On March 5, 2019, the draft PRC Foreign Investment Law was approved by the National People’s Congress gathered in Beijing. The bill is set to come into effect on Jan 1, 2020 and to replace current laws and regulations ruling on FDI and their corporate forms in China - Chinese-Foreign Equity Joint Ventures Law, Wholly Foreign-Owned Enterprises Law and Chinese- Foreign Contractual Joint Ventures Law.
The evolution of foreign investment regulation in China
China did not have any formal regulations regarding foreign investment until 1979, when the country began to open its economy to the world. The first Chinese-Foreign Equity Joint Ventures Law was adopted through the Second Session at the Fifth National People’s Congress and experienced three amendments within 37 years. It symbolized an opening gate to the outside world. A few years later, the creation of Wholly Foreign-Owned Enterprises Law and Chinese-Foreign Contractual Joint Ventures Law came one after the other. The new Foreign Investment Law has basically swept away 3 years work by officials from the Ministry of Commerce and pledged its scope to the National Democratic Reform Commission right when foreign lobbies, chambers and actors are demanding for non-discriminatory rules and increased access for FDI in China’s economy.
The new Foreign Investment Law aims to improve the transparency of the policies and unified the provisions of foreign and domestic enterprises. It mainly focuses on providing pre-entry national treatment to FIEs except for the industries in the Negative List for Foreign investment. National treatment for FIEs includes non-differential practice in governmental procurement, financing, IPRs protection, and company registrations, etc.
The 'Negative List'
Starting from 2015, China’s Market Authorities started a de-regulating process in order to shift the country’s approach to FDI from an Investment Catalogue stating sectors open to foreign investment to a Negative List simply focusing on exceptional industries regulated or barred from that. One of the goals of this radical change was to improve the overall efficiency of the entrance process.
Highlights of the PRC Foreign Investment Law
1. Legislation for foreign investment in China and eligible foreign and Chinese investors
The Foreign Investment Law has abolished the PRC Law on Chinese-foreign Equity Joint Ventures (EJV), the PRC Law on Chinese-foreign Contractual Joint Ventures (CJV) and the PRC Law on Wholly Foreign-owned Enterprises (WFOE). The provisions of the PRC Company Law (revised in 2018) and the PRC Partnership Enterprise Law (revised in 2006) will apply to the legal form, organization structure and other aspects of foreign-invested enterprises (FIE).
Eligible foreign investors remain unchanged i.e. foreign individuals, companies or other entities. It is unclear now under the Foreign Investment Law whether a Chinese individual instead of a Chinese company can set up a cooperative FIE with the foreign investor. Also, it is ambiguous whether the investment from HK, Macau, and Taiwan will be treated by reference to foreign investment given relevant changes in the cooperation between China’s new Greater Bay Area (Guangdong, Macau & Hong Kong). For foreign investment in regulated industries e.g. banking, securities, insurance, freight forwarding, specific industry regulations still apply.
2. Protective and regulatory actions on foreign investment
The Foreign Investment Law provides various national treatments to FIEs, including:
- governmental procurement of the products and/or services that FIE manufactured or provided in China;
- equally application of compulsory national standards;
- no expropriation of foreign investment, except for special circumstances with fair and reasonable compensation to foreign investors;
- protection of IPRs and trade secrets of FIEs, and
- "free" foreign exchange settlement of capital injection, profits, capital revenues, assets disposal incomes, royalty fees, compensation, indemnity, and liquidation proceeds, etc.
The regulatory scheme of foreign investment now consists of the Negative List for Foreign Investment (2018 Version), the annual reporting and national security review. The scope, content, documents, procedures, and timeline of the national security review are not specified in the Foreign Investment Law.
3. Five-year transition period
The CJVs, EJVs, and WFOEs that had been incorporated according to the former CJV, EJV and WFOE laws may retain its current "organizational form" e.g. limited liability company or legal person within the five-year transition period after the effectiveness of the Foreign Investment Law. For Joint Ventures in the process of discussing shareholders agreements and terms it is unclear what piece of regulation they should follow (old CJV, EJV Laws, Company Law). Until further guidance is released by the Mofcom and AIC, our suggestion is to structure any deal with a dual set of agreements already set to enter into force the moment that each piece of law stays relevant (i.e. scheduled transition).
There is no substantial influence on the organization form of WFOEs, the legal form of most of Foreign Investments.
Perspectives from Hawksford
With respect to the CJVs and EJVs, clients and parties may consider adapting their AoA in compliance with the PRC Company Law or at least kick-start new negotiation rounds with their Chinese counterparts. A major challenge would be represented by changing the JV’s highest authority from the Board of Directors to the shareholder's meeting and reassignment of the director's appointment and voting rights on major company decisions (buy-outs, structural changes). For the set-up of representative offices by foreign companies or NGOs in China, the current legislation and authorities in charge (Ministry for Civil Affairs) remains the same.
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