A game changer? The PRC Foreign NGO Law

NGO-LAWThe Law of the PRC on Management over Foreign NGOs’ Activities in China (Foreign NGO Law), took effect on 1st January, 2017. It is the third of a series of laws that were proposed in 2015 to address the growing concerns of China’s leadership about national security and foreign interference with China’s domestic affairs[1] 

Sherry Gong and Sherry Hu of Hogan Lovells examine the law and find that the final version includes some improvements from previous drafts and appears to relax certain previously proposed restrictions and burdens on foreign NGOs’ activities in China. However, they also note that many issues are still not properly addressed.

Following the adoption of the Foreign NGO Law, the Ministry of Public Security (MPS)—the registration and administration authority of foreign NGOs—issued two main implementing rules: (i) the Guidelines on the Registration Procedures for Representative Offices and Record-Filing for the Temporary Activities of Foreign NGOs (Registration Guidelines) on 28th November, 2016; and (ii) the Catalogue of Areas and Projects for the Activities in China of Foreign Non-Governmental Organisations, and the Catalogue of Supervisory Authorities for Foreign Non-Governmental Organisations (2017) (National Catalogue) on 20th December, 2016. Some local MPS at the provincial level (e.g., Guangdong Province, Shanghai and Tianjin) have also formulated and published their own catalogue applicable within their jurisdictions (the Local Catalogues). These are basically the same as the National Catalogue, except they specify the supervisory authorities as being the counterpart authorities at the provincial level.

New regulatory scheme for foreign NGOs’ activities in China

Two paths to conduct activities in China  

Foreign NGOs will now only be able to conduct activities through one of two paths in China:

  1. Through a foreign NGO’s representative office (RO) in China, which is the only type of legal form that Foreign NGOs are allowed to establish in China under the Foreign NGO Law.
  2. As a ‘temporary activity’ approved by and filed with the relevant authorities (such record-filing is valid for up to one year unless a new record filing is done with the local MPS at the provincial level).

Dual-layer approval and registration mechanism

The Foreign NGO Law sets out a ‘dual layer’ of supervision over foreign NGOs’ activities in China. As to the first layer: (1) for establishing a RO, the foreign NGO shall secure the approval from the supervisory authority (listed in the National Catalogue and the Local Catalogues); or (2) for carrying out temporary activities, a foreign NGO is required to be sponsored by a Chinese partner (which can be a government agency, a people’s organisation, a public institution or a social organisation), who must then obtain the relevant authorities’ approval of such temporary activities.

The second layer falls under the authority of the MPS and its branches at provincial level, and consists of either its approval of the registration application for a RO establishment or the record filing with the MPS for the temporary activities.

Unclear scope of carve-out

The Foreign NGO Law includes the following, rather vague definition of a foreign NGO: “non-profit, non-government social organisations that have been legally established outside China, such as foundations, social organisations, and think tanks, etc.”[2]  Particularly unhelpful is the inclusion of “etc.” as part of the definition.

Although the Foreign NGO Law also introduces a carve-out as provided under Article 53 (Carve-out Provision),[3] with the scope broadened compared to the previous draft, it can still end up leaving more questions than it resolves. Instead of simply exempting foreign schools, hospitals and research institutions and academic organisations from the definition of foreign NGOs, the Carve-out Provision only specifically lists exchange and cooperation activities between foreign and domestic schools, hospitals, natural science and engineering research institutions or academic organisations.

Thus, foreign schools, hospitals, natural science and engineering research institutions and academic organisations with a domestic counterpart in compliance with applicable PRC laws can take some comfort that they do not require registration as a foreign NGO’s representative office, nor do they need to secure an approval and record filing for temporary activities from the relevant government agencies under the Foreign NGO Law. However, at the same time, they must refrain from engaging in or providing financial support to for-profit activities, political activities and illegally supporting or sponsoring religious activities. More troubling is whether any other activities of foreign schools, hospitals, research institutions or academic organisations that are not engaged in exchange or cooperation with a domestic counterpart, or research institutions or academic organisations that are engaged in exchanges or cooperation that fall outside of the scope of “natural sciences or engineering”—even when they have a domestic counterpart—are subject to the substantive requirements of the Foreign NGO Law.

These ambiguities remain even after the release of the Registration Guidelines and the National Catalogue (as well as some Local Catalogues). In particular, the National Catalogue lists education as one of those nine areas,  and is further divided into four sub-areas, each covering certain main projects (Education Section). The Ministry of Education and its local, provincial departments (collectively, the MOE) are listed as the main supervisory authority for the Education Section. Certain activities and projects listed under this section, such as “conducting joint research projects”, “promoting bi-directed overseas studies”, and “cooperation in carrying out academic exchanges” has given rise to concern and confusion, as, to our understanding, these activities should have already been carved out under the Carve-out Provision if these activities are between a foreign university, hospital or academic institute and its Chinese counterpart. We have sought advice from the relevant authorities in a number of different jurisdictions (both the MPS and the MOE) and received contradictory and inconsistent guidance in this regard. However, at least in different situations the answers given by officials from the national MPS are consistent, i.e. exchange and cooperation between two organisations of the same type—for example between a foreign school and a Chinese school, or a foreign hospital and Chinese hospital—are covered under the Carve-out Provision.

