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28 Dec 2018

China Promulgates the Unified Draft Foreign Investment Law

On 23 December 2018, the Standing Committee of the National People’s Congress, a main legislative body of China, deliberated its Law of the People’s Republic of China on Foreign Investment (Draft) (“Draft Foreign Investment Law”), which was subsequently submitted for public comments on 26 December 2018. When officially promulgated and entered into force, the finalized version of the Draft Foreign Investment Law will become the primary legislation in the field of foreign investment, and will replace the three major legislative frameworks that currently regulate foreign-invested enterprises (“FIEs”), including: the Law of the People’s Republic of China on Sino-foreign Equity Joint Ventures (promulgated on 1 July 1979 and last amended on 3 September 2016), which has been in force for approximately 40 years; the Law of the People’s Republic of China on Foreign-invested Enterprises (promulgated on 12 April 1986 and last amended on 3 September 2016) ,which has been in force for approximately 32 years; and the Law of the People’s Republic of China on Sino-foreign Cooperative Joint Ventures (promulgated on 13 April 1988 and last amended on 4 November 2017), which has been in force for approximately 30 years. Accordingly, the Draft Foreign Investment Law marks a major development which will ultimately provide a unified legal framework applicable to FIEs, including wholly foreign-owned enterprises, Sino-foreign equity joint ventures and Sino-foreign cooperative joint ventures.

The Draft Foreign Investment Law provides general rules for the promotion, protection and management of foreign investments, including the following major developments:

Equal Treatment for Domestic and Foreign Investors. The Draft Foreign Investment Law expressly provides for the equal treatment of FIEs and domestic enterprises. These protections include:

  • the equal application of the State’s policies in support of enterprise development to the development of FIEs;
  • the ability for FIEs to equally participate in the formulation of national industrial standards, and for compulsory standards to apply equally to FIEs;
  • the ability for FIEs to participate fairly in government procurement procedures, and for government authorities to treat domestic products produced by FIEs on an equal footing during procurement procedures; and
  • the ability for FIEs to finance through public offerings of stocks, debentures and other securities, or by other means.

Notably, on 25 December 2018, one day before the Draft Foreign Investment Law was submitted for public comments, two Chinese government authorities (the National Development and Reform Commission and the Ministry of Commerce) jointly publicized a Negative List for Market Entry (2018 version), in order to implement a unified “negative list” system of restricted and prohibited activities applicable to market entry. Except for investments in areas of the Chinese market that are already restricted and prohibited under the current Special Administrative Measures for Entry of Foreign Investment (Negative List) (amended on 28 June 2018), the newly published negative list provides that foreign investors will be treated equally as Chinese investors, and that they will be subject to other relevant requirements placed on investors that are set forth in the list.

Enhanced Protection of Foreign Investments. The Draft Foreign Investment Law also enhances the protection of foreign investments, primarily in the following ways: 

  • by improving the intellectual property protections of FIEs, by means of prohibiting forced technology transfers; 
  • by expressly providing that capital contributions, profits, capital gains, royalties on intellectual property, and lawfully obtained compensation or indemnification proceeds can be freely remitted abroad in RMB or in foreign currency (with particular emphasis on the royalties on intellectual property);
  • by strictly limiting the conditions for state expropriations of FIEs; and
  • by expressly strengthening rules regarding the regulatory documents applicable to foreign investments, prohibiting the formation of regulatory documents that unlawfully injure the legal rights and interests of foreign investors, or increase their obligations, and calling for the perfection of systems that will allow FIEs to file complaints and to safeguard their rights. 

Local Government Authority to Adopt Preferential Policies. The Draft Foreign Investment Law also clarifies that local governments have the authority to formulate policies aimed at promoting foreign investments within their jurisdictions. In practice, this means that local governments may have broader authority to formulate more flexible policies with respect to the procedures concerning approvals and record-filings, facilitation of foreign investment, etc. Meanwhile, the Draft Foreign Investment Law also requires that local governmental authorities implement commitments to conform with the law’s policies. We expect that relevant local government bodies will launch additional implementing rules after the official and finalized version of the Draft Foreign Investment Law comes into force.

Additionally, in contrast to the previous Foreign Investment Law (Public Comment Draft) publicized back in 2015, the Draft Foreign Investment Law does not provide details concerning other technical nuances such as the status of VIE arrangements commonly used by foreign investors in China. The Draft Foreign Investment Law continues the Chinese government’s vague approach to the legal status of VIE structures. Notably, in addition to greenfield investments, capital increases, mergers and acquisitions and other direct forms of investment, the Draft Foreign Investment Law provides some catch-all language covering investment “within the territory of China through other means provided by laws, administrative regulations or rules of the State Council”. Effectively, this reserves room for the Chinese government to possibly launch special provisions regarding VIE structures in the future.

According to comments from the Ministry of Justice during the Draft Foreign Investment Law’s deliberation proceedings, the Draft Foreign Investment Law will serve as the primary system and framework for future foreign investment legislative developments and will reserve space for further, more extensive reforms. As the Draft Foreign Investment Law’s substantive provisions are still very general at this time,the State Council and other government authorities will still need to launch relevant guidelines or implementing rules after the finalized version of the Draft Foreign Investment Law becomes effective. Such guidance should help clarify various remaining uncertainties, including the application and scope of new and existing laws before the final legislation is fully adopted and implemented, the relationship between the finalized legislation and other major current regulations on foreign investment, and the practice of FIEs remitting their foreign currency. Solutions to each of these uncertainties are unclear at this time and are still pending further observation.

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