Starke Managing Counsel Daniel Albrecht gave some insides about the new “Chinese Investment Law” (waishang touzi fa, 外商投资法) and it’s impact for EUROPEAN countries on Taiwan EBC 24h. Report was broadcasted at March 31.
Since October 2013, China has carried out successful pilot reforms of the foreign investment approval system in Shanghai, Guangdong, Tianjin and Fujian. In 2014, the Foreign Investment Law entered the State Council's legislative plan for the first time. One year later, the Ministry of Commerce published a draft for soliciting opinions on its website. In late December 2018, the final draft of the legislation was released for public review and comment. The law passed March 15 is set to take effect on Jan. 1, 2020. As of October 2018, there were almost 950,000 foreign-funded companies registered in China, accounting for investments exceeding $2.1 trillion, according to Xinhua.
Article 2 of the Foreign Investment Law defines the types of foreign investment into China that will be regulated by the Foreign Investment Law:
- establishment of a foreign invested enterprise (FIE) in China
- acquisition of shares, equities, property or any other similar rights and interests of an enterprise in China
- investment in a new project in China
- investment in any other way as may be stipulated by laws, administrative regulations or provisions of the State Council
The law consists of 39 articles divided into six sections: general provisions, investment promotion, investment protection, investment management, legal responsibility, and other provisions. The scope of the new law covers all forms of engagement, including in particular green field investments, M&A transactions and project investments. The law clarifies that the purpose is to further expand opening up, actively promote foreign investment, protect the legitimate rights and interests of foreign investment, promote the formation of a new pattern of comprehensive opening, and promote the healthy development of the socialist market economy.
The new FDI law will replace the “Three Investment Laws” (Waizi San Fa, 外资三法) that currently guide foreign investment into China. These three laws are: the Sino-Foreign Equity Joint Venture Law (Zhong-Wai Hezi Jingying Qiye Fa, 中外合资经营企业法), the Foreign Invested Enterprises (FIE) Law (Waizi Qiye Fa, 外资企业法), and the Sino-Foreign Cooperative Joint Ventures Law (Zhong-Wai Hezuo Jingying Qiye Fa, 中外合作经营企业法). The “Three Laws” have guided how foreign investors do business in China throughout the Reform Era that began in the late 1970s. The Sino-Foreign Equity Joint Ventures Law was originally passed in 1979, but each of the three have been continually updated (the latter law has been updated roughly each decade since 1979, Ministry of Commerce, January 14 2003; the Law on Sino-Foreign Cooperative Joint Ventures was originally adopted in 1988, and then updated in 2000). Each of these three laws, as well as the law that manages investment from Taiwan, were amended in 2016.
One component of the law is the scope of the “negative list” (fumian qingdan, 负面清单) system. This basic concept holds that all sectors of the economy will be open to foreign investment, other than those explicitly listed on the negative list. The first version of a negative list for FDI in China was pioneered under the China (Shanghai) Pilot Free Trade Zone [Zhongguo (Shanghai) Ziyou Maoyi Shiyanqu, 中国（上海）自由贸易实验区], or PFTZ. The PRC State Council’s 2013 announcement of the creation of the Shanghai PFTZ laid the framework for use of a negative list in that zone (PRC State Council, September 18 2013). The negative list framework was subsequently expanded to other pilot free trade zones. The Negative is a list of industries into which foreign investment is either prohibited or restricted, and contains restrictions or prohibitions on foreign investment in 34 sectors. The Negative List had already been published and in use nationwide since 2018, and is not a new concept proposed under the Foreign Investment Law. Aside from steering clear of industries on the Negative List, foreign investors will also need to ensure that their investments do not trigger concerns under the National Security Review laws which have already been in effect for almost eight years.
The more holistic approach will form the basis of all rules regarding foreign investment and promote modernization of China’s system. It includes sections on protecting, promoting and managing foreign investment, as well as legal liabilities that come with entering the Chinese market:
- China will guarantee the equal treatment of domestic and foreign-funded enterprises (Article 9)
- that national treatment will be provided to foreign businesses, albeit with the negative list system still in place (Article 4)
- investment promotion mechanisms will be improved (Article 3)
- the law encourages the government at all levels to improve the level of its foreign services (Articles 18 and 19)
- The new law stipulates that the conditions for technical cooperation in the process of foreign investment shall be determined only by the parties to the investment, and the government shall not use administrative means to force the transfer of technology
- foreign companies will in future be granted a direct legal entitlement which is intended to protect them from state interference with regard to involuntary technology transfer
no expropriation of foreign-owned assets other than in special circumstances
free transfer of renminbi or foreign currency into and out of China, for returns of capital, profits, capital gains, royalty payments, and other lawfully obtained compensation
- China will implement high-level investment liberalization and facilitation policies, establish and improve foreign investment promotion mechanisms, and create a stable, transparent and predictable investment environment
In the near future China will establish a foreign investment information reporting system. But because Article 34 or the other provisions of the FIL do not provide any guidance as to the information that will be required under a foreign investment information reporting system, it is not yet clear how the registration process and the reporting system will intersect. It is unclear how the foreign investment information reporting system differs from or connects with existing systems.
The new law provides for a five-year transitional period during which the existing joint ventures and WFOEs must adapt their organizational form to the FIL and accordingly the Chinese Company Law.
The new rules respond to some concerns among foreign governments and businesses but disregard many other worries.
In fact, with only 42 articles, the law is unusually "slim". It is a basic law, meaning it will require the State Council — China's cabinet — to frame the rules and regulations for its implementation. Regulations and methods for enforcing the new FDI law will be far more important than passage of the law itself. A series of matching regulations and normative documents” will be necessary for the FDI law to realize its intent.
At this stage Starke needs to complain about vague wording adding to legal uncertainty. Of particular concern are also the lack of detail, the broad scope of the national security review and the possibility of companies being forced to draw up new contracts with their existing joint ventures. It is also questionable thatArticel 40 "allows for political issues to influence investor-state relations".
The implimention of the new Foreign Investment Law goes hand in hand with the draft of a new patent law in china. The draft of the new Patent Law include higher penalties for patent infringement and extention of the term of patents from 10 up to 15 years.
If you like to know more about the new investment regulations, please feel free to approach us.
The video you can find: here