Back to Asia Pacific Regional Forum publications

David Wang
Zhong Lun Law Firm, Shanghai
davidwang@zhonglun.com

April Yan
Zhong Lun Law Firm, Shanghai
yanjingan@zhonglun.com

Klaus Ni
Zhong Lun Law Firm, Shanghai
niyunxuan@zhonglun.com
 

Although Deng Xiaoping’s‘open door’ policy opened the door to foreign investors and businesses, the education industry remains a highly regulated area in China, especially K12 education (from pre-school education to high school education). Depending on the different phases of K12 education, foreign investment is either prohibited or restricted. Where restricted, the foreign investor is required to cooperate with a local Chinese party in order to comply with regulatory requirements.

In this article we will summarise key regulatory requirements for foreign investment in K12 education and illustrate some key points in cooperating with Chinese parties, supported by our experience in assisting foreign education institutions establish a K12 education program in China.

K12 education

According to the Regulations for the Implementation of the Law of the People’s Republic of China (PRC) on Promoting Private Education (the ‘Education Promotion Law’, revised in 2018) and other relevant regulations, public organisations or individuals, other than state authority, are prohibited to establish private profit-making schools providing compulsory education from elementary to junior high school level. This requirement is in line with China’s 2019 foreign investment negative list (the ‘Negative List’) which specifically prohibits foreign investors from investing in China’s private schools for compulsory education.

In addition, the Negative List has set out that pre-school and high school education shall be limited to the form of a Sino-foreign cooperative institution or program, and shall be dominated by the Chinese party (please refer to the table below for detailed requirements on Chinese party dominance).

Put simply, the legally feasible option for foreign investment in K12 education is to form a Sino-foreign cooperative institution or program with a Chinese party. The PRC laws and regulations distinguish between a Sino-foreign cooperative education institution - Cooperative Education Institution - and a Sino-foreign cooperative education program - Cooperative Education Program. The major difference between these two forms is that the Cooperative Education Institution focuses on establishing a new school.

In practice, it is quite common for the Chinese party to contribute the rights of land use and other real properties for establishing a school, while the foreign party will primarily contribute the intellectual properties (such as course design, training of teachers, etc). The Cooperative Education Program is another form where Chinese and foreign parties cooperate to offer joint education programs without establishing a new school.

The governmental approval/filing requirements of the Cooperative Education Institution and Cooperative Education Program for pre-school and high school education are slightly different. Both the Cooperative Education Institution and the Cooperative Education Program for pre-school and high school education are submitted to the educational administration department of the provincial level for approval. However, the Cooperative Education Program for pre-school and high school education will also be filed with the educational administration department under the State Council for record. It is worth noting that application for a Cooperative Education Institution or Cooperative Education Program can only be filed with the approval authority in March or September of each year.

The table below summarises the regulatory requirements for foreign investment in K12 education:

 

	Phase of Education	FDI Treatment	Approval Authority	Filing Authority
Foreign investment in K12 education	Preschool	Restricted to Sino-foreign cooperative institution or program	Educational administration department of the provincial level	Sino-foreign cooperative program filed to the educational administration department under the State Council.
	Elementary school	Prohibited	N/A	N/A
	Junior high school	Prohibited	N/A	N/A
	High school	Restricted to Sino-foreign cooperative institution or program	Educational administration department of the provincial level	Sino-foreign cooperative program filed to the educational administration department under the State Council.
Requirements of Chinese party’s dominance	Sino-foreign cooperative institution or program shall be dominated by a Chinese party, which requires that: the proportion of foreign investment shall be less than 50 per cent; the principal or chief executive is a Chinese national; and at least half members of the council, board of directors or joint administrative committee have Chinese nationalities.

 

Key points in cooperating with a Chinese party

For preschool and high school education the foreign investor needs to cooperate with the Chinese party to establish a Cooperative Education Institution or Cooperative Education Program. As the foreign investor is unfamiliar with the Chinese market and relevant PRC laws and regulations, they are usually in a weak position to negotiate with the Chinese party and may fall into some regulatory risks.

