By Jeffrey Zhu / Malo Yang

 

On 7^th November, 2016, the Standing Committee of PRC National People’s Congress adopted the Decision on Revising the Law of the People’s Republic of China on the Promotion of Private Education (the “Amendment”), which will come into effect as of 1^st September 2017.

 

To implement the Amendment, the State Council promulgated the Several Opinions of the State Council on Encouraging Civic Entities to Run Schools and Promoting Healthy Development of Private Education (the “Opinions”) on 29^th December 2016; the Ministry of Education, Ministry of Human Resources and Social Security, Ministry of Civil Affairs, State Commission Office of Public Sectors Reform and State Administration for Industry & Commerce jointly promulgated the Implementation Rules for Classified Registration of Private Schools (the “Rules for Classified Registration”) on 30^th December 2016; and the Ministry of Education, Ministry of Human Resources and Social Security and State Administration for Industry & Commerce jointly promulgated the Implementation Rules on Regulation and Supervision over the For-profit Private Schools (the “Rules over For-Profit Private Schools”) at the same day.

 

Based on the four aforementioned regulations, together with our experience from long-term practice, we set forth below the major changes on the administration and supervision over the private education:

 

1.       Private schools are classified as for-profit and non-profit private schools, and shall be applied to classified registration and charging Policies

 

The Amendment and Rules for Classified Registration stipulate that the sponsor(s) may choose to establish a private school as a non-profit or for-profit private school at its discretion; the non-profit school shall be registered as (i) a private non-enterprise entity with the local Administration for Civil Affairs or (ii) a non-profit institution with the local Administration for Organization Establishment, and the for-profit school shall be registered with the relevant Administration for Industry & Commerce (“AIC”) .

 

In addition, the following different charging polices shall apply to the non-profit and for-profit private schools:

 

1)       for-profit private schools shall implement market-adjusted charging policy, and determine the fee standards on their own without any prior administrative approval or filing. The only limitation is that the items and standards of fee shall be published for public review for 30 days before execution.

 

2)       non-profit private schools cannot implement market-adjusted charging policy right now, and the specific measures for them to charge fees shall be formulated by government of province, autonomous region or municipality directly under the Central Government.

 

However, since the Amendment will not be in effect until 1^st September, most of the local AICs in Beijing, Shanghai, Guangzhou and Shenzhen do not accept the application for registration of for-profit education institutions for the time being, including for-profit private schools and for-profit private training institutions.

 

2.       For-profit private training institutions shall be regulated and supervised according to the requirements for for-profit private schools, and shall obtain a permit for running school

 

Article 66 of the Law of the People’s Republic of China on the Promotion of Private Education[1] before the adoption of the Amendment (the “Original Private Education Law”) stipulates that the administrative measures of for-profit private training institutions registered with the AICs shall be separately formulated by the State Council.  Although the State Council has never formulated the abovementioned measures, it authorized Shanghai city, Zhejiang province and other places as the pilot areas to implement the classified registration on for-profit private schools and non-profit private schools.  Thus, a large number of for-profit private training institutions registered with the AICs emerged and most of which have not obtained the permit for running school.

 

The Amendment deleted the abovementioned Article 66 of the Original Private Education Law, and Article 49 of Rules over For-profit Private Schools clearly stipulates that the Rules over For-profit Private Schools shall apply to for-profit training institutions.  Therefore, the for-profit private training institutions are required to obtain the permit for running school before registered with the AIC, and this has been verified by the local Administration for Education and AICs in Beijing, Shanghai, Guangzhou and Shenzhen.

 

However, as mentioned above, since the Amendment has yet to take effect, most of the local Administrations for Education and AICs in Beijing, Shanghai, Guangzhou and Shenzhen do not accept the application for permit for running school and registration of for-profit private training institutions for the time being. Nevertheless, we have observed a side effect of this change: AICs have been explicitly authorized to take actions against those existing for-profit school and training institutions that have obtained business licenses from local AICs but not obtained the permit from local Administration for Education or Administration for Human Resources and Social Security.

 

3.       The sponsors of for-profit private schools may obtain legal proceeds from the operating surplus of the said school

 

The Original Private Education Law does not classify the private schools into for-profit or non-profit private schools, and allows the sponsors of the schools to obtain reasonable returns from the operating surplus of the school, but we seldom see sponsors obtain reasonable returns directly from the private schools mainly because of the following two reasons:

 

1)       Before the promulgation of Rules for Classified Registration and Rules over For-profit Private Schools, which stipulate that the for-profit private schools shall be registered with the AIC, a private school in most parts of China was only allowed to be registered as (i) a private non-enterprise entity with the local Administration for Civil Affairs or (ii) a non-profit institution with the local Administration for Organization Establishment (excluding the private training institutions in the previous Pilot areas).  Furthermore, according to Interim Regulations for the Administration of Registration of Non-Enterprise Entity[2] and Interim Regulations for the Administration of Registration of Non-Profit Institution[3], the non-enterprises and non-profit institutions shall be non-profit and make no allocation on their operating surplus.

