China: China's Draft Foreign Investment Law

The Proposed New Regulatory Regime For Foreign Investments
Last Updated: 4 December 2015
Article by Todd Liao, Frank Niu and Sarah Zeng

On January 19, 2015, the Ministry of Commerce (MOFCOM) of the People's Republic of China (PRC) published a draft law called the Foreign Investment Law of the PRC and began to solicit public comments thereon. MOFCOM also published a document explaining its legislative intent and key provisions.

Currently, there are three key legislations governing foreign-invested enterprises (FIEs): the Sino-Foreign Equity Joint Venture Law (EJV Law), the Sino-Foreign Contractual Joint Venture Law (CJV Law) and the Wholly Foreign-Owned Enterprise Law (WFOE Law). These laws, as well as their amendments and implementing rules and regulations,1 together form a distinct body of law for foreign investors in China. Once the draft law becomes effective through legislative process, the EJV Law, the CJV Law and the WFOE Law will be abolished.

These three laws, promulgated in the late 1970s and the 1980s, have led to some issues for regulators, adjudicators and investors. They are enforced by different government agencies without much inter-agency coordination, and there are conflicts and inconsistencies between them and the PRC Company Law promulgated in 1993 (which applies to all PRC companies incorporated as limited liability companies or joint stock companies, including FIEs) in terms of corporate governance, share transfers, capital requirements and so forth. MOFCOM has been tasked with drafting the Foreign Investment Law to resolve these issues and bring all types of foreign investments into one consolidated framework to supplant the EJV Law, the CJV Law and the WFOE Law.

A. Executive summary

There are six key changes proposed in the draft law:

  • The draft law has broadened the definition of "foreign investment" and adopted the principle of "substance over form" by introducing the concept of "control" by looking through the shareholding structure or contractual arrangement and at the nationality of the ultimate controlling person or entity. For instance, if a foreign investor incorporates a wholly owned or controlled company in China which in turn invests into other domestic companies, such investment would be treated as "foreign investment" as the ultimate controlling person is foreign.
  • The EJV Law, the CJV Law and the WFOE Law will be abrogated once the draft law is adopted and the FIEs would need to comply with the corporate governance requirements under the PRC Company Law or the PRC Partnership Law, as applicable.
  • New foreign investments in industries outside the "negative list," a special catalogue to be published by the State Council, will enjoy the same national treatment as domestic companies in terms of market entry. In other words, a foreign investor will no longer be required to obtain prior approval of MOFCOM to set up a new company in industries outside the "negative list." Such a foreign investor may apply for business licenses directly with the company registration agency just like any Chinese investor. Foreign investments in restricted industries on the "negative list" are subject to prior approval from MOFCOM based on MOFCOM's review of the nature of the investment from public interest perspective rather than the contracts underlying such investment.
  • Foreign investors are required to apply for national security review on voluntary basis while at the same time the government may initiate the national security review on its own. However, there is no clear guideline in the draft law as to when a foreign investor should proactively apply for such review and what would constitute a threat to national security.
  • The draft law has adopted a comprehensive information reporting system, which may increase existing foreign investors' operating costs in China.
  • Further, the nationality of the ultimate controlling owner would determine the nature of the so-called "variable interest entity" (VIE) structures. VIE structures could no longer be used to circumvent the restrictions on foreign investments once the draft law is adopted.

B. Key changes proposed in the draft law

1. Definition of foreign investment and foreign investor

The draft law defines "foreign investment" much more broadly under the draft law than in the existing regulations, and includes: (i) establishing domestic enterprises; (ii) obtaining equity interests, shares of property, voting rights or similar rights and interests of domestic enterprises; (iii) providing financing with a term of more than one year to the aforementioned domestic enterprises; (iv) obtaining concession rights relating to exploitation or development of natural resources in the PRC or construction or operation of infrastructure projects in the PRC; (v) obtaining domestic land use rights, housing ownership or other rights to immovable property; and (vi) obtaining control of domestic enterprises or the equity interests in domestic enterprises through contractual or trust arrangements. Importantly, this last item suggests that the VIE structures used to circumvent the approvals of foreign investments in restricted industries would be brought under regulatory oversight.2

The draft law defines "foreign investor" to include, among others, domestic enterprises controlled3 by foreign investors. Investments made by such domestic enterprises would be treated as foreign investments and regulated under the Foreign Investment Law. "Control" is defined to include both the situations when an investor holds more than 50 percent of the voting power of a company and when an investor holds less than 50 percent of the voting power but has the power to influence the decision making body of a company. It is unclear whether a company will be treated as an FIE if a company is jointly controlled by several investors, some of which are foreign investors and some are PRC investors.