Implementing rules

Although these two sets of implementing rules for the Foreign NGO Law are now available, their release was quite close to the Foreign NGO Law officially taking effect which leaves very little time for foreign NGOs to prepare and plan their RO registration applications or temporary activities, not to mention that there are still outstanding questions and issues.  For example:

  1. Does the National Catalogue apply to a Foreign NGOs’ temporary activities as well?                            This is still unclear. One possible interpretation is that these catalogues only apply when foreign NGOs seek to set up ROs in China, but do not apply to their temporary activities. Some MPS officials at both national and provincial level hold this view.
  2. What is a Foreign NGO’s status after 1st January, 2017, before its successful registration/filing with MPS?                                                                                                                                            On 8th November, 2016, a representative from the MPS’ Foreign NGO Management Bureau indicated at a briefing held in Shanghai that the MPS will not grant an official ‘transition’ or ‘grace period’ with respect to enforcement of the Foreign NGO Law. As of 1st January, 2016, they expected applicable Foreign NGOs to start submitting their application documents and complying with the law. However, as there will be lead times for the approval process before a foreign NGO completes the registration of its RO or record-filing for its temporary activities, many foreign NGOs have concerns over whether they are prohibited from engaging in any activities until after they have received such registration or record-filing. Many MPS officials we spoke to through anonymous telephone inquiries answered in the affirmative. As far as we know, many foreign NGOs have adopted a wait-and-see attitude and have suspended their current operations in China until they obtain the registration or filing with the MPS or have better information on which to base a decision.
  3. What is the intent of the prohibition on for-profit activities?
    The Foreign NGO Law specifically prohibits foreign NGOs from engaging in or providing financial support to for-profit activities and political activities, and illegally conducting or sponsoring religious activities.[4] While the restrictions on political and religious activities have long been in effect, no guidance has been provided as to what types of activities will be deemed as either carrying out or sponsoring for-profit activities in China. For example, given the general inability to register a non-profit subsidiary in China in the past but the desire to be able to hire employees, rent space and conduct activities in China, many foreign NGOs have set up subsidiaries in China as for-profit legal entities (usually in the form of a wholly foreign-owned entity, (WFOE)), either as a direct subsidiary, or perhaps within a holding company for its overseas operations. Due to the prohibition on for-profit activities and the language of Article 9,[5] which applies restrictions on direct or indirect activity, it is not clear whether these existing WFOEs will be permitted to continue their operations in China under grandfather approval rules, and whether the WFOE is still an available option for a foreign NGO to enter into China with its overseas for-profit holding company. Based on anonymous phone inquiries with the MPS and its provincial arms, officials have advised that a foreign NGO will not be allowed to act as direct shareholder of a WFOE but its affiliate established offshore as a for-profit entity can still invest and set up a WFOE in China.

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[1] The other three are: (i) the National Security Law, which became effective from 1st July, 2015; (ii) the Anti-terrorism Law, effective from 1st January, 2016; and (iii) the Cyber Security Law, the draft of which was released for public comments on 6th July, 2015.

[2]  See Article 2 of the Foreign NGO Law.

[3]  Article 53 of the Foreign NGO Law provides: “The exchange and cooperation between foreign schools, hospitals, natural science and engineering research institutions or academic organisations and domestic schools, hospitals, natural science and engineering research institutions or academic organisations shall follow and comply with the relevant regulations and rules of the state. If the foreign schools, hospitals, institutions or organisations referred to in the preceding paragraph violate the provisions of Article 5 herein when they conduct their activities in China, they shall be subject to legal liabilities in accordance with law.”

[4] Article 5 of the Foreign NGO Law provides: “Foreign NGOs that conduct activities within China shall comply with the law of China; shall not threaten China’s national unity and safety and the unity of all ethnic groups of China; shall not jeopardise China’s national interests, societal public interests or the legitimate rights and interests of the citizens, legal persons and other organizations. Foreign NGOs shall not engage in or provide financial support to for-profit activities or political activities within China. They are also forbidden to illegally conduct or sponsor religious activities.”

[5] Second paragraph of Article 9 of the Foreign NGO Law provides: “A Foreign NGO that has not established and registered a representative office or has not completed the record-filing for conducting temporary activities is not permitted to directly or indirectly conduct activities within China, and shall not directly or indirectly entrust and sponsor any unit or individual within China to conduct activities within China.”