2022 has been a challenging year. In addition to the continuing impact of COVID-19 and the recent relaxation measures in China, the war in Ukraine has also brought impacts on society, politics and businesses.
However, not only are we challenged by the above, but for some time now, the corporate world has also been facing an increase in complex regulation that we all have to deal with in daily work. Meeting these ever-increasing requirements is one of the key challenges for companies, not only from the point of view of general compliance, but also in view of sustainable competitiveness.
In China, topics such as personal information protection law, cross-border data transfer, supply chain compliance etc. will continue to be a concern for most companies in the coming year. However, there is also potential here that we can leverage together with you, our clients and contacts. We actively support you in using the existing and developing legal framework to best shape your day-to-day businesses and to maintain your innovative strength.
We have compiled an overview of legal topics which we consider to be or become important in 2023.
Please do not hesitate to contact us, if you have questions or would like to have more information on any of these.
We wish you a happy holiday season and all the best for 2023!
Adaptation needed for the Insolvency Law
The global economic recession and the impact of COVID-19 have forced many enterprises to restructure their China business, some of them to even apply for insolvency. The current PRC Insolvency Law was promulgated 15 years ago and needs to be adapted to suit up-to-date PRC law and the current insolvency practice. With the first amended draft of the Insolvency Law being planned in 2022, we expect that an official amended law draft will be released for public comments in 2023.
Possibly major update to the PRC Company Law
On 24 December 2021, the Standing Committee of the 13th PRC National People’s Congress released the draft of a major update to the current PRC Company Law. The draft update, i.e. the Company Law of the People’s Republic of China (Draft Amendment) (the “Draft”), was issued for public comments which could be made until 22 January 2022.
If enacted in its current form, the Draft would provide for numerous changes, inter alia, concerning corporate governance, increased liabilities for directors, supervisors and senior managers, establishment and liquidation procedures, abolishment of the requirement of other shareholders’ consent for transfer of shares, increased options for capital contributions in kind, increased control on related party transactions, etc.
Currently, it is still unclear whether, when and in which form the Draft will be enacted into actual law. Further legislative development is to be expected in 2023. For more information about this topic, please refer to our newsletter published earlier this year.
Adapting Joint Ventures in accordance with the PRC Foreign Investment Law and the PRC Company Law
Until 31 December 2019, Sino-foreign Equity Joint Ventures ("EJV") and Sino-foreign Cooperative Joint Ventures ("CJVs") were governed by special laws, and the structure of EJVs and CJVs under these special laws was different to those of wholly foreign-owned enterprises (“WFOE”) and domestic limited liability companies ("DLLCs") according to the PRC Company Law. In particular, in EJVs, the Board of Directors was the highest company authority (and not the Shareholders’ Meeting as it is the case for WFOEs and DLLCs).
However, this has changed with the entry into effect of the PRC Foreign Investment Law (“FIL”) on 1 January 2020. As of the same date, also the above-mentioned special laws for, inter alia, EJVs and CJVs were abolished, and the FIL (together with the PRC Company Law, the PRC Partnership Law, and so on) became the main legal basis for foreign investment in the PRC.
According to the FIL, the organization form, institutional framework and standard of conduct of existing entities, which are not consistent with the PRC Company Law or the PRC Partnership Law, will need to be changed respectively within 5 years after the FIL came into effect, that is at the latest by 31 December 2024. This will have considerable impact on EJVs and CJVs. Among others, the highest company authority will need to be changed from the Board of Directors to the Shareholders' Meeting. We expect that more and more existing EJVs and CJVs will start to adapt to the new structure in 2023 and 2024, which may require comprehensive amendments to the Joint Venture Contract and the Articles of Association and re-negotiations with the Chinese joint venture partners. For more information on the FIL, please refer to our newsletter published earlier.
Development in China's Competition Law Regime
In 2022, China published the amended PRC Anti-Monopoly Law (“AML”) which came into force on 1 August 2022. This is the first time that China overhauled the AML since its effectiveness on 1 August 2008. Due to these amendments, we expect that a number of existing competition regulations will be reviewed and updated, and China will further strengthen its enforcement in the area of competition law. For more information, please refer to our newsletter on this topic published earlier.
Corporate Social Credit System: Blacklistings and Redlistings
Companies need to further develop their risk management strategies, in order to make their businesses risk-proof and to achieve the regulatory benefits under China’s Corporate Social Credit System. The most recent regulatory development is reflected by the Law of the People's Republic of China on the Development of the Social Credit System (Draft for Public Comment), which has been announced in November 2022 and is likely to be enacted in 2023.
Supply Chain Compliance
Companies, especially German companies, should watch out for supply chain compliance given to risks of disruption in supply chains and new regulatory developments abroad, such as the German Act on Corporate Due Diligence Obligations for the Prevention of Human Rights Violations in Supply Chains (Lieferkettensorgfaltspflichtengesetz - LkSG) which may affect purchasing, inter alia, in China. The LkSG will apply to German enterprises with at least 3,000 employees. As of 1 January 2024, this figure will be decreased to 1,000 employees. The LkSG requires enterprises to conduct human rights and environment-related due diligence on themselves and their supply chains. I.e., enterprises have to make sure that certain human rights and environment-related risks are identified, prevented, stopped or at least mitigated, both in their so-called own business area and at the level of their product and service suppliers. Further information on this can be found here.
Data Transfer and Protection
Increasingly sophisticated regulation of cross-border data transmission
Cross-border data transmission has become the focus of Chinese regulators in recent years. With the promulgation of the Measures for the Security Assessment of Outbound Data Transfer in 2022, the threshold and detailed requirements on security assessment for cross-border data transmission have been established. For more details, please refer to our newsletter on this topic.
