Alert 05.02.16
Alert
Alert
By Jerald A. Jacobs,
03.02.17
The coming into effect of the new Foreign NGO Law and relevant regulations initiate a new era for supervision of foreign NGOs in China. Foreign NGOs, domestic NGOs, CSR departments of multinational companies and other stakeholders working with foreign NGOs in China should assess their operations carefully and comprehensively under the new Foreign NGO Law to avoid any non-compliance under the law.
On April 28, 2016, the Standing Committee of the National People’s Congress passed the Law on the Management of Overseas NGO’s Activities in China (境外非政府组织境内活动管理法 in Mandarin, Foreign NGO Law or the Law1). The Foreign NGO Law stipulates the basic principles and general administrative framework for foreign NGOs’ activities in China. In particular, the law requires that foreign NGOs carrying out activities in China register a representative office or file temporary activities with the Ministry of Public Security (MPS) and its local counterparts (which are the enforcement authorities of the Foreign NGO Law). On November 28 and December 20, 2016, MPS released the Guidelines on Organizational Registration and Temporary Activities Reporting under the Foreign NGO Law2 (境外非政府组织代表机构登记和临时活动备案办事指南3 in Mandarin, MPS Filing Guideline) and Catalogue of Fields of Activities and Categories of Projects and Professional Supervisory Units (境外非政府组织在中国活动地域和项目目录、业务主管单位目录 (2017)4 in Mandarin, Catalogue of Fields and PSU List) on its website. Although the new law provides a new legal regime for foreign NGOs’ activities in China, many questions are arising in the implementation of the law, and require attention from foreign NGOs.
In our May 2016 client alert, we introduced the basic legal framework established by the Foreign NGO Law. Below we discuss our views regarding the implementation of the Law as well as the questions and concerns raised after the Law came into effect.
China’s leadership has been concerned about the role of foreign NGOs in China and wanted to obtain more control over their activities. At the same time, the government has taken steps to remove direct government control over domestic NGOs. In addition, the Ministry of Civil Affairs (MCA), the main supervising authority for domestic NGOs, has issued various lists of illicit offshore associations, most of which are registered offshore by Chinese citizens and which the MCA believes are engaging in illicit fund raising and membership drives in mainland China.
Recent Implementation of the Law
After release of the Law in April 2016, MPS, the governing authority for the Foreign NGO Law, has tried to be available for discussions with foreign government officials, foreign NGOs and other stakeholders. Since May 2016, MPS has met with several diplomats and delegations from the U.S., Australia, Germany and other European countries for discussions regarding the new law.
On November 28, 2016, MPS released the MPS Filing Guidelines. The MPS Filing Guidelines don’t provide much interpretation of the law as previously expected by foreign NGOs, but stipulate the procedures and document requirements for (1) registration of foreign NGO rep offices, (2) filing of the annual activity plan and annual inspection, (3) filing of temporary activities, and (4) other miscellaneous issues.
On December 20, 2016, MPS issued the Catalogue of Activities and PSU List on its website. Such catalogue includes more than 40 PSUs at the national level and their provincial counterparts, which includes 43 government agencies and 4 social groups with strong governmental background. Surprisingly, certain government agencies that foreign NGOs used to work with previously are not included in the catalogue, such as the Ministry of Foreign Affairs and the China Academy of Social Sciences. Four domestic social groups are authorized to act as PSUs, such as the All China Women’s Federation. Foreign NGOs are expected to select PSUs for their rep offices based on their major area of activities in China.
In January, 2017, the first batch of 31 foreign NGO representative offices were registered at public security bureaus (PSB) in Beijing, Shanghai and Guangdong. Most of the first 20 foreign NGO rep offices registered at the Beijing PSB were formerly registered at MCA as rep offices of foreign foundations, and transferred to Beijing PSB by submitting certain supplemental materials, which took approximately two weeks. Most of the foreign NGOs registered in Shanghai and Guangdong are chambers of commerce and industrial associations. Many of those transferred foreign NGO rep offices have been granted a geographic area of “China” rather than several specific provinces.
In January 2017, the tax authorities and banks in Beijing received guidance on how to handle the tax registration and how to open bank accounts for the newly established foreign NGO rep offices.
Hot Topics and Concerns among Foreign NGOs
Although the Law came into effect on January 1, 2017, many foreign NGOs still have questions regarding the procedures for rep office registration and temporary activity filing as well as understanding of the Law. Below are some of the key concerns and open questions:
1. PSU Selection
According to the Foreign NGO Law, to register a rep office, a foreign NGO needs to obtain a consent letter from a PSU agreeing to act as the PSU for the rep office. However, the Law and the MPS Filing Guidelines haven’t specified the procedures for selecting PSUs. The good news is that some government authorities at both the national and provincial levels have indicated to their foreign NGO partners that they are drafting internal or public procedures for application for consent letters.
