Legal ref.: Foreign Investment Law of People’s Republic of China
Promulgation Date: March 15th 2018
Effective Date: January 1st, 2020
On March 15, 2019, the second session of the 13th National People’s Congress passed the Foreign Investment Law of the People’s Republic of China (“Foreign Investment Law”), which will come into effect on January 1, 2020.
This new landmark law regulates the promotion, protection, management and other aspects of foreign investment in China, providing an overall regime, which will replace the one existing since 1979.
Background
In the past decades, the main laws governing foreign investments into China were the “Sino-Foreign Equity Joint Venture Enterprise Law of PRC”, the “Wholly Foreign-Owned Enterprise Law of PRC” and the “Sino-Foreign Cooperative Joint Venture Enterprise Law of PRC” (collectively, as the “Three Pillars”), which have so far materially differentiated the regime applicable to foreign-funded enterprises with respect to that applicable to Chinese invested companies.
After years of discussion, on January 19, 2015, the Ministry of Commerce submitted the “Law of PRC on Investment from Foreign Countries (Draft)” to all citizens, seeking their opinions. Then the Standing Committee of the National People’s Congress promulgated the “Draft Foreign Investment Law of the People’s Republic of China” on December 26, 2018 to solicit public comments. Finally, the Foreign Investment Law was officially adopted on March 15, 2019.
The new Foreign Investment Law plays the role of a basic law, which provides guiding principles, pending promulgation of implementing rules. It is however clear that the law brings about a revolution for foreign investors operating in China.
The new law is applicable to direct and indirect foreign investments in China, including (a) foreign invested companies establishing new entities in China (i.e. wholly foreign owned companies, sino-foreign invested companies), (b) acquisition of shares, equity or assets by foreign companies as well as (c) investment into projects in China by foreign companies.
Three main chapters form the new law: “Investment Promotion”, ” Investment Management” and “Investment protection”, which are followed by the no less important final chapters “Legal Responsibility” and “Miscellaneous”.
Investment Promotion
The Foreign Investment Law is aimed at creating a stable, transparent, predictable and fair competitive market environment (Article 3). where Chinese invested entities and foreign invested enterprises are meant to be regulated and treated in the same manner, with the only exception of the “Negative List”, listing the fields were foreign investment is restricted.
In particular, the Foreign Investment Law adopts the principle of “pre-entry national treatment“, which refers to the treatment granted to foreign investors and their investment during set up period; such treatment shall be no less favorable than that granted to domestic investors and their investment (Article 4). The access permits system shall only be applicable to the investments in the areas specified in the Negative List, where preliminary approvals from the competent authorities shall be obtained before incorporation of the new vehicle or completion of the acquisition. Foreign investment in a sector not included in the Negative List shall be administered according to the principle that domestic and foreign investments are to be treated alike (Article 28).
These provisions all prove that the differences between domestic enterprises and foreign enterprises are meant to materially decrease in view of a more equal treatment of all entities.
Investment protection
The Foreign Investment Law has introduced several provisions to protect the legitimate rights and interests of foreign investors. Expropriation and requisition can only be carried out under special circumstances, and the State shall grant “fair and reasonable” compensation (Article 20).
A specific article clarifies that foreign investors are entitled to collect, in CNY or EUR, dividends, royalties, damage compensations, proceedings deriving from liquidation and other legitimate funds (Article 21).
Should local authorities and relevant departments be compelled to change preferential policies, for which a commitment was made or a contract signed, due to state reasons or public interests, they shall compensate the damages so caused to the foreign invested enterprises (Article 25).
Intellectual property rights and trade secrets protection have always been a key focus for foreign investors. This time the law specifically provides for the protection of intellectual property rights and trade secrets through Article 22 and Article 23 respectively.
Investment management
After efficacy of the Foreign Investment Law, foreign invested entities shall be subject to the “PRC Company Law”, to the “PRC Ownership Law” and other relevant laws and regulations (Article 31), while the Three Pillars, which have been regulating foreign investments in China since almost 40 years, shall be repealed (Article 42).
Unless otherwise provided by law or administrative regulations, the relevant departments in charge shall review foreign investors’ application for a license in accordance with the same conditions and procedures for domestic investors.
Such change of regime is going to strongly change the future equilibrium between foreign and Chinese partners in any new investment, after January 1st, 2020.
What about existing foreign invested enterprises?
Since there exist many differences between the enterprise organization systems under the Three Pillars and under the PRC Company Law, in order to ensure a smooth transition to the new regime, the Foreign Investment Law has granted a five-year transition period (from January 1, 2020 to December 31, 2024) during which such companies, established under the “Three Pillars”, may “keep their original organization forms”.
All the aforementioned changes mean that foreign-investment enterprises face a new legislative framework. Since wholly foreign-owned enterprises have been subject to the “Three Pillars” for long time before the promulgation of the Foreign Investment Law, they shall now face a great compliance challenges, such as changing to the company’s highest authority (a shareholders meeting shall be established) composition of the Board of Directors, changes in the method for approval of resolutions on major issues, etc.
In this regard, specific implementation rules shall be promulgated by the State Council.
