China's Foreign Investment Law: Implications for investors
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.
The new Law will replace the three existing laws:
- Law on Chinese-Foreign Equity Joint Venture (1979)
- Law on Foreign Capital Enterprises (1986)
- Law on Sino-Foreign Contractual Joint Ventures (1988)
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 However, compared to the PRC Company Law which kept being updated and revised, these three laws seem to be quite outdated and have caused many conflicts, confusion and ambiguity in practice for foreign companies, resulting in unequal treatment varied among regional governments,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
- Pre-establishment national treatment plus negative list. The Negative list was first trialed in the Shanghai Free Trade Zones in 2013, and the new law has adopted and updated the list to facilitate the registration procedures of foreign invested enterprises nationwide. This means that foreign investors seeking to establish business operation in China will be treated exactly the same as domestic companies with simplified registration process, as long as they are not from the industry sectors listed on the Negative list. If foreign investors are to enter industries restricted by the Negative list, their investment shall meet certain requirements per the Negative list.
- Equal treatment in making and implementing the governmental policies and regulations. The Government guarantees the equal treatment of foreign invested enterprises in accordance with the laws and regulations and will reinforce the information disclosure and public supervision of standard making process. The policies made by government in order to support development of enterprises shall treat foreign invested enterprises equally. No discriminative policy should be made.
- Equal treatment in public financing activities. Foreign invested enterprises are allowed to finance through public offering of stocks, corporate bond and other types of securities. Foreign invested enterprises receive equal treatment as domestic enterprises regarding requirements and procedures in financing activities.
- Equal treatment in government procurement bidding. The Government guarantees the equal participation of foreign invested enterprises in government procurement bidding activities through fair competition with domestic companies.
2. Protecting foreign company’s investment and trade in China
- Freedom of inbound and outbound transaction
- Protecting foreign company’s Intellectual properties
- Channel for appeal and complaints
The capital investment, profit, dividends, assets, IP licensing fee, compensations that foreign investors gain legally can be transferred inbound and outbound freely in RMB or other foreign currency. No limit on the type of currency, amount and frequency of transaction should be imposed by any entities or individuals.
Forced technology transfer was one of the key issues China has been criticized for by many foreign companies and by the US Section 301 Investigation. In the past, foreign investors from certain industries were required to look for domestic partners to set up joint venture and some Chinese companies required them to share technologies or sensitive trade secrets, which has been interpreted as the Chinese government’s encouraging forced technology transfer.
The new Law provides protection of foreign investor’s intellectual properties and prohibits compulsory tech transfer, clearly stating that “the conditions for technology cooperation in the process of foreign investment shall be decided by both parties through negotiation. Administrative authorities shall not use administrative methods to force the transfer of technology,” and “the administrative authorities shall keep confidential of the trade secrets of foreign investors.” Administrative authorities shall limit the extent, scope, and exposure of IP material and content concerning a foreign business’ trade secrets that will be required to be handed over to administrative bodies
In addition, punitive damages systems for the infringement of IP rights will be established.
The Government will establish appealing mechanisms to make sure that foreign invested enterprises will have proper channels to communicate with the relevant authorities regarding their complaints and concerns, and will process and solve the appeals in a timely manner. Foreign investors can also use the system to report any misconduct of government administrative staff that violates their legal rights. The government will conduct daily operation of the appealing mechanisms. The rules, channels, instructions to use the appealing mechanisms will be announced to the public.
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.