The special list of market access to the Hainan Free Trade Port will be formulated by the relevant departments of the State Council in conjunction with Hainan Province. The Hainan Free Trade Port will implement investment facilitation measures focusing on process supervision and will gradually formulate the “market access upon commitment” system. The specific measures will be formulated by Hainan Province together with relevant departments of the State Council

  • Entry and Exit

The Hainan Free Trade Port will establish an efficient and convenient entry and exit management system, including the gradual implementation of a wider range of visa-free entry policies, extension of visa-free stay time, optimization of exit and entry inspection management, and convenience with regard to exit and entry customs clearance

  • Cross Border Trade

The Hainan Free Trade Port will establish a cross-border capital flow management system that meets the needs of high-level trade and investment liberalization and facilitation. Gradually, the Hainan Free Trade Port will promote full convertibility under foreign debts of non-financial enterprises and facilitate cross-border trade settlement and the free and convenient flow of funds between the Hainan Free Trade Port and overseas countries

  • Industrial Development and Talent Support

China will support the Hainan Free Trade Port to build an open and ecological service industry system, and priority will be given to active development of the real economy, such as tourism, modern service industries, and high-tech industries

  • Conversion of Agricultural Land

The State Council authorizes the Hainan Provincial People’s Government to consider and approve:

  • the conversion of agricultural land to construction land; and
  • land expropriation (which would otherwise require approval from the State Council),

in accordance with the needs of the construction of the Hainan Free Trade Port. The Hainan Free Trade Port will actively promote:

  • the integrated and coordinated development of urban-rural and reclamation areas;
  • a new model of land use for small towns and cities; and
  • the capitalization of agricultural land.
  1. 143 Additional sectors encouraged in Hainan Free Trade Port

On 27 January, 2021, the National Development and Reform Commission, the Ministry of Finance and the State Taxation Administration jointly issued the Catalogue of Encouraged Industries in the Hainan Free Trade Port (Fa Gai Di Qu Gui No. 120 [2021]) (“Catalogue”) (see here for the full text in Chinese).. The Catalogue has two parts. The first part outlines industries that are currently encouraged in the existing national Catalogue of Encouraged Industries for Foreign Investment. The second part covers 143 additional encouraged industries specifically for the Hainan Free Trade Port, which predominantly comprise manufacturing, construction, information transmission, software and information technology services, scientific research and technical service, transportation, warehousing and postal services, agriculture, forestry, animal husbandry, fishery, wholesale and retail, accommodation and catering, water conservancy, environment and public facilities management, education, health and social work, and sports and entertainment. The contents of the Catalogue will be adjusted as required by the needs of the construction of the Hainan Free Trade Port.

  1. China issues legislation to block unjustified extra-territorial application of foreign legislation and measures

On January 9, 2021, the Ministry of Commerce (“MOFCOM”) issued Rules on Counteracting Unjustified Extra-territorial Application of Foreign Legislation and Other Measures (“Rules”) (see here for the full text in Chinese), effective immediately. The Rules will serve as a countermeasure to foreign extra-territorial sanctions and export control restrictions that may adversely impact PRC businesses and individuals.

The Rules request that PRC individuals and legal entities (including but not limited to PRC-incorporated subsidiaries of non-PRC parents) must file a report with the MOFCOM with respect to any extra-territorial measure that prohibits or restricts their ability to engage in normal economic dealings, trade or other activities with a third country entity or individual. Failure to file a report with the MOFCOM may result in penalties commensurate to the severity of the circumstances.

Once the report is filed, a group led by the MOFCOM will consider the extra-territorial application of foreign legislation and determine whether it is unjustified. Among other things, the determination should be made with reference to:

  • whether international law or the basic principles of international relations are violated;
  • the potential impact on China’s national sovereignty, security and development interests; and
  • the potential impact on the legitimate rights and interests of PRC individuals or entities.

If the working group identifies unjustified extra-territorial application of foreign legislation, the MOFCOM will issue an order prohibiting the recognition of and compliance with that foreign legislation.