 

2)       The Implementation Regulations on the Law of the People’s Republic of China on the Promotion of Private Education[4] (“Implementation Regulation on Private Education”) sets a series of rigid procedures, vague standards to determine the proper rates and severe sanctions against illegal acts to regulate the obtaining of reasonable returns.

 

The Amendment and Rules for Classified Registration stipulate that the sponsors of a private school may choose to register a private school as a for-profit private school with the AIC at its discretion, and then obtain legal proceeds from the operating surplus of the school according to the PRC Company Law and other relevant PRC laws and administrative regulations.  Therefore, a for-profit private school is no longer limited to be registered as a private non-enterprise entity or a non-profit institution, and can make allocation on its operating surplus.  Meanwhile, the Amendment also removes the relevant provisions regarding the reasonable returns in the Original Private Education Law.

 

4.       The existing private schools can be registered as for-profit private schools, and shall deal with their remaining assets after paying off debts according to PRC company law

 

Since the private schools, which were approved to be established before the adoption of the Amendment on 7^th November 2016 (the “Existing Private School(s)”), have not been classified into for-profit or non-profit private schools in most parts of China, the Existing Private Schools shall be registered as non-profit or for-profit private schools according to Rules for Classified Registration after 1^st September 2017.

 

An Existing Private School can be registered as a for-profit private school with the AIC after completing the following procedures:

 

1)       financial liquidation;

 

2)       clarifying property ownership of the land, premises and school accumulation by departments concerned of the sub-provincial government and related institutions;

 

3)       paying relevant taxes;

 

4)       re-applying the permit for running school.

 

According to the Opinions, if an Existing Private School chooses to be registered as a for-profit school, when terminated, its remaining assets after paying off debts shall be dealt with according to the PRC Company Law, which means its remaining assets can be allocated to its sponsors.

 

After the adoption of the Amendment on 7^th November 2016, the mergers and acquisitions of private schools are frequent in the capital market, and the premium is relatively high.  However, as mentioned above, since the Amendment has yet to take effect, for the time being, the buyer usually holds the interests of a private school by acquiring the shares of the sponsors (usually are companies) of a private school rather than acquiring the interests of the private school directly.  Furthermore, the sponsors usually transfer the profits of the private school through performance of the consulting and service agreement, curriculum development agreement, marketing support agreement or IP license agreement.

 

5.       Government support system toward private schools has been further improved

 

1)       Encouraging to Broaden Fund-raising Channels

 

PRC Governments encourage financial entities to develop financial products which are appropriate to the private schools’ characteristics provided that the risk is controllable, and to explore to provide diversified financial services to private schools, such as collateralized loan on school’s expected operation income or intellectual property, bank loan, trust and financial leasing.

 

Concurrently, we have noticed that the first ABS of private schools after the adoption of the Amendment —— The Special Assets-backed Scheme of Securities Backed by Tuition of 21^st Century International School has received the No-objection Letter from Shanghai Stock Exchange on 6^th February 2017.  The underlying assets of the above Scheme are the school’s partial expected tuition and quarterage and the total scale of the above Scheme is RMB 300,000,000.

 

2)       Distinct Tax Preference

 

a)       Same price policy with public schools on fees of using electricity, water, gas and heat service.

 

b)       Exempting from house property tax and urban land used tax for self-used house and land.

 

c)       As regards an enterprise's expenditures for public welfare donations, the portion within 12% of the total annual profits is permitted to be deducted; a natural person’s public welfare donation on supporting education can be deducted in accordance with the laws and regulations and policies related to tax.

 

d)       Enjoying the same tax preferential treatment with public schools.  The non-profit income of Private schools can be exempted from corporate income tax after acquiring tax free qualification under the Tax Law.

 

3)       Distinct land using policies

 

Construction land of private schools will be administrated as land for science and education, and land using policies to non-profit private schools and for-profit private schools are different.

 

a)       The land for Non-profit private schools can be supplied by way of allocation under the same policy with public schools.

 

b)       The land for for-profit private schools shall be supplied by the way conforming to relevant administrative policies, currently including the way of calling for bids, auction, listing and negotiated trade).  If a for-private school is the sole candidate applying for using a land, the land can be supplied by way of negotiated trade.

 

However, when land users apply for modifying the using purpose of whole or part of the land, government will retrieve the land and re-supply it under the price at that time.

 

6.       Chinese Communist Party (“CCP”) will intensify its leadership on private schools

 

To conclude relevant provisions on Opinion of the State Council, Rules for Classified Registration and Rules over For-profit Private Schools, the intensification of leadership by CCP on Private School mainly appears as follows:

 

1)       CCP organization shall be established in Private Schools.  The person in charge of the CCP in the school will also act as the steering commissioner of the School appointed by local government as well as a member of the board of director or executive council of the School (board of governors).

 

2)       Additional documents and materials with respect to the establishing of the CCP organization in the school shall be submitted when applying the establishment of a private school, among which a for-profit private school shall specify the establishment of CCP organization in the application report and shall submit a list stating the person in charge of the CCP organization and members of such organization and their respective photocopy of valid identification, and submit a list stating teaching staff who are CCP members.

 

3)       The establishment of the CCP organization in and its leadership in the school will be important aspects to be reviewed in the annual review.

