In 2012, China’s population aged 60 and over was 194 million. By 2025, this population is expected to reach 300 million. In response to growing urbanization and economic changes, the question of providing adequate senior care is posing a serious challenge to this populous country. In recent years, the Chinese government has introduced a number of reforms to address the shortage of healthcare facilities. Starting in 2013, the Chinese government issued a series of policies and regulations aiming to encourage private and foreign investment to invest in this sector. In the most recent announcement on 24 November 2014, the Ministry of Commerce (MOFCOM) and the Ministry of Civil Affairs (MCA) jointly issued the Circular on Various Issues on Foreign Investment in For-profit Senior Care Facilities (the Circular) providing detailed guidelines for foreign investment in senior care business in China.
It is important to note that the Circular only covers the for-profit part of foreign investment in the senior-care business in China. The non-profit part will continue to be governed by the Measures on the Establishment of Senior Care Facilities and other related regulations issued by MCA and other government agencies.
Some of the provisions in the Circular are not new but derive from previous policy statements, rules and briefings. Below are some developments and changes worth highlighting.
Relevant authorities for approval and registration
Foreign investment in for-profit senior care business is subject to approval by MOFCOM, licensing by MCA and registration with the State Administration of Industry and Commerce (SAIC)1. However, the sequence of these requirements is not always clear in practice and varies across different locations. The Circular specifies that the foreign investor will first need to apply for approval from the provincial level of MOFCOM at the place of the senior care facility followed by registration of the company with the local branch of SAIC. After the business license is issued by SAIC, the foreign invested senior care enterprise must apply for a Senior Care Facility Establishment Permit (SCFE Permit) from MCA at the municipal or district level. Before the SCFE Permit is issued, the foreign invested senior care enterprise cannot commence operation by charging any fees or admitting any senior person into its facility.
If the foreign invested senior care facility intends to provide medical services as part of or in addition to senior care service, it will also need to apply for a Medical Institution License separately.
Streamlining of the establishment procedure
The Circular streamlines the establishment procedure by setting out the maximum time frame (20 days after acceptance of application) that MOFCOM can use to decide whether or not to approve the application. The Circular also reduces the documentation required for the application. The requisite documents include the following:
· an application report;
· a situation statement (venue, security, and medical/care measures);
· joint venture contract and/or articles of association;
· directors and their appointment letters;
· name reservation evidence2; and
· a statement and evidence of the relevant experience of the investor or the ultimate controller or the proposed management team of the enterprise.
In addition to the above documentation, it is also worth noting that the Circular leaves in a catch-all provision authorizing the authorities to ask for other documents required under law, rules and administrative regulations. The level of detail required by the authorities for each documentation remains to be tested.
Encouragement for franchises
After the foreign invested senior care enterprise is established, the foreign investor is allowed by the Circular to make other senior care related investments in China. Foreign investors are also encouraged to scale up the senior care investment, develop franchises and cultivate quality senior care brands in China. Foreign investors are also allowed to participate in privatization and restructuring of public senior care facilities.
Prohibition from Real Estate projects
The Circular addresses some of the loopholes in the senior care system. In the past, private and foreign investors have relied on the provision of senior care as a way to develop real estate projects. To ensure that the approved senior care investment is restricted to its intended purpose, the Circular specifically sets out restrictions through prohibiting local government from approving any subsequent change in land usage or floor space ratio granted. Foreign investors are also prohibited from carrying out “reverse mortgage” businesses in China which are typically targeted at senior homeowners.
Administrative charges and tax benefits
Under the Circular, foreign invested senior care facilities will enjoy the same preferential treatment granted to domestic private senior care facilities, including exemption from or reduction of taxes and administrative charges. However, the Circular does not elaborate the details of such preferential treatment. The Ministry of Finance and the National Development and Reform Commission recently issued a joint notice (Cai Shui 2014 No. 77) to specify how senior care facilities can enjoy the reduction of administrative fees.
The tax benefits awarded to foreign investors remain unclear. The Chinese Government has recently launched a campaign to investigate tax benefits granted by local governments on a discretionary basis, in particular, targeting tax benefits which have been approved without express authorization of law or from the State Council.
This overhaul in the tax scheme will mean that there may be less flexibility in tax benefits. However, it is anticipated that tax benefits made available to foreign invested senior care facilities will have either express legal basis or written endorsement from the State Council.
One big issue unanswered by the Circular is whether the services provided by foreign invested senior care businesses will be subject to price control by the Chinese Government. This issue was touched on in the Administration Measures of Senior Care Facilities promulgated by MCA in 2013 but no further details have been given in the Circular.
The Circular is a welcome move for foreign investors in the senior care industry. It is anticipated that the Chinese government will introduce further clarification and implementation measures in the coming year. Compared to foreign investment in medical institutions in China which are subject to more regulatory restrictions3, foreign investors may find it easier to establish a wholly owned senior care institution in China and apply their brand, expertise and know-how as they see appropriate. For now, domestic firms are not yet sophisticated enough to pose serious competition in this nascent industry. In light of this development, we are likely to see a boom of foreign investment in the China’s senior care sector from international companies and private equity funds and the introduction of more international healthcare brands in the market.
1. Non-profit foreign invested senior care facility must be registered with MCA.
2. Proposed name of the institution, which has to be registered with the local SAIC
3. For example, in most places in China foreign investors are not allowed to set up wholly foreign owned medical institutions.