Background
Very fast growing number of foreign non-governmental organizations (“NGO”) operate in China. However, the laws regulating them are few, vague and inadequate. Currently, only the Regulation for the Administration of Foundations applies for NGOs to establish representative offices in China. As such, some of the existing foreign NGOs in China operate as business enterprises whilst others may even remain unregistered and thus unregulated. The second draft of the Foreign NGO Management Law, which was issued for consultation last year, therefore marks an important step forward to introduce regulatory oversight and more transparency for NGOs in China.
Some Provisions of the Draft Law
Some of the key provisions of the draft law are summarized below :-
Article 2 – This law applies to activities carried out by foreign NGOs within the territory of China. Foreign NGO refers to non-profit, non-governmental social organizations established outside mainland China.
Article 3 – Foreign NGOs may carry out activities in accordance with the law to develop public welfare in the areas of economics, education, science and technology, health, culture, sports, environmental protection, charity etc.
Foreign NGO is broadly defined in the draft law to include any non-profit and non-governmental social organization based outside mainland China. However, it is unclear whether foreign NGOs that are operating and registered as a private company in China will now fall within the purview of the draft law. The word “activities” conducted by the foreign NGOs is not defined in the draft law and this has been widely criticized especially by human rights groups. If the draft law is to be passed and enacted exactly as the second draft, it is likely that anything done by a foreign NGO will be caught by the draft law.
Article 6 – Foreign NGOs that conduct activities in China should either set up a legally registered representative office or obtain a temporary activity permit. Otherwise, they are not allowed to conduct activities in China nor engage or sponsor domestic Chinese individuals, legal persons or other organizations to conduct activities in China.
Under the draft law, each foreign NGO can only apply to set up one Representative Office in China. After the Representative Office is established, all activities of the foreign NGO should be operated through that office with prior approval of the business supervising units.
As an incentive for the establishment of foreign NGOs in China, foreign NGOs will enjoy a preferential tax rate as stated in the draft law. Business supervising units will also provide guidance to foreign NGOs in the development of their activities.
Article 7 – The public security department of the State Council and provincial public security authorities are in charge of the registration and management of the foreign NGOs conducting activities in China. The relevant departments of the State Council and those of provincial level governments as well as organizations authorized by the State Council or provincial level governments are the business supervising units to foreign NGOs carrying out activities in China.
Article 10 – A foreign NGO can set up only one representative office. Foreign NGOs are only entitled to apply for registration under the draft law if :-
(i) it is legally established outside China;
(ii) it can assume civil liability independently;
(iii) its objectives and operational scopes are beneficial to the development of public welfare;
(iv) it must have substantial operation for at least 2 continuous years outside
China; and
(v) it has to comply with any other requirements provided by the laws or administrative regulations.
Article 11 – Foreign NGOs that apply to establish a representative office shall obtain consent from business supervising units.
Article 35 – The proportion of foreign personnel working for the foreign NGOs shall not exceed 50% of the total number of the staff.
Article 40 – The registration and administration authorities together with the relevant departments will set out the activity scope and project list of foreign NGOs and publish the list of business supervising units in order to provide guidelines to conducting activities by the foreign NGOs.
Articles 55 to 64 – Penalties up to RMB200,000 on breach of the relevant articles are set out in articles 55 to 64.
It should be noted that the Public Security Bureau (“PSB”) (instead of the Ministry of Civil Affairs which oversees domestic NGOs) will become the authority to supervise foreign NGOs in China. They will also be under the supervision of the business supervising units. In China, PSB is responsible for criminal investigation. The draft law confers on PSB extensive investigative powers including search, seizure and freezing of assets. It remains to be seen if the Chinese government is going to take a stringent approach towards the regulation of foreign NGOs under the new law.
Conclusion
The proposed new law will help foreign NGOs operate in China and give them a legal status. At the same time, certain restrictions will be imposed on the foreign NGOs. To ensure sustainability, not only potential foreign NGOs shall understand the implication of the draft law but existing foreign NGOs in China, either unregistered or registered as companies, should get themselves ready for the requirements under the new law.
If you have any questions on the above or other issues on doing business in Mainland China, experienced lawyers in our China Business Department will be happy to assist you.