New China Foreign Investment Law Proposed

Friday, July 17, 2015 | Published by

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On January 19, 2015, the Ministry of Commerce of China (“MOFCOM”) announced a draft PRC Foreign Investment Law (the “FIL”) for public comment. The Chinese government aims to adapt foreign investment to the current situation of China´s development with this draft, as well as to create a stable and transparent legal environment.

The spokesman of the Chinese Ministry of Commerce, Jiwen Sun, released the details of the draft. The new law will replace the current legal framework of foreign invested enterprises (“FIEs”), which includes The Law of the People´s Republic of China on Chinese-Foreign Equity Joint Ventures, The Law of the People´s Republic of China on Foreign-Capital Enterprises and The Law of the People´s Republic of China on Chinese-foreign Contractual Joint Ventures, as well as the corresponding administrative rules and regulations in relation to the FIEs. The new law is required to go even further with the goal of opening-up the market to the outside world, in order to encourage foreign investment and management.

China´s Foreign Investment Law draft contains 11 Titles and 170 Articles. One of its main points is Title II, which will provide a new definition of investor and foreign investment; an enterprise will not regulate based on its property, but rather based on its “real control”. An enterprise will be considered as foreign or national depending to who will control the investment.

FIL´s Key Points

Foreign Investment concepts expanded

In regards to the “Foreign Investor´s” figure, under the draft, a domestic company controlled by foreigners or foreign entities will be deemed as foreign investors. In this way, it is intended to introduce a new concept of control, which includes; (i) holding, directly or indirectly, more than 50% of shares or other similar equity powers in the enterprise, (ii) the ability to have significant impact on the operations, human resources and finances; and (iii) entitlement to directly or indirectly, appoint more than half of the members of the decision-making body.

According to the definition of “Foreign Investment”, the Foreign Investment Law not only covers green field investment and acquisition, but also must regulate the following activities as foreign investment: obtaining real property rights in China; providing financing with a term of one year or more to their subsidiaries in China; and obtaining a concession to exploit and develop natural resources in China, among others.

Changes to the Regulatory Approval Regime

The draft seeks to streamline and simplify the regulatory approval regime for foreign investment. Under the FIL, State Council will transmit a Catalogue of Special Administrative Measures to be promulgated by the State Council (the “Negative List”) which will set out the industries in which a foreign investor will be prohibited from making investments. The Negative List will also contain a restricted industry list, which is intended to achieve more efficiency in foreign investment administration. The draft will adopt the negative list approach in respect to foreign investment approval similar to the model applied in the China (Shanghai) Pilot Free Trade Zone, which sets out restricted industry sectors to foreign investment.

Corporate Governance

Once the FIL is adopted, foreign invested companies will be subject to the same treatment as local enterprises with respect to corporate governance matters. The draft provides for a three-year transitional period for all the current CJVs, EJVs and WFOEs to comply with the PRC Company Law.

About Reporting Requirements

Simultaneously, the FIL recommends imposing regular reporting requirements for all foreign investments and all such disclosures will be accessible by the public through public inquiries with the exception of trade secrets and personal information. Foreign investors and their subsidiaries in China are obliged to fulfil a number of reporting responsibilities via an online system to be set up by MOFCOM. This information normally includes an initial information report, a change report and an annual report.

Case of Variable Interest Entity (“VIE”)

If the FIE is adopted in its current form, it will apply to companies using the variable interest entities (VIE) structures, which involve foreign control by way of contractual arrangements. The VIE structures are often used by foreign investors to invest or operate in areas subject to foreign investment restrictions. Thus, MOFCOM has proposed several options for the regulation of VIEs, although it is still unclear whether any grace period will be granted to existing VIE investments in order for such VIE investments to comply with the FIL, but would either be regularized or outlawed subject to the Negative List and the released provisions governing existing VIE structures.

The draft FIL represents steps that the Chinese government is taking to reform its existing foreign investment regulatory framework, which aims to sustain and strengthen the work of the government, but also to consolidate the protection system of investors and their investments.


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