Outbound and Overseas Investment Filing (ODI)

1. Introduction

At present, China's economy is experiencing a double-cycle development system at home and abroad, and scientific and technological progress and industrial transformation are injecting new impetus into China's economic development. How to effectively develop "new quality productive forces" according to local conditions will become a new task of China's economic development. Despite the intensification of geopolitical competition between China and the United States and the increase of uncertainties and risks in the global environment, the enthusiasm of Chinese enterprises to go to sea has not diminished, and they are still riding the waves of the sea. According to the statistics of the Ministry of Commerce and the State Administration of Foreign Exchange, in 2024, the foreign direct investment of the whole industry in China will reach 1,159.27 billion yuan, an increase of 11.3% (US $162.78 billion, an increase of 10.1%). Among them, Chinese domestic investors have made non-financial direct investment in 9,400 overseas enterprises in 151 countries and regions around the world, with a cumulative investment of 1,024.45 billion yuan, up 11.7% (US $143.85 billion, up 10.5%) [1]. It seems that "do not go to sea, you are out" has become the development consensus of many enterprises.

In this context, the first step that Chinese enterprises need to complete before going to sea is to complete the Overseas Direct Investment approval/filing (hereinafter referred to as "ODI approval/filing"). For the avoidance of doubt, the ODI approval/filing introduced in this paper is mainly based on the real economy enterprises going to sea, and the "shareholder turnover" structure ODI arising from the establishment of the red chip /VIE structure is not within the scope of this paper. Based on this, the author will combine his own practical experience, focusing on the ODI approval/filing of the relevant declaration process and review points.

2. Basic concepts of overseas investment

Article 2 of the Measures for the Administration of Overseas Investment (Decree No. 3 of the Ministry of Commerce of 2014) stipulates that the term "overseas investment" as mentioned in these Measures refers to the behavior of an enterprise lawfully established within the territory of the People's Republic of China to own a non-financial enterprise overseas or to acquire the ownership, control, operation and management rights and other rights and interests of an existing non-financial enterprise through new establishment, merger and acquisition or other means.

Article 4 of the Measures for the Administration of Overseas Investment by Enterprises (Order No. 11, 2017 of the National Development and Reform Commission) stipulates that the term "overseas investment" as mentioned in these Measures refers to the overseas enterprises of the People's Republic of China, directly or through their control, by investing assets, rights and interests, or providing financing, guarantees, etc. Investment activities that obtain overseas ownership, control, management rights and other relevant rights and interests.

According to the above provisions, we can find that: (1) all the investment entities are domestic enterprises, and the essence of domestic enterprises includes enterprises in Hong Kong, Macao and Taiwan controlled by the investment entities, as well as non-enterprise organizations such as public institutions and social organizations [2]; (2) Material disclosure of the overseas final destination business entity; (3) The right to control should be interpreted broadly, that is, directly or indirectly owns more than half of the voting rights of the enterprise, or does not have more than half of the voting rights, but can control the business decisions, finance, personnel, technology and other important matters of the enterprise.

In short, whether a domestic enterprise is setting up a new subsidiary or a new production line overseas (hereinafter referred to as "greenfield investment") or acquiring the equity or assets of an overseas target company (hereinafter referred to as "cross-border M&A"), as long as these domestic enterprises have acquired the interests of an overseas company directly or indirectly, they need to complete the relevant ODI approval/filing procedures. At present, ODI approval/filing is still the most important way for Chinese enterprises to comply with the sea.

3. Regulatory framework for overseas investment

Under the current system of laws and regulations, the Ministry of Commerce of the People's Republic of China (hereinafter referred to as the "Ministry of Commerce"), the National Development and Reform Commission (hereinafter referred to as the "Development and Reform Commission") and the State Administration of Foreign Exchange (hereinafter referred to as the "SAFE") are mainly responsible for supervising the overseas investment of Chinese enterprises.

