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China Responds to WTO Obligations - Decree 114 Implementing Rules for Foreign Invested Design Enterprises

1. Background & Development

1.1 The issuance of the Regulations on the Administration of Foreign-invested Construction Engineering Design Enterprises ("Decree 114") by the PRC Ministry of Construction ("MOC") and the PRC Ministry of Commerce ("MOFCOM") in 2002 signified a step towards opening up China's construction engineering design market to foreign investors. Upon accession to the WTO, China had committed to remove trade barriers in various service sectors including the engineering services sector. In particular, China allowed foreign service suppliers establishing commercial presence in the form of joint ventures (either as Sino- foreign equity joint ventures ("EN") or Sino-foreign co-operative joint ventures ("CN")) upon accession, and in the form of wholly foreign-owned enterprises ("WFOE") five years thereafter. Decree 114 was issued to regulate commercial presence of foreign investors in the field of construction engineering design, and to permit the setting up of foreign invested design enterprises ("FIDE").

1.2 Although Decree 114 allowed for immediate establishment of FIDEs in the form of ENs, CNs and WFOEs, given that no implementing rules were issued for Decree 114 prior to January 2007, the authorities would not accept any application for setting up a FIDE in the form of WFOE except those made in accordance with the Closer Economic Partnership Agreement between the Chinese Mainland and Hong Kong SAR & Macao SAR (collectively "CEPA"). The exception to CEPA service suppliers was made based on the Supplementary Rules to Decree 114 jointly issued by the MOC and the MOFCOM in 2003. In a Supplementary Notice to CEPA issued in 2005, the MOC further granted CEPA service suppliers certain concessions in relation to track records, personnel requirements and residency requirements.

1.3 Decree 114 envisaged the MOFCOM as the supervisory body over the establishment of FIDEs, and the MOC as the supervisory body regulating the qualification of FIDEs. Under this regime, an application for establishing FIDE would first need to satisfy the MOFCOM on the requirements of setting up an EN, CN or WFOE (i.e. incorporation), and then satisfy the MOC on the requirements of obtaining construction engineering design qualifications ("CED Qualification ").

1.4 Four years after Decree 114 became effective, the MOC and the MOFCOM jointly issued the Implementing Rules for Decree 114 ("Implementing Rules") on 5 January 2007. The Implementing Rules were made publicly available through the MOC's official website on 31 January 2007. As can be seen below, the Implementing Rules contain measures which encourage the establishment of FIDEs.

1.5 The Implementing Rules clarify the application procedure, requirements and materials for setting up a FIDE. The Implementing Rules also extend certain concessions which were previously enjoyed by CEPA service suppliers to all foreign service suppliers. The Implementing Rules are applicable to foreign investors, including investors from Hong Kong, Macao and Taiwan.

1.6 The Implementing Rules make it clear that, in addition to the requirements prescribed by Decree 114 and the Implementing Rules, the relevant regulations on the administration of CED Qualifications applicable to domestic applicants will equally apply to foreign applicants.

1.7 With the Implementing Rules in effect, the MOC will be in a position to accept applications for CED Qualifications for the purpose of establishing a FIDE in the form of WFOE. As Decree 114 provides that a FIDE in the forms of EN or CN requires at least 25% equity participation by a local partner, foreign investors may prefer setting up a FIDE in the form of WFOE to retain more control over their investment. 1.8 In any event, the Implementing Rules introduce certain transparency and relaxation for foreign investor wishing to obtain CED Qualifications and enter the PRC construction engineering design market. Subject to the grade and scope of CED Qualification obtained, a FIDE will be able to engage in construction engineering design activities independently and without the need of collaborating with PRC domestic design enterprises.

2. CED Qualifications

2.1 Types of CED Qualifications

  • General Qualification - The existing laws and regulations only refer to General Qualification without providing further details and requirements on obtaining it. It is noted that a draft Construction Engineering Design Qualification Grading Standard providing such details and requirements has remained in the draft form.

  • Industrial Qualification - This is further divided into Full Industrial Qualification, Partial Industrial Qualification and Sector Industrial Qualification for a total of twenty-one industries available. The industries are further divided into sectors, where certain principal professional technical specialties are assigned to each sector in addition to the industry specific ancillary professional technical specialties.

