The current Chinese foreign investment laws were enacted decades ago. Under these laws the approval process is typically time-consuming and burdensome for a foreign investor. In an attempt to streamline the regulatory framework, as well as to attract foreign investment at a time of weak economic growth, the Chinese government has initiated a reform to the existing foreign investment regime.
On September 3, 2016, the Standing Committee of the National People's Congress adopted amendments to the four existing foreign investment laws1 ("Amendments"), replacing the current approval system with a "filing & negative list" approach to foreign-invested enterprises ("FIEs")2 in China. On the same day, the Ministry of Commerce ("MOFCOM") published the draft Interim Measures on Administration of Filing in respect of Establishment and Change of Registration of FIEs ("Draft Measures") for public consultation, which set forth detailed rules regarding the new regime. Both the Amendments and the Draft Measures will take effect on October 1, 2016.
Some highlights of the changes:
"Case-by-Case Approval" to "Filing & Negative List Approach"
For many years, foreign investment in China has been approved on a case-by-case basis, regardless of the type of investment or its industry. A simplified record-filing process will replace the existing approval requirement for foreign investment projects that are not subject to a "negative list." Unlike the existing system, it will not be necessary to complete a filing in most cases before an FIE can be established, or before major changes can be made to an FIE.
However, if a FIE's underlying business falls within the scope of the "negative list," approval will still be required. The national-wide "negative list" to be issued by the MOFCOM will therefore be decisive for how the new system will operate.
Scope and Procedures of Filing
Both the establishment of FIEs and major changes to them must be filed. Major changes include a change of basic information of the FIE/foreign investor(s), change of equity interest, and transfer of the FIE's assets. Notably, the Draft Measures require disclosure of information regarding ultimate controller(s) of the FIE and the source of funds for the investment.
For establishment of a FIE, the filing procedure should be completed either prior to or within 30 days after the incorporation of the FIE. For any change of company particulars to the FIE after its incorporation, filings should be completed within 30 days upon the occurrence of the change. Foreign investors are required to submit documents electronically on an online platform. The filing will be processed within three working days.
What the Change May Bring About
By reducing governmental approval formalities and introducing consistency throughout the country, the new regime is likely to lead to a more efficient and transparent legal system governing foreign investment in China. The new regime is considered to be a significant move to relax the regulatory control over foreign investments pending the promulgation of the PRC Foreign Investment Law. However, under this welcome change, a number of uncertainties remain. These include the interpretation of coverage of the "negative list," the implementation of subsequent examination, and lack of clarity in how the new regime will interact with other current foreign investment regulations.
1 Sino-Foreign Equity Joint Ventures Law, Sino-Foreign Contractual Joint Ventures Law, Wholly Foreign-Owned Enterprises Law, and the Law on the Protection of Investment of Taiwan Compatriots.
2 FIEs include Sino-foreign equity joint ventures, Sino-foreign cooperative joint ventures and wholly foreign-owned enterprises.
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