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Revised PRC foreign investment catalogue – implications for real estate

In brief: The National Development and Reform Commission and the Ministry of Commerce issued on 31 October 2007 a revised version of China's Foreign Investment Catalogue, which sets out the industries for which foreign investment is encouraged, restricted or prohibited. The amendments to the Catalogue took effect on 1 December 2007. Partner Nigel Papi (view CV) and Senior Associates Maggie Ma and Ross Keene look at the impact of the changes on the real estate sector.

- Background
- 2007 amendments to the Catalogue
- Key implications of the changes

Background

Foreign investment in China is subject to the Foreign Investment Industry Guidance Catalogue (the Catalogue). The Catalogue categorises foreign investment in particular industries in China as either 'encouraged', 'restricted' or 'prohibited'. If an industry is not specifically referred to in the Catalogue then investment in that industry is considered to be 'permitted'.

If an industry is categorised as prohibited then no approvals for foreign investment will be granted. The key implications of falling into one of the other three categories (encouraged, restricted or permitted) are as follows.

- If the project is encouraged or permitted then, provided the required documentation is submitted and in order, and the proper procedures are followed, the approval process should be reasonably straightforward and the authorities can generally be expected to approve the project. If the total investment amount of the project is US$100 million or more, the application for approval must be made with the Ministry of Commerce (MOC) and the National Development and Reform Commission (NDRC) at the State level.

- By contrast, if the project is in the restricted category, State-level MOC and NDRC filing is required if the total investment amount of the project reaches US$50 million, and regardless of the level at which the application is made, the MOC and/or the NDRC may delay, suspend or withhold their approval for the project at their sole discretion.

- Projects in the industries set out in the Catalogue can be wholly foreign-invested unless the Catalogue specifies otherwise. In some cases the Catalogue will require that a Chinese party has a controlling stake or that the project be by way of a Sino-foreign equity or cooperative joint venture. Such restrictions are imposed not only on investments in restricted industries, but also on a number of encouraged industries. If an industry is not referred to in the Catalogue (and so is permitted), then generally such a project can be wholly foreign-owned.

- Investments in encouraged industries enjoy certain preferential policies, for example lower income tax rates (although these will be phased out under the new Enterprise Income Tax Law) and exemptions on duty for equipment imported for the company's own use. No such preferential treatment is extended to projects in the restricted or permitted categories.

2007 amendments to the Catalogue

The following changes have been made in the real estate sector under the revised version of the Catalogue that was issued by the MOC and the NDRC on 31 October 2007, which took effect on 1 December 2007:

- 'real estate secondary market transactions and real estate agency and brokerage' has been added to the restricted category;

- the 'development of ordinary residential property' has been removed from the encouraged category, so it is now simply in the permitted category; and

- the 'construction and operation of large scale theme parks' has been removed from the restricted category, and so is also now in the permitted category.

The following references in the Catalogue relevant to real estate remain unchanged:

- 'development of large pieces of land' stays in the restricted category, and such projects are still required to be by way of equity or cooperative joint venture. Note that this refers to land development as opposed to the development of the buildings on the land (which is discussed below); and

- the 'construction and operation of high-ranking hotels, villas, high-class office buildings and international exhibition centres' also remains in the restricted category.

Key implications of the changes

Real estate secondary market transactions and real estate agency and brokerage

The breadth of the concept of 'real estate transactions in the secondary market' is unclear. Generally a 'secondary market transaction' means the purchase of a property for the first time (and also any subsequent transactions) after the property has been developed. However, it is not clear whether:

- the development and sale of the property by the initial developer is also part of this 'secondary market' (and so restricted); or

- these activities are considered part of the primary market and so permitted.

It does seem clear though that the purchase of the property from the initial developer, and then any subsequent sales and purchases of the property, as well as the holding and leasing of such properties, will be part of the secondary market and so restricted.

Formal clarification of the definition of 'secondary market transactions' from the NDRC and MOC is expected.

Approval requirements

For those projects that are considered to involve secondary market transactions, the key implication will be that the MOC and/or the NDRC may delay, suspend or withhold their approval for such projects at their sole discretion, and if the total investment amount of the project is US$50 million or more the approval must be obtained from the MOC and the NDRC at the State level.

Filing

We note that, notwithstanding the position under the Catalogue, at the very least a filing with the MOC at the State level is now required for all foreign-invested real estate enterprises by virtue of Circular 50 by the MOC and the State Administration of Foreign Exchange, which was issued in May 2007.

Development of 'ordinary residential property'

'Ordinary residential property' is defined differently in different parts of China, but generally this refers to developments of residential units with an area of less than 120 square metres each, and with a purchase price less than 120 per cent of the average purchase price of residential properties in the same geographic area in the relevant city. As this category of development is now relatively mature in China, the authorities no longer consider it necessary to extend preferential treatment to such developments. However, moving such projects from the encouraged to the permitted category should not affect the approvals process for such projects.

Source: Allens Arthur Robinson

Original Lawyer NEWS Article HERE.