Since the early 1990s, welcoming foreign investment has been one
of the cornerstones for China's economic development, while at
the same time foreign investors have continued to be subjected to
stricter rules and procedures than their domestic counterparts.
This is about to change with the new PRC Foreign Investment
Law, which will simplify procedures for foreign investors to
establish in China, and lift some of the remaining restrictions to
foreign investment in specific industries.
The draft PRC Investment Law was published on 19 January 2015
for public comment, and is expected to be issued this year for
implementation in early 2016 [I read everywhere timing is
uncertain and implementation is not expected before late 2016, and
possibly later]. The current draft will likely be subject to
some further revisions, but some of the key principals are expected
The new PRC Foreign Investment Law replaces [I understand
the law only abolishes the laws on FIEs, thereby enabling foreign
investors to set up entities in accordance with the PRC Company
Law/Partnership Enterprise Law/Law on Individual Proprietorship
Enterprises] the existing legal framework for foreign-invested
enterprises, consisting of separate laws for wholly foreign-owned
enterprises (WFOE's), equity joint ventures (EJV's) and
cooperative joint ventures (CJV's) with foreign investment, as
well as their implementing rules. Existing WFOE's and JV's
will have three years to comply with the new rules.
The approval procedures that currently apply to the
establishment of foreign-invested enterprises will be replaced by a
direct registration with the local Administration for Industry and
Commerce (AIC), which will not only save time but also limit
scrutiny on key documents such as the articles of association and
joint venture contract (where applicable). Foreign investors will
thus have more flexibility to make arrangements on a commercial
basis, as long as they comply with the PRC Company
Currently, the Catalogue for Guidance of Foreign Investment
Industries determines whether foreign investment in a certain
sector is encouraged, restricted or prohibited; foreign investment
is permitted in all sectors not listed. This Catalogue will be
replaced by a "Negative List" containing prohibited and
restricted sectors, which is expected to be shorter. Only foreign
investment in restricted sectors, or investments above a certain
monetary threshold, will remain subject to approvals or, in some
cases, a national security review, while no foreign investment will
be allowed in the prohibited sectors.
Foreign investment is no longer defined with regard to
ownership but rather, should reflect on control. As a consequence,
round-trip investments by Chinese investors will no longer be
subject to foreign investment restrictions. On the other hand,
Variable Interest Entities (VIE) whereby a foreign company controls
a domestically-owned business through a contractual arrangement
will be regarded as foreign investment, as may other forms of
foreign control such as long-term foreign financing and the
acquisition of concessions to explore natural resources. The
widespread use of VIEs to circumvent restrictions on foreign
investment in prohibited or restricted sectors (e.g. media,
internet) seems therefore no longer allowed when the new law comes
into force. It is yet uncertain if and how existing VIEs (e.g.
Alibaba, Baidu) in such sectors may continue to operate.
To counter the removal of prior approvals, including for
routine changes such as of address, registered capital or even
ownership, the PRC Foreign Investment Law introduces new reporting
requirements, compelling foreign-invested companies to submit
initial reports, subsequent reports and periodical reports on
operational and financial performance, the actual controller of the
investment etc. Considering that the law also introduces the
principle of national treatment, it remains to be seen how this
burden will be work in practice.
Interestingly enough, many of the provisions including the
removal of approval procedures and the introduction of a Negative
List, have already been successfully tested in the Shanghai Free
Trade Zone. Many questions remain, including what will happen to
tax and customs duty benefits that some foreign-invested companies
have been enjoying. Nonetheless, the immediate conclusion remains
that this law is the natural next in the gradual process of
lowering barriers to foreign investment, and providing
foreign-invested businesses with more freedom to engage in
activities on commercial terms and in full and fair competition
with domestic-invested counterparts.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
To print this article, all you need is to be registered on Mondaq.com.
Click to Login as an existing user or Register so you can print this article.
In last 25 years, Indian telecom sector has seen rapid changes with the advent of private investment and FDI.
Some comments from our readers… “The articles are extremely timely and highly applicable” “I often find critical information not available elsewhere” “As in-house counsel, Mondaq’s service is of great value”
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).