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C
hina
B
riefing
·
Issue 167
·
August
2016
8
This alsoapplies to the aforementioned international
schools for children of foreigners. Correspondingly,
education institutions are usually required to be
registered as “private non-enterprise units” in the
civil affairs department, rather than registered as
“limited liability companies” in the Administration
of Industry and Commerce (AIC).
Although the Private Education Promotion Law
(
民办教育促进法
) stipulates that investors could
get a “reasonable return”of up to 75 percent of the
net margin from a private education institutions, it
is still significantly different from regular dividends
distribution. In practice,“reasonable return”is rarely
added into the institution’s Articles of Association
because this concept is never clearly defined,
making pre-establishment approval even more
difficult as a result.
Nevertheless, the recent revision of China’s national
education laws in 2015 – together with some
local level regulations and practices – sheds some
light on the feasibility of for-profit education. The
revised PRC Education Law (
教育法
) abolished the
previous provision “No organization or individual
may establish or run a school or any other
educational institution for profit-making purposes”,
pointing towards a more relaxed attitude from the
government regarding for-profit education. At
the local level, Shanghai released two provisional
regulations on commercial training institutions
in 2013, making Sino-foreign for-profit education
explicitly operable in the Pilot Free Trade Zone
(FTZ). Similar practices are also observed in Beijing,
Guangzhou, Shenzhen, and Hangzhou, amongst
others, though these cities have not released
formal regulations as Shanghai has. Conversely,
however, the vote on the proposed amendment
to the “Private Education Promotion Law”, which
emphasizes the legitimacy of for-profit education
and specifies the transfer method of non-profit
education institutions to for-profit institutions,
was temporarily suspended. There are also further
contradictions in China’s recently released NGO
law, which is discussed in detail in this magazine’s
final article. Consequently, it is still too early to say
that the barriers to for-profit education have been
eliminated, both legally and in practice.
Common Investment Models
In view of the abovementioned restrictions and
market entry barriers, foreign investors sometimes
use the “variable interest entities (VIE)” model
to access China’s education industry. Under
this model, foreign investors retain control over
entities operating domestically in China through
a series of contractual arrangements rather than
direct shareholding. Typical examples include
TAL Education Group, New Oriental, and Maple
Leaf Educational System, the structure of which is
summarized in the graph in the upper left.
However, considering the increasing legal risks
embedded in the VIE structure, such as contract
invalidity, fighting of control rights, and transfer
pricing reviews, investors may instead choose one
of several direct investment models, including:
• Model 1:
Set up self-owned pre- and K12
international schools for children of foreigners
or vocational training centers, e.g. Wellington
College International Shanghai, Wall Street
English, etc.
• Model 2:
Set up Sino-foreign cooperative
educational institutes, such as a university-level
cooperation (e.g. NYUShanghai), department-level
cooperation (e.g. China-EU School of Law), and
program-levelcooperation(MDSProgrambetween
Peking University and Hong Kong University)
WFOE
Typical VIE Structure
Domestic
Operating
Entities
Contractual Arrangements
Such as: Trademark licensing agreements,
teaching support agreements,
service agreements, website development
and use agreements,
equipment rental agreements
OFF SHORE
Foreign Investors
SPV-1
Overseas
SPV-2
(a VIE structure targeting China
will usually have two SPVs,
with the second typically Hong Kong)
ON SHORE