The Foreign Investment Regulation Review: China
The People's Republic of China (PRC or China) initiated its policy of 'openness' and 'reform' in 1979. In the same year, the National People's Congress of the People's Republic of China (NPC) enacted the Sino-Foreign Equity Joint Venture Enterprise Law (the EJV Law). In 1983, 1986, 1988, 1990 and 1995, the Implementing Regulations for the EJV Law, the Wholly Foreign-Owned Enterprise Law (the WFOE Law), the Sino-Foreign Cooperative Joint Venture Enterprise Law (the CJV Law), the Implementing Rules for the WFOE Law and the Implementing Rules for the CJV Law were also promulgated. The promulgation of these three laws and their implementing regulations (collectively the FIE Laws) marked the establishment of the foreign investment regime in China.
In the decades that followed the promulgation of the FIE Laws, China's regulators have continuously refined their approach to regulating foreign investment and China has been opening up more sectors of its economy that were previously closed to foreign investment, such as logistics, telecommunications and finance. Despite China's efforts to amend and improve the FIE Laws, as the country's domestic and international situation changed, it became increasingly difficult for the FIE Laws to meet China's needs in relation to its expanding reform and opening up. In 2019, the NPC passed the Foreign Investment Law, which came into effect on 1 January 2020, replacing the FIE Laws and making significant changes to the foreign investment regime. Subsequently, the State Council enacted the Implementing Regulations for the Foreign Investment Law (the Implementing Regulations). Consequently, the FIE Laws, having fulfilled their purpose for nearly 40 years, have now been replaced and no longer apply.
Foreign investment regime
China has a civil law system established by the Constitution of the PRC, national laws enacted by the NPC and its Standing Committee, administrative regulations issued by the State Council and regulations, rules and policies promulgated by the ministries and other local legislative bodies. The major regulatory authorities for foreign invested enterprises (FIEs) include the Ministry of Commerce (MOFCOM), the State Administration for Market Regulation (SAMR), the State Administration for Foreign Exchange and the National Development and Reform Commission (NDRC). Depending on the particular industries in which they have invested, FIEs may also be subject to oversight by industry-specific regulatory authorities, such as the Ministry of Ecology and Environment and the Ministry of Science and Technology. Foreign investors entering the Chinese market must comply with applicable laws, regulations, rules and industrial policies of these authorities.
It should be noted that case law is not an official source of law in China, unlike in the common law system, where judicial decisions are binding or persuasive in courts of the same level or lower. However, to eliminate the phenomenon of 'similar cases being judged differently', the Supreme People's Court (SPC) started to release 'guiding cases' in 2011. The SPC's guiding cases (Guiding Cases) refer to rulings and judgments that have already come into legal effect, that have been confirmed and released by the SPC according to prescribed procedures and that have universal guiding effect.2 According to the Provisions of the Supreme People's Court Concerning Work on Case Guidance, courts at all levels should refer to the Guiding Cases released by the SPC when adjudicating similar cases.3
i Foreign investment-related laws and regulations
As mentioned above, the Foreign Investment Law and its Implementing Regulations constitute the fundamental laws and regulations for foreign investors doing business in China. Foreign investment promotion, protection and administration are the key principles of the Foreign Investment Law and its Implementing Regulations.
The two major pieces of legislation regarding mergers and acquisitions (M&A) are the Regulations on Mergers and Acquisitions of Domestic Enterprises by Foreign Investors (the M&A Regulations) and the Measures for the Administration of Strategic Investment in Listed Companies by Foreign Investors (the Measures for Strategic Investment). If foreign investors want to invest in a publicly traded company or if an FIE is listed on a PRC stock exchange, PRC regulations regarding publicly traded companies and the rules governing PRC stock exchanges, such as the Measures for Strategic Investment, shall apply. Chinese regulations regarding state-owned enterprises (e.g., the Law on State-Owned Assets in Enterprises) apply to foreign investors who intend to acquire a Chinese state-owned enterprise.
