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.
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.
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.
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.
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:
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:
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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