It should be noted that according to the Notice of the State Administration of Foreign Exchange on Further Simplifying and Improving the Foreign Exchange Management Policy of Direct Investment (Huifa [2015] No. 13), since June 1, 2015, foreign exchange registration and related matters under overseas direct investment have been directly handled by banks, and SAFE has realized indirect supervision by entrusting banks to conduct foreign exchange audit. Therefore, in practice, for the last step of foreign exchange registration and capital exit, such work is mainly handled by the bank where the enterprise is registered. In addition, the above-mentioned regulatory authorities usually carry out regular supervision work through online monitoring, interview letters and random checks and verification.

4. Application of ODI approval/filing

China's regulatory authorities are mainly divided according to the type and amount of overseas investment projects, and respectively implement ODI approval and record management. For enterprises' overseas investment involving sensitive projects, the investment amount of more than 300 million US dollars, the implementation of approval management; The overseas investment of enterprises under other circumstances shall be subject to record management.

According to the relevant provisions of the Measures for the Administration of Overseas Investment by Enterprises, the Catalogue of Sensitive Industries for Overseas Investment (2018 edition), The General Office of the State Council forwarding the Notice of the Ministry of Foreign Affairs of the Ministry of Commerce of the National Development and Reform Commission on Further Guiding and Regulating the Direction of Overseas Investment (State Administration of Development [2017] No. 74) and other relevant provisions, the above sensitive projects include: (1) Projects involving sensitive countries and regions; (2) Projects involving sensitive industries.

Sensitive countries and regions include:

Countries and regions that have not established diplomatic relations with China;

Countries and regions where wars or civil unrest are taking place;

Countries and regions that need to restrict investment by enterprises in accordance with international treaties and agreements concluded or acceded to by China;

Other sensitive countries and regions.

Sensitive sectors include:

Development, production and maintenance of weapons and equipment, development and utilization of cross-border water resources;

News media, real estate, hotel;

Cinema, entertainment, sports clubs;

Establish equity investment funds or investment platforms without specific industrial projects overseas.

Non-sensitive projects refer to projects that do not involve sensitive countries and regions and do not involve sensitive industries. In practice, for general enterprises, the ODI declaration of most offshore projects is based on the record class, and the approval class is supplemented.

5. Declaration process and review points of overseas investment

(1) Application process and materials

At present, China's enterprises ODI project declaration mainly in the form of online declaration. The reporting enterprises can enter the unified platform of the business system of the Ministry of Commerce and the national Overseas Investment management and service network system respectively to upload the relevant written materials and electronic files. After the online review and feedback materials (if any) are supplemented and passed, the relevant written materials will be submitted offline. In terms of the order of declaration, the enterprise should first apply to the relevant Ministry of Commerce and the National Development and Reform Commission for ODI approval/filing (it is worth noting that there is no sequence in the implementation of the Ministry of Commerce and the National Development and Reform Commission, in order to improve the efficiency of certificate processing, it is recommended that the applicant apply to the two departments at the same time); After the approval of the above two departments, finally apply to the bank to complete the foreign exchange registration procedures. As far as the declaration cycle is concerned, depending on the complexity of the enterprise declaration project and the degree of data completion, the ODI approval cycle is usually between 1-3 months.

(2) Key points of review

Greenfield investment projects

Enterprises need to focus on the following contents in the declaration:

1. Construction content and scale. Including construction site, construction content, construction scale, engineering and technology scheme, construction period and schedule, main product scale and target market. Where resource exploitation is involved, the amount of resources that can be exploited, the categories, the amount of equity resources available to the Chinese side and the development plan shall be stated.

2. Implementation of supporting conditions. Including project employment, land, materials and arrangements; Conditions and arrangements of roads, railways, ports, energy supply and other related infrastructure; Whether the project meets the local technical, environmental protection, energy consumption, safety and other standards.