Moreover, the draft law provides that if an offshore transaction results in a foreign investor's acquisition of the control of a domestic enterprise, the transaction is treated as a foreign investment. These rules may frustrate the purpose of many holding structures adopted by foreign investors used to make and exit investments in China.

2. Corporate governance in line with the PRC Company Law

The draft law abrogates the corporate governance rules in the existing FIE laws and regulations. New FIEs would need to comply with the requirements under the PRC Company Law and the PRC Partnership Law, as applicable. Existing FIEs have a three-year transition period to achieve such compliance. However, if the term of an existing FIE expires and is renewed during the three-year period, the FIE must ensure compliance at the time of renewal.

The corporate governance structure set forth in the existing FIE laws differs significantly from that of the PRC Company Law. For example, under the EJV Law, the supreme corporate organization is the board of directors, while under the Company Law it is the shareholder's meeting. The PRC Company Law also requires a company to have "supervisors," while such requirement is not found in the FIE laws and regulations. The joint venture agreements and articles of association of existing EJVs would need to be renegotiated and amended to reflect the corporate governance structure in the Company Law.4

3. National treatment for market entry as a general rule for foreign investment and approval required only for specific industries

The draft law no longer requires that every foreign investment transaction and the related agreements be approved by the National Development and Reform Commission (NDRC) and MOFCOM, or by their respective local counterparts, before the investee entity (such as a joint venture or a wholly foreign-owned enterprise) can be established and registered.5 Under the draft law, the State Council will publish a special catalogue (i.e., the "negative list") comprised of two categories: prohibited industries and restricted industries.6 Foreign investors in industries outside these categories will enjoy equal treatment with local investors, and will only be required to submit information reports to MOFCOM regarding the investments7 rather than to obtain approval from regulatory authorities.

Foreign investments in restricted industries on the negative list will still require prior approval from MOFCOM (and possibly the relevant industry regulators). There are two types of restrictions: investments above a certain monetary threshold set by the State Council, and investments in restricted areas. MOFCOM will review, among other aspects, the impact on national security,8 the satisfaction of conditions imposed in the negative list and the situation of the foreign investor and its actual controller. MOFCOM may either disallow a foreign investment or impose conditions thereon, a decision which may be appealed.

4. National security review

The draft law sets forth the national security review mechanism applicable to all foreign investments, and enumerates a range of factors to be considered in the review, such as impact on national defense, key infrastructures, key technologies, key information and network security. However, there is still a lack of clear guidelines as to what may constitute a threat to national security. The government reserves the right to carry out a review on its own, but foreign investors may proactively apply for national security review, which would afford certainty to the investor in the event of doubt. Relevant government agencies, industry associations, affected enterprises and competitors may also recommend transactions for national security review.

There are two stages to the national security review: general review, which may last 30 business days, and specific review, which may last 60 business days and is an additional period reserved for applications that fail to receive approval during the general review. If the review authority, an inter-ministry committee co-chaired by MOFCOM and the NDRC, believes an investment poses a threat to national security, it should provide a written opinion to the State Council, which shall render a final and non-appealable decision. The review authority may also impose conditions on its approval, the implementation of which will be monitored by MOFCOM.

The draft law provides that MOFCOM and the NDRC will jointly lead the review authority and invite relevant authorities to conduct the national security review. However, it is unclear what other authorities will be involved, who will play a more significant role in the review process, and how the final decision will be made among the relevant authorities.

5. Comprehensive information reporting system

Foreign investors and FIEs are required to file reports of information on themselves and their investments with MOFCOM prior to making the investments or within 30 days thereafter. They are also required to make an updated filing upon certain changes to their basic information or to their investments. If a foreign investor purchases 10 percent or more of the shares of a publicly listed company in China, or enough shares to cause a change of control in the listed company, it must also submit a report to MOFCOM.

Furthermore, foreign investors are required to file annual reports containing basic information on themselves and their investments. If a foreign investment involves the establishment of or any change to a domestic enterprise (FIE), such report shall also include other pertinent information. If the assets or revenues of the FIE are more than RMB10 billion or if it has more than 10 subsidiaries, it is required to file quarterly reports containing its operating and financial information.

The information to be reported is quite extensive, such as the foreign investor's actual controller, the source jurisdiction of investment and the details of operating information. Some of the information requested overlaps with information required to be submitted to the company registration agency, the State Administration of Industry and Commerce and its local counterparts. The draft law also requires foreign investors that control, directly or indirectly, several FIEs provide consolidated annual and quarterly reports, which is likely to create a huge burden on large multinational companies.

