China Justice Observer

中国司法观察

China's Foreign Investment Law Series -01:Changes and Impacts of the PRC Foreign Investment Law on China's Existing Regulatory Framework for Foreign Investment

Sun, 16 Feb 2020
Categories: Insights

 

The PRC Foreign Investment Law (“the Law”) came into force officially on 1st Jan. 2020, and “Implementing Regulations of the PRC Foreign Investment Law”(中华人民共和国外商投资法实施条例) (“the Regulations”, collectively referred to as “the new Legislation” with the Law) also entered into force at the same time. The law and the Regulations will establish a new framework and formulate a new cooperation model for foreign investment. Meanwhile, “the Law of the People's Republic of China on Sino-foreign Equity Joint Ventures” (中华人民共和国中外合资经营企业法, “the EJV Law”), and “the Law of the People's Republic of China on Sino-Foreign Cooperative Joint Ventures” (中华人民共和国中外合作经营企业法, “the CJV Law”), together with “the Law of the People's Republic of China on Wholly Foreign-owned Enterprises” (中华人民共和国外资企业法,“the WFOE Law”, collectively referred to as “three Foreign-funded Enterprise Laws” with the EJV Law and the CJV Law), which had played significant roles in the field of foreign investment before, were simultaneously repealed by the Law.

The Foreign Investment Law Series will be published in two posts. This post will introduce major changes in the foreign investment regulatory framework arising from the new Legislation. The second post will further discuss the changes in enterprise management mechanisms and the protective mechanisms for foreign-funded enterprises arising from the new Legislation. This post expects to give readers a direct understanding of the effect of the New Legislation through a brief summary of key issues. Meanwhile, China Justice Observer will give further interpretations of the key issues mentioned in this post in subsequent articles.

I. New investment forms under the regulatory framework

1.Three new forms of foreign investment

Pursuant to the Article 2 of the Law, in addition to the existing investment activities,  i.e. establishing new foreign-funded enterprises, three other forms of investment activities are also applicable to the regulatory framework: (1) a foreign investor invest in new projects within the territory of China, independently or jointly with any other investor; (2) a foreign investor acquires shares, equities, property rights or any other similar rights and interests within the territory of China; (3) investment in any other way prescribed by laws, administrative regulations or provisions of the State Council. This provision enables different forms of investment to be governed by Chinese laws and prevents foreign investment from being unregulated due to the form of investment. However, the Law doesn’t define the term “investment in new projects”, nor does it explain how to apply the foreign investment regulatory framework to these newly-invested projects, which needs to be further clarified. [1]

2. Clarify forms of indirect foreign investment

The Law categorizes foreign investment into direct and indirect foreign investment. Different from the three Foreign-funded Enterprise Laws, which only regulated the direct investment in newly-established enterprises, indirect investment is also applicable to the Law, aiming to prevent foreign investors from circumventing the application of the Negative List by indirect foreign investment. However, the Law has not yet given a clear definition of "indirect investment", nor has it introduced specific forms of indirect investment and the extent of penetration, which also need to be further clarified.

II. Simplify the foreign investment regulatory framework

1. Clarify the pre-establishment national treatment and the Negative List

The pre-establishment national treatment refers to the treatment accorded to foreign investors and their investments at the initial entrance stage of the investment, which is no less favorable than that accorded to domestic investors and their investments. The Negative List refers to the special administrative measures stipulated by China for foreign investment's access to specific industries, according to which specific industries are prohibited to be invested, and restricted industries can only be invested after the conditions thereof are satisfied. After amendments of the three Foreign-funded Enterprise Laws in 2016, China actually implemented a management mechanism under the Negative List. Foreign investment in restricted industries prescribed in the Negative List required a case-by-case approval mechanism pursuant to the three Foreign-funded Enterprise Laws. However, with the repeal of the three Foreign-funded Enterprise Laws, the previous approval system of restricted foreign investment will lose its legal grounds, so new management measures are required to be introduced. [2]

2. Simplify procedures for establishing foreign-funded enterprises

Take the newly established enterprises as an example. After the implementation of the Law and the Regulations, foreign investors will no longer need to go through special examination and approval procedures (including approval of the establishment of foreign-invested enterprises, approval/record-filing of investment projects and relevant industrial permits) as long as the industries involved are not in the negative list, and they can establish new foreign-funded enterprises upon completing registration. [3]

3. Establish an information reporting system and security review system

The Law does not have specific provisions on the record-filing system of foreign investment beyond the Negative List, but proposes to establish a unified information reporting system. Articles 38 and 39 of the Regulations reaffirm the aforementioned principle and authorize competent departments for commerce and market regulation to draft specific provisions to regulate the foreign investment information report. At the same time, the information reporting system combines the previous two channels to submit materials about foreign-funded enterprises respectively to the Ministry of Commerce and the Market Regulation Bureaus into an integral one, which relieves the burden on enterprises.

In respect of the security review system, Article 35 of the Law requires the security review of foreign investment that affects or may affect the national security, but this provision hereof is too general. And the Regulations simply mention in Article 40 that China will establish a security review system for foreign investment. [4]Therefore, the current security review system still needs to be further tested in the practice of relevant departments and further improvement can be put forward later.

III. Unsolved issues related to the legitimacy of the VIE structure 

Variable Interest Entity (“VIE”) structure is very important for companies in industries of Internet, media, and education, etc. to raise funds through overseas financing. However, the legitimacy of the VIE structure has always been in a “gray area”. Although the Law and the Regulations do not give a direct answer to this issue, according to the definition and form of foreign investment in the Law, which refers to “the investment activity where foreign investors obtain ······other similar equity” and “via other forms of investment”, some practitioners believe it sufficient to cover the form where the foreign investors make an investment or acquire equities through the VIE structure. Therefore, the above-mentioned catch-all provisions left the regulatory authorities with ample room for interpretation, and when available, the regulatory authorities may incorporate such foreign investment via the VIE structure into the whole regulatory framework for foreign investment.

 


[1] 王开定,曾坚等:《进入<外商投资法>时代——外商投资法律实务的变化与挑战》2019年3月15日发布< https://www.kwm.com/zh/cn/knowledge/insights/new-foreign-investment-law-20190315 >

[2] 李斌辉,刘宏宇,梁家威:《外商投资法系列之一︱二审稿说了些什么(上)》2019年3月12日发布<https://www.allbrightlaw.com/CN/10475/405a43091f1596d6.aspx >

[3] 湖北省委台办:《一图看懂<外商投资法>》2019年3月20日发布< http://www.sohu.com/a/302652126_120024211>

[4] 徐萍,姚丽娟:《外商投资开启全新时代:<外商投资法实施条例>评析》2020年1月2日发布< https://www.chinalawinsight.com/2020/01/articles/crossing-borders/%E5%A4%96%E5%95%86%E6%8A%95%E8%B5%84%E5%BC%80%E5%90%AF%E5%85%A8%E6%96%B0%E6%97%B6%E4%BB%A3%EF%BC%9A%E3%80%8A%E5%A4%96%E5%95%86%E6%8A%95%E8%B5%84%E6%B3%95%E5%AE%9E%E6%96%BD%E6%9D%A1%E4%BE%8B%E3%80%8B/>

Photo by Alexandre Valdivia(https://unsplash.com/@alevaldivia) on Unsplash

Contributors: Xiaodong Dai 戴晓东

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