3. If a newly established overseas enterprise (such as a newly registered overseas subsidiary or joint venture) does not involve new production lines, mergers and acquisitions of assets and other investment activities, it shall state the name, place of registration, registered capital, legal representative or person in charge, enterprise type, business scope and other basic information of the proposed overseas enterprise. The description of the implementation of supporting conditions can be appropriately simplified.

Cross-border merger and acquisition projects

Enterprises need to focus on the following contents in the declaration:

1. Acquisition of the target. Equity purchase items should include the acquired enterprise name, registration place, registered capital, legal representative or person in charge, enterprise type, business scope and other basic information; Basic information such as the name, nationality or place of registration of the main shareholder, and the proportion of shares held; Distribution of main assets (industry and location), production and operation, and financial status; Listing status and latest stock market performance (if any); The position of the acquired enterprise and its products and technology brands in the same industry, etc. Asset acquisition items shall include the composition and distribution of the acquired assets (industry and location), the basic information of the asset owners (name of the main owner, nationality or place of registration, holding ratio, etc.), and the evaluation or valuation determined by professional intermediaries (if any).

2. Acquisition plan. It includes the acquisition target, the acquisition price (indicating the valuation and pricing method and the main reference factors), the implementation subject, the transaction method, the schedule, etc., as well as the equity structure diagram of the acquisition target before and after the acquisition, which is traced back to the final actual controller.

Other notes

1. Investment entities

In practice, some enterprises will choose to set up an empty shell and no substantial operation of the company in the short term to invest overseas, and such "quick set up and quick out" landing scenarios are usually not approved by the regulatory authorities. In addition, in the case of low paid-in registered capital of the domestic parent company and difficult operating conditions, the actual scale of overseas investment is far greater than the actual operation and investment capacity of the investment subject, and such "snake swallowing elephant" or "mother and child big" investment merger and acquisition methods are also difficult to be recognized by the regulatory authorities. In this regard, it is suggested that the reporting enterprise should choose the investment entity established for more than one year and meet the substantial business conditions, and the overseas investment project should be related to the main business, to avoid large amounts of non-main business investment situation.

2. Country risk

The applicant should also focus on the country risks of the final investment destination, including but not limited to political risks, security risks, economic risks, social risks and environmental risks. In this regard, it is recommended that the reporting enterprises systematically elaborate the above main risks, and comprehensively list how to take appropriate and effective prevention and response measures.

3. Continuous reporting

The applicant shall upload the corresponding project completion report form online through the network system within 20 working days from the date of completion of the project. The date of completion of the project usually takes the completion of the construction of the new project, the completion of the equity or asset delivery of the target of the investment and acquisition, and the completion of the investment by the Chinese side as the starting point. In addition, in addition to the above project completion report, the enterprise is also required to complete the overseas direct investment stock equity registration before June 30 each year. If the above procedures are not completed in time, the enterprise may suffer administrative penalties from the regulatory authorities.

6. Conclusion

While Chinese enterprises are actively engaged in business expansion in overseas markets, they must also pay further attention to the requirements and challenges of global geopolitics, international trade, localization of production in overseas markets, and localization of management teams. Before going to sea, Chinese enterprises should make the top-level design of strategic planning and strengthen the balance between legal risk control and commercial value realization. Only on the premise of compliance with the sea, Chinese enterprises can achieve the long-term development goal of "global layout, stable and far-reaching".

Footnote:

[1] Ministry of Commerce 2024 China's industry-wide foreign direct investment concise statistics.

[2] Article 61 of the Measures for the Administration of Overseas Investment by Enterprises, institutions, social organizations and other non-enterprise organizations shall carry out overseas investment with reference to these Measures.

Article 62 of the Measures for the Administration of Overseas Investment by Enterprises, where an investment entity directly or through an enterprise under its control invests in Hong Kong, Macao or Taiwan, these Measures shall be implemented with reference. Where an investment entity invests overseas through an enterprise in Hong Kong, Macao or Taiwan under its control, these Measures shall be implemented with reference.