Sunday, September 11, 2016

Some Insights from a Q&A with the Ministry of Public Security on the Overseas NGO Law

I apologize for not posting as often as I would have liked over the past two months. I've been too busy trying to catch up on work after my summer vacation and was traveling quite a bit last month.

I thought I'd start my first post this month on the following summary of a recent Q&A session between the European Chamber of Commerce and the Foreign NGO Management Bureau of the Ministry of Public Security (MPS). The Q&A was sent to a listserve I participate in and appeared in the form of a newsletter dated August 10, 2016 from the international law firm Hogan Lovells.

It's now less than four months before the law goes into effect and so far we have had very little information from the MPS regarding the law, so this Q&A is important because it provides us some initial indications from the MPS about how it understands the law.

Below is the text of the Q&A, after which I discuss my main takeaways.

China's New Law on Foreign NGOs: Q&A

Summary of Meeting with The Foreign NGO Management Bureau, Ministry of Public Security

The Ministry of Public Security (the “MPS”) recently held a question and answer session in Beijing with the European Chamber of Commerce, in order to address various questions about the new Foreign NGO Management Law (the “NGO Law”). The responses are only verbal interpretations by MPS, so they remain subject to change, but the information offers some perspective of the relevant Chinese regulators.

Q: When will implementing rules and guidance for the NGO Law become available?

A: The MPS Foreign NGOs Management Bureau currently is in the process of creating a foreign NGO registration administration guideline and a catalogue of professional supervisory units for foreign NGOs. Those two documents will serve as implementation guidelines for the NGO Law. MPS estimates that it will release those documents online around October 2016.

Q: As to the carve-out provision under Article 53 of the NGO Law (which appears to specifically carve out from the NGO Law cooperation between foreign and Chinese schools, hospitals, and academic organizations) does the Chinese counterpart need to be the same-type institution as the foreign party?

A: Yes. Article 53 of the NGO Law is intended to address exchange and cooperation between two organizations of the same type, e.g., foreign school to Chinese school, or foreign hospital to Chinese hospital. If not the same type, MPS may need to decide on a case-by-case basis.

Q: Will those WFOEs already set up by foreign NGOs in China be permitted to continue their operations in China under grandfather approval rules? Is a WFOE still a viable option for a foreign NGO to enter into China if it uses an overseas for-profit holding company?

A: For WFOEs set up by a for-profit corporation with a foreign NGO as the ultimate shareholder, they can continue in operation as long as they will do ordinary businesses as normal for-profit companies and comply with applicable law. They can donate their money or otherwise use their money for public interests or charity purposes in China. However, the WFOE cannot be used to solely carry out “NGO” activities on behalf of the foreign NGO to promote the mission of the foreign NGO.

Q: Is a foreign university that comes to China to recruit students required to comply with the NGO Law?

A: No. Foreign universities may engage in recruiting activities in China through overseas study agencies that have a license from the Ministry of Education (MOE). These activities are not subject to the NGO Law, as they are subject to MOE regulations.

Q: What types of for-profit activities carried out or sponsored by a foreign NGO will be forbidden under the NGO Law? Will foreign NGOs still be allowed to have income generated from activities in China?

A: The NGO Law prohibits foreign NGOs (including their representative offices registered in China) from engaging in or providing financial support to any for-profit activities. However, this doesn’t mean income is not allowed to foreign NGOs. Whether it is for-profit or not-for-profit is determined by the purpose. Foreign NGOs should not focus on earning a profit and providing dividends for shareholders/owners.

According to Article 36, foreign NGO representative offices may enjoy tax benefits in accordance with law. Also, Article 21 permits foreign NGOs to use “other funds legally acquired within China” for their activities in China. This means income or revenue is allowed as long as the foreign NGO keeps its not-for-profit nature, namely, will not distribute dividends or profit to its shareholders/owners. For example, it is permissible for a foreign NGO to charge a fee for providing services or licensing intellectual property rights to a Chinese party.

Q: For those representative offices/affiliates already established by foreign NGOs and registered with the Ministry of Civil Affairs (the “MOCA”) or the State Administration for Industry and Commerce (the “AIC”), will they still be acknowledged as legally existing under PRC law and permitted to continue their operation under a grandfather and/or transition rule?

A: The NGO Law will be effective on January 1, 2017. However, there will be a transition period for existing foreign NGOs that are registered with the MOCA or AIC to complete the process of transferring from the original registration authority to MPS by submitting certain supplemental documents, and for new foreign NGOs to apply for relevant certificates and go through relevant administrative process. MPS acknowledged the registration process may take some time after the effective date of the NGO Law.

The 29 foreign foundations that were previously registered with MOCA will be handed over to MPS and will be administered by MPS.

Q: Which MPS department at which level will be mainly in charge of the foreign NGO registration process?

A: The foreign NGO registration process will be administered by the Exit and Entry Administration Authority of provincial level service portals.

