China: Foreign investments falls into the New Law in year 2019

May 14, 2019 | Uncategorized

The Draft of Foreign Investment Law (“The Draft FIL”) has been submitted to the second session of the Thirteenth National People‘s Congress on March 8, 2019.How

would this have an impact on Foreign Investments to China?

Background

The movement of China’s Reform and Opening Up was launched in 1978, which has been the catalyst for enormous changes to the country, reaching all parts of society. In order to attract Foreign Investments to China, the three laws of Chines-Foreign Equity Joint Ventures, Chinese-Foreign Contractual Joint Ventures and Wholly Foreign Funded Enterprises (hereafter abbreviated as “Three Laws”) have been promulgated in the early stage of the movement. The Three Laws form the legal foundations of Foreign Investments to China and make great contributions to China’s Reform and Opening up steps.

This year marks the 40th anniversary of the start of Reform and Opening Up in China.  It is a suitable time to review the Three Laws and issue a new one to speed up our Reform and Opening Up process.

Key changes

How to encourage Foreign Investments* to China?

The Draft FIL would continuously encourage Foreign Investments to China in respect of the following fields:

  1. From post-establishment national treatment to pre-establishment national treatment. The negative list will be appropriately reduced.
  2. Establish special economic areas or implement foreign investment pilot programme in certain areas.
  3. Chinese Government will procure products and commodities manufactured by Foreign Invested Enterprises (“FIEs”) in China based on equal treatment.
  4. FIEs are allowed to make financing through public offerings, corporate bonds and debentures and other forms based on the relevant laws and regulations.
  5. Chinese Government at or above the county level would set out Foreign Investment promotional and facilitative policies and measures within their statutory authority.

How to protect Foreign Investments to China?

The draft regulates further on how to protect Foreign Investment’s legitimate rights and interests as below:

  1. Chinese Government will not make any expropriation on foreign investments. Under certain special circumstances, the expropriation or the requisition shall be done in terms of public interests, Chinese Government must go through legal process and make fair and reasonable economic compensations.
  2. It will strengthen intellectual property rights protection owned by foreign investors and FIEs. The government officials are not permitted to make a compulsory transfer of intellectual property rights by their own.
  3. Foreign investors can arrange their capital injection, net profits and equity earnings remitted outside China in RMB or other foreign currencies without any restrictions.
  4. In case there is a violation to legitimate rights and interests of FIEs or their foreign investors, they could apply to resolve the issues through FIEs’ complaint mechanism, administrative reviews or administrative proceedings.

Key Considerations

When foreign investors make investments to China, they need to understand which business is permitted, limited or prohibited. Chinese Government guides foreign investments by a “Negative List”. The “Negative List” refers to a special permit management measure which aims to provide a guidance for foreign investment areas.

Foreign Investments

Do/Don’t Negative List (NL)
are not allowed to make an investment to Prohibited areas as regulated in the NL.
should comply with the conditions in the NL when making an investment to Limited areas as regulated in the NL.

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Foreign Investors should accept an inspection made by business operators when participating into the Chinese business through M&A. Foreign Investors or FIEs should submit investment information through enterprise registration system and enterprise credit information publicity system. Foreign investors would be on a security check if foreign investments would have an impact on our national securities.

Summary

It has been foreseen that the draft Foreign Investment Law would supersede Three Laws once it is finalized. During the transitional period, the FIEs incorporated under Three Laws would retain their organizational types for 5 years after the new Foreign Investment Law is taken into effect.

The Foreign Investment Law would play an important role for attracting and retaining foreign investments, create more opportunities for international co-operations and simulate our Reform and Opening Up step to a higher level.

* Foreign investments refer to foreign individuals, foreign enterprises or other organizations directly or indirectly undertake investment activities within mainland China.

For more information, contact:
Eva Tian, Tax Director
Chung Rui Tax Group Ltd.
T: +86 186 2181 0863
E: tianwenyan@crtax.com