Home Services China Business Guide Part 3: The legal system

China Business Guide Part 3: The legal system

by Tom Pattinson
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In this six-part business guide to doing business in China produced by Hawksford, we’ll give an overview of what you need to consider before entering the market. Ranging from localisation, to the legal and banking systems, to type of company set up. This series is a great jumping-off point to understand the many nuances of doing business with China.

Part 3: The legal system

The new Foreign Investment Law regime

It has been over 30 years since China promulgated its first law on FDI (Foreign Direct Investment), the Sino-foreign Equity Joint Venture Enterprise Law, from which China has gradually established a complicated but comprehensive legal framework for foreign investment. The year 2019 arguably saw the most significant legislative move in this area in recent times, with the Foreign Investment Law (FIL) of the PRC enacted on 15 March 2019, coming into force on 1 January 2020. The FIL replaced the Sino-foreign Equity Joint Venture Enterprise Law, Sino-foreign Contractual Joint Venture Enterprise Law, and Wholly Foreign Invested Law, the three basic and most fundamental laws governing foreign investment.

The FIL has led to great changes to the legal regime of forging investments, among others, demonstrating the Chinese government’s determination to further open up to foreign investors. Highlights of the new law are summarised below.

National treatment

FIL replaced the case-by-case investment approval system with a system consisting of national treatment in conjunction with a ‘negative list’ for foreign investment. Under this system, except as required under the negative list, the competent PRC authorities are to treat foreign investors with at least the same degree of accommodation as Chinese investors.

The negative list refers to a list of industry sectors in which foreign investment is restricted or prohibited. Foreign investment in industries not listed on the negative list is permitted. The latest version of the negative list, the Special Administrative Measures for Foreign Investment Access (Edition 2020), went into effect on July 23 this year. The negative list has been regularly updated over the years to liberalise investment in various industries.

A more relaxed and efficient foreign investment administration system

The case-by-case foreign investment approval requirement for FIEs has been replaced with an online reporting requirement with the Ministry of Commerce, greatly simplifying the administration of foreign investment. With this, most foreign-invested companies can directly apply for company establishment registration or other corporate changes, including equity transactions, by filing with the State Administration of Market Regulation (SAMR) or its local counterparts.

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Protection of intellectual property rights

Responding to foreign investors’ concerns about IP protection in China, the FIL clearly makes provisions for China to protect the IP of foreign investors and FIEs. Administrative authorities shall also not, directly or indirectly, force foreign investors or FIEs to transfer technologies to them in any administrative procedures. In early 2019, the State Council amended the Regulation on the Administration of the Import and Export of Technology and removed a number of restrictive provisions in technology import contracts, such as the ownership of technology improvement, which is often a point of controversy in technology license agreement negotiations.

Comprehensive protection of foreign investment

Responding to foreign investors’ concerns that they may be subject to discriminatory restrictions or otherwise treated less favourably than domestic PRC enterprises, the FIL explicitly provides a series of rights to investors, including:

  1. Local governments at all levels must lawfully honour policy commitments made to foreign investors and FIEs and perform all contracts concluded with foreign investors in accordance with applicable laws.
  2. The State’s various policies in support of enterprise development will be applied equally to FIEs and Chinese enterprises in accordance with generally applicable relevant laws.
  3. The State protects FIEs’ right to participate in government procurement activities through fair competition.
  4. FIEs may seek financing in China via the public offering of shares, issuance of corporate bonds or other securities.
  5. Foreign investors enjoy full discretion in remitting into or out of China, in Renminbi or any other currency, their contributions, profits, capital gains, and other legal income according to law.

Key compliance requirements 

In the spirit of the new Foreign Investment Law, which aims to grant consistent national treatment to all FIEs in China and also create a fair environment for both Chinese and foreign companies, several developed cities such as Beijing and Shanghai have introduced their own implementation measures to further optimise the business environment for FIEs since late 2019.

As mentioned, since the legal and regulatory framework governing foreign investment in China is dominated by the new Foreign Investment Law, the 2020 Negative List for Foreign Investment (listing the prohibited and restricted industries for foreign investment), the Company Law and other laws regulating specific industries, such as banking, insurance and pharmaceuticals, a newly established FIE in China should meet the following compliance requirements:

  • Formal registration with the tax authorities, foreign exchange, labour and social insurance, customs office and any other relevant authorities responsible for regulating specific industry and/or business operations relating to the newly set-up company. For instance, a wine retailer should obtain a wine retail permit while a medical device manufacturing company should get a manufacturing and a distribution licence for the trading of medical devices from the National Medical Products Administration. Only after such a permit or licence or filing has been obtained or made can the newly set-up company lawfully and fully start its business operations.
  • Ongoing compliance requirements, which mainly include monthly tax declarations, annual CIT return and IIT return reports, monthly social insurance and housing fund contributions for employees, and enterprise annual/joint reports.

The Chinese government is constantly enacting new laws to match developing business and regulatory needs. This consequently poses new compliance challenges for FIEs in terms of factors such as cybersecurity and personal data protection.

 PART 4: The tax system


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