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Foreign NGOs and NPOs in China: a growing sector navigating regulatory complexity

7 June 2021

Ivy Yang

Senior Manager, Business Development

Ivy Yang

Senior Manager, Business Development

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We assess the challenges and opportunities for international non-profit organisations entering China.

The number of foreign non-governmental organisations (NGOs) and non-profit organisations (NPOs) registered in China has increased by 50% over the past two years to around 595 today.

Compared with the number of foreign commercial companies, the landscape of NGOs and NPOs remains very small, of course. But this challenging sector, which is addressing a wide range of social causes, is growing fast.

On 1 January 2017, the authorities introduced the Overseas NGO Law with the aim of governing how foreign NGOs and NPOs (including foundations, social groups and think tanks) operate in China. The new rules raised the compliance standard for organisations that would like to establish local offices; but they have also attracted large international NGOs, for whom compliance is less of an obstacle. These include the Bill and Melinda Gates Foundation, WWF, Children Investment Fund Foundation, Save the Children, ClientEarth and various industry associations such as the Brewers Association and the Institute of Management Accountants.

How the Overseas NGO Law works

Before the new law came into effect in 2017, foreign NGOs operating in China did not have a clear set of regulatory frameworks to follow. The new rules are therefore a welcome step towards eliminating uncertainties and ensuring uniform compliance standards for the industry.

As this is a niche sector and the law is relatively new, there is little common practice for foreign organisations to follow. It is therefore vital that NGOs planning to set up in China seek legal advice to help structure their operations, establish relationships with their PSUs (Professional Supervisory Units) and obtain government approval. It is also essential to engage a professional accounting firm to navigate the rules and ensure that local offices are compliant – because these local offices are usually held to a higher standard than typical commercial enterprises.

According to the Overseas NGO Law, foreign NGOs have two means of operating in China. The first is to set up a representative office (RO) and the second is to conduct temporary activities. The latter refers to a short-term venture with a Chinese partner – for example, a one-year project with a Chinese university. With 3,395 temporary activities registered in China as of 12 April 2021, compared with just 595 NGO/NPO ROs, this is seen by many organisations as the most viable route, despite the time restrictions and other conditions.

Setting up and running an RO

For those choosing to register an RO, one of the key challenges is to get approval from the relevant Professional Supervisory Unit (PSU). This takes time and commitment to build a mutual understanding between the applicant organisation and the relevant ministry or bureau.

The PSU process varies depending on the sector in which the organisation intends to operate. For example, foreign NGOs working on environmental protection should apply to the Ministry of Ecology and Environment. As China is currently very focused on environmental protection concerns, such as combating air pollution, approval processes may be relatively straightforward. For NGOs and NPOs whose agendas do not align as closely with that of the authorities, the process could prove more difficult.

Once the RO is established, the organisation must submit an audit and an activity plan to the PSU each year. The law requires this activity plan to “detail the projects that they intend to run and how they intend to use their funding

in the coming year”. This can be a significant undertaking – especially for NGOs that run multiple projects.

Furthermore, deadlines are often tight; the plan must be submitted to the PSU before the end of December. And, after approval, the RO must submit it to the registration management authorities for filing within 10 days. An external accounting firm and auditor can help with this process; it’s crucial to select a firm that can meet tight deadlines and that has good track records on compliance matters.

A representative office or a wholly foreign-owned enterprise?

Organisations sometimes opt for a third structure: a wholly foreign-owned enterprise (WFOE). This gives more operational flexibility than an RO – for instance, around funding and banking – and there is no PSU involved. For instance, an educational NGO may choose a WFOE structure to enable them to conduct certain profit-making activities locally and thus generate a cash flow in China to better support its philanthropic cause.

When decided which is the most appropriate structure, organisations should always consider their proposed activity and operating models, along with their legal and compliance requirements. Intertrust Group works with a wide spectrum of professional law firms that have relevant expertise and experience in this sector, to help organisations make appropriate decisions.

How challenging is the new law?

While the Overseas NGO Law has raised compliance standards and associated costs for foreign NGOs looking to set up and operate in China, it has provided a clear roadmap for international organisations that want to further their cause in the local community.

Despite the initial difficulties that arose for smaller NGOs and NPOs, due to these heightened compliance requirements, the growing number of registered organisations proves that there are opportunities available if you find the right support. An excellent example is the Coalition for Epidemic Preparedness Innovations (CEPI) – a global partnership that launched in 2017 to develop vaccines to prevent future epidemics from spreading. CEPI gained approval to establish itself in China in the midst of the Covid-19 pandemic and is a testament to the international cooperation that is possible under the new law.

How Intertrust Group can help NGOs and NPOs

  • Liaising with legal advisers to complete approval and registration filings
  • Post-registration, including bank selection and account opening, tax registration and CA certificate application
  • Daily maintenance, including accounting, tax compliance, treasury, payroll and custodian duties
  • Annual compliance, including audit assistance and government reporting