It is advisable that the foreign investors pay attention to the litigation risks created under the Rules when dealing with PRC companies.

  1. PBC and SAFE issued Guidelines for Anti-money Laundering and Counter-terrorism Financing for Cross-border Business of Banks (for trial implementation)

On February 1, 2021, the People's Bank of China (“PBC”) and the State Administration of Foreign Exchange (“SAFE”) jointly promulgated the Guidelines for Anti-Money Laundering and Counter-terrorism Financing for Cross-border Business of Banks (for Trial Implementation) (Yin Fa [2021] No.16) (“Guidelines”), which came into force on February 19, 2021 (see here for the full text in Chinese).

“Cross-border business”, as defined in the Guidelines, refers to the cross-border receipt and payment of RMB and foreign currencies, and the domestic and foreign business activities of domestic and foreign institutions and individuals. According to the Guidelines, when handling cross-border business, banks shall strictly comply with the laws and regulations on anti-money laundering, and effectively perform the duties of “knowing your clients, knowing your business and conducting due diligence” in accordance with the Guidelines. The Guidelines stipulate that banks are required to identify, evaluate, monitor and control the risks of money laundering and terrorist financing in cross-border business, including by:

  • client background investigation;
  • business review;
  • continuous monitoring; and
  • information and materials retention and reporting.

The Guidelines regulate the banks’ duties with respect to client due diligence, business risk identification and due diligence, reporting systems and data retention, and internal control, as set out below.

  • Client Due Diligence

Banks shall implement the principle of "knowing your clients", including through:

  • verifying the identity of clients;
  • reasonably determining the level of risk that each client poses in regard to money laundering and terrorist financing; and
  • implementing measures that correspond with the level of risk posed by the client.

 

  • Business Risk Identification and Due Diligence

Banks shall regularly assess the money laundering and terrorist financing risks of cross-border businesses and reasonably determine the risk levels. When handling cross-border businesses for clients, banks shall implement the principle of "know your business", including through:

  • examining the compliance, authenticity and reasonableness of transactions and the consistency of the cross-border receipts and payments; and
  • conducting continuous monitoring of subsequent transactions and capital flows.
  • Reporting System and Data Retention

Banks shall establish and implement a system for recording and reporting large-value and suspicious transactions. Banks shall completely and properly keep information such as client identity data and transaction records, as well as the relevant materials and records reflecting client due diligence conducted by banks.

  • Internal Control

Banks shall establish and implement an organizational structure for internal control. This internal control system must include requirements addressing the prevention of money laundering and terrorism financing in cross-border businesses. These requirements must be incorporated into any and all processes for internal inspections, risk identification, and assessments and audits.

IP

  1. SPC and CNIPA issued Notice on establishment of online litigation and matching mechanism for IP disputes

On January 16, 2021, the Supreme People’s Court of China (“SPC”) and the China Intellectual Property Administration jointly issued the Notice on the Establishment of an Online Litigation and Settlement Matching Mechanism for Intellectual Property Disputes (“Notice”) (see here for the full text in Chinese), aiming to establish a diversified resolution mechanism to coordinate intellectual property disputes online and improve the quality and efficiency of intellectual property mediation. Significant aspects of the Notice are as follows:

  • The Notice requires the establishment of a “general office to general office” online litigation and settlement coordination mechanism

The Notice requires that the SPC and the CNIPA should coordinate to promote the establishment of an online settlement coordination mechanism. The CNIPA is to guide all levels of the local intellectual property management departments to establish a coordination mechanism or platform that will operate on all levels of the People’s Courts. Intellectual property dispute mediation organizations and mediators must have access to the People’s Courts online platform. The online platform must allow for parties to:

  • conduct the full process of a mediation on the platform;
  • apply for judicial confirmation; and
  • access mediation documents.

 

  • The Notice emphasizes the division of responsibilities within the litigation and mediation coordination mechanism

Pursuant to the Notice, the Third Civil Tribunal and the Intellectual Property Court Tribunal of the SPC are responsible for guiding and urging the intellectual property trial judges of the People's Courts at all levels to use the mediation platform to:

  • carry out dispute assignment;
  • entrust mediation work; and
  • conduct professional training for intellectual property dispute mediators.

