In response to international criticism about China’s openness to foreign businesses and an attempt to attract more foreign investors to expand their businesses to China, the National People’s Congress passed the Foreign Investment Law of the People’s Republic of China (Foreign Investment Law) on March 15 2019, which will come into force on January 1, 2020.
This newly-approved law will replace the existing legislation regulating foreign investment, including the Law on the Sino-Foreign Equity Joint Venture, Law on the Sino-Foreign Cooperative Joint Venture and Law on Wholly Foreign-owned Enterprise (commonly referred to “the Foreign-Invested Enterprise (FIE) Laws”).
The new Foreign Investment Law provides principle-based provisions within six chapters, including general provisions, investment promotion, investment protection, investment management, legal liability, and supplementary provisions. Some highlights include:
New Administration Mechanism
The Foreign Investment Law has stipulated that foreign investment would be subject to the pre-entry national treatment plus negative list administration mechanism.
The negative list of foreign investment includes special administration measures applicable to foreign investment access to China. Foreign investors cannot invest in sectors prohibited by the negative list and must comply with the restricted requirements provided in the negative list. The negative list has been shortened in recent years. The “2019 National Negative List,” which was newly released on June 30, 2019, would go to effect on July 30, 2019, has relaxed access in the service sector, i.e. transport, infrastructure, culture, and value-added telecommunications. Furthermore, some market access restrictions for foreign investment will be canceled in agriculture, mining and manufacturing industries.
In connection with foreign investments in sectors that are not on the negative list, foreign investors should be treated the same as domestic investors. The law defines “pre-entry national treatment” as treatment given to foreign investors at the stage of entry in which the investment standards are the same as domestic investors. This is a great movement towards the equal treatment of foreign and domestic investors.
Similar to domestic state-owned or private enterprises, the organizational form, framework and activity guidelines of foreign-invested enterprises shall be subject to the company law and the Partnership Enterprise Law.
The Information Reporting System
The state will establish a foreign investment information reporting system. Foreign investors/enterprises shall “submit investment information to the operative commercial authorities through the enterprise registration system and the enterprise credit information publicity system.” It is not yet clear what information will be required for the reporting and how the registration and reporting process will intersect with each other. Article 34 of the law further clarifies that duplicate information reporting is not required if the investment information submitted to the relevant government departments by foreign investors is available through an information-sharing platform.
Measures to Protect Foreign Investors
Chapter III of the Foreign Investment Law are designed to provide specific protections of the lawful rights of foreign investors, including:
- No levy or expropriation of the investment of foreign investors unless in special circumstances in accordance with the law wherein timely and reasonable compensation shall be paid.
- Capital contribution, profits, capital gains, royalty or compensations transferred into and out of China may be freely remitted in RMB or foreign currency.
- Protect the intellectual property rights and business secrets of foreign investors and foreign-invested enterprises.
- Requirements that the local governments must carry out contractual and policy commitments lawfully made and the State shall establish a complaint mechanism to promptly address issues raised by foreign investors.
Even though the new Foreign Investment Law is principle-based and many details of the implementation of the law are yet to be specified in the future regulations and guidelines, the new law will help to shape a more attractive investment environment for foreign investors to explore or expand businesses in China.
If you have questions about how your business may be impacted by these or other elements of the Foreign Investment Law, contact Clayton & McKervey.