China: New draft Foreign Investment Law emphasizes national treatment

Last Updated: 16 May 2019
Article by Maarten Roos

In January 2015, China's Ministry of Commerce published a draft of what should have become a new legal cornerstone for foreign investment in China: the PRC Foreign Investment Law. Arguably the most controversial provision in that draft – and perhaps the reason why the draft never became law – was a provision that defined a Chinese entity under the "control" of a foreign company as foreign investment.

The common interpretation was that this would doom the VIE (Variable Interest Entity) structures commonly used for Chinese companies such as Alibaba, which operate in sensitive industries (including in technology, media and telecommunications) restricted or closed to foreign investment but are listed on foreign stock exchanges and therefore have foreign ownership.

In December 2018, after almost four years of waiting, the National People's Congress released a new draft of the PRC Foreign Investment Law (the "Draft FIL"). Most noticeably, it is silent on whether "control" by a foreign company would make a Chinese entity one of foreign investment – suggesting that at least for now, the Chinese government is inclined to keep the status quo in allowing foreign-controlled VIE structures in sensitive industries for the time being.

The Draft FIL would replace the specific laws that currently still apply to wholly foreign-owned enterprises, Chinese-foreign equity joint ventures and Chinese-foreign cooperative joint ventures; and if adopted in its current form it is poised to modernize the legal landscape for foreign investment. Particularly noteworthy are the provisions relating to national treatment, and the promotion of foreign investment.

National Treatment

Foreign investors are entitled to "national" treatment, except where subject to the Negative List for Foreign Investment. This Negative List establishes which industries are still restricted or prohibited to foreign investment; the current version was published on 28 June 2018.

Below are some of the opportunities that this new rule on national treatment means may present to Chinese-registered companies with foreign investment (often referred to as foreign-invested enterprises, "FIEs"):

  • Rules and policies supporting the development of domestic companies will equally apply to those companies with foreign investment.
  • FIEs can participate in bidding for government procurement projects.
  • FIEs may raise equity or debt financing in China, which includes getting listed on a Chinese stock exchange, and issuing corporate bonds.
  • FIEs that require special licenses to operate in a certain industry, will be subject to the same criteria and procedures as their counterparts without foreign investment – except as provided in specific regulations and rules.

It remains to be seen how (and how soon) these provisions will work in practice. There are plenty of ways that an FIE may still feel unfairly treated: in government bidding processes for example, the bidding standards could be defined in favor of companies with local investment. And as the decision on whether a company will be listed on a Chinese stock exchange typically has a strong political element, it may remain more difficult for FIE's to get approval. On the other hand, a clear and detailed determination of the national treatment principle will only help in the years to come.

Protecting Foreign Investment

The Draft FIL also contains some encouraging notes on other subjects. For instance:

  • Intellectual property rights held by foreign investors and FIEs shall be protected; and forced technology transfer to Chinese parties shall be prohibited.
  • Local governments that offer commitments to or reach agreements with foreign investors on special benefits shall abide by those commitments and agreements; in case of changes due to national, social or public interests, the foreign investors and FIEs shall be compensated.
  • An improved mechanism shall be introduced to deal with complaints from FIEs.

Interesting is the implied recognition that forced technology transfer has taken place (and is no longer permitted); and a very express recognition of investment benefits and their legal validity. In recent years local government promises for tax preferences, subsidies and other benefits have again gained in popularity. This provision further encourages foreign investors to try negotiating favorable terms, and then including them in investments agreements that are signed with the local government or their representatives

Chinese Government Retaliation

The Draft FIL provides one exception to national treatment which is worth emphasizing: where any country takes discriminatory prohibitive, restrictive or other similar measures against Chinese investments, then the Chinese government may take corrective measures which presumably includes measures against investors from such country.

Conclusions

The Draft FIL is a welcome step in the right direction, compromising on the biggest concern in the earlier draft from 2015 and introducing rules that should benefit foreign investment in general, and foreign-invested companies operating across a broad range of sectors in particular. Hopefully the new PRC Foreign Direct Investment Law will be promulgated soon, so that we can start seeing how the new provisions will help foreign investors in practice.

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.

Authors
Maarten Roos
Similar Articles
Relevancy Powered by MondaqAI
Dezan Shira & Associates
 
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”

Related Topics
 
Similar Articles
Relevancy Powered by MondaqAI
Dezan Shira & Associates
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Mondaq Free Registration
Gain access to Mondaq global archive of over 375,000 articles covering 200 countries with a personalised News Alert and automatic login on this device.
Mondaq News Alert (some suggested topics and region)
Select Topics
Registration (please scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

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 or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq 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 of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

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