On 7 November 2016, the Standing Committee of the National People’s Congress passed a decision on the amendments to the Law on Promotion of Private Schools, which will take effect on 1 September 2017. The revised law reflects a major reform in the regulation of private schools in China; for the first time, it recognizes the legality of for-profit private schools.
According to the current Law on Promotion of Private Schools, promulgated in 2013, sponsors of non-profit private schools are generally allowed to demand “reasonable return” from schools. However, as the current law and its implementation rules did not specify a clear definition and criteria for “reasonable return”, it is difficult for the sponsors to obtain “reasonable return” in practice.
In contrast, the revised law explicitly classifies private schools into non-profit and for-profit schools. Preschools, high schools, higher education schools and non-degree education schools can be established as for-profit schools, but schools of compulsory education (i.e., primary schools and junior high schools) must be non-profit.
The revised law elaborates on different regulations and treatments applicable to the for-profit private schools and non-profit private schools in the following major aspects:
- Distribution of surplus. Sponsors of a for-profit school are entitled to the distribution of the surplus from school operations in accordance with the Company Law, while for a non-profit school the surplus cannot be distributed to sponsors, and must only be used for school operations.
- Registration of legal entity. A for-profit school should be registered with the Administration for Industry and Commerce, while a non-profit school should register with the Administration of Civil Affairs.
- Tuitions and fees. A for-profit school may determine tuition and fees based on market conditions, while a non-profit school must follow fee scales set out by the provincial-level government.
- Taxes. A for-profit school may enjoy some preferential tax policies in accordance with national regulations, while a non-profit school can enjoy the same preferential tax treatments as public schools.
- Use of land. A non-profit school has the same preferential land policies as public schools, i.e., allocated land can be used to establish a non-profit private school. A for-profit school has to obtain land use rights according to national regulations.
- Distribution of liquidating assets. In winding up a for-profit school, assets must be liquidated according to the Company Law. With a non-profit school, the remaining assets after liquidation can only be used for operation of a non-profit school.
- Government support. Government support for a for-profit private school includes government procurement of services, student loans, scholarships/financial aids, and lease or transfer of idle state-owned assets. A non-profit school may also enjoy government subsidies, fund awards and donations.
For transition from the current law to the revised law, private schools established pursuant to the current law may choose to continue to be a non-profit school, or become a for-profit school once the revised law takes effect. If a school chooses to remain non-profit, it only needs to amend its articles of association and other registration information accordingly.
A private school may be re-registered as a for-profit school if it is applied for, provided that financial liquidation has been conducted to clarify the ownership of the properties of the school, and the related taxes and fees have been paid. The detailed regulations in this regard will be formulated by local governments at provincial level.
Private schools constitute an important component of the education sector in China. A report issued by Ministry of Education in 2015 counts 163,000 private schools nationwide. In particular, private schools constitute up to 90% of the total number of preschools. It could be reasonably expected that implementation of the revised law will have a profound impact on investment in the education industry in China. For-profit private schools will become popular targets of capital investment, and will be put into the assets pool of companies going for listing.
The authors expect that the revised law will also have a major impact on foreign investment in the private education industry in China. Foreign investors may have more options in determining appropriate investment structures, in addition to commonly used contractual arrangements. However, the revised law does not lift restrictions on the holding of foreign capitals in private schools, which means foreign investors still have to set up private schools in the form of Sino-foreign co-operation, and are permitted to invest in a for-profit private school and entitled to the profit distribution under the revised law.
The authors expect the release of more detailed implementing rules in connection with the revised law, and believe that its implementation will help the private education sector in China to enter a new era.
Yi Qian is a partner at AllBright Law offices in Shanghai, and Dannie Xu is an associate at the firm