In addition, the reported information is open to public search with MOFCOM. Even though the draft law provides that the public search does not apply to trade secrets and confidential information, it is unclear who will decide what constitutes trade secrets and confidential information and how the confidential treatment will be provided. With these uncertainties, foreign investors may be reluctant to disclose sensitive information in the reports. This is particularly a concern for many large multinational companies that are publicly listed abroad and cannot release their business information to the public prior to filing annual or quarterly reports with similar information according to relevant stock exchange rules.

6. Treatment of companies with VIE structures

VIE structures are used by many Chinese companies listed or seeking to list abroad that operate in industries currently restricted to foreign investment, such as telecommunications and online content services. Such structures typically involve a foreign entity setting up an FIE which exercises control over a domestic enterprise via complex contractual arrangements. Such structures have so far largely escaped the scrutiny of Chinese regulators. Under the draft law, such structures would constitute foreign investment if the ultimate controlling owner of the domestic enterprise is determined to be a foreign investor. This may render VIEs ineffective for foreign investors seeking to circumvent the regulations on investing in restricted industries. For the existing VIE structures controlled by foreign investors, the treatment remains unclear and to be clarified in the legislative process.

C. Conclusion

The draft law would significantly change the regulatory landscape for foreign investors and constitute a milestone in the deregulation of foreign investment. It should facilitate the creation of a clearer framework and a more level playing field for foreign investors in China. Regardless, uncertainties remain with respect to some provisions as well as to more detailed rules. Foreign investors are advised to closely monitor the future lawmaking process in planning and carrying out their investments in China.


1 For example, the EJV Law, CJV Law and WFOE Law each have an implementing regulation. In addition, MOFCOM and other regulatory authorities have issued rules and regulations addressing specific aspects of foreign investments. There is also a special regulation on a foreign investor's acquisition of existing domestic enterprises as opposed to establishing new FIEs.

2 Please see Section 6 below for further discussion of the VIE structures.

3 "Control" is broadly defined and exists with respect to an enterprise if a person holds directly or indirectly 50 percent or more of the equity interests, voting rights or similar interests in the enterprise or, when the holding is less than 50 percent, any of the following is satisfied: (i) the person has the right to appoint, directly or indirectly, or has the power to make sure its nominees will constitute, more than half of the board or other decision-making body; (ii) its voting power is sufficient to influence the decisions of the board, shareholders' meeting or other decision-making bodies; or (iii) the person is able to influence in a "deciding manner" the operations, finances, human resources or technology of a domestic enterprise through contractual or trust arrangements.

4 It is notable that the terms "equity joint venture" and "cooperative joint venture," which have been used since the inception of foreign investments in China, are not found in the draft law. FIEs with foreign and Chinese shareholders or partners would be a normal multiple shareholder company or a partnership under the PRC law.

5 It should be noted that the approval or reporting requirements under the Foreign Investment Law do not replace or otherwise affect the anti-monopoly clearance requirement for an investment transaction.

6 It is not clear what these restricted and prohibited industries are, but guidance can be found in the current "negative list" issued by the Shanghai Free Trade Zone, a test field of the reform policy, in July 2014, which includes 110 restricted industries and 29 prohibited industries.

7 Please see Section 3 below for a description of the information reporting system.

8 Please see Section 5 below for a description of the national security review process.

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

Click to Login as an existing user or Register so you can print this article.

Events from this Firm
24 Jan 2018, Seminar, San Francisco, United States

Dentons will host our Fourth Annual Courageous Counsel Leadership Institute in January, centered on the theme "Cultivating Innovation."

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”

Up-coming Events Search
Font Size:
Mondaq on Twitter
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).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:
  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.
  • Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.
    If you do not want us to provide your name and email address you may opt out by clicking here
    If you do not wish to receive any future announcements of products and services offered by Mondaq you may opt out by clicking here

    Terms & Conditions and Privacy Statement (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

    Use of

    You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


    Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

    The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


    Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

    • To allow you to personalize the Mondaq websites you are visiting.
    • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
    • To produce demographic feedback for our information providers who provide information free for your use.

    Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

    Information Collection and Use

    We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

    We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to with “no disclosure” in the subject heading

    Mondaq News Alerts

    In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


    A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

    Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

    Log Files

    We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


    This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

    Surveys & Contests

    From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


    If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


    From time to time Mondaq may send you emails promoting Mondaq services including new services. You may opt out of receiving such emails by clicking below.

    *** If you do not wish to receive any future announcements of services offered by Mondaq you may opt out by clicking here .


    This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to

    Correcting/Updating Personal Information

    If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to

    Notification of Changes

    If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

    How to contact Mondaq

    You can contact us with comments or queries at

    If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at and we will use commercially reasonable efforts to determine and correct the problem promptly.

    By clicking Register you state you have read and agree to our Terms and Conditions