China Releases Draft Implementation Rules of Foreign Investment Law

On 1 November 2019, the Ministry of Justice released the Implementation Rules of Foreign Investment Law (Draft for Comments) (《中华人民共和国外商投资法实施条例（征求意见稿）》) (“Draft Implementation Rules”)[1] in order to solicit public comments from relevant stakeholders[2] concerning the Chinese government’s envisioned implementation of the groundbreaking Foreign Investment Law of People’s Republic of China (“Foreign Investment Law”) promulgated earlier this year.[3] The official version of the Draft Implementation Rules is aimed to take effect alongside the same effective date of the Foreign Investment Law, i.e., 1 January  2020, and the Draft Implementation Rules specify and further elaborate the general provisions set forth under the Foreign Investment Law, thereby making its provisions detailed and workable for parties operating in China. This newsletter sets forth some of the key specifics proposed under the Draft Implementation Rules.

Clearer Rules for Foreign Investment Management

Above all else, the key principle established under the Foreign Investment Law is that foreign-invested enterprises (“FIEs”) will be treated the same as PRC domestic companies in China, except for their remaining subject to the particular and defined additional restrictions and prohibitions set forth in the “Negative Lists” maintained by PRC regulators.[4] The Draft Implementation Rules set out clearer rules concerning the mandatory adjustment of FIE organizational forms and governance mechanisms as required by the Foreign Investment Law, as well as an array of provisions regarding the regulation and management of foreign investment, the key rules of which include:

• Investments that both: (1) are made by foreign entities which are wholly established by PRC citizens or PRC domestic entities; [5] and (2) have been reviewed by a designated PRC governmental authority and also approved by the State Council, will no longer be subject to the restrictions and prohibitions set forth in the Negative Lists. Notably, details surrounding this review and approval mechanism by the State Council have yet to be provided and are currently unclear. In any event, this comprises a groundbreaking change which would mean that round-trip investments meeting the conditions above will no longer be subject to restrictions under the Negative Lists. Having said that, if the entity making such a round-trip investment is not 100%  owned by PRC parties (including if it involves the participation of any non-PRC funds), then such an entity will not be entitled to this exemption, and will still therefore be subject to the Negative Lists.
• The State Administration for Market Regulation (“SAMR”) and its local branches are clarified as the authority responsible for the registrations of FIEs, as well as for review and examination procedures that determine whether a foreign investment meets special regulation requirements under the Negative Lists. The Draft Implementation Rules also provide that if other governmental authorities have performed such examinations, then re-examinations with SAMR will not be required. In practice, this may require some level of coordination between SAMR and other governmental authorities in order to avoid double examination requirements, although such coordination details and mechanisms have yet to be specified. Based on this clarification, foreign investments made in restricted sectors under the Negative Lists will be subject to SAMR’s approval, and will not be subject to review and approval by the Ministry of Commerce (“MOFCOM”) under the existing management system.
• After conducting their registrations with SAMR, foreign investors/FIEs will be also be required to report/file investment information to MOFCOM via SAMR’s registration system and the so-called “Enterprise Credit Information Publicity System”. The detailed procedures and requirements for such filings will be further clarified in future MOFCOM and SAMR regulations.
• The Foreign Investment Law and all of its implementation rules will also apply to foreign investments within mainland China conducted by investors from Hong Kong, Macau or Chinese nationals living abroad. However, foreign investments within mainland China conducted by investors from Taiwan will still be subject to the Law of the People's Republic of China on the Protection of the Investments of Taiwan Compatriots (“Taiwan Compatriots Investments Law”) and its implementing rules. Meanwhile, for any matters that are not expressly covered in the Taiwan Compatriots Investments Law, theForeign Investment Law will apply.

Emphasis on Equal-Treatment System

In order to flesh out the equal treatment principle called for under the Foreign Investment Law, the Draft Implementation Rules provide/emphasize the following details:

• Where PRC governmental authorities formulate or implement any policies aimed at supporting the development of enterprises, such as policies relating to government funds, land use, tax reductions or exemptions, qualifications and licensing, project filing, and human resources, no discriminatory measures or policies may be made or imposed on FIEs.
• No governmental authorities may apply mandatory technology standards on FIEs which are higher or stricter than the compulsory standards imposed on domestic enterprises, and such authorities have no right to force FIEs to adopt any recommended technology standards or group standards.
• No entities or individuals may prevent or restrict FIEs from participating in the government procurement market in any manner. Likewise, no governmental authorities or government purchasing agencies may restrict the engagement of FIEs in government procurement activities via limitations on ownership, organization type, shareholding structure, nationality of investors, or other conditions that would discriminate against FIEs.
• Where: (1) FIEs pursue financing through the public offering of shares, corporate bonds and other securities within China; or (2) FIEs engage in industries or business activities that require applicable licenses or operating permits, governmental authorities and other institutions must handle FIE administrative applications according to the same conditions and procedures applicable to domestic enterprises, unless additional requirements are expressly provided under PRC law and regulations (e.g., such as under the Negative Lists).

