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China's Foreign Investment Law: Implications for investors

November 21, 2019 / 5 min read

A new Foreign Investment Law hopes to bring stability, fairness, and transparency in the middle of global trade challenges. Here’s a summary of the new law, and what it is replacing.

On March 15, the second session of the 13th National People’s Congress has passed the new Foreign Investment Law of PRC, which will come into force on January 1st, 2020. The new Law marks the next level of China government’s opening-up policy to enhance a more transparent business environment and ensure that domestic and foreign enterprises compete on a level playing field, with equal treatment under the unified legislative rules and processes.

In November 2019,the government has further released a draft of the Implementation Regulations for Foreign Investment Law. Some detailed measures regarding profit repatriation and IP infringement have been addressed within the provisions.

Background

The new Law will replace the three existing laws:

China’s three laws related to foreign investment date back to the late 1970’s when China opened its door to foreign investors. However, compared to the PRC Company Law which kept being updated and revised, these three laws seem to be quite outdated and have caused many conflicts, confusion and ambiguity in practice for foreign companies, resulting in unequal treatment varied among regional governments, complicated administrative procedures and reporting systems, low efficiency, and hidden barriers in market entry for foreign operations in China.

Determined to revise the old three laws, in 2015, the Ministry of Commerce published the draft of Law of PRC on Investment from Foreign Countries. In 2018, with the increasing trade frictions between China and US, foreign investment withdrawal, as well as the unstable global trade environment, Chinese government speeded up the process of launching new law.

Key highlights in the new law

1. The new law makes clear on the principles of equal treatment of domestic and foreign investment

2.  Protecting foreign company’s investment and trade in China

3. New regulations on the type of foreign investment companies

Under the new Law, the organization form of foreign-invested enterprises shall be regulated by the PRC Company Law and PRC Partnership Enterprise Law. Therefore, a new foreign-invested enterprise will be registered either as a limited liability company, a joint stock limited company, or a partnership enterprise, without the current types such as wholly foreign-owned, Sino-foreign joint ventures or Sino-foreign cooperation.

It is worth noticing that the new Law provides a five-year transition period for already established foreign-invested enterprise according to the previous Three Laws, meaning that those established companies can maintain its original organization form (such as wholly foreign-owned, Sino-foreign equity joint venture or Sino-foreign co-operative joint venture) within five years after 2020.

We will keep following and updating the details, specific rules and explanations that will come out in the near future regarding the actual provisions and implementation of the new Foreign Investment Law.

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