A foreign investment will be subject to review if it is considered to be a threat to national security or triggers antitrust review thresholds. Regulations on national security review include the National Security Law and the Notice of the General Office of the State Council on the Establishment of the Security Review System for Mergers and Acquisitions of Domestic Enterprises by Foreign Investors (the Security Review Notice). Regulations on antitrust review include the Anti-Monopoly Law.
Other particularly relevant foreign investment laws and regulations include:
- Measures on Reporting of Foreign Investment Information, effective since 1 January 2020;
- Provisions on Merger and Splitting of Foreign Investment Enterprises, revised and effective since 28 October 2015;
- Interim Provisions on the Domestic Investment of Foreign Investment Enterprises, revised and effective since 28 October 2015;
- Provisions on the Establishment of Investment Companies by Foreign Investors, revised and effective since 28 October 2015;
- the Company Law, revised on 26 October 2018 and effective since 26 October 2018;
- the Partnership Enterprise Law, revised in 2006 and effective since 1 June 2007;
- Measures for the Administration on the Establishment of Partnership Business by Foreign Enterprises or Individuals in China, revised in 2009 and effective since 1 March 2010; and
- Administrative Measures for the Confirmation and Recordation of Foreign-Investment Projects, revised and effective since 17 June 2014.
In addition, there are regulations specifically tailored to particular industries or sectors, such as the Provisions on the Administration of Foreign-Invested Telecommunications Enterprises, revised and effective since 6 February 2016.
ii Rules and policies
National industrial policies provide guidance to foreign investors regarding the types of industries in China that are open to foreign investment and the restrictions that may accompany that investment. Foreign investors should ensure that they are in compliance with China's national industrial policies when investing in China. For different regions, the applicable national industrial policies may vary.
The national industrial policies governing foreign investment include the Special Administrative Measures for the Market Entry of Foreign Investment (2020 Version) (the National Negative List) and the Special Administrative Measures for the Market Entry of Foreign Investment in Pilot Free Trade Zones (2020 Version) (the FTZ Negative List) and the Catalogue of Industries for Encouraging Foreign Investment (the Encouraging FI Catalogue).See Section IV for more details of the National Negative List and the FTZ Negative List.
The Encouraging FI Catalogue is one of China's most important mechanisms for promoting foreign investment. Foreign investment projects listed in the Encouraging FI Catalogue may enjoy preferential treatment in areas such as tax in accordance with laws, administrative regulations or the provisions of the State Council. For example, from 1 January 2011 to 31 December 2020, enterprises engaged in promoted industries in Western China may enjoy a reduced enterprise income tax rate of 15 per cent.4 Also, for foreign investments within the scope of the Encouraging FI Catalogue, the tariff exemption policy shall apply to equipment imported for self-use within the total investment amount.5
Typical transactional structures
It is important to select a suitable transaction structure to ensure the success of foreign investment in China. Under current PRC law, foreign investors may include foreign individuals, enterprises and other types of commercial organisations. Note also that investors from Hong Kong, Macao and Taiwan are treated as foreign investors. Foreign investment, made either directly or indirectly, shall taking the following forms: (1) Newly established FIEs: foreign investors establishing FIEs solely or jointly with other investors; (2) M&A, with foreign investors acquiring shares, equity, property shares or other similar rights or interests in domestic enterprises; (3) new projects, with foreign investors investing in new projects solely or jointly with other investors; and (4) other forms of investment – foreign investors make other types of investments permitted by laws, administrative regulations or provisions of the State Council.6
i Greenfield investments through establishment of an FIE
The 2020 National Negative List stipulates that foreign investors shall not engage in business activities in the capacity of an individually owned business, an investor in a sole proprietor enterprise or a cooperative member of a farmers' speciality cooperative.7 This measure puts restrictions on the type of entities that may be established by foreign investors in China (i.e., they must, in the main, engage in business as companies or partnerships).
Limited liability companies
Most foreign investors, including individuals, enterprises or other organisations, choose to establish a foreign-invested limited liability company alone or jointly with other investors. The company's liability is limited to its entire assets and the shareholders' liability is limited to its subscribed capital contribution or subscribed shares (as the case may be).
The issue of whether to invest alone or invest jointly with a Chinese partner is among the most common questions raised by potential foreign investors.
