Review of Foreign Investment Law

The FIL is set out in 6 chapters and 42 articles, which systematically establishes the framework in respect to access rules, reporting and management system, protection of investor’s interests, among other aspects of the most interests for foreign investment.

1. Unification of Three Enterprise Laws

Article 42 of the FIL stipulates that “from the date of the implementation of the FIL, the Three Enterprise Laws will be abolished at the same time. Foreign-invested enterprises will no longer be categorized as wholly foreign-owned enterprises, Chinese-foreign equity joint ventures and Chinese-foreign contractual joint ventures”. As a result, arrangements for internal governance structures, rules of order, equity transfers as well as profit distribution of foreign-invested enterprises will all apply provisions of the PRC Company Law, PRC Partnership Law and other regulations, representing unified rules for foreign-invested enterprises with their domestic counterparts in administration. The unification between domestic and foreign investment ends the lengthy differentiated administrative systems for enterprises whose investment are originated from different capital territorialities.

2.Pre-access National Treatment Plus Negative List System

One of the biggest highlight of FIL lies in the clarification of “pre-access national treatment plus a negative list”. FIL expressly provides that “treatment of foreign investors and their investments at the investment access stage are not to be less favorable than those of domestic investors”. Generally speaking, Greenfield investment (including newly establishment, acquisition and expansion) and M&A activities are all in the stage of investment access, during which foreign investment activities are allowed to be less restrictive thanks to the national treatment policy. Negative list refers to the special management measures for the access of foreign investment in specific industries. Since 2013, it has been piloting by Shanghai Free Trade Zone, together with the filing management systems. After years of revisions and promulgation of related rules, negative list has been implemented throughout China. As a result, transparency and predictability of foreign investment access have been improved accordingly.

At present, China applies the “Special Management Measures for Foreign Investment Access (Negative List) (2018 Edition)”, promulgated by the National Development and Reform Commission and the Ministry of Commerce on 28th June 2018. It is reported that the content of the negative list will be further reduced with the opening process of China.

3.Comprehensive Foreign Investment Methods

Article 2 of FIL indicates that, Foreign investment mentioned in this Law refers to the investment activities of foreign natural persons, enterprises or other organizations(hereinafter referred to as foreign investors)conducted directly or indirectly within the territory of China, including the following: Foreign investors set up foreign-invested enterprises in China alone or jointly with other investors; Foreign investors obtain shares, equities, property shares or other similar rights and interests of enterprises within the territory of China; Foreign investors investing in new project in China alone or jointly with other investors; Other investment prescribed by laws, administrative regulations or specified by the State Council.

we still on the fence of whether the above-mentioned investment forms include the actual control of the enterprises in China by the agreement control structure (“VIE structure”), or the reinvestment by the foreign-invested enterprises and their subsidiaries are "indirect" investments as stipulated in the FIL.

4.Protection and Encouragement of Foreign Investment

The FIL provides a rule of law guarantee for the ever-changing demands of foreign investors. Specifically, the following points are worthy of attention:

a.Under extradinary circumstances, the State may expropriate and requisition the investment of foreign investors in accordance with the law and for the needs of the public interest. It shall be conducted in accordance with legal procedures and reasonable compensation shall be given. (Article 20)

b.Foreign investors' capital contribution, profits,capital gains,assets disposal income, intellectual property license fees,legally obtained damages or compensation,liquidation proceeds,etc.,may be freely remitted to overseas according to law. (Article 21)

c.The State protects the intellectual property of foreign investors and foreign-funded enterprises as well as the legitimate rights and interests of holders of intellectual property rights and the relevant right holders according to the present Law. (Article 22)

d.The people's government at all levels and their relevant departments shall be in compliance with the provisions of laws and regulations in formulating normative documents concerning foreign investment; unless authorized by laws and administrative regulations,they shall not derogate from the legitimate rights and interests of foreign-invested enterprises or increases their obligations, set forth conditions for market access and exit, and interfere with normal production and operation of foreign-invested enterprises. (Article 24)

e.Local people's government at all levels and their relevant departments shall honor their commitments on policies made available to foreign investors and foreign-invested enterprises under the law and various types of contracts concluded in accordance with the law. (Article 25)

f.The state establishes a complaint and settlement mechanism for foreign-invested enterprises. In addition to applying for a coordinated solution through the complaint and settlement mechanism for the foreign-invested enterprise, they may also apply for administrative reconsideration and file an administrative lawsuit according to law. (Article 26)

The rights, especially the intellectual property rights of foreign investment, are clarified by legislative approach, which lay the foundation for the unification of laws and we will pay close attention to it.

5.Establishment of Foreign Investment Information Reporting System

Article 34 of FIL indicates that, “the State establishes a system for foreign investment information reporting. Foreign investors or foreign-invested enterprises shall submit investment information to the competent commerce department through the enterprise registration and the enterprise credit information publicity system”. According to the practice of Three Enterprise Laws, foreign investment has experienced a period from case-by-case approval system to filing system, and was finally replaced by a unified registration process. Compared with the former practice, the foreign investment information reporting system established by the new law is a further implementation of the “distribution management” reform in the field of foreign investment, and its specific implementation rules need to be further legislated.