A Brief Introduction of Foreign Investment Law and the Implementation Regulations
At the beginning of January 2020, the “Foreign Investment Law of the People’s Republic of China” and the “Implementation Regulations for the Foreign Investment Law of the People’s Republic of China” (hereinafter referred to as the “Foreign Investment Law” and the “Implementation Regulations”) officially came into force, providing a legal guarantee for continuously optimizing the foreign investment environment and promoting a higher level of opening up.
The promulgation of the Foreign Investment Law and the Implementing Regulations is of milestone significance. Its main positive effects can be easily detected in the following aspects:
- The definition of “Foreign Investment”
According to the Foreign Investment Law, foreign investment refers to any investment activity directly or indirectly carried out by foreign natural persons, enterprises or other organizations (hereinafter “foreign investors”), including the following circumstances in which:
- a foreign investor establishes a foreign-funded enterprise within the territory of China, either alone or together with any other investor;
- a foreign investor acquires shares, equities, property shares or any other similar rights and interests of an enterprise within the territory of China;
- a foreign investor invests in any new project within the territory of China, either alone or together with any other investor; or
- a foreign investor invests in any other way stipulated under laws, administrative regulations, or provisions of the State Council.
For the present Law, a foreign-funded enterprise 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. Besides, the Implementation Regulations interpret “other investors” as including Chinese natural persons
- The Principle of Unifying Market Access Standard for Domestic and Foreign Investment
In the past, foreign investment had to go through a full set of filing system or even approval system operated by the market supervision department, commerce department and etc. before entering the Chinese market, which might be very complicated and time-consuming. What’s more, there were also some local or industrial special provisions inconsistent with the law and regulations, making the entry threshold for foreign investment more stringent than it appeared.
Since 1 January 2020, the Ministry of Commerce, the National Development and Reform Commission and the Ministry of Justice have organized all regions and departments to conduct a comprehensive clean-up of the current relevant and effective laws, regulations and normative documents, repeal or amend the provisions that are inconsistent with the Foreign Investment Law and its Implementation Regulations. Moreover, it is stipulated that:
- domestic and foreign enterprises will be treated equally in terms of project declaration, land supply, tax relief and qualification license;
- foreign enterprises shall participate in the formulation and revision of national, industrial and local standards on an equal footing according to the law;
- the government and its relevant departments shall not restrict foreign-funded enterprises from entering the government procurement market or implement differential and discriminatory treatment.
- Management System of “Pre-establishment National Treatment and Negative List”
Article 4 of the Foreign Investment Law stipulates that the State adopts the management system of pre-establishment national treatment and Negative List for foreign investment. The term “pre-established national treatment” refers to the treatment given to foreign investors and their investments at the stage of establishment, acquisition and expansion of enterprises, which is no less than that given to domestic investors and their investments.
The so-called Negative List refers to the special administrative measures for foreign investment in specific areas stipulated by the state. The state shall grant national treatment to foreign investment that is not on the Negative List. Now, we have a full set of foreign investment guiding system, which includes Negative List plus Industry Guidelines on Encouraged Foreign Investment and a Negative List for Market Access for both foreign and domestic investment.
- Abolishment of the Three FIE Laws
Since the Foreign Investment Law and its Implementation Regulations came into force on 1 January 2020, the existing three laws and their implementing rules (collectively Three FIE Laws) governing the establishment of Sino-foreign equity joint ventures, Sino-foreign co-operative joint ventures and wholly foreign-owned enterprises and their operations in China have been repealed simultaneously.
However, there are still some normative documents such as departmental rules, local regulations, local rules and judicial interpretations that may not be suitable for abolishing at once, nor can they be screened one by one in a short time. For this reason, the Implementation Regulations stipulate that in case of any inconsistency between the provisions on foreign investment formulated before 1 January 2020 and the Foreign Investment Law and the Implementation Regulations, the provisions of the Foreign Investment Law and the Implementation Regulations shall prevail.
Also, for established foreign-invested enterprises, Article 42 of the Foreign Investment Law stipulates a five-year transitional period during which established foreign-invested enterprises may continue to maintain their original organizational forms, etc. In another word, during this 5-year transitional period, foreign-invested enterprises can choose either staying the same organizational form or going through a change procedure according to Company Law or Partnership Enterprise Law. If an enterprise has not changed its form after the transitional period, it shall be regarded as a violation of the law and the market supervision department will not handle the change or filing procedures of any registered items of the enterprise.
- Investment Management: Foreign Investment Information Reporting
Foreign investors or foreign investment enterprises shall submit investment information through the enterprise registration system as well as the enterprise creditworthiness information announcement system to the commerce administrative authority.
The contents, scope, frequency and detailed workflow for foreign investment information reporting shall be determined and announced by the commerce administrative authority of the State Council jointly with the market regulatory authority of the State Council and other relevant authorities. The commerce administrative authority and other relevant authorities shall strengthen information sharing and shall not require foreign investors or foreign investment enterprises to submit such investment information which can be obtained through inter-departmental information sharing.
In short, the approval and filing system has already been replaced by the information reporting system. For most foreign-invested enterprises, commerce filing is no longer required because such information will be shared by the governmental departments.
Written by Edwin Yin, China Consultancy Team, CW CPA