Foreign Investment Law (Mainland China)

Karl Zhang

The National People’s Congress recently reviewed and approved the Foreign Investment Law of the People’s Republic of China (the “Law”) to set down corresponding provisions on foreign investment in China.  The Law, which will go into effect on January 1, 2020, covers matters including the promotion, protection and administration of investment, as well as further clarifies the definition of foreign investment and access methods:

1. Definition and access of foreign investment

Under the Law, “foreign investment” is defined as the investment activities that foreign natural persons, enterprises or other organizations (the “Foreign Investors”) directly or indirectly engage in China, including the following circumstances: (1) the Foreign Investors set up foreign-invested enterprises in China independently or in conjunction with other investors; (2) the Foreign Investors acquire shares, equity, property shares or other similar rights and interests of domestic enterprises in China; (3) the Foreign Investors invest in new projects in China independently or in conjunction with other investors; or (4) any investment made in other manners stipulated pursuant to law or administrative regulations or as required by the State Council.

“Foreign-invested enterprise” refers to an enterprise that is wholly or partially invested by Foreign Investors and is registered and incorporated in China.

Under the Foreign Investment Law, the administrative system for foreign investment access is based on pre-establishment national treatment plus a negative list.  Pre-establishment national treatment means the Foreign Investors and their investments would receive treatment no less favorable than that accorded to domestic investors and their investments with respect to investment access.  The “negative list” refers to the state-imposed special administrative measures controlling foreign investment access to certain sectors, while providing national treatment to foreign investment outside of the negative list.  In case any international treaty or agreement concluded or acceded to by the People’s Republic of China provides for more favorable treatment in respect of access of the Foreign Investors, the relevant provisions of the treaty or agreement may apply.

2. Investment promotion

Under the Foreign Investment Law, the state policies in support of enterprise development shall apply equally to foreign-invested enterprises.  For example, the state protects the right of foreign-invested enterprises to participate in government procurement activities through fair competition, government procurement of products and services provided by foreign-invested enterprises in China are treated equally, and foreign-invested enterprises may also obtain financing through public offering of stocks and corporate bonds.  The Foreign Investment Law also states that local people’s governments at or above the county level may, in accordance with the law, administrative and local regulations, formulate policies and measures for promoting and facilitating foreign investment.

3. Investment protection

For investment protection, the Foreign Investment Law once again emphasizes that the state does not expropriate investments made by Foreign Investors.  Capital contribution made by Foreign Investors in China, as well as their profits, capital gains, asset disposal proceeds, intellectual property royalties, indemnity or compensation legally obtained, or proceeds received upon settlement in China may be freely remitted inward and outward in RMB or a foreign currency.  It is also specifically pointed out that the state protects the intellectual property rights of Foreign Investors and foreign-invested enterprises as well as the interests of holders of intellectual property rights and other related rights.  The state also strictly prosecutes the legal liabilities for infringers of intellectual property rights.

4. Investment administration

The Foreign Investment Law states that the Foreign Investors are not allowed to invest in sectors on the negative list to foreign investment.  The organizational format, organizational structure and by laws of foreign-invested enterprises must also governed by laws such as the Company Law of the People’s Republic of China and the Partnership Law of the People’s Republic of China.  Foreign Investors who acquire a Chinese domestic enterprise or otherwise participate in the concentration of business operators shall be subject to business operator concentration review in accordance with the Anti-Monopoly Law of the People’s Republic of China.  Meanwhile, the state shall set up a security review system for foreign investment and review foreign investments that may potentially affect national security, and the resulting decision from the review shall be final.

In general, the Foreign Investment Law remain a framework based law with many details that involve actual operations to still require more specific laws and regulations.  Although the Law of the People’s Republic of China on Chinese-Foreign Equity Joint Ventures, the Law of the People’s Republic of China on Foreign-funded Enterprises, and the Law of the People’s Republic of China on Chinese-Foreign Contractual Joint Ventures will be abolished and become void on the effective date of the Law, foreign-invested enterprises established pursuant to the above three laws may maintain their original corporate organizational format for five years after the effective date of the Law.  Since the promulgation of the Law will have a substantial impact on the future organizational format of foreign-invested enterprises in China, those whose corporate governance structure is based under the old laws may need to consider revising their corporate organizational structure to avoid compliance issues.