On 15 March 2019, the Second Conference of the 13th National People's Congress voted to pass the "Foreign Investment Law of China" ("Foreign Investment Law") which will be officially implemented from 1 January 2020.
The promulgation of the Foreign Investment Law is an epoch-making step in the field of foreign investment in China. It officially ends the era where the foreign investment in China had been concurrently governed by the Law of China on Wholly Foreign-owned Enterprises, the Law of China on Sino-Foreign Equity Joint Ventures, and the Law of China on Sino-Foreign Cooperative Joint Ventures (collectively "Three Foreign Investment Laws"). The new law also proclaims that by implementing the pre-establishment national treatment plus negative list administrative system, China will protect the rights and legitimate interests of foreign-invested enterprises and provide foreign-invested enterprises with equal opportunities to compete in China. Further, China will also take steps to unify the laws and regulations relating to the compliance, supervision and protection of foreign-invested enterprises with those of domestic-funded enterprises.
Unified Definition of Foreign Investment
According to Article 42 of the Foreign Investment Law, the Three Foreign Investment Laws will be repealed when the Foreign Investment Law comes to effect on January 1, 2020. As a result, the categories of "equity joint venture" ("EJV") and "cooperative joint venture" ("CJV") which exist under the Three Foreign Investment Laws regime will be merged into a single category "foreign-invested enterprise". In this regard, the Foreign Investment Law sets a five-year transitional period so that companies incorporated prior to the implementation of the Foreign Investment Law may retain its original corporate structure until the end of the fifth year after the implementation date (Chapter 6, Article 42). Further, the Foreign Investment Law also explicitly defines "foreign investment" as "investment activity directly or indirectly conducted by foreign natural persons, enterprises or other organizations in China" (Chapter 1, Article 2).
It is worth noting that the elaboration of the abovementioned definition under the Foreign Investment Law indicates that the new law not only retains the foreign investment mode via setting up of a company in China under the old Three Foreign Investment Laws regime but also includes project-based investment. In addition, the definition introduces modes of investment via acquisition, i.e., the acquisition of shares, equity, property shares or other similar rights in China (Chapter 1, Article 2). The expansion of scope ensures that the Foreign Investment Law covers a more comprehensive list of foreign investment activities beyond the scope previously covered by the Three Foreign Investment Laws regime.
Under the "Draft Foreign Investment Law of the China (for Public Consultation)" released in 2015 ("2015 Draft for Public Consultation"), foreign investors controlling domestic enterprise or holding interests in any domestic enterprise by contract, trust or other means were to be regarded as a type of the foreign investment to be governed by the Foreign Investment Law. This was supposedly targeting the variable interest entity structure ("VIE Structure"). However, such provisions have been deleted in the final Foreign Investment Law. The Foreign Investment Law retains the definition of "indirect investment activities" (Chapter 2, Article 2). Together with the relevant provisions that allows the scope of foreign investment to be expanded as may be stipulated by laws, administrative regulations or statement of the State Council (Chapter 2, Article 2), arguably, the Foreign Investment Law may still apply to VIE Structure in the future.
Promotion and Administration of Foreign Investment
The Foreign Investment Law clarifies that China implements a pre-establishment national treatment principle plus negative list administrative system for foreign investment (Chapter 1, Article 4), and clearly states that industries not included in the "negative list for foreign investments" shall be regulated based on the equal treatment policy between domestic investments and foreign investments (Chapter 4, Article 28). The above-mentioned provisions have effectively abolished the application of the "pre-establishment approval" mechanism at the legislative level.
Apart from reducing the cost for foreign investors to enter China market, the Foreign Investment Law also emphasizes the promotion (Chapter 2) and the protection (Chapter 3) of foreign investments, setting out policies to provide equal opportunity for competition and to protect the rights and legitimate interests of foreign-invested enterprises. Certain popular topics, such as the protection of intellectual property rights, have also been addressed. For example, the Foreign Investment Law endeavours to protect the intellectual property rights of foreign investors and foreign-invested enterprises (Chapter 2, Article 22), prohibiting any administrative department or its officers from forcing any transfer of technology by administrative means (Chapter 2, Article 2). The Foreign Investment Law also allows foreign investors to freely transmit the intellectual property royalty/license fees across the border, subject to the existing regulations (Chapter 3, Article 21).
For the purpose of government administration, the Foreign Investment Law mandates the establishment of a foreign investment credit reporting system. Foreign investors/foreign-invested entities are obliged to submit relevant information about their investments to the Ministry of Commerce via the enterprise registration platform and the enterprise credit information bulletin board platform (Chapter 4, Article 34). Further, the government is required to establish a foreign investment security review system to conduct the review of foreign investment which affects or may affect China's national security (Chapter 4, Article 35). The decision of the security review is final (Chapter 4, Article 35). While the detailed implementation rules for such a security review system are yet to be issued, queries may be raised about whether the foreign investors will be barred from appealing against the decision of the security review by way of legal proceedings.
Adoption of the existing regulations on domestic enterprises
Another highlight of this Foreign Investment Law is the unification and adoption of the relevant laws for domestic enterprises. It is clear that the organization form, institutional framework and code of conduct of foreign-invested enterprises shall be subject to the provisions of the Company Law of China, the Partnership Enterprise Law of China, and other laws which are currently only applied to domestic enterprises (Chapter 4, Article 31).
This is a landmark change in China's conventional dual-track corporate administration regime which distinguishes between foreign-invested enterprises and domestic ones. The principal corporate structures have been unified and standardized at the legislative level. This unification may cause a significant impact on the commercial decision making of foreign investors and the compliance requirements of existing foreign-invested enterprises. The table below summarizes certain key changes which may impact the governance of the relevant existing EJVs and CJVs which will be regulated by the relevant provisions under the Company Law of China in relation to companies with limited liability after the implementation of the Foreign Investment Law:
Insight for Singaporean Investors
For Singaporean investors, the Foreign Investment Law provides greater commercial freedom and reduces the legal risks of investing in China to some extent. The Foreign Investment Law clarifies that domestic and foreign-invested enterprises will be uniformly regulated according to the Company Law of China and other relevant laws with regard to their organization form, institutional framework and code of conduct. Considering the similarity between the governance framework under the Company Law of China and that under the Companies Act of Singapore, local investors may find it easier to comprehend the governance regime under Chinese law and assess the relevant legal risks accordingly. We believe that the new Foreign Investment Law is expected to boost Singaporean investors' confidence in the investment environment in China.
Published: March 22, 2019
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