As of December 31, 2018, the following are highlighted in the 2018 Report:

• 441 FNGOs in total have successfully registered a representative office (RO)[1] and 1,381 temporary record-filings (TRF) have been made in China since the effective date of FNGO Law which was January 1, 2017.  (136 ROs were newly established in China in year of 2018, a decrease of 55% in comparison with the number registered in 2017.)

   

• Among those 441 legally-registered FNGOs,

   

  -The top 5 overseas jurisdictions (representing 69.61% of total 441 FNGOs) by location of headquarters are the US (24.26%), Hong Kong (18.82%), Japan (12.02%), South Korea (8.84%) and Germany (5.67%).

   

  -The top 5 provinces (representing 70.29% of total 441 FNGOs) where the ROs are established in China are Beijing (33.11%), Shanghai (20.63%), Yunnan (5.67%), Guangdong (5.67%) and Sichuan (5.22%).

   

  -Regarding the breadth of regional coverage, 146 ROs (33.11%) are nationwide, 154 ROs (34.92%) cover one province, and the remaining 141 ROs (31.97%) cover multiple provinces, ranging from 2 provinces to 31 provinces.   

   

  -The top 5 PRC Supervisory Authorities that would supervise the ROs (representing 74.29% of total 441 FNGOs) are the Ministry of Commerce (43.08%), Ministry of Civil Affairs (9.52%), Ministry of Education (9.52%), National Health Commission (6.8%), People's Organization (5.67%) and their respective subordinate bodies.

   

  -The top 5 areas of operation are the economy (49.89%), poverty alleviation (11.11%), education (11.11%), healthcare (6.12%) and environmental protection (4.99%). 

   

• Among 1,381 TRFs, the top 5 overseas jurisdictions where the FNGOs are located are Hong Kong (55.47%), the US (20.06%), Germany (4.56%), Macau (3.91%) and the UK (3.26%).  Notably, the total number of TRFs launched in 2018 (894 TRFs) marked a significant increase of about 1.83 times that number established in 2017 (487 TRFs).

2018 was busy year for China’s domestic non-profit sector. However, for FNGOs, the FNGO Law evolved a bit slowly and there were not many significant new regulations or guidelines for improving clarity on long-standing issues, including but not limited to:

1)Further defining and determining what kind of organizations would constitute a “FNGO", what kind of activities are deemed “for profit", “political" and “religious", what constitutes “developing members. There is also the lack of detailed negative or positive lists and an existing public case pool;

2)Whether the income generated from the activities or services performed in China (and what kind of activities or service performed; for instance, making investment, provision of consulting or technical services, government procurement) can fall into the category of “other legitimate source of funding";

3)Whether certain formal fast lanes can be provided along with the business registration, tax and other relevant authorities so as to ease the transition from an existing business entity (a for-profit WFOE) directly into a RO under FNGOs without the burden of deregistration, registration and transfer of documentation;

4)Whether certain favorable tax exemption/reduction policies can be offered to those ROs due to their not-for-profit nature, and whether donating funds to ROs of FNGO can enjoy pre-tax deduction policy at the donor level according to Article 35 of FNGO Law;

5)What are the responsibilities and liabilities for acting as the chief representative and normal representatives of the RO;

If changes occur during the implementation of the China project, what would be deemed “special circumstances" for an annual plan change recorded pursuant to Article 19, and could this conditional wording be relaxed to some extent to provide more flexibility. 

In terms of new legislation published in 2018, it is worth mentioning that, in August 2018, the State Administration of Sports (SAS) issued Administrative Measures for Carrying Out Sports Activities in China by FNGO (Sports Circular), which makes it clear that FNGO shall register a RO or make a TRF, as well as obtain approval from SAS or the provincial sports authority before they can be allowed to conduct any sports activities in China. Under the Sports Circular, those sports activities mainly include the following:   

1)Olympic games and activities

2)Games and activities regarding items that are non-Olympic

3)Mass sports

4)Sports industrial exchange and cooperation

5)Sports culture and sports news exchange and cooperation

6)Sports education, scientific research and academic activities

7) Anti-doping exchange and cooperation

It should be noted that, under the Sports Circular, non-compliance by a FNGO could lead to being blacklisted in the sports market, which may largely affect the future sports operation in China (even in future international sports cooperation).