The primary advantage of foreign investors establishing a foreign-invested limited liability company alone (previously known as a WFOE) is that it allows the foreign investors to retain complete control over the management and financial affairs of the company. In general, for foreign companies that are already familiar with doing business in China and wish to operate independently in China without a domestic partner, this structure is especially recommended.
However, in many other circumstances, it is more productive to partner with a Chinese investor, who potentially has many assets to bring to the table. For example, foreign investors will benefit from the assistance of local partners in obtaining government approvals, permits and land. It may also take less time for inexperienced foreign investors to access the market in China as the domestic partner will contribute sales through existing distribution channels and local connections.
For certain sensitive industries that are not fully open to foreign investors, a Chinese partner is mandatory. Foreign investors with a Chinese partner may share the profits and losses of the company in accordance with the shareholders' agreement, provided that the requirements of applicable laws and regulations are met.
Many foreign investors choose to establish a representative office (RO) when entering the Chinese market. Normally, an RO in China is not a legal person and is forbidden from undertaking any direct business activities, such as the distribution of goods manufactured by its foreign parent company. Moreover, the business scope of an RO may be limited to conducting business liaison activities (such as consultation, coordination and information collection and exchange) on behalf of its foreign parent company, which makes it unattractive as an entry vehicle in many cases.
A foreign-invested partnership is established by two or more foreign entities or individuals with or without Chinese partners. There are two kinds of partnerships: general partnerships or limited liability partnerships.8
A general partnership consists of partners who take joint and several liability for the debts of the partnership.
A limited liability partnership consists of general partners and limited partners, with the general partners taking joint and several liability for the debts of the partnership and the limited partners being liable for the debts of the partnership only to the extent of their capital contributions.9 Partnerships do not have independent legal person status. General partners (one or more) are appointed to conduct partnership affairs. A limited partner does not act as an executive partner.10 That is, a limited partner shall not conduct partnership affairs nor represent the limited liability partnership in its external dealings.11
Furthermore, where a restrictive requirement regarding the ratio of equity of foreign capital applies, the form of partnerships is not permitted.12 In addition, for foreign invested partnerships engaged mainly in investment activities, other special provisions may apply.13
Partnerships are taxed less heavily than limited liability companies. Unlike company shareholders, who would have to be taxed twice, a partnership is transparent for tax purposes and the partnership itself is non-taxable. Instead, the partners pay tax on their respective shares of the partnership's income – if partners are individuals, they pay individual income tax and if partners are legal persons or other organisations, they pay enterprise income tax.
The M&A of domestic enterprises by foreign investors includes equity acquisitions and asset acquisitions. An equity acquisition refers to the acquisition by foreign investors of equity interest in a PRC domestic company or the subscription by foreign investors to new equity issued by a PRC domestic company, resulting in the conversion of the PRC domestic company to an FIE. An asset acquisition refers to both (1) the establishment of an FIE by foreign investors with the purpose of using the FIE to acquire and operate assets purchased from PRC domestic companies, and (2) the direct acquisition of assets from PRC domestic companies by foreign investors who then use those assets to establish an FIE.14
Under PRC law, capital may be contributed in cash or in kind by using equity interest in domestic companies, intellectual property rights, land use rights or other non-monetary assets such as machinery, industrial property, proprietary technology and so forth. In particular, subject to the fulfilment of certain requirements (e.g., the offshore company must be a listed company), a foreign investor may use the equity interests of an offshore company as a means of payment for an acquisition of a PRC domestic company. The price of such an acquisition should be determined on the basis of a valuation report prepared by a PRC asset valuation company entrusted by the parties. If state-owned assets are involved in an equity acquisition or asset acquisition, the price for the acquisition should be determined in accordance with the relevant regulations governing the management of state-owned assets.15 Also, for M&A of domestic enterprises by foreign investors, national security and antitrust reviews may be triggered under certain circumstances (see Section IV for more details).
iii New project investments
A new project investment is defined as an investment in a specific project other than an investment made through the setting up of an FIE or through an M&A transaction. The scope of new project investments has not been clearly defined in the Foreign Investment Law. For foreign investments that are not in an enterprise form, the foreign investor must submit investment information through the Enterprise Registration System and the National Enterprise Credit Information Publicity System administered by SAMR.16 However, other regulations regarding such new project investments, such as market entry requirements, have not been clearly stipulated yet and we are presently awaiting further laws and regulations to provide clarification in this area.