Here are some key tips based on our prior experience to help foreign investors better understand potential risks in dealing with the Chinese party and how to avoid them.

The legal capacity of the Chinese party

When forming a Cooperative Education Institution or Cooperative Education Program with a Chinese party, it is important to verify the legal capacity of the Chinese party. According to article 9 of the Regulations of the PRC on Sino-foreign Cooperative Education, both Chinese and foreign educational institutions applying for the establishment of a Cooperative Education Institution must be of legal person status.

If the Chinese party is a limited liability company, we suggest requesting the Chinese party provides their latest business license, which will serve as a proof of the Chinese party’s legal establishment and valid existence. Sometimes, the Chinese party discussing the cooperation project with the foreign party is not the one who will enter into the cooperation agreement with the foreign party, therefore, it is important to verify the legal status and qualification (as mentioned below) of the actual cooperation party.

The educational qualification of the Chinese party

Under the PRC law, private profit-making schools shall apply for the ‘License for Establishment of a School’ (the ‘School Establishment License’) before engaging in profit-making educational business. To verify the educational qualification of the Chinese party, we suggest requesting a copy of the School Establishment License obtained by the Chinese party in order to prove that they are qualified to carry out educational activities. In some provinces, such as Shanghai, it is also feasible to verify the information of the School Establishment License on the official website of the education authority where such Chinese party is located.

Cooperation agreement with the Chinese party

According to article 5 of the Implementing Measures for the Regulations of the PRC’s on Sino-foreign Cooperative Education (‘Implementing Regulations’), the Chinese and foreign parties that intend to engage in cooperative education shall sign a cooperative agreement. The cooperation agreement is the most essential document between the foreign and Chinese parties. It will set out both parties’ rights and obligations, and it must be submitted to the approval authority for approval. There are several factors which also need to be considered.

Regulatory requirements

In addition to the governmental approval and filing requirements as mentioned above, according to the Implementing Regulations, the following documents of the Cooperative Education Program must be filed with the approval authority for record:

• courses and list of teaching materials;

• student administration system; and

• samples of the enrollment brochure and advertisements.

To avoid any regulatory risks, we suggest stipulating in the cooperation agreement that the Chinese party shall be responsible for completing all relevant approval and filing requirements under the Implementing Regulations and other applicable laws and regulations, and shall bear default liabilities for its failure to complete them.

Diplomas

According to article 34 of the Implementing Regulations, the Cooperative Education Institution or Cooperative Education Program may issue either a Chinese diploma or a foreign diploma. If a foreign diploma is issued it must be identical to the foreign diploma issued by the foreign education institution in the country where it is located and shall be recognised in that country.

In some cases, the foreign education institution is unable issue an identical foreign diploma for the Cooperative Education Institution or Cooperative Education Program due to local legal requirements or school policies. The parties then may agree to issue a Chinese Partnership Diploma, which includes the statement ‘in partnership with the foreign education institution’. The Partnership Diploma is not prohibited under the Implementing Regulations.

Since the educational authorities of different provinces have their own specifications, we advise to request that the Chinese party confirm with the local education authority whether a Partnership Diploma is acceptable.

Intellectual property rights

In practice, it is quite common that the foreign party will license the Chinese party to use its intellectual property (IP) for the purpose of program promotion, curriculum design, etc. To control the proper use of IP, we suggest adding certain restrictions in the cooperation agreement. For example, any content of the program promotion or curriculum materials shall be pre-approved by the foreign party in writing. Additionally, if the cooperation agreement is terminated, the Chinese party shall return the foreign party’s IP and any copies thereof immediately.

To summarise, the education industry in one of the few areas in China which is still heavily regulated. To avoid any legal compliance issues, we suggest that when making investment in K12 education foreign investors shall engage experienced PRC legal counsels as early as possible to ensure the Cooperative Education Institution or Program can be established legally, smoothly and be continued successfully.