Changes after the Implementation of the Foreign Investment Law of the PRC

On 15 March 2019, the Foreign Investment Law of the PRC was adopted by the second session of the 13th National People’s Congress, the country’s top legislature, which will come into force on 1 January 2020. The PRC Law on Sino-Foreign Equity Joint Ventures (the “EJV Law”), the PRC Law on Sino-Foreign Contractual Joint Ventures (the “CJV Law”) and the PRC Law on Foreign-Capital Enterprises (the “WFOE Law”) will be repealed simultaneously.

The Foreign Investment Law of the PRC consist of 42 articles, which includes 6 chapters, i.e. General Provisions, Investment Promotion, Investment Protection, Investment Administration, Legal Liabilities and Supplementary Provisions. The provisions of the new law are mostly principled or macroscopic. It is merely a fundamental law for foreign investment in China. A series of related supporting regulations shall be formulated in order to implement the new law.

This article hereby presents a brief analysis of the possible changes after the implementation of the Foreign Investment law of the PRC.

1. Investment from Hong Kong, Macau and Taiwan

According to the Foreign Investment Law, foreign investment refers to the investment activities directly or indirectly conducted by foreign natural person(s), enterprise(s) or other organization(s) within the territory of the PRC.

The new law does not expressly stipulate whether investment from Hong Kong, Macau and Taiwan shall be governed by the Foreign Investment Law. But Premier Li Keqiang of the PRC said at a news conference after the conclusion of the National People’s Congress session that investment from Hong Kong, Macau and Taiwan may be administrated in reference to the Foreign Investment Law. The competent authorities shall formulate relevant laws and regulations to specify the governing law for investment from Hong Kong, Macau and Taiwan to avoid uncertainty and disputes in the futures.

2. Can a Chinese Natural Person Establish a New Foreign Invested Enterprise with Foreign Investor(s)

Under the EJV Law and CJV Law, only Chinese companies, enterprises or other economic organizations can set up EJVs or CJVs with foreign investor(s). A Chinese natural person is not allowed to establish an EJV or CJV directly with foreign investor(s).

Under the new Foreign Investment Law, foreign investment includes “foreign investor(s) establish foreign invested enterprise(s) solely or together with other investor(s) within the territory of the PRC”. It does not specify whether other investor(s) include Chinese natural persons. It may be possible for a Chinese natural person to directly establish a new foreign invested enterprise with foreign investor(s). But it is still unclear now and subject to further clarification by the competent authorities.

3. Whether the Current Filing and Approving System for the Establishment of Foreign Invested Enterprises will be abolished

Currently, the restricted foreign investment listed in the negative list will be subject to case-by case approval system, while foreign investment outside of the negative list will be subject to record filing system.

According to the new Foreign Investment Law, foreign investment in the PRC will be subject to pre-established national treatment plus a negative list administration system. The pre-establishment national treatment means that foreign investors will be treated at par with domestic investors during the initial stages of investment access. The negative list refers to the special administrative measures for foreign investment access in special sectors as stipulated by the State. Foreign investment outside of the negative list will receive national treatment.

After the new law comes into force, foreign investors cannot invest in the sectors in the negative list that foreign investment is prohibited. Foreign investors investing in a sector listed in the negative list as a restricted sector, shall satisfy the requirements provided in the negative list. Foreign investment in a sector not listed in the negative list shall be administered according to the principle that domestic and foreign investment are treated equally. Does it means that the current record filing and case-by-case approval administration mode will be abolished and the registration procedures for the establishment of a foreign invested enterprise will be the same as a domestic enterprise? It is to be clarified by the competent authorities. Detailed implementation rules are required.

4. Whether Actual Control Rules will be Applied

Actual control rules were introduced in the draft Foreign Investment Law to determine whether it constitutes foreign investment. But such rules are missing in the adopted law. It does not clearly specify whether foreign investment shall be determined based on the nationality or place of registration of the investor or the nationality or place of registration of the actual controller. It is subject to further clarification by the competent authorities as well.

5. Adjustment of Form of Organization, Organizational Structure, and the Code of Conducts

According to Article 31 of the Foreign Investment Law, the form of organization, organizational structure, and the code of conducts of foreign invested enterprises shall conform to the provisions of the laws such as Company Law of the PRC and the Law of the PRC on Partnership Enterprises.

Those foreign invested enterprises established in accordance with the EJV Law, CJV Law and WFOE Law prior to the implementation of the new Foreign Investment Law may keep their original organization forms organizational structure, and the code of conducts within five years.

After the five-year transition period, the form of organization, organizational structure, and the code of conducts of all foreign invested enterprises shall conform to the provisions of the laws such as Company Law of the PRC and the Law of the PRC on Partnership Enterprises. The inconsistencies between EJV, CJV and WFOE will be eliminated. However, the new law does not specify what are the consequences if adjustments have not been made after the five-year transition period. Further clarification by the competent authorities are needed.

In order to ensure the smooth implementation of the new Foreign Investment Law, China’s Ministry of Commerce is now cleaning up the existing regulations on foreign investment and formulating relevant supporting regulations. The relevant implementation rules are expected to be released by the end of the year. We will keep a close eye on the adjustments and the release of new regulations.