 

4)       If board of supervisors is set in for-profit private schools, member(s) of the CCP leaders shall be involved in such board.

 

5)       For-profit Private Schools shall include into the school expense budget with the fund for CCP organization construction, ideological and political work and mass organization work.

 

7.       Private schools shall draw not less than 5% of the amount of the tuition as a fund for rewarding and supporting students

 

       The Implementation Regulation on Private Education has stipulated that private schools shall draw not less than 25% of the amount of the annual increase in the net assets or the annual net profit, as a development fund for construction and maintenance of the school and for purchase and updating of its teaching equipment.  And the Opinions stipulate that private schools shall draw not less than 5% of the amount of the tuition as a fund for rewarding and supporting students.

 

But please note that at present, in addition to the above two national-wide funds, the local laws or regulations usually require private educational institutions in certain educational fields to set up the school-running risk fund for the expenses of dealing with the remaining problems such as the students’ fees refund and teachers’ remuneration when the educational institutions encountering school-running difficulties or crisis.  For instance, Measures for the Administration of Secondary Vocational and Non-degree Education by the Social Forces in Guangdong Province (For Trial Implementation)[5] requires that the sponsor(s), after the education institution is officially approved to be established, must pay the first tranche of school-running risk fund for the educational institution, which is, for the secondary vocational school 100,000 yuan and for non-degree educational institution 50,000 yuan; educational institutions, starting from their formal enrollment, shall draw 10% of the amount of the tuition into the special account opened by the examination and approval department each year until the amount of fund equals to the total amount of 1 year tuition of students at the educational institution.

 

8.       New qualification requirements for the private school principals

 

The Amendment does not modify the provision on the principal’s qualifications in the Original Private Education Law, which is the private school shall engage a principle who has the similar qualifications with the principal in a public school of the same grade and category, and the age limit may appropriately be extended.  However, the Opinions, clearly stipulates that the principal of a private school shall be familiar with PRC educational and other relevant laws and regulations, have at least five years of education management experience, have performed well in their previous school management; and have good personal credit ratings.

 

Please note that, other laws and regulations, which have set stricter qualifications for the principals in certain educational fields, shall remain applicable.  For instance, the Provisions on the Administration of Higher Education[6] stipulates that the principal of a higher education private school shall have at least ten years of higher education management experience, with the age no more than 70.

 

9.       New special requirements on for-profit private schools

 

Comparing to non-profit private schools and ordinary companies, the Amendment to Private Education Law and Rules over For-profit Private Schools set several special requirements on for-profit private schools.  Here below are the main special requirements except the special requirements related to strengthening CCP’s leadership in the private schools listed above:

 

1)       A for-profit private school is prohibited from delivering the compulsory education (from primary school to junior secondary school, 9 years in total).  To avoid the foregoing requirement, we have noticed that some enterprises are transferring the profit of private schools which are delivering compulsory education by way of charging service fees or other fees, such as the Wisdom Education International Holdings Company Limited, which was just listed on Hong Kong’s stock exchange.

 

2)       Sponsors must be a natural person who is a Chinese national and domiciled in China or a Chinese legal person whose legal representative is a Chinese national and domiciled in China.

 

3)       Donated assets and the government appropriation shall not be used for or participate in the establishment of a for-profit private school.

 

4)       The educational facilities shall not be mortgaged.

 

5)       Comparing to there is no registered capital requirement on an ordinary company, the registered capital of a for-profit private school is required to suit its nature, level and scale, but the specific and exact amount standard is still unclear currently.

 

6)       The sponsor(s) of a for-profit private school shall have the economic capability that is appropriate to the school’s level, nature and scale.  When applying for the pre-establishment of or the official establishment of a for-profit private school, documents relating to the economic capability must also be submitted, including the annual audit report issued by a qualified accounting firm for the last two years (if the sponsor is a legal person) or personal certificate of deposit (if the sponsor is a natural person).

 

7)       A for-profit private school shall set up a board of directors rather than an executive council or an executive director.

 

However, the current legislative reform on private education failed to address the following dilemmas foreign investors are facing in China’s private education sector:

 

Regarding investment forms: non-degree professional skill training institutions are the only foreign investment form classified as “encouraged” under the Catalogue for the Guidance of Foreign Investment Industries (2015 edition)[7], and explicitly allowed to be established solely by foreign investor(s) under the Special Management Measures for the Market Entry of Foreign Investment in the Pilot Free Trade Zone (Negative List)[8].  But due to the lack of further legislation on wholly foreign owned non-degree professional skill training institutions, in most parts of China[9], the only form foreign investors can take in investing the said institutions still is Sino-foreign cooperation.

 

Regarding the investment scope: the Catalogue for the Guidance of Foreign Investment Industries (2015 edition) re-classifies higher education institution, senior secondary education institution and pre-school education institution as restricted industry for foreign investment, which can only be invested in the form of Sion-foreign cooperation, and the Chinese side shall take a dominant position therein, which means its principal or the leading administrator shall have Chinese nationality, and the Chinese members of the executive council, board of directors or joint management committee therein shall not be less than 1/2.