In addition to considerations such as time and costs, foreign investors seeking to invest in China via greenfield investments, M&A or new project investments should consider the restrictions on corporate and shareholding structures in the 2020 Negative List, including but not limited to investments in:
- medical institutions, which require the establishment of joint ventures between Chinese and foreign parties;
- market survey companies, which require the establishment of joint ventures between Chinese and foreign parties. Specifically, investment in broadcasting and television listening and ratings survey companies must be controlled by the Chinese party; and
- public air transport companies, in which the Chinese party is required to hold the controlling equity interest, the legal representative must be a Chinese national and the percentage invested by one foreign investor and its affiliates is limited to 25 per cent of the total investment.
Foreign investors should consider licensing requirements when investing in certain sectors, such as drug manufacturing and operations, and seed manufacturing. If it is difficult for a newly established limited liability company or partnership to obtain the required operational licences or permits, foreign investors may also consider M&A arrangements with companies that already hold licences and permits.
Foreign investment may be subject to certain review processes by the PRC government authorities. Depending on the form and features of the foreign investment, foreign investment may be subject to a series of administrative measures, including but not limited to: (1) foreign investment review procedures; (2) foreign investment information reporting; (3) national security review; (4) approval by or record-filing with NDRC; (5) antitrust review; and (6) industry-specific approval requirements for certain industries. We focus on the foreign investment review procedures, foreign investment information reporting and national security review below.
i Foreign investment review procedures
In 2013, China adopted for the first time a pilot negative list approach to foreign investment in the Shanghai Free Trade Zone. After the negative list was tested and adjusted in the Shanghai Free Trade Zone, the Special Administrative Measures for the Market Entry of Foreign Investment (Negative List) (2018 Version) was released and implemented nationwide. The negative list includes prohibited and restricted industries. Foreign investors are not entitled to make investments in prohibited industries. Foreign investors must meet certain conditions prescribed in the negative list to make investments in restricted industries. For industries not listed in the negative list, foreign investors are treated equally with domestic investors and enjoy national treatment prior to and after the investment.
There are two negative lists now in effect, the National Negative List and the FTZ Negative List. The National Negative List applies to FIEs established nationwide (excluding free trade zones). The FTZ Negative List applies to FIEs established in free trade zones.
Compared with the National Negative List, the FTZ Negative List is less restrictive. There are fewer prohibited and restricted industries. The National Negative List includes 33 prohibited and restricted industries. The FTZ Negative List includes only 30 industries. For example, foreign investment in fishing for aquatic products in China's waters and inland waters is prohibited by the National Negative List, but it is not prohibited by the FTZ Negative List. The restrictions imposed on restricted industries are also more relaxed in the FTZ Negative List. For example, the National Negative List prohibits foreign investment in artistic performance groups. The FTZ Negative List only requires that the investment in artistic performance groups be controlled by the Chinese party.
Furthermore, compared with their 2019 versions, the 2020 National Negative List and the FTZ Negative List have seen the restrictions on foreign investment reduced further; for example, the previous foreign investment ratio requirements (limiting the percentage of foreign investment in a securities company, securities investment fund management company, futures company or life insurance company to no more than 51 per cent) have been lifted.
Foreign investment information reporting system
The foreign investment information reporting system (the Information Reporting System) has been formally in place since 1 January 2020. Under the Information Reporting System, foreign investors or FIEs must submit investment information to MOFCOM or its provincial counterpart on the basis of the principle of necessity. This replaced the previous approval and filing procedures for MOFCOM or its provincial counterpart.
According to the Measures for Foreign Investment Information Reporting, foreign investors or FIEs must submit investment information to MOFCOM or its provincial counterpart by providing an initial report, change report, deregistration report or annual report, depending on the type of foreign investment. The investment information sought includes information about the enterprise, the investors and their actual controllers, investment transactions, enterprise operations and enterprise assets and liabilities. For enterprises subject to special administrative measures, the applicable industry licence must also be submitted.