Further Details on Foreign Investment Protection

The Draft Implementation Rules also envision the following key terms regarding the protection of foreign investment:

• Further to the Foreign Investment Law’s liberalized rules regarding the free transfer of certain proceeds into and out of mainland China in either RMB or foreign currencies,[6] the Draft Implementation Rules provide that no entities or individuals (including governmental authorities) may set restrictions on the amounts, frequency or currency of such transfers.
• The Draft Implementation Rules also elaborate that no governmental authorities or their staff may engage in forced technology transfers with FIEs, whether by direct administrative actions or by the manner of performing their administrative duties (e.g., registrations, project approvals or filings, administrative licenses, supervision activities, administrative penalties or compulsion). 
• Further to the Foreign Investment Law’s requirement that all PRC government bodies fully perform their commitments with FIEs and foreign investors, the Draft Implementation Rules specify that: (1) all commitments made by PRC government bodies shall be in writing;  (2) no PRC government bodies may modify their contractual or policy obligations unless such modifications are necessary to protect state interests or social/public interests; and (3) any changes to a particular PRC administrative division, government body or officer that is caused by an expired term limit or an expired/terminated term of appointment, or any organizational changes or modification of authorizations and duties of such parties, will not be a sufficient excuse for PRC government bodies to breach their commitments.
• The Draft Implementation Rules also specify that formal complaint mechanisms are to be established at both the national level (possibly under MOFCOM) and the local level (by applicable local governments, depending on actual needs). Foreign investors and FIEs are to be provided full access to these complaint mechanisms at both the national and local level in order to issue and resolve their formal complaints.

Transition Period

The Foreign Investment Law provides for a five-year transition period for FIEs to update their organizational forms and governance mechanisms to comply with the unified forms supplied under the PRC Company Law[7] and the PRC Partnership Enterprise Law.[8] The Draft Implementation Rules fill in gaps concerning this transition period, expressly noting that the government will encourage FIEs to adjust their organizational forms and governance mechanisms during the transition period. If FIEs fail to handle such updates by 1 January 2025, and do not rectify their failure within six months of this deadline, then SAMR will not accept any registration applications from such FIEs, and may choose to publish such failures via the Enterprise Credit Information Publicity System. The Draft Implementation Rules further specify that any adjustments made to comply with the Foreign Investment Law’s adjustment requirements will not affect the existing agreements between shareholders of FIEs regarding allocations of proceeds and property. More detailed guidance on these mandatory organization and governance updates will be issued by SAMR at a later stage.

Unaddressed Issues

The Draft Implementation Rules provide clear and detailed provisions which are a welcome development in terms of both implementing the Foreign Investment Law and promoting and facilitating foreign investment to China, within the boundaries set by relevant laws. Having said that, there are still several major issues under the Foreign Investment Law that remain to be resolved or clarified in the future, for instance: how the reinvestment of FIEs will be managed in sectors subject to the Negative Lists, and what the scope will be of the national security review system applied to foreign investments potentially affecting PRC national security.[9] It is expected that PRC governmental authorities may issue additional implementation rules or guidance on these particular issues in order to amplify the impact of the Foreign Investment Law.  

[1] The Implementation Rules of Foreign Investment Law (Draft for Comments) was jointly issued by the Ministry of Justice, the Ministry of Commerce and the National Development and Reform Commission.

[2] The deadline for the public’s submitting such comments will be 1 December 2019.

[3] For more details on the major implications of the Foreign Investment Law, please see our previous newsletter addressing this topic.

[4] The Negative Lists system currently in force is composed of two lists jointly issued by the Ministry of Commerce and the National Development and Reform Commission. Namely, the Negative Lists include: (1) the Special Administrative Measures for Access of Foreign Investment (Negative List) (2019 Edition), which was issued on 30 June 2019 and which applies to the PRC except for in pilot free trade zones (“FTZs”); and (2) the Special Administrative Measures for Access of Foreign Investment in Pilot Free Trade Zones (Negative List) (2019 Edition), which was issued on 30 June 2019 and applies to FTZs. Please see our newsletter for more details concerning such Negative Lists.

[5] The Draft Implementation Rules specify that PRC domestic entities do not include FIEs.

[6] Article 21 of the Foreign Investment Law provides that the capital contributions, profits, capital gains, royalties on intellectual property, and lawfully obtained compensation or indemnification proceeds, as well as the income from disposal of assets and liquidation, are all to be freely transferrable into and out of mainland China, regardless of whether in RMB or in foreign currency.

[7] The Company Law of the People's Republic of China (Revised in 2018) (《中华人民共和国公司法（2018年修订）》) issued by Standing Committee of the National People's Congress on 29 December 1993 and recently revised on 26 October 2018.

[8] The Partnership Enterprise Law of the People's Republic of China (Revised in 2006) (《中华人民共和国合伙企业法（2006年修订）》) issued by the Standing Committee of the National People's Congress on 23 February 1997 and revised on 27 August 2006.

[9] The Foreign Investment Law provides that national security reviews will be required for any foreign investments affecting or having the possibility to affect PRC national security.