Foreign Investment Law – Practical Impact & Compliance Guide

The introduction of a new year represents a significant and fundamental adjustment for foreign investment laws and regulations in China. Last year, the National People’s Congress promulgated the Foreign Investment Law (FIL) in June comprising a total of six chapters and forty-two articles. Recently, in December, The Interpretation of the Supreme People’s Court on Several Issues Concerning the Application of the Foreign Investment Law of the People’s Republic of China with additional seven articles was released, with the Regulations for the Implementation of the Foreign Investment Law (Implementing Regulations) providing further details on the provisions of the legislation with a total of forty nine articles and six chapters.

The aforementioned rules and regulations have been approved and have come into effect as of January 1, 2020, as the previous legislation governing foreign investment in China, the Law on Wholly Foreign-owned Enterprises (WFOE Law), the Law on Sino-foreign Cooperative Joint Ventures (CJV Law), the Law on Sino-foreign Equity Joint Ventures (EJV Law) have all been simultaneously repealed.

 

Overview

An extensive introduction of new regulations for foreign investment legislation in China, it is envisioned that the organizational form, governing structure, and operating rules of FIEs will be subject to the provisions of the applicable laws which govern domestic enterprises, however, while the Implementing Regulations have provided further details and guidance regarding the implementation of the FIL, there are still vague aspects and pending issues to be resolved in regards to which of the rules and regulations implemented under the old foreign investment regime remain applicable and which have been abolished.

In relation to such changes, one of the most notable aspects of the FIL lies in clarifying the provisions of “National Treatment” (Article 4 FIL) and “Principle of Equality” (Article 9 FIL), which are outlined to be present at both the pre-investment stage and operating stage for FIE’s respectively. However, at the pre-investment access stage, the law specifies that any foreign investment shall still be subject to the negative list system and for FIE’s in operation, although it is stated that all national policies supporting the development of enterprises shall equally apply to FIE’s, it is subject to the a limiting factor of where permitted by “laws and administrative regulations” (Article 35 Implementing Regulations).

At present, concepts of “National Treatment” and “Principle of Equality” outlined within the FIL showcase the groundwork for a future in which such ideals, which would represent a level playing field for both domestic and foreign enterprises, may be fully realized.

Upon assessing the new business environment for foreign invested companies in China, we shall examine some of the main impacts such new provisions will have on the operation of foreign invested companies within China and the practical actions companies shall make.

 

Corporate Restructuring

One of the most important factors to be aware and to take action upon is the fact that Co-Operative Joint venture companies (CJV) and Equity Joint Venture Companies (EJV) established before the implementation of the New Foreign Investment Law will need to change their governing structure within a five-year transitional period. (Article 42 FIL)

In relation to wholly foreign-owned enterprises (“WFOE”), their form will the least influenced by the implementation of the FIL as the corporate governance of WFOEs complies with the PRC Company Law. Although foreign investors will need to make amendments to the articles of association of wholly foreign-owned enterprises established in China, and report them to the relevant governmental departments for approval or record-filing within the aforementioned five-year transitional period in order to adapt and be in compliance to the new legal requirements.

For Joint Venture Companies, in order to adjust its organizational form to a limited liability company in accordance with the PRC Company Law or transfer its partnership enterprise according to the PRC Partnership Enterprise Law, it shall be necessary to amend the joint venture company’s articles of association, establish a board of shareholders and to reorganize the board of directors.

In practice, regardless of whatever form the joint venture decides to implement within the transitional period, new rounds of negotiations with the relevant business partners within the company will be required and a prolonged period of adaption should be expected. It is advisable that investors should not waste time in order to implement such changes, taking into consideration the possibility of unexpected events and unforeseen complications in the process.

The implementation regulations have since set an additional provision for enterprises to make such changes after the five-year transitional period deadline, in which case they will no longer be able to make other changes, and such incompliance will be shown in the Enterprise Information Publicity System. (Article 44 Implementation Regulations).

 

Remittance of Income and Profits

The FIL and Implementation Regulations stipulates the free remittance of legitimate funds in and out of China for foreign investors, in RMB or foreign currency, inclusive of capital contributions, profits, capital gains, income from asset disposal, intellectual property royalties, intellectual property license fees, lawfully acquired compensation, indemnity or liquidation income obtained within the territory of China.

In addition, wages and other legal income of foreign employees in such FIE’s can be remitted freely in accordance with the laws. It is important to note that there will be no restrictions placed on the particular currency, amount or frequency of such remittances (Article 22 Implementation Guidelines).

 

Intellectual Property Protection

A constant concern for foreign investors, the protection of intellectual property of FIE’s is extensively addressed within the FIL and the Implementing Regulations, which calls for harsher punishment for intellectual property infringement and the elimination of improper governmental interference in technology transfers, as administrative organs are not permitted to use licenses, inspections, penalties, or coercions in order to force the transfer of foreign enterprises’ technology, such punishment would come in the form of disciplinary action, up to and including criminal liability (Article 39 FIL).

In addition, when it is necessary for FIEs to provide materials and information related to their trade secrets, the scope of disclosure should be limited to the extent of necessity for the performance of their duties, the scope of knowledge shall be strictly controlled, and personnel not related shall not be privy to such relevant materials and information.

As a final level of protection, administrative departments or its staff members shall keep confidential any trade secret of FIEs during the performance of their duties, lest they be subject to the aforementioned punishment previously outlined.

Intellectual property protection is well outlined within the FIL and the implementation regulations, however the directions and penalties afforded seem to indicate a general legal framework for such protection as there is no express indication as to which penalties or remedies will be enforced in regards to the respective infringements.

 

Management of Foreign Invested Enterprises

The FIL requires FIEs to submit investment information through the enterprise registration system and the enterprise credit information publicity system based on the principle of “genuine necessity”, which includes information such as the initial report, change report, dissolution report and annual report (Article 34 FIL) .

Failure to report investment information as required will firstly result in the department for commerce ordering the FIE to make corrections within a specified time limit, if the entity fails to remedy the issue, a fine of no less than 100,000 yuan but not more than 500,000 yuan shall be imposed and such violations shall be entered into the credit information system (Article 37 FIL) .

In practice, a unified foreign investment information reporting system should lower the reporting burden on FIEs, avoiding repeated reporting to different authorities, and a reduction in administrative costs for FIEs, therefore simplifying and expediating the management of FIE’s.

 

As the new decade begins with a new law for foreign investments in China, despite foreign invested companies having a 5 year transition period in order to ensure compliance with such provisions, the relevant research and studying of the internal documents and regulations of foreign invested companies should start now, for the Foreign Investment Law as well as the Corporate Social Credit System. The aforementioned updates are merely a brief overview of some of the main changes that FIE’s should be aware of in relation to ensuring their ongoing business activities are in compliance to the FIL and it’s implementing regulations, for a more detailed and case specific overview, please feel free to contact us at info@dandreapartners.com.