National security review
According to both the National Security Law and the Security Review Notice, foreign investment that affects or is likely to affect national security will be subject to national security review. The Cybersecurity Law also emphasises the importance of national security.
At present, China's foreign investment national security review focuses on M&A transactions. A joint committee led by MOFCOM and NDRC is responsible for security reviews. The target enterprises subject to national security review are divided into two categories: (1) domestic enterprises related to national security (including military industrial enterprises or military industry-related supporting enterprises, enterprises located close to key and sensitive military facilities and other units related to national security), for which a national security review will be triggered should a foreign investor acquire assets or equity in, or actually operate the assets of, the enterprise; (2) important domestic enterprises related to national economic security (including enterprises related to key agricultural products, key energy and resources, key infrastructure, key transportation services, core technology and significant assembly manufacturing), for which a national security review will be triggered should a foreign investor acquire assets or equity in, or actually operate the assets of, the enterprise and obtain de facto control of the enterprise.17 Where a merger or acquisition causes or is likely to have a significant impact on national security, the foreign investors may be required to terminate the transaction or take other effective measures to eliminate the influence of the transaction on national security. Other rules and regulations regarding foreign investment security may be further developed and promulgated.18
It is also of note that the rules on foreign investment national security reviews in free trade zones differ slightly from national rules. In free trade zones, foreign investment in 'important culture' and 'important information technology products and services' is also subject to national security review. In addition, the scope of national security reviews in free trade zones also includes foreign investment in the forms of new project investments and subscription of convertible bonds.19
Project approval or record-filing by NDRC
Foreign investment projects20 will be subject to either an approval process or a record-filing process with competent government agencies. Generally, the approval process takes around 20 business days and the projects are considered case by case, with reference to the specific circumstances of each project.
In practice, whether a foreign investment project requires the approval of NDRC, its local branches, the State Council or other competent government agencies depends on the gross investment amount, industry, circumstances of the individual project, etc. Therefore, it is prudent for a foreign investor to consult the relevant local government investment department before initiating a foreign investment project.
SAMR's Anti-Monopoly Bureau will be notified about transactions in which the foreign investment is, inter alia, deemed to cause a 'concentration' under the Anti-Monopoly Law and meets the statutory turnover thresholds. Details of the thresholds can be found in the Anti-Monopoly Law and other relevant laws and regulations.
Industry-specific approval requirements for certain industries
As mentioned earlier, for industries not listed in the National Negative List or FTZ Negative List, foreign investors are treated equally with domestic investors and enjoy national treatment prior to and after the investment. Certain industries open to foreign investment, such as the general aviation industry and the tobacco production monopoly, may be subject to pre-registration approval by the relevant government authorities. These approvals must be obtained before registration with SAMR or its local branch.
The approval procedures and the length of the approval process are subject to the different requirements of the government authorities concerned.
ii Other review procedures
Review of foreign investment involving state-owned assets
Under the Provisional Measures for the Administration of Valuation of State-Owned Assets of Enterprises and the Law on State-Owned Assets in Enterprises, before any assets are transferred to foreign investors, a certified asset evaluation agency must issue a valuation report providing the value of the assets. The transfer price must not be less than 90 per cent of the value in the valuation report unless expressly it has been approved by the relevant authorities. Transfer of state-owned assets that may lead to the state losing controlling shareholder status for the state-owned enterprise must be reported to the relevant government authorities for approval. Furthermore, certain state-owned asset transfers are required to be transferred publicly on an asset and equity exchange such as the China Beijing Equity Exchange, or CBEX.
Review of foreign investment in listed companies
Pursuant to the Measures for Strategic Investment, foreign investment in listed companies will be subject to the supervision of the securities regulatory authorities.
Registration with the registration authority
For the establishment and change of an FIE, the FIE must register with SAMR or its local branches to obtain or renew its business licences. This registration normally takes five to 10 business days.21
The above-mentioned foreign investment review procedures are general practice in accordance with PRC laws and regulations. The procedure may vary slightly depending on different factors, such as the type and the amount of the investment, the location of the project and the different requirements of the relevant local governmental authorities.