Technically, business entities in China (such as WFOE or joint venture enterprises (JV)) will not be subject to this Sports Circular.  That said, we do observe some FNGOs are the ultimate controller or affiliates of such China WFOEs or JVs.  Thus, we do not exclude the possibility that PSB would determine that a FNGO conducts sports activities in China by a non-compliant route of a WFOE or JV (under current FNGO Law, a WFOE or JV is not a legal form of conducting FNGO activities in China).  In this regard, those Sports FNGOs (such as international sports schools, sports training institutions, and sports associations) would need to review and assess the legal risk from the perspective of FNGO Law and make a timely decision to adjust their China operation plan and do their best to comply with the FNGO Law and the Sports Circular in light of the recent tight scrutiny by the Sports Authority on the sports and game space.  

Overall, the implementation and development of China’s FNGO Law in 2018 was stable and peaceful. There were no black swan events, and few public cases with material adverse effect occurred in 2018. Also, the data shown in the 2018 Report did not provide any major surprises. However, understanding the nuances below and knowing which aspects to communicate and how to structure China activities are an important part of any management’s tool kit. 

• TRF becomes more popular than RO. Considering the limited working capacity of the government and the relatively large number of existing ROs to be managed, the number of future RO registrations approved each month will remain low, while the TRF will become a more important and popular option for FNGOs who do not have a strong track record in China and run activities that contain elements that might be less welcomed by China.  Without getting a license of a RO, many FNGOs have no choice but to operate their projects in China through consecutive renewal of the TRF.         

   

• Cooperation/partnership between RO of FNGO and China local NGO becomes another option to do non-profit work more effectively in China.  Cooperation/partnership between Sino-foreign NGOs will be a more innovative and effective way to carry out projects in China and worldwide given the various legal restrictions on both sides. We highly recommend that, before doing so, it is critical to conduct full internal evaluation, seek professional legal advice and consult with relevant government officials in areas in which many aspects remain grey and unclear. It is also crucial to set a clear boundary, in particular, defining the power, responsibility and scope of work between the RO of FNGO and China local NGO. 

   

• More new circulars are coming.  More detailed circulars are expected to be promulgated by different supervisory authorities to regulate specific areas.  FNGOs should remain cognizant of potential changes in political and economic winds. The case of the Sports Circular is a good example of efforts to reform the currently overheated sports market.

   

• Communication is always key.  As a lot of issues are still pending and unclear, it is wise to keep a friendly and positive relationship with the relevant officials and make them your mentors.  Ask before acting when there is no clear line regarding certain matters.  Make sure the RO has the right representatives to deal with authorities – representatives who are reasonable and can communicate clearly in a friendly manner. Also, we anticipate the Chinese government will very likely increase human resources and adjust or set up new departments to coordinate internally and cope with the gradual growth of FNGOs in China.

   

• Internal control and compliance work can never be neglected.  Many existing ROs still lack robust internal control systems. We dealt with several FNGO clients who made different types of mistakes during the registration process and operations. As a result, they suffered severe consequences.  For example, the FNGOs missed deadlines, failed to make various legal filings, paid or received funds through different bank accounts, run for-profit activities/projects that cannot be justified, and hired or fired employees in the wrong way. All those mistakes could have been avoided if the FNGOs were more prudent about the internal control process.

We hope the observations on the issues, trends and evolvement of the FNGO Law are helpful. Our Zhong Lun non-profit attorneys offer bespoke and effective solutions for various non-profit legal issues that FNGOs may encounter throughout their entire lifespan in China.

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