CHINESE UPDATE — Impact of China’s Law on the Activities of Overseas NGOs
The new Law on NGO provides guidance for the registration, operating activities, financial management, and penalties, etc. of or for Overseas NGOs within China.
The Law of the People’s Republic of China on the Management of Activities of Overseas Non-Governmental Organizations within the Territory of China (“Management Law”) was adopted at the twentieth session of the Standing Committee of the twelfth National People’s Congress on April 28, 2016 and will become effective on January 1, 2017. It can be expected that the implementation of the Management Law will have a profound impact on the activities of Overseas NGOs within China. Below is a brief analysis of the impact of the Management Law, focusing on certain questions that may concern Overseas NGOs.
The Management of the Overseas NGOs’ WFOE in China
The current practice is that the Ministry of Civil Affairs mainly administrates the Overseas NGOs, but it has been very difficult for an Overseas NGO to duly establish an entity in China. As an alternative, some Overseas NGOs have chosen to establish a wholly foreign owned enterprise (“WFOE”) or representative office in China, which should be approved by the Administration for Industry and Commerce. After January 1, 2017 (the day of the Management Law’s effectiveness), the Overseas NGO are able to apply for the registration of a representative office or filing for provisional activities in China.
The administration of a WFOE and the administration of Overseas NGOs within China are subject to different regulatory rules. The Management Law is silent on whether the WFOEs established by Overseas NGOs before the effectiveness of the Management Law will be required to be closed or otherwise regulated. If an Overseas NGO keeps the WFOE but the WFOE engages in any activities which are prohibited under the Management Law (such as fundraising in China in the name of an Overseas NGO), the WFOE shall be exposed to penalty.
Fundraising Activities of Overseas NGOs
According to the Management Law, neither Overseas NGOs nor their representative office may engage in fundraising within China.
In practice, Overseas NGOs may engage in fundraising in the name of a domestic qualified entity (by way of signing a management contract with a qualified entity). On the surface, it seems that the arrangement may be feasible. However, the Overseas NGO might be considered engaging in fundraising if actual control is found to exist between the Overseas NGO and the domestic qualified entity. Another common practice is for an Overseas NGO to set up a WFOE which will organize meetings and generate revenues from conference fees and other means. Under this model, if there is no evidence that the real motives of charging is to raise funds for the activities of Overseas NGOs when collecting the conference fees, the WFOE may claim it as its normal operating income and have it remitted abroad after fulfilling taxation obligations. In this case, the compliance risk may be mitigated to a certain extent.
The Management Law does not restrict Chinese natural persons, legal persons or other organizations to be donors for fundraising carried out abroad. In determining whether the fundraising is carried out abroad, factors which will be jointly considered include identifying the site of collection for donation, the subject for which the donations are made and its bank account and the provisions of the donation agreement. It should be noted that the donation remitted overseas shall be subject to foreign exchange control policies, and the donors will not be able to enjoy taxation deductions on these donations.
The Management Law sets forth express provisions on the activities of Overseas NGOs: the Overseas NGOs shall carry out activities within their registered business scopes and registered area; and the activities of Overseas NGOs will also be regulated by the competent business administration authorities apart from the Ministry of Public Security (as the registration authority of the representative office of Overseas NGOs).
The directory of the competent business administration authorities has yet to be promulgated. It is foreseeable that the initial directory of the competent business administration authorities probably will not cover every possible business scope of existing Overseas NGOs in China but only some typical business fields which have already been relatively clearly divided. For those sensitive or ambiguous fields, such as those involving national security, religion, and etc., we cannot rule out the possibility that no competent business authority will be included in the directory and thus such Overseas NGO will not be able to apply to the authority for setting up an office in China yet.
The Management Law is the result of years of management experience of the PRC authorities related to Overseas NGOs. As a whole, the Management Law continues the existing policy, and clarifies the grey areas. The Management Law also consolidates the existing legislation of the incorporation, management and the activities of Overseas NGOs. Ancillary rules of the Ministry of Public Security and other relevant authorities are anticipated for the implementation of the Management Law.