In addition to the above, FIEs are subject to regulations regarding annual reporting to or inspection by (if applicable) SAMR or its local branches, the administration for foreign exchange or its local branches and other relevant government authorities once established.
Post-registration filing or registration with the relevant authorities
After obtaining its business licence, an FIE must complete the filing or registration procedures (i.e., registering with the tax authorities, opening a foreign currency account and registering for social insurance) with the relevant authorities and banks. It normally takes around 30 business days to complete all these procedures.
Approval of the environmental protection authority
For foreign investments in construction projects and others that may cause environmental concerns (such as pollution or impact on wildlife), a foreign investor must conduct an environmental impact assessment before starting the project, and submit the assessment documents to the local environmental protection authority for the approval of the project. The length of the environmental impact assessment process depends on the extent of the environmental impact the project may cause.
Foreign investor protection
i Protection by multilateral and bilateral treaties
China has signed, approved or ratified several regional and multilateral treaties and international trade agreements governing matters including intellectual property (IP) protection, customs, civil aviation and dispute resolution. The rules of international law for foreign investment protection in China are mainly composed of bilateral investment treaties, regional agreements, multilateral conventions and investment chapters in free trade agreements (FTAs). For civil relations involving foreigners, where the provisions of an international treaty that China has concluded or has acceded to differ from the civil laws of China, the provisions of the international treaty shall apply, with the exception of those articles for which China has declared its reservation;22 if for foreign investments more preferential treatment for foreign investor access is provided under international treaties or agreements governing foreign investment to which China accedes or has concluded, the provisions of those treaties or agreements may apply.23 In addition, China has established multilateral and bilateral cooperation mechanisms for investment promotion with other countries and regions and international organisations, to reinforce international communications and cooperation in the investment areas. For example, as at 27 June 2020, according to the information on China FTA Network, China has signed 16 FTAs with 24 countries and regions.
ii Protection under PRC law
The legitimate rights and interests of foreign investors and FIEs in China will be protected through a series of measures, the most important of which are discussed below.
Arrangements to allow free transfer of technology
To eliminate any perceived improper influence of the government on commercial arrangements between Chinese and foreign parties, the Chinese government and its officials may not compel foreign investors and FIEs to transfer technology through administrative licensing, administrative inspection, administrative punishment or any other administrative actions. 24 In addition, Chinese and foreign parties now enjoy more freedom to negotiate technology cooperation. For example, the Regulations on Technology Import and Export Administration promulgated by the State Council on 8 January 2011 stipulate that a technology import agreement is prohibited from restricting the transferee from improving the technology provided by the transferor or from using the improved technology.25 The Decision of the State Council on Revising Certain Pieces of Administrative Regulations (2019) issued by the State Council on 2 March 2019 has removed this prohibition.
Government requirements to fulfil its contract obligations
To better protect foreign investors, local governments and their departments must fulfil policy commitments made to, and perform the contracts concluded with, foreign investors and FIEs pursuant to the laws. Local governments and their departments may not breach contracts due to be performed, including on grounds of administrative division adjustment, change in government, change in organisation, or job function adjustment or replacement of relevant responsible persons, among other reasons. Policy commitments made by local governments and their departments are written commitments made pursuant to their statutory authority in respect of the support policies, preferential treatment and convenience applicable to investments by foreign investors and FIEs in the region concerned.26
No expropriation except in special circumstances and fair compensation
The government may not expropriate a foreign investor's investment in a discretionary manner. Under the special circumstances of a foreign investor's investment being expropriated pursuant to law because of public interest needs, the expropriation must be conducted according to statutory procedures. In addition, the foreign investor must be compensated in a timely, fair and reasonable manner.27
Protection of trade secrets
The government and its officials must keep confidential the trade secrets of foreign investors and FIEs of which they acquire knowledge during the performance of duties and they may not divulge or illegally provide such trade secrets to third parties.28
Free repatriation of lawful income outside China
Foreign investors may, according to applicable laws, freely remit their capital contributions, profits, capital gains, income from asset disposal, IP royalties, lawfully acquired compensation, indemnity or liquidation income and other types of lawfully earned income into or outside China, in yuan or any other foreign currency. These policies are intended to alleviate some investors' concerns about foreign exchange controls and capital requirement regulations in China.29
iii Legal remedies
Foreign investors who engage in business or conduct activities in China have the right to protect their legal interests via litigation or arbitration. Generally, litigation allows for appeals and arbitration is final. Foreign investors tend to prefer arbitration over litigation because it is more international and less time-consuming. Arbitration commissions in China, such as the China International Economic and Trade Arbitration Commission (CIETAC), are becoming more familiar with dealing with complex domestic and international commercial disputes. The Hong Kong International Arbitration Centre and the Singapore International Arbitration Centre have also became popular choices for foreign investors. In addition, China joined the International Centre for Settlement of Investment Disputes (ICSID) in 1992. Subject to the requirements of the ICSID Convention, initiating ICSID arbitration may also be a solution to foreign investment disputes between foreign investors and the PRC government.
