The Standing Committee of the National People’s Congress released the second Foreign Investment Law of the People’s Republic of China Draft for Public Comment (The Draft Law) on 26 December 2018. The Draft Law remains open for comment from 26 December till 24 February, and could be submitted to the annual National People’ s Congress plenary session in March 2019 for deliberation and voting.
Once enacted, the Draft Law shall replace the existing three laws — Wholly Foreign Owned Enterprise Law, Equity Joint Venture Law and Cooperative Enterprise Law — which serve to regulate foreign investment in China. The Draft Law forms part of wider promotions for increased foreign investment in China and easing access to the Chinese market.
Consisting of 39 articles, the Draft Law focuses on promotion, protection and management of foreign investment in China. Below are the key takeaways from the Draft Law:
Foreign Investment Definition
Foreign investment is referred to in the Draft Law as any investment activity directly or indirectly carried out by foreign natural persons, enterprises or other organisations including those
- Investing in new projects, establishing FIEs, or increasing investment, either individually or jointly with other investors;
- Obtaining stock shares, stock equity, property shares, other similar interests in Chinese domestic enterprises through mergers or acquisitions; and
- Making an investment in mainland China through other means provided by laws, administrative regulations or State Council provisions.
The scope of foreign investment also includes enterprises funded by a foreign investor(s), either wholly or partly.
Adoption of pre-establishment national treatment and Negative List
Foreign investment shall be subject to pre-establishment national treatment. In principle, foreign investment is subject to the same market access and pre-establishment laws and regulations as domestic companies, except in the prohibited and restricted industries stipulated in the Negative List or provisions provided in international treaties and agreements governing foreign investment that the People’s Republic of China concludes or accedes.
The Negative List refers to Special Administrative Measures on Access to Foreign Investment which outlines the prohibited, restricted and encouraged industries for foreign investment. The most recent Negative List, effective from 28 July 2018, reduced the number of restrictive measures from 63 in the previous version to 48, signifying further movements in opening the market to foreign investors.
Foreign investment and domestic companies shall be equally treated in the application of the following:
- Business development policies (except in provisions stipulated in laws and regulations)
- Compulsory standards
- Government procurement
In the enactment of laws, regulations and rules relating to foreign investment, the opinions and suggestions of foreign investors shall be taken into account. In addition, a foreign investment service system providing service and consultation related to laws and regulations, policies and measures, investment project information and so forth. shall be established for foreign investments.
The Draft Law calls on government bodies to protect foreign investments and forbids illegal actions of government bodies to impair foreign investments from legitimate rights and interests, market access and exits. Government bodies shall honour policy commitments and contracts with foreign investments. Any adjustments made to policy commitments and contracts due to national or public interests shall be compensated.
Equally, there is an emphasis on the protection of intellectual property rights for foreign investments. Here, technology cooperation is encouraged on the basis of business rules and regulations, with forced technology transfers by administrative organs being prohibited.
Relating to the latter, there will be a complaint mechanism established for foreign investments to file complaints and resolve problems in a transparent and timely manner.
Foreign investment in industries outside of the forbidden and restricted industries within the Negative List shall be subject to laws and regulations applicable to Chinese domestic entities.
In practice, once enacted, the Draft Law will repeal the Wholly Owned Foreign Entity law, Equity Joint Venture law and Cooperative Joint Ventures law, and foreign investments outside of the Negative List shall be required to be structured in accordance with the Company Law of the People’s Republic of China and the Partnership Enterprise Law of the People’s Republic of China.
The Draft Law will drastically affect the corporate governance structures of Equity Joint Ventures (EJV) and Cooperative Joint Ventures (CJV), in which the current highest governing board — board of directors — in EJVs and CJVs (legal entity) shall be changed to the board of shareholders in accordance of the Company Law.
For EJVs, there will be an option to either appoint a board of directors or executive director, and the requirement where one party appoints the chair of the board, the counterpart shall appoint the deputy chair, and the EJV law shall no longer apply. In terms of CJVs without an established legal entity in the territory of China, they may need to be re-established as a legal entity since there is no other provision in the current laws and regulations of China for a non-legal entity except in CJV law.
Once the Draft Law comes into effect, existing WOFE, EJV and CJV entities may retain in the current form of entity for five years upon the effective date. As a result, current foreign investments in China, upon the enactment of the Draft Law, should prepare and implement the correct legal entity form through proper legal consultation.
In sum, the Draft Law signifies further efforts in the promotion and protection of legitimate rights and interests for foreign investment. Specifically, the adoption of domestic treatment for foreign investment outside of the negative list allows foreign investment to be provisioned with the same rights and protections as domestic companies, as well as increased ease on administrative procedures.
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