Q: Is it correct that after the NGO Law becomes effective, there will be only two paths for foreign NGOs to conduct activities in China?

A: Yes. There are only two ways for foreign NGOs to carry out activities in China under the NGO Law:

1. Establish a representative office for long-term activities with the approval of the Professional Supervisory Authority and registration with the MPS; or

2. Cooperate with a Chinese Partner for temporary activities, and have the Chinese Partner apply for an approval of the competent authority and file and record the temporary activities with the MPS.

Q: Are there any further guidance/requirements on temporary activities conducted by foreign NGOs and their Chinese Partners?

A: Foreign NGOs that have not established a representative office in mainland China to carry out temporary activities must cooperate with a Chinese Partner. There are only four types of Chinese Partners. They are government agencies, people’s organizations, public institutions, or social
organizations. Corporations and individuals cannot be Chinese Partners.

Q: What is the intent of the requirement for foreign NGOs to make filings on their proposed temporary activities?

A: The reporting requirement is not to set limitations on a NGO’s temporary activities, but mostly to record the overall status of activities for statistical purposes. When temporary activities (such as disaster relief) must be carried out in emergency situations, it is permissible to file after the activities. The filing process is not expected to become a barrier for serving a good cause.

Q: For foreign corporations doing corporate social responsibility activities in China, is it still possible for them to provide funding to Chinese entities in mainland China as a donation or grant?

A: A corporate foundation based outside China cannot give money directly to Chinese entities as a donation or granting, but instead may transfer funds to an affiliate corporation or contracting third-party corporation offshore and have that corporation fund its Chinese partner for charity activities.

Q: Can foreign NGOs do fundraising in China?

A: No. A foreign NGO cannot set up entities in China to do fundraising, whether public offering or private offering.

Q: Can foreign industry associations develop membership in China?

A: No. A foreign industry association cannot develop membership in China.

My Takeaways

1)  The Q&A tells us that the MPS has set up a special department, the Foreign NGO Management Bureau, to deal with the law. It does not tell us how many staff they are planning to hire, or whether there will be a similar office set up in the provincial Public Security departments.

2)  It appears that the MPS will not have implementing regulations out before the law goes into effect. Instead the MPS states it will provide a set of guidelines, and a list of qualified professional supervisory units for foreign NGOs thinking about registering a representative office. This announcement is not all that surprising. The Ministry of Civil Affairs (MCA) is only now coming out with implementing regulations for the Charity Law which went into effect September 1, 2016 and they have had a running start because they've been working on implementing guidelines for the last few years. Unlike MCA, the MPS has no experience managing NGOs and to my knowledge has not been working on implementing guidelines. Unlike the Charity Law which has been in the drafting phase for 10 years, the Overseas NGO Law came out quite suddenly and MPS may simply not have the expertise or staff to develop the necessary implementing regulations within a short period of time.

3) The response to the question about whether WFOEs set up by NGOs can continue under the current form is interesting because it appears the MPS is willing to be flexible and allow NGOs to continue operating in China as a representative office of a WFOE as long as "the WFOE cannot be used to solely carry out “NGO” activities on behalf of the foreign NGO to promote the mission of the foreign NGO." The wording here is strange and reflects in my opinion a misunderstanding of what NGOs or nonprofits are and do, but I won't get into that here. As I read this, the WFOE needs to be running some for-profit, commercial activities alongside its "NGO" activities to justify its WFOE form. What the MPS does not clarify here is whether the use of WFOEs will only be allowed for those NGOs that already had this type of arrangement prior to the law going into effect, or will it also allow NGOs to continue this practice after the law goes into effect? In any case, the WFOE arrangement may provide a possible alternative for NGOs that will be unable to find a willing professional supervisory unit and thus be unable to register a representative office. It's not clear, however, just how long the MPS will allow this WFOE arrangement. The MPS mentions a transition period for foreign NGOs that are already registered with MCA or with the Administration of Industry and Commerce (AIC) but doesn't specify how long that transition period will be.

4) For those NGOs thinking of carrying out "temporary activities," the Q&A confirms something that I had been wondering and that is the "filing a record" (bei'an) procedure is meant to inform the MPS about the "activities" and will not require an approval from the MPS. Of course, if the activity requires approvals from other government departments, then those approvals should be submitted as part of the record, but MPS itself does not have to approve the activity for it to proceed. And the MPS also confirms that a NGO's Chinese partner for the purpose of carrying out the "temporary activity" cannot be a corporation, although I still cannot figure out why they made that rule.

5) On the question of foreign corporations working on CSR projects with Chinese partners, this appears to be ok. The MPS person answering the question confuses a foreign corporation doing CSR with a corporate foundation which is a NGO. Many foreign corporations don't necessarily do CSR through their corporate foundation, but through their CSR department which would seem to be fine as long as the CSR department is part of the company which is for-profit and thus would not come under the law.

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