The new Foreign Investment Law (the “New Law”) of the People’s Republic of China (“PRC”) came into force on 1 January 2020 and has replaced the three previously existing laws on wholly foreign-owned enterprises, Sino-foreign contractual joint ventures, and Sino-foreign equity joint ventures (together “the Old Laws”) altogether. The aim of the New Law is to further open up the Mainland Chinese market, promote foreign investment and protect the rights and interests of foreign investors.
What is foreign investment ?
According to Article 2, the New Law applies to foreign investment carried out within the territory of the PRC. “Foreign Investment” means the investment activities carried out directly or indirectly by foreign natural persons, foreign enterprises or other foreign organizations (hereinafter referred to as “Foreign Investors”) in PRC, including the following circumstances where :-
(a) Foreign Investors, independently or jointly with other investors, set up foreign-invested enterprises in PRC;
(b) Foreign Investors obtain shares, equities, property shares or other similar rights and interests of PRC domestic enterprises;
(c) Foreign Investors, independently or jointly with other investors, invest in new projects in PRC; or
(d) Any other investment through other means stipulated in laws, administrative regulations or provisions of the State Council.
The scope of investments includes mergers and acquisitions and also “new projects” which seems to be a wider range of investments than in the Old Laws. The New Law does not mention investments from Hong Kong Special Administrative Region, Macau Special Administrative Region and Taiwan. Given that they had previously been governed by the Old Laws which are now being replaced by the New Law, investments from these three regions should also follow the New Law in practice.
What are the highlights for Foreign Investors ?
1. Pre-incorporation national treatment and Negative List
Article 4 provides that Foreign Investors will be treated no less favorably than domestic investors in the pre-incorporation assessment stage except for prohibited and / or restricted industries specified in the Negative List issued by the State Council. Foreign Investors therefore unlike the domestic investors will continue be subjected to the Negative List (see Article 28).
Article 16 also guarantees Foreign Investors’ right to participate in government procurement activities through fair competition. Foreign Investors may now participate in government tenders and procurement activities but only if their products are manufactured or services are provided in PRC (Article 16).
2. Repatriation of capital contributions, profits etc
It is encouraging to note that Article 21 states that on foreign investor’s capital contribution, profits, capital gains, income from assets disposal, intellectual property rights (IPR) royalties, indemnity or compensation received according to law and income from liquidation, etc in PRC may be freely remitted inward or outward either in Renminbi or foreign currencies.
3. Compliance with the PRC Company Law
Pursuant to Article 31, the organizational form, organizational structure and their activities of Foreign Investment shall be governed by the provisions of the PRC Company Law and the PRC Partnership Enterprise Law.
4. Protection on intellectual property
Article 22 emphasizes the protection of foreign investors and foreign-invested enterprises’ IPRs. Technical cooperation should be carried out according to voluntary principles and business rules. The conditions for technical cooperation shall be negotiated and determined by all parties to the investment on equal basis pursuant to the principle of fairness. Administrative organs and their staff members shall not use administrative means to force the transfer of technology. Thus, forced technology transfers will not be allowed.
Interestingly, Article 23 further requires that administrative organs and their staff members keep confidential and shall not disclose or illegally provide to others, the trade secrets of foreign investors that become known to them during their performance of duties. It remains to be seen how IRPs may be protected in these instances.
5. Complaint mechanism
Article 26 provides for the establishment of a complaint mechanism for Foreign Investors to complain about administrative organ and the staff members who may have violated their lawful rights and interests. The complaint mechanism provides the right to apply for coordination and resolution to the appropriate authority and also the procedures of administrative reconsideration and administrative lawsuit. It is however unclear which authority will oversee the complaint mechanism and what the detailed procedures are.
6. Transition Period
Pursuant to Article 42, existing foreign-invested enterprises established under the Old Laws are allowed to maintain their existing organization structure for the period of 5 years after the implementation of the New Law.
The New Law is a welcoming step in the right direction for the PRC to further open its market to foreign enterprises, protect their rights and interests and provide fair play environment for foreign enterprises to compete with domestic enterprises. However, the New Law is generally a statement of principles and lacks necessary details. It is expected that substantial implementing legislation would be required.
Although there is a grace period of 5 years for existing foreign-invested enterprises to fully comply with the New Law, foreign investors should follow up closely on the fast changing regime for foreign investors and the implementing rules under the New Law. It is advisable for all existing foreign-invested enterprises to start working on the relevant issues eg by amending the Articles of Association of existing equity joint venture in accordance with the PRC Company Law.
If you have any questions on the above or other issues under the PRC laws, experienced lawyers in our China Business Department will be happy to assist.