Foreign Investment Law - key points that all foreign investors should know

On January 1, 2020, the new Foreign Investment Law of the People’s

Republic of China went into effect. This represents a new era for China’s

legal framework surrounding foreign investment.

The new FIL replaces the Law on Wholly Foreign-Owned Enterprises, the Law on Sino-Foreign Equity Joint Ventures, and the Law on Sino-Foreign Cooperative Joint Ventures (the three previous foreign investment laws).

The FIL will apply uniformly across all foreign investment in China. This lists some of the key aspects of the new law, and the differences with the previous legislation.

 

Under the Foreign Investment Law, you will find the following:

 

  • Foreign investment is defined as “investment activity directly or indirectly carried out by foreign natural persons, enterprises or other organizations”

  • A “foreign-invested enterprise” (or FIE) refers to an enterprise incorporated under Chinese laws within the territory of China, and with all or part of its investment from a foreign investor.

  • FIL distinguishes ‘foreign investment’ into ‘direct investment’ and ‘indirect investment’ and adds ‘merger and acquisition’ (M&A) into the scope of foreign investment

  • It abolishes the distinction between WFOE, EJV, and CJV and refers the enterprises of foreign investment uniformly as ‘foreign-invested enterprise’.

  • The organizational form, governing structure, and operating rules of FIEs will be subject to the provisions of the Company Law, the Partnership Enterprise Law, and other applicable laws, in the same way as enterprises established by domestic investors.

  • China will adopt the management system of pre-establishment national treatment and Negative List for foreign investment.

  • The pre-establishment national treatment refers to the principle that will grant foreign investors and their investments market access with no less favorable conditions than what is granted to domestic investors and their investments.

  • The Negative List refers to special administrative measures for foreign investment market access to specific fields. The government will give national treatment to foreign investments outside the Negative List.

  • Approval is still listed as one of the conditions for foreign investors to get access to the restricted area. Investors need to pay close attention to how the approval process will be changed under the new management system.

  • Foreign investors and FIEs are required to submit relevant information to the Commerce Department in charge through the Enterprise Registration System or the Enterprise Credit Information Publicity System.

  • The content and scope of foreign investment information report shall be determined based on necessity.

  • The Commerce Department in charge shall order the foreign investors or the FIEs to make corrections within a time limit if they fail to report the investment information as required. If they fail to do so within the prescribed time limit, a fine between RMB 100,000 and RMB 500,000 shall be imposed.

  • FIL establishes the national security review system for foreign investment. Under this article, the security review shall be conducted for foreign investment that affects or will likely affect the national security of China. Any decision that follows a security review will be final.

  • Foreign investors and FIEs should enjoy the pro-business policies ‘according to laws’. China expects FIEs to operate within the boundary of the current law, without exceptional privileges.

  • The law protects the intellectual property of foreign investors and foreign-invested enterprises, as well as legitimate rights and interests in intellectual property and other relevant obligations.

  • Any intellectual property infringement will be investigated for legal liability, and the State will encourage technical cooperation in the process of foreign investment on the basis of free will and business rules.

  • Government departments and personnel are not allowed to divulge or illegally provide the trade secrets learned in the course of performing duties to any other third party. In case of non-compliance, legal penalties will be imposed on government personnel, which could trigger criminal liability if a crime is constituted.

  • If a foreign investor or FIE deems that the administrative practice of a government department or its personnel infringes upon its legitimate rights and interests, the foreign investor or FIE can apply for coordination and resolution through the complaint mechanism.

  • The foreign investor or FIE may also apply for administrative reconsideration or institute an administrative lawsuit to protect its legitimate rights and interests.

  • The organization form, governing structure, and operating rules of FIEs will be subject to the provisions of the Company Law, the Partnership Enterprise Law, and other applicable laws.

  • Foreign investors may freely remit into or out of China their capital contributions, profits, capital gains, income from asset disposal, intellectual property royalties, lawfully acquired compensation, and indemnity or liquidation income in renminbi or any foreign currency within the territory of China.

  • Regulatory measures for foreign exchange supervision should not be an obstacle to the normal commercial arrangements of foreign investors in investment activities.

Should you have questions about the foreign investment law and how it might affect foriegn investors in China, complete the below inquiry form with your questions and comments. 

DISCLAIMER: All information in this article is verified to the best of our ability and is assumed to be correct at time of release; however, Woodburn Accountants & Advisors does not accept responsibility for any losses arising from reliance on the information provided within. The information provided is for general guidance and does not replace specialized advice.

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