Recognition and enforcement
Under certain circumstances, in addition to direct involvement in arbitration or litigation proceedings in China, foreign investors may request that the system of the People's Courts recognises and enforce a foreign arbitral award or judgment.
On 22 April 1987, China became a party to the United Nations Convention on the Recognition and Enforcement of Foreign Arbitral Awards (the New York Convention). As such, China applies the principles of the New York Convention on a reciprocal basis to enforce foreign arbitral awards from other signatory countries for disputes that are regarded as commercial disputes under PRC law. In the event that ratification and enforcement by a People's Court of the PRC is sought for a judgment or ruling made by a foreign court, one of the following prerequisites must be met: (1) an international treaty exists between China and the foreign country, pursuant to which China and the foreign country mutually ratify and enforce the judgments rendered by each other's national courts; (2) reciprocity exists, namely where a foreign national court recognises and executes a Chinese judgment, China can also recognise and enforce the judgments of the other country in accordance with the principle of reciprocity.30
Other strategic considerations
In addition to the foregoing, it is imperative that foreign investors focus on the following:
- corporate governance and the management of FIEs;
- profit distribution and remittance;
- long-term business plan, including initial public offering schedules and exit mechanisms;
- construction of internal compliance systems, in particular the anti-commercial bribery system;
- communication with the relevant government authorities;
- labour issues regarding, inter alia, employment contracts, non-compete agreements, occupational safety, social insurance, labour law compliance, labour litigation and arbitration;
- IP protection regarding, inter alia, IP audits and strategic IP, IP portfolio management, commercial IP transactions and IP due diligence; and
- any amendment or update of foreign investment-related laws and regulations.
Furthermore, foreign investors should consult a local PRC law firm to assist them with their investments in China. Local attorneys who are familiar with PRC laws and have extensive experience in dealing with foreign investment issues can assist foreign investors to navigate through PRC laws and regulations, which are complex and subject to change.
i Recent statistics
According to statistics published by MOFCOM, foreign investment in China has grown steadily in recent years. From 1979 to 2019, China received a total of US$2.2874 trillion in foreign investment and 1,001,377 FIEs were established. Further, against a background of slowing global economic growth, sluggish cross-border investment and intensified competition for foreign investment, foreign investment in China in 2019 maintained steady growth, with total investment of US$138.14 billion, an increase of 2.4 per cent over the same period in 2018. The industries with high growth rates of foreign investment are information transmission, software and information technology services, leasing and commercial services, pharmaceutical manufacturing, electrical machinery and equipment manufacturing, instrument and meter manufacturing and scientific research and technology services.31
ii Adjustments for existing FIEs
Adjustments need to be made for existing FIEs according to the Foreign Investment Law. Before the Foreign Investment Law was implemented, special provisions of the FIE Laws prevailed for FIEs in relation to organisational form and corporate governance structure. Only where the FIE Laws were silent on matters did the Company Law and other laws apply to FIEs. The Foreign Investment Law no longer prescribes the organisational form and corporate governance structure of FIEs. The organisational form, corporate governance structure and business activities of newly established FIEs are governed by the Company Law, the Partnership Law and other relevant laws. FIEs established before the Foreign Investment Law was implemented must adjust their organisational form and corporate governance structures to comply with the Company Law, the Partnership Law and other applicable laws within five years of the implementation of the Foreign Investment Law (the Transition Period). Otherwise, after the Transition Period, the local counterparts of SAMR will not process the registration matters of those FIEs and will announce publicly that the organisational form and corporate governance structures of those FIEs have not been adjusted.
