The Foreign Investment Law (“FDI law”) has been effective since 2020 which has replaced the previous 3 foreign investment related laws and become the new milestone for foreign investment management trends in China. Foreign-invested companies in China have been experiencing a transitional period and may have adopted certain changes to follow the new rules. The Chinese government has also delivered its concerns to foreign investors and issues various policies accordingly.
This article aims to brief the significant impacts, from both legal and financial perspectives, on foreign-invested companies resulting from the FDI law as well as the investment circumstances.
1. Company Governance Rectification for Joint Ventures
Due to the discrepancies between the previous JV law and the FDI law, the FDI law provides a 5-year transitional period for joint ventures. Joint ventures may take this opportunity to modify their company governance so as to be in line with the FDI law as well as to improve management mechanisms.
For example, the Board of Directors (BOD), members of which shall be appointed by both the Chinese shareholders and foreign shareholders, used to be the dominant authoritative body of joint ventures. Now, shareholders shall be the highest power authority in joint ventures according to the FDI law. This change may provide wider control for foreign investors since they may be directly involved in the decision-making of crucial topics and may further appoint reliable BOD members or even a sole executive director to manage daily operations.
2. Domestic Treatment and Simplified Procedures
In association with the reformation of FDI laws, the Chinese government also implements various measures to attract foreign investors. For example, the Negative List has been updated multiple times, and the limits of foreign equity in certain sensitive industries, such as automobiles, have been completely removed. The Chinese government strives to provide domestic treatment to foreign-invested companies by simplifying the administrative procedures as well as providing various supporting policies.
According to the Statistical Bulletin on Foreign Investment in China 2022, the actual use of foreign investment in China increased steadily in 2021, with the actual use of foreign investment in the year reaching 1,197.58 billion RMB. In 2021, China’s foreign direct investment (FDI) inflow accounted for 11.4% of the global share, ranking second in the world. From these figures we can surmise that China seems still attractive to foreign investors.
3. National Security and Safety Review
The Chinese government has established a safety review procedure for foreign investment which may affect national security. Foreign investment in sensitive business areas, such as military, agricultural products, energy and resources, equipment manufacturing, internet and communication industries, may trigger such a safety review by the Chinese government. Quite a few foreign investors are concerned about the potential influence of the safety review policy, which still remains quite vague at this moment.
4. Tax Revolution
From a taxation perspective, the changes and impacts for foreign investment actually came earlier than the aforementioned laws updated in 2020.
Before 2008, foreign-invested companies paid taxes in accordance with the regulation of <Corporate Income Tax Law on Foreign-invested Enterprises and Foreign Enterprises>, and domestic companies paid taxes in accordance with the regulation of <Interim Regulations on Corporate Income Tax>. Foreign-invested enterprises enjoyed more favorable tax policies, thus their real tax burden was much lower than that of domestic companies.
Then, the issuance of the regulation of <Corporate Income Tax Law> in 2008 unified the two different tax regulations for foreign-invested companies and domestic companies, and harmonized domestic and foreign enterprises in terms of tax rates.
Nevertheless, in order to encourage and promote foreign investment, the PRC government and competent tax authorities introduced a variety of preferential tax policies. For example, the dividends income obtained by foreign individuals from foreign-invested enterprises being temporarily exempt from individual income tax; for manufacturing foreign-invested enterprises with a business period of more than ten years, upon the approval of the tax authorities, from the beginning of the profit-making year, the Corporate Income Tax being exempted in the first and second years, and the Corporate Income Tax being halved in the third to fifth years.
The Chinese government is always welcoming foreign investment from all over the world and intends to provide a comprehensive system to support foreign investment operations in China, with both a sufficient legal basis and feasible practical solutions. If you are interested in foreign investment in China, please contact firstname.lastname@example.org.