Many foreign NGOs are engaged in multiple areas of activities in China. The MPS Filing Guidelines require those foreign NGOs to locate a PSU according to its major area of activities in China. However, for some large international organizations, without clear guidance from the authorities, it is very hard to decide its “major area of activities.” Further, a PSU is required by the Law to consult with other PSUs when a program of the rep office falls outside the jurisdiction of more than one PSU, but the Law doesn’t specify how PSUs should coordinate with each other. We note that some leading international NGOs have already contacted their proposed PSUs regarding this issue, but most PSUs don’t know how the coordination will work and are not willing to do the coordination.
The biggest issue for finding a PSU is that the designated government authorities are not incentivized to act as PSUs. The Foreign NGO Law requires certain government authorities to supervise foreign NGOs, but those government authorities are not able to see the benefit from supervising foreign NGOs directly. Except for those which already have a close partnership with a relevant government organ, most foreign NGOs are still struggling to locate a government authority to act as a PSU. We note that even government authorities in different areas may have completely different attitudes. For example, a leading foreign NGO has contacted the MCA and its various provincial counterparts. They found that provincial MCAs in southwest China appear to be more positive than those in big cities, such as Beijing and Tianjin.
Although certain local PSBs are trying to push other government authorities to act as PSUs for foreign NGOs, more clear and detailed procedures for locating PSUs will be needed to facilitate foreign NGOs’ operations in China.5
2. Definition of “Activity”
Any foreign NGO carrying out “activities” in mainland China has to either register a rep office or file for temporary activities, but the Law itself and officials at local PSBs are not yet able to give a clear definition of “activities.” The law enforcement authorities require that foreign NGOs consult with them on a case-by-case basis.
Based on our experience helping foreign NGOs communicate with officials at MPS and local PSBs, the following examples have been obtained regarding an “activity” under the law:
3. Industrial associations, chambers of commerce and professional societies under the Law
Literally, the Foreign NGO Law applies to all kinds of foreign NGOs, but it is drafted in a way that covers foreign foundations and other charity groups. Industrial associations, chambers of commerce and professional societies (collectively Mutual Benefit NGOs) are completely different types of foreign NGOs from charity groups but unfortunately are also covered by the new law. For example, most Mutual Benefit NGOs are member-driven organizations, but the new Law prohibits developing any membership program in China.
How the Foreign NGO Law applies to associations has been a key topic among the foreign association groups. We note that MPS and local PSBs have stated realizing the gap between the Law and the common practices of Mutual Benefit NGOs, but the law enforcement authorities still need time to learn and understand how Mutual Benefit NGOs work and how they differ from other NGOs. Foreign Mutual Benefit NGOs need to work closely with the authorities to develop an approach that fits their practices and also complies with the law.
4. CSR Departments of MNCs under the Foreign NGO Law
Aside from foreign NGOs, other stakeholders should also pay attention to compliance under the law, especially for large multinational companies. MNCs used to work with international NGOs in their programs in China. Prior to the Law, although most corporate foundations of MNCs have no subsidiary or rep office in China, many MNCs used their overseas corporate foundations to work with Chinese domestic charitable groups, a practice that could now raise concerns under the Foreign NGO Law.
5. Exemption of foreign schools, hospitals, research institutes and academic organizations
Article 53 of the Foreign NGO Law stipulates that communications and cooperation between foreign schools, hospitals, natural sciences and engineering technology research institutes, or academic organizations and their counterparts in China are exempted from the Law.
Article 53 could be useful for any foreign NGO that falls into the exempted category and can locate a partner in mainland China.
6. Membership
The Foreign NGO Law explicitly prohibits foreign NGOs from “developing membership” in China. Based on our experience working with PSBs in several provinces, local PSBs tend to adopt a stricter explanation of such article, and prohibit foreign NGO from conducting any membership development activities within mainland China. Such a strict approach will run counter to the needs of Chinese professionals wishing to join such global associations or gain membership and / or certification in such entities.
The general impression is that the Foreign NGO Law prohibits developing membership in China, but the law actually states “Representative offices of foreign NGOs and foreign NGOs who have temporary activities in China should not develop members in mainland China” rather than simply say “Foreign NGOs should not develop members in China.” Therefore, it remains to be explored whether overseas foreign NGOs that have no rep office or temporary activities in mainland China are exempted from this prohibition.