The expansion in opening up and the promotion of foreign investment dominate the features of China's current foreign investment legislation. The promulgation and implementation of foreign investment laws and regulations such as the Foreign Investment Law and its Implementing Regulations demonstrate China's desire to create a fair, convenient and open business environment. Under the Foreign Investment Law, foreign investors will be treated equally with domestic investors and their investments will be better protected in China. Foreign investors will also have opportunities to invest in more industries and regions. With the further opening up of China, foreign investors should proactively assess the Foreign Investment Law's impact and keep a close eye on the supporting legislation, regulations, local administrative approvals and even the 'window guidance' of relevant governmental bodies or agencies in charge.
1 Jianwen Huang is a partner at King & Wood Mallesons.
2 See Article 2 of the Provisions of the Supreme People's Court Concerning Work on Case Guidance.
3 See Article 7 of the Provisions of the Supreme People's Court Concerning Work on Case Guidance.
4 See Preferential Enterprise Income Tax for Encouraged Industries in Western China promulgated by the State Tax Administration.
5 See Article 7 of the Notice on Further Deepening the Reform regarding Foreign Invested Projects in Response to the Epidemic.
6 See Article 2 of the Foreign Investment Law.
7 See the Note in the Negative List and the FTZ Negative List.
8 See Article 2 of the Administrative Measures on the Establishment of Partnership Enterprises in China by Foreign Enterprises or Individuals.
9 See Article 2 of the Partnership Law.
10 See Article 67 of the Partnership Law.
11 See Article 68 of the Partnership Law.
12 See the Note in the Negative List and the FTZ Negative List.
13 See Article 14 of the Administrative Measures on the Establishment of Partnership Enterprises in China by Foreign Enterprises or Individuals.
14 See Article 2 of the M&A Regulations.
15 See Article 14 and 18 of the M&A Regulations.
16 See Article 30 of the Measures on Reporting of Foreign Investment Information.
17 See Article 1 of the Notice of the General Office of the State Council on Launching the Security Review System for Mergers and Acquisitions of Domestic Enterprises by Foreign Investors.
18 See Article 4 of the Notice of the General Office of the State Council on Launching the Security Review System for Mergers and Acquisitions of Domestic Enterprises by Foreign Investors (released by the General Office of the State Council on 3 February 2011 and effective from 3 March 2011).
19 See Article 1 of the Notice of the General Office of the State Council on Printing and Distributing the Trial Measures for the National Security Review of Foreign Investment in Pilot Free Trade Zones.
20 Foreign investment projects include the M&A of Chinese enterprises by various types of FIEs and foreign enterprises, the capital increase and re-investment by FIEs, etc. See Article 2 of Administrative Measures on Approval and Filing for Foreign Investment Projects.
21 The estimated lengths of the approval processes by the authorities quoted in this section are based on when all the required application documents are agreed upon and accepted by the relevant authorities and no further modification is required.
22 See Article 142 of the General Principles of Civil Law of the People's Republic of China.
23 See Article 4 of the Foreign Investment Law of the People's Republic of China.
24 See Article 24 of the Implementing Regulations.
25 See Article 29 of the Regulations of the People's Republic of China on Technology Import and Export Administration.
26 See Article 25 of the Foreign Investment Law and the Article 27 of the Implementing Regulations.
27 See Article 20 of the Foreign Investment Law.
28 See Article 23 of the Foreign Investment Law.
29 See Article 21 of the Foreign Investment Law.
30 See Article 281 and 282 of Civil Procedure Law of the People's Republic of China (Amended in 2017).
31 The statistics are from the press conference on the commercial affairs and operation of 2019 held by the State Council Information Office of the People's Republic of China on 21 January 2020 and the 2019 Statistical Bulletin of China's Foreign Direct Investment released by MOFCOM.