At a glance: the implementation of China’s Foreign Investment Law

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published on 23 January 2020 | reading time approx. 7 minutes

 

The Regulation on the Implementation of the Foreign Investment Law (the “Implementation Regulation”), drafted by the Ministry of Justice of the People’s Republic of China and the Ministry of Commerce along with the Development and Reform Commission, came into force on 1 January 2020. The Implementation Re­gu­lation is the supporting administrative regulation of the Foreign Investment Law of the People’s Republic of China (the “Foreign Investment Law”), which details the specific measures of the Foreign Investment Law, aiming at continuously optimizing the investment environment and further protecting the legitimate rights and interests of foreign-invested enterprises.

 

 

Investors in the FIL

The Implementation Regulation clearly defines the concept of foreign investment in the Foreign Investment Law. As stipulated in the Foreign Investment Law, foreign investment includes the establishment of foreign-invested enterprises in China by foreign investors alone or jointly with other investors; also includes foreign investors investing in new projects in China alone or jointly with other investors. However, the term of “other investors” is controversial. In order to address this issue, the Implementation Regulation explicitly includes Chinese natural persons as “other investors”. Therefore, foreign investors shall have the right to set up foreign-invested enterprises or invest in new projects independently or jointly with Chinese natural persons, and such foreign investment shall be protected by the Foreign Investment Law and the Implementation Regulation.
 

Establishment of Foreign-invested Enterprise

The approval and filing system for the establishment of foreign-invested enterprises is one of the foreign investment management systems that were established in the Law of the People’s Republic of China on Sino-foreign Equity Joint Ventures, the Law of the People’s Republic of China on Sino-foreign Co-operative Enterprises and the Law of the People’s Republic of China on Wholly Foreign-owned Enterprises and its supporting administrative regulations. When the Foreign Investment Law and the Implementation Regulation came into force on 1 January 2020, the above three laws and their implementation rules as well as the Provisional Regulation on the Duration of Sino-foreign Equity Joint Venture Enterprises were invalidated at the same time, thus the approval and filing system for the establishment of foreign-invested enterprises would no longer be in use. The move will effectively implement the pre-establishment national treatment and negative list management system established by the Foreign Investment Law, further simplify the procedures for setting up foreign-invested enterprises, and create a more convenient environment for foreign investment.
 

The newly effective Implementation Regulation specifies the implementation mechanism of the negative list for foreign investment. Foreign investors cannot make investment in industries where investment is prohibited by the negative list. Where foreign investment is restricted in the negative list, foreign investors must meet the equity requirements, senior management requirements and other restricted access requirements specified in the negative list. The negative list will be adjusted in due course in light of the country's further opening-up and economic development needs. According to the current form of economic policy, it is conceivable that the negative list will be further compressed.
 

Standardize the Administration of Foreign Investment

In accordance with the provisions of the Foreign Investment Law on encouraging and guiding foreign investors to invest in specific fields, the Implementation Regulation further illustrates specific incentive measures. According to the Industry Guidelines on Encouraged Foreign Investment, foreign investors are entitled to preferential treatment in public finance, taxation, finance and land use if they make investment in relevant encouraged industry. Moreover, the Implementation Regulation further clarifies that foreign investors are entitled to enjoy corresponding preferential policies for reinvestment (i.e. to expand their investment in China with their investment income in China).
 

In view of the foreign-invested enterprise information reporting system established in the Foreign Investment Law, the Implementation Regulation has clarified the details for implementation of the system. Foreign-invested enterprise shall submit relevant investment information through the company registration system and the national enterprise credit information publicity system in accordance with the content, scope, frequency and process required by the Commission of Commerce and the State Administration for Market Regulation. At the same time, the department of commerce and relevant authorities shall strengthen information sharing. The information that can be obtained through departmental information sharing shall not be demanded from the foreign investors or foreign-invested enterprises. This measure will greatly reduce the burden on foreign-invested enterprises.
 

In order to implement the foreign-invested enterprise information reporting system, the Ministry of Commerce and the State Administration for Market Regulation promulgated the Measures on Foreign-invested Enterprise Information Reporting on December 30, 2019 (the “Measures”). The Measures came into effect on 1 January 2020. The Measures stipulate that foreign investors or foreign-invested enterprises shall provide investment information by submitting initial reports, alteration reports, liquidation reports and annual reports in accordance with the Measures. When establishing a foreign-invested enterprise in China, a foreign investor shall submit an initial report through the enterprise registration system at the time of registration. The initial report shall include the basic information of the enterprise, the information of investors and its actual controllers, the information of investment transactions and other information. If the information contained in the initial report is changed and the change involves registration (filing), the foreign-invested enterprise shall submit the change report through the enterprise registration system when handling the registration (filing) for change. The market supervision department shall forward the initial report or change report submitted by foreign investors and foreign-invested enterprises to the competent commercial authority timely.
 

Equal Treatment for Domestic and Foreign Enterprises

Based on the provisions of the Foreign Investment Law requiring the government to treat all domestic and foreign-invested enterprises as equals, the Implementation Regulation emphasizes that the preferential policies such as state-owned capital arrangement, land supply, tax deductions, qualifications, standard formulation and human resources, etc. shall apply to the foreign-invested enterprises equally. 
  

Especially in the government procurement, given that Foreign Investment Law guarantees the right of foreign-invested enterprises to fairly participate in government procurement activities, the Implementation Regulation explicitly addresses that the government and relevant authorities shall not obstruct or restrict the free access of foreign-invested enterprises to government procurement markets in their respective regions and industries.
  