Despite the foregoing, the Law doesn’t provide a definition for “membership.” If not called “membership,” some foreign NGOs are very likely to be allowed to establish programs in which participants have no membership rights but can subscribe to news regarding developments in the industry, upcoming conferences and events, etc.
7. How to apply for tax exemption for foreign NGO rep offices?
Many leading university professors with expertise regarding the Foreign NGO Law have mentioned recently that the tax authority has been working with MPS on regulations regarding tax exemption.
We note that even for domestic NGOs, it is still difficult to obtain tax exemption from the tax authorities. However, as noted above, China is also reforming the domestic NGO sector, including making it easier for domestic NGOs to apply for tax exemption.
Further, in late February, the State Council submitted a draft revision to the Enterprise Income Tax Law to the National People’s Congress for its review. According to the press release, the revision includes possible tax breaks for donations made by enterprises to charities.
8. How Foreign NGO Law relates to the new Charity Law and other laws
In September 2016, the Charity Law of PRC came into effect. MCA and its local counterparts have been issuing new regulations to implement the Charity Law. However, it remains unclear how the Charity Law interacts with the Foreign NGO Law. For example, social organizations are listed as one of the options for foreign NGOs to select Chinese partners for their temporary activities, and the social organizations need to obtain a consent letter from the “relevant authority.” However, it remains unclear who is the “relevant authority,” how to apply for a consent letter, what materials need to be provided, etc.
9. Other Issues
The Foreign NGO Law requires that a foreign NGO rep office submit its annual report for the previous year to the PSU before January 31. Since the annual report requires a large amount of information, including an audited financial statement, this requirement may not be feasible for many foreign NGO rep offices in practice. We believe revision of this requirement will be needed.
Our Suggestions
Each foreign NGO has unique characteristics, and “one size does not fit all.” However, we suggest each foreign NGO adopt the following steps to consider how the Law applies to itself:
1. Analyze operations in China comprehensively
We have been working with many foreign NGOs in exploring their China strategies under the new law. We suggest instead of rushing to establish a foreign NGO rep office, each foreign NGO should review its current and future activities and projects in China, and analyze the legal risks under the new Law comprehensively to determine whether a rep office or temporary activity filing is needed.
2. Closely monitor the latest developments of the Law
Although the Law came into effect on January 1, 2017, many pending issues remain to be clarified by the MPS and its local counterparts.
Previously many foreign NGOs learned from officials of MPS and local PSBs that a foreign NGO should register a rep office in every province where it has an office site. However, many of the first batch of foreign NGOs that were transferred from MCA to Beijing PSB were approved to cover all provinces of China. Moreover, recently, some PSBs (such as Beijing) have allowed the Beijing registration to include offices in other provinces.
3. Work closely with Chinese government agencies and partners in exploring your China strategy under the new Law
The Foreign NGO Law requires a foreign NGO to obtain permission from a PSU for registration of its rep office and work with a Chinese partner to file for its temporary activities. Officials at MPS emphasize that a PSU should play a key role in the supervision of daily operations of foreign NGO rep offices. We note that some international NGOs have had difficulty locating a PSU for their rep offices, which underlines the importance to work closely with government authorities. Prior to the Foreign NGO Law, some international organizations may have had no cooperation with government agencies and simply relied on their own efforts for implementing projects in China, which will be more difficult under the new law.
Although the Foreign NGO Law explicitly prohibits developing members, officials at local PSBs in Beijing and Shanghai confirmed that foreign NGOs can incorporate membership programs of domestic NGO counterparts into its own membership program, given that such members are not called members of the foreign NGO.
Pillsbury’s China lawyers have been working with various foreign NGOs, foreign chambers of commerce, and consulting companies in exploring their strategies in China for several years, and have been helping many foreign foundations, industrial associations, professional societies, service providers in the non-profit sector and various foreign NGOs regarding how the Foreign NGO Law applies to them.
1. Official English translation of the Foreign NGO Law is available at the website of MPS: http://www.mps.gov.cn/n2254314/n2254409/n4904353/c5548987/content.html
2. Official English translation of the MPS Filing Guidelines is available at the website of MPS: http://www.mps.gov.cn/n2254314/n2254409/n4904353/c5587463/content.html
3. Chinese version of the MPS Filing Guidelines is available at the website of MPS: http://www.mps.gov.cn/n2254314/n2254409/n4904353/c5556625/content.html
4. Chinese version of the Catalogue of Activities and PSU List is available at the website of MPS: http://www.mps.gov.cn/n2254314/n2254409/n4904353/c5579013/content.html
5. For example, some provincial PSBs (such as Ningxia) have established a coordination mechanism with other provincial government authorities; and certain provincial PSB officials (such as Sichuan) are offering help to foreign NGOs which are having difficulties locating PSUs.