China: China's New Foreign Investment Law

Intellectual Property and Foreign Investment
Last Updated: 14 August 2019
Article by Edward Guo and Jack Yu

CHINA'S NEW FOREIGN INVESTMENT LAW

On March 15, 2019, China announced its new Foreign Investment Law (the "FIL"), which will come into force on January 1, 2020. The FIL will fundamentally change the existing foreign investment legal regime in China currently ruled by the Sino-Foreign Equity Joint Ventures Law, the Sino-Foreign Contractual Joint Ventures Law, the Wholly Foreign Owned Enterprises Law, and relevant implementing regulations (collectively, the "Existing Investment Laws").

A. Overview of Existing Investment Laws

The Existing Investment Laws have been implemented since 1979 and have gradually evolved into a complicated system, where foreign investments are strictly required to be registered on a record filing system through on-line submission of prescribed information. In addition, certain categories of foreign investments are subject to special administrative measures, beyond a mere filing requirement. Such categories of investments are referred to as the "Negative List".

The Negative List either entirely prohibits foreign investment in certain industrial areas and/or activities (such as internet news information services, compulsory education institutions, and postal services), or establish restrictions or limitations on foreign investment in other industrial areas and/or activities (for example, value-added telecommunications services, market surveying, and higher educational institutions). All restricted foreign investments are subject to relevant governmental authorities' examination and approval on a case-by-case basis.

The Negative List was first introduced in 2016. On June 30, 2019, National Development and Reform Commission and the Ministry of Commerce jointly issued the 2019 Edition of the Special Administrative Measures for Foreign Investment Access (Negative List) and the Special Administrative Measures for Foreign Investment Access in Pilot Free Trade Zones (Negative List). Both negative lists will become effective as of July 30, 2019.

B. New Foreign Investment Law

1. National Treatment

Under the FIL, foreign investments which are outside of the Negative List will be subject to "pre-access national treatment", meaning that, at the stage of investment access, foreign investors and their investments shall enjoy treatment not less favorable than that applied to domestic investors and their investments. For example, government policies supporting the development of enterprise shall apply equally to foreign-invested enterprises outside of the Negative List; the government shall also guarantee that foreign-invested enterprises outside of the Negative List can participate in governmental procurements on an equal footing with local enterprises.  

2. Negative List

As mentioned above, the Negative List has already been established, and it consists of prohibited sectors and restricted sectors.

(a) The prohibited sectors are industrial sectors prohibited from foreign investment. No foreign investors are allowed to invest in such areas by any means (such as acquisition, joint venture, minority investment, establishment of new business, etc.), either directly or indirectly; and

(b) The rest of the industrial sectors on the Negative List have investment restrictions for foreign investors, such as the maxim percentage of equities that could be held by foreign investors, special qualifications for management personnel, and composition of board of directors. Under the 2019 Edition of the Negative List, governmental approval must be obtained to proceed with investment in restricted sectors. More detailed rules and regulations regarding the approval process are expected to be released in the future.

As mentioned above, foreign investments in Chinese businesses outside of the Negative List shall enjoy a national treatment and the principle of equality shall be applied to both domestic and foreign investment.

3. Intellectual Property Protection and Technology Transfer

The FIL emphasizes that Chinese government shall protect the intellectual property of foreign investors and foreign-invested enterprises, as well as the legitimate rights and interests of intellectual property rights holders and other relevant right holders. The Chinese government shall also pursue legal liability for infringement of intellectual property rights in strict accordance with the law.

The FIL further provides that the conditions for technical cooperation between foreign investors and domestic businesses shall be determined by the parties to the investment, through negotiation under the principle of fairness. Administrative authorities and their staff shall not force the transfer of technology by administrative means.

While it remains to be seen how the government's enforcement of such provisions will manifests in practice, the policy direction of the FIL will be a welcoming sign to foreign investors who will share their intellectual properties with Chinese counterparts.

4. Information Reporting System

The FIL will establish a foreign investment information reporting system. Foreign Investors or foreign-invested enterprises shall submit investment information to the competent governmental authorities through the enterprise registration system and the enterprise credit information publicity system. More detailed implementation guidance regarding such information reporting system is expected to be issued.  

5. National Security Review

A foreign investment security review system will also be established under the FIL to review foreign investment that affects or could affect the national security of China. Under the Existing Investment Laws, security review only covers mergers and acquisitions of Chinese business as well as investments in pilot free trade zones pertaining to sensitive industries (such as military and national defense), sensitive areas (for example, areas surrounding major or sensitive military facilities), and certain key products and services (such as important agricultural products, important energies and resources, important transportation services, and key technologies). The FIL does not provide any detailed information regarding the proposed national security review system (such as scope, content, and procedures). More detailed rules and guidelines are expected to be issued.

6. Transitional period and Corporate Governance

The FIL will become effective on January 1, 2020, repealing the Existing Investment Laws simultaneously. After the implementation of the FIL, the default governing legislations of foreign-invested enterprises outside of the Negative List will be the same as those that apply to local Chinese enterprises, such as the Company Law and the Partnership Enterprises Law of China, rather than the special rules stipulated in the Existing Investment Laws. In effect, a foreign-invested enterprises' business affairs, such as forms of organization, organizational structures, and other general business activities will be subject to the same regulations as local Chinese enterprises.

Foreign-invested enterprises that were established per the Existing Investment Laws before the implementation of the FIL may retain their organizational structure within a transitional period of five years starting from January 1, 2020. Foreign investors shall be prepared to negotiate with their Chinese partners for necessary changes to the structure of joint ventures established before the implementation of the FIL.

C. Conclusion

As the foundation of China's new foreign investment management legal system, the FIL covers promotion, protection, administration and legal liability of foreign investment in China. The overall aim of the FIL appears to be allowing foreign investments outside of the Negative List to fairly compete with local enterprises, by subjecting them to the same regulations and treatments, while keeping a clear record of all foreign investments and implementing policies that address foreign investors' primary concerns (such as intellectual property protection). However, the FIL only has 42 articles and most of which are general principles rather than detailed implementation rules. It is expected that further legislation will be formulated and released by relevant authorities to provide clarification and guidance for the FIL. We will continue to follow and report on such regulatory developments.

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
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