Intellectual property management departments at all levels are responsible for:

  • coordinating with the People’s Courts at the same level in litigation and mediation;
  • guiding other institutions, such as the intellectual property protection centers, to establish mediation organizations and registration system for mediators; and
  • organizing mediation organizations and mediators to carry out online mediation work.
  • The Notice stipulates the work plan of the online litigation and mediation coordination mechanism

The Notice clarifies the work plan for:

  • the collection and management of information regarding mediation organizations and mediators;
  • confirmation of specifically invited mediation organizations and mediators;
  • the process for coordination of online litigation and mediation; and
  • strengthening of online audio and video mediation.

Labor

  1. SPC issued Interpretation on application of law in labor dispute cases

On December 29, 2020, the SPC published the Interpretation of the Supreme People's Court on Issues Concerning the Application of Law in the Trial of Labor Dispute Cases (I) (“New Judicial Interpretations”) (see here for the full text in Chinese), which came into force on January 1, 2021. The SPC had previously issued four judicial interpretations and two approval documents on labor dispute cases, which were issued to provide clarity on the dispute resolution procedure applying to labor disputes. Each of the previous judicial interpretations and two approval documents have been superseded by the New Judicial Interpretations.

The New Judicial Interpretations combine and reorganize the contents of the four previous judicial interpretations and update the interpretations to incorporate the Employment Contract Law. One of the most significant changes is that the New Judicial Interpretations stipulates that the Civil Code is the legal basis for the courts to hear labor dispute. Other notable changes in the New Judicial Interpretations include:

  • Redefining the scope of labor dispute cases to be heard by the courts.
  • Confirming the status of labor relations between residents in Hong Kong, Macao and Taiwan and employers in Mainland China.

Article 33 of the New Judicial Interpretations stipulates that “foreigners or stateless persons who sign labor contracts with employers in China without having obtained employment certificates in accordance with the laws will not be supported by the People’s Court if the parties request confirmation of the existence of employment relationships. Foreigners who hold a ‘Foreign Expert Certificate’ and a ‘Foreigner’s Work Permit in China’ and have signed labor contracts with employers in China can be deemed to have formed an employment relationship.”

On July 28, 2018, the State Council issued the Decision on Cancelling a Batch of Administrative Licensing, which officially cancelled the employment permits for Taiwan, Hong Kong, and Macao residents working in mainland China. To reflect this decision, the New Judicial Interpretations abolished relevant restrictions on Hong Kong, Macao, and Taiwan residents working in mainland China.

  • Reinforcing the effects of employers' internal rules and regulations

In the New Judicial Interpretations, the power to make relevant internal rules and regulations has been removed from Article 4 of the Labor Law. This power is now found in Article 4 of the Employment Contract Law. Under the old interpretations, the legal purpose of such rules and regulations was to form “the basis for the people’s courts to hear labor dispute cases”. In the New Judicial Interpretation, the purpose of the rules and regulations is to outline “the basis for determining the rights and obligations of parties.” This change has further clarified the procedures for formulating internal rules and regulations and the purpose and effect of such internal rules in court trials.

  1. Beijing lowered the proportion of basic medical insurance paid by employers

On January 11, 2021, Beijing Municipal Medical Insurance Bureau and Beijing Municipal Finance Bureau issued the Notice on Adjusting the Proportion of Basic Medical Insurance for Urban Employees (see here for the full text in Chinese). Pursuant to such notice, starting from January 2021, the employers’ contribution ratio for basic medical insurance (including maternity insurance) of urban employees in Beijing will be reduced by 1%, from 10.8% to 9.8%; while the personal contribution ratio will remain unchanged.

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Should you need any additional information, or if you would like to discuss how recent updates in Chinese law may affect your business, please feel free to contact us.

Disclaimer

This client alert is not intended to be legal advice. Readers should seek specific legal advice from KWM legal professionals before acting on the information contained in this alert.

 

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