  • Specialist Qualification - This is for relatively technical expertise and may be favoured by foreign investors specialized in particular aspects of construction engineering design.

3. Important Aspects of the Implementing Rules

3.1 Dual Qualification

Decree 114 requires that a FIDE must retain a specific percentage of individual foreign service providers with dual qualifications. Dual qualification personnel refer to architects or engineers qualified in both their home jurisdiction and in the PRe. The prescribed percentage of dual qualified personnel for a FIDE in the form of EN and CN is 1/8, whereas a FIDE in the form of WFOE is required to retain at least 1/4 dual qualified personnel.

The Implementing Rules make a temporary concession on the dual qualification requirement, in that foreign applicants may employ PRC-registered architects and engineers for the time being if they cannot satisfy this requirement.

3.2 Individual Foreign Service Providers

Decree 114 provides that a FIDE must retain a specific percentage of individual foreign service providers with the relevant design expertise. The prescribed percentage of such personnel for a FIDE in the form of EN and CN is 1/8, whereas a FIDE in the form of WFOE is required to retain at least 1/4 of such personnel. The Implementing Rules provide similar concession in that professional technical staff with PRC nationality can be counted towards meeting this requirement.

3.3 Residency

Decree 114 imposes a requirement of 6 month minimum PRC residence per annum for foreign service providers. The Implementing Rules indicate that the requirement may not be applied, suggesting the authorities may retain discretion on whether to waive this requirement.

3.4 Registered Architects and Engineers

Upon application for CED Qualification, the applicant is expected to employ a sufficient number of staff with the requisite qualification and experience to cover those professional technical specialties assigned to the relevant industry or sector.

For the purpose of counting as principal professional technical staff, the educational background, engineering design experience, foreign registration, track records and reputation of architects and engineers employed by the applicant will be assessed by the authorities, but not their professional technical titles.

As regards educational background of foreignregistered architects and engineers, the Implementing Rules provide that at least a bachelor's degree is required, and that the relevant degree should relate to the majors and subjects set out in the Construction Engineering Design Qualification Grading Standard. As for engineering design experience, the Implementing Rules provide that a minimum of 10 years experience is required.

3.5 Work Permit

Individuals who hold professional qualifications as registered architects or engineers in their home jurisdiction should obtain a PRC work permit in order to be counted as principal professional technical staff. The Implementing Rules also provide that such architects or engineers may not be employed by more than one engineering design enterprise.

3.6 Track records

The Implementing Rules provide that, upon first application, foreign service providers should provide proof of track records in at least two overseas projects, one of which should be located in their home jurisdiction. As foreign investors are unlikely to have substantial PRC track records, it is sensible to consider their overseas track records. Subsequent application for upgrades of CED Qualification will be assessed based on projects completed after obtaining the CED Qualification, with the requirement that at least two projects should be located in the PRC.

3.7 Documentation and Materials Evidencing Track Records and Professional Qualifications

The Implementing Rules prescribe certain documents and materials required of foreign service providers in relation to track records and professional qualifications.

Foreign investors are required to provide the details of the relevant projects as certified by the project employer or a government agency or notary public, and also provide photographs of the completed project. The relevant construction engineering design contracts and completion certifications may be required for a FIDE to evidence participation in such projects.

Foreign-registered architects and engineers are also required to provide certified details of the relevant projects with supporting evidence. In addition, foreignregistered architects and engineers should also provide their diploma, professional qualification certificates, certificates of good standing and PRC work permit for the purpose of evidencing their professional qualifications.

4. Additional Considerations for Obtaining a CED Qualification

4.1 Minimum Registered Capital Requirement

Depending on the qualification grade, the minimum capital requirement for Industrial Qualifications ranges from RMB 6m for a Grade A Full Industrial Qualification and RMB O.5m for a Grade C Partial Industrial Qualification or Grade B Sector Industrial Qualification.

4.2 Limitation on the Scope of Design Works

CED Qualifications carry with them certain limitation on the scope of design works, which limitation may relate to the type and scale of the design project as well as its geographical region.

4.3 Acquisition of PRC Domestic Engineering Design Institutes

An acquisition process will subject the existing CED Qualification of the domestic engineering design institute to reassessment by the authorities based on postacquisition compliance with the grading criteria.

Lovells (Engineering & Construction) Newsletter
January 2007

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