In addition, the Chinese national cyberspace departments are also developing legislations for implementing a standard contract and personal information protection verification as alternative approaches regarding cross-border data transmission, which may be widely adopted by normal companies in the future. In particular, with regard to the standard contract, the Cyberspace Administration of China has released the first draft of Provisions on the Standard Contract for Outbound Cross-border Transfer of Personal Information for public comments in 2022. We expect that the finalized version will be promulgated and take effect in 2023.
First revision of the PRC Cybersecurity Law
The current PRC Cybersecurity Law was promulgated in 2017 as the first fundamental law in the data protection area. The PRC Data Security Law and the PRC Personal Information Protection Law were promulgated in 2021. Due to rapid developments in the digital world, the current PRC Cybersecurity Law needs to be updated to be consistent with the later promulgated laws and enforcement practice, especially with regard to provisions on legal consequences. With the first amended draft of the PRC Cybersecurity Law being published in September 2022, we expect that the amened PRC Cybersecurity Law will be finally promulgated and take effect in 2023.
Employers shall take active measures to better cope with changes and challenges brought by the latest nationwide relaxed COVID measures
On 7 December 2022, the Chinese government removed most of the controlling measures on prevention of COVID-19 adopted in the past three years. Due to the high infectivity of the COVID-19 virus, it is expected that in the coming months, infections in many cities will peak. Along with the substantial relaxation of COVID control policies by the government, employers will face increasing challenges in dealing with COVID situations incurred at workplaces. In addition to complying with statutory requirements, employers are recommended to take active measures by taking into consideration of their own business situation in order to maintain business sustainability and protect employees’ health and safety.
Managing labor costs in time of crisis/difficulties
The war in Ukraine, tight China-US relationship and COVID-19 pandemic which has lasted for three years seriously impacted the economy. In 2023, companies facing financial pressures or operational difficulties will look for possibilities to control and reduce labor costs by restructuring business, laying-off employees or reducing employees’ salaries or benefits, etc. For more information, please refer to our earlier newsletter on this topic.
When deciding to take measures, companies shall pay attention to and follow the legal provisions under PRC labor law. Otherwise, affected employees very likely will raise claims against the employer through labor arbitration or lodge complaints to the labor authority. In order to avoid potential labor disputes with employees, employers shall carefully evaluate each specific case, take actions in a legal way or reach agreements with affected employees if needed and possible.
Development of Chinese social insurance mechanism requires employers to re-evaluate and take measures to ensure compliance with statutory laws and regulations
In recent years, the Chinese government has been making efforts in developing a national social insurance mechanism such as changing the authorities levying social insurance fees to the tax bureaus, striving for overall planning of social insurance at the national level, setting up a unified national social insurance service system and prohibiting the provision of social insurance for employees at locations other than that of the employer, etc. For more information, please refer to our earlier newsletter on this topic.
In 2023, the Chinese social insurance mechanism will continue changing and further developing. For example, starting from 1 January 2023, by fulfilling certain online formalities, employees can directly pay medical fees incurred at designated hospitals with their medical insurance accounts in a location outside the location where their social insurances are provided; the statutory retirement age very likely will be increased in the near future. On the other hand, the Chinese government will take more measures on supervising the social insurance practices. Given the above, employers in China need to re-evaluate their social insurance practice compliance and make necessary adjustments according to statutory laws and regulations.
New legal requirements for female protections at workplace
The newly amended PRC Law on Protection of Rights and Interests of Women will come into force on 1 January 2023. The new law raises new requirements on employers in China to provide protections for female employees such as taking specific measures to prevent sexual harassment in workplace, excluding gender discrimination in workplace, etc. Employers in China shall pay attention to the new law and take measures to comply with the requirements of the new law. For more information on this topic, please refer to our newsletter.
Increased tax scrutiny likely on high-net-wealth inpiduals (“HNWIs”)
Under the topic of common prosperity for everyone in China, the pressure on fiscal revenue and the advancement of systematic collection and administration have led to a trend of strict tax administration especially on HNWIs. At the beginning of 2022, the State Administration of Taxation (“SAT”) and the Ministry of Finance (“MOF”) issued Announcement  No. 41 which stipulates that inpiduals holding shares, stocks, partnership units and other equity investments through sole proprietorships or partnerships shall be subject to Inpidual Income Tax (“IIT”) calculation based on actual profits. In the past, the inpiduals earning business profits through sole proprietorships and partnerships could be taxed based on deemed profit methods which might give rise to lower effective tax results. This Announcement has indicated that the Chinese tax authorities are strengthening the tax control of HNWIs and improve the ability of precise supervision. For more information on this topic, please refer to our newsletter published earlier.
“Golden Tax System Version IV” is expected to be launched and implemented at the end of 2022
The promotion of the "Golden Tax System IV" will make the modern tax collection and administration system more powerful and stricter, and it marks the upcoming era of "digitalized tax administration", providing conditions and foundation for intelligent tax administration and intelligent supervision. The Golden Tax System IV has mainly introduced three new angles for precise supervision: (i) increasing the control of non-tax matters (such as social security, etc.); (ii) enhancing information exchange with the People's Bank of China and excercising strict control on investment funds; and (iii) increasing the control on information of identity and credit of the relevant personnel (such as shareholders, executives, etc.) of enterprises. The Golden Tax System Version IV will use Big Data to share all the information between the banks, tax authorities, Market Supervision Administration, Customs and other relevant governmental authorities, and it will also adopt modern information technologies such as artificial intelligence to conduct analysis on different types of taxes for each enterprises, aiming to achieve a better and more precise supervision on the tax compliance of all tax payers. Companies shall improve their own tax compliance awareness and prepare a tax risk management system to comply with the stricter regulatory environment.