In terms of the requirements of the Foreign Investment Law that domestic and foreign-invested enterprises should equally participate in the formulation of the standards, the Implementation Regulation further specifies that the wholly foreign-owned enterprise shall have the equal right to formulate “national standards, industry standards, local standards and corporate standards” in accordance with the laws, and can put forward the project proposal and undertake the drafting work.

 

Capital Operation

The Foreign Investment Law stipulates that foreign-invested enterprises have the right to raise funds by issuing stocks, corporate bonds and other means according to law. The Implementation Regulation defines the above-mentioned “other means”, which refers to the financing of foreign-invested enterprises by means of public or non-public issuance of other financing instruments or borrowing foreign debts. This clarification broadens the financing channels of foreign-invested enterprises and helps solve the problems of capital operation of foreign investors. At the same time, based on the provisions in the Foreign Investment Law that foreign investors can freely import and export funds in RMB or foreign currencies in accordance with the laws, the Implementation Regulation provides a further explanation: the currency, amount and frequency of foreign exchange of foreign investors shall not be illegally restricted; the lawful income of foreign workers may also be remitted freely. That is, the Implementation Regulation further guarantees that foreign investors and enterprises with foreign investment is entitled to free exchange in accordance with the laws.
 

Protection of Intellectual Property

The provisions on intellectual property protection in the Foreign Investment Law reflect the trend of comprehensively improving the standards of intellectual property protection in China. The Implementation Regulation strengthens the protection of technology and trade secrets owned by foreign investors and foreign-invested enterprises. On the basis of the requirement stipulated in the Foreign Investment Law that no administrative means shall be used to compel the transfer of technology, the Implementation Regulation specifies that administrative authorities and personnel shall not use administrative licensing, administrative inspection, administrative penalty, administrative coercion etc. to force technology transfer or force in a disguised form. At the same time, in view of the principle of protecting commercial secrets of foreign-invested enterprises stipulated in the Foreign Investment Law, the Implementation Regulation further points out that non-performing personnel shall not have access to materials involving commercial secrets; if it is necessary to share the materials with other departments, the commercial secrets contained in the materials shall be treated confidentially. 
 

Protection of Foreign Investment

The Implementation Regulation strengthens the investment protection measures stipulated in the Foreign Investment Law in the aspects concerned by foreign investors. The Foreign Investment Law points out clearly that the government shall not expropriate the investment of foreign investor. This principle is embodied in the Implementation Regulation, which stipulates that if the government expropriates the investment of foreign investors under special circumstances for the public interest, the expropriation shall be conducted in a non-discriminatory manner in accordance with legal procedures and compensation shall be made according to the market value. The Foreign Investment Law stipulates that governments and departments at all levels shall fulfill the policy commitments and contracts made to foreign investors and foreign-invested enterprises. The Implementation Regulation further refines the provisions, pointing out that governments at all levels should honor their commitments and perform contracts, and should not break the contract on the grounds of administrative district adjustment, change of officials, institution or function adjustment. If the relevant authorities and personnel fail to perform their commitments or contracts, they shall bear corresponding legal liabilities.
 

Promoting the five-year Transition Period

The Foreign Investment Law, taking effect on 1 January 2020, abolishes the Law of the People’s Republic of China on Sino-foreign Equity Joint Ventures, the Law of the People’s Republic of China on Sino-foreign Co-operative Enterprises and the Law of the People’s Republic of China on Wholly Foreign-owned Enterprises, and at the same time stipulates that foreign-invest enterprises established on the basis of the above three old laws, such as “organizational form” and “organizational structure”, which are inconsistent with the provisions of the Company Law of the People’s Republic of China and the Partnership Enterprise Law of the People’s Republic of China can continue to retain the original enterprise organizational form of enterprises within the five-year transition period set up in the Foreign Investment Law. The Implementation Regulation has made further specific provisions on how to deal with such foreign-invested enterprises after the transition period: since 1 January 2025, for the existing foreign-invested enterprises that have not adjusted their organizational forms or organizational structures etc. and have not gone through the change of registration in accordance with the laws, the registration authority will not deal with other registration matters of those foreign-invested enterprises and will publicize the relevant situations. This measure effectively motivates enterprises to cooperate with the implementation of the new law without imposing additional burdens on enterprises’ normal operation. Once the organizational form and organizational structure are adjusted in accordance with the laws, the equity or equity transfer method, income distribution method and residual property distribution method etc. that are agreed by the original parties to the joint venture or cooperation contract can still apply in accordance with the contract. Thus the implementation of the Foreign Investment Law and the Implementation Regulation will be smoothly and effectively conducted, while effectiveness of the contracts remain unaffected. However, it is worth noting that the Implementation Regulation does not address the legal consequences of the foreign-invested enterprises that fail to transit within five years. The effectiveness of the original joint venture agreement, articles of association and the board of directors’ resolution in the original organizational form after the transition period remain to be further standardized and clarified by other legal documents and judicial practices.
 

Investment by Investors from Hong Kong, Macao and Taiwan

In view of the fact that the Foreign Investment Law does not address the issue of investment in China by Hong Kong, Macao and Taiwan investors and Chinese citizens residing abroad, the Implementation Regulation clearly states that investment in the mainland by Hong Kong and Macao investors shall be governed by the Foreign Investment Law and the Implementation Regulation; Investment by Taiwan investors in the mainland shall be governed by the Law of the People’s Republic of China on the Protection of Investment by Taiwanese Compatriots and its implementation rules. Chinese citizens residing abroad who invest in China shall be subject to the Foreign Investment Law and the Implementation Regulation.

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