To better understand the foreign investment administration model established by the Foreign Investment Law of the People’s Republic of China (中华人民共和国外商投资法) (implemented on 1 Jan. 2020, hereinafter referred to as the “Foreign Investment Law”), we should first understand the subjects and behaviors regulated thereby. To this end, this post will give a brief introduction to the subjects and behaviors.
I. Foreign investors under regulation
Pursuant to Article 2 of the Foreign Investment Law, the subjects under regulation are foreign investors, i.e. foreign natural persons, foreign enterprises, or other foreign organizations. However, the Foreign Investment Law does not specify whether “foreign countries” only refer to sovereign states. According to China’s general legal practice, “foreign countries” should include countries and regions. Especially for the investment by natural persons, enterprises, or other organizations from Hong Kong, Macao and Taiwan in Mainland China, the Chinese regulator has always been adhering to the relevant requirements of foreign investment. Therefore, as far as the Foreign Investment Law is concerned, foreign natural persons generally refer to natural persons holding passports or similar identity documents of other countries and regions; foreign enterprises or other organizations refer to enterprises or other organizations registered and established in countries or regions other than Mainland China. 
II. Foreign investment under regulation
Pursuant to Article 2 of the Foreign Investment Law, “foreign investment”, which is the behaviors regulated by the Foreign Investment Law, refers to the “direct or indirect investment activities conducted by foreign investors in China”. For foreign investment, the following points need to be noted:
i. Foreign indirect investment is put under regulation
Before the implementation of the Foreign Investment Law, China’s special laws and regulations related to the administration of foreign investment generally only regulate foreign direct investment (FDI) in China. However, in recent years, the relevant Chinese authorities have found that some investors would evade the relevant laws and regulations through indirect investment and indirect holding. Therefore, the relevant authorities have included some indirect investment activities under regulation into some laws and regulations. For example, according to the Announcement on Several Issues of Corporate Income Tax on Indirect Transfer of Property among Non-resident Enterprises (关于非居民企业间接转让财产企业所得税若干问题的公告) promulgated by the State Taxation Administration, which came into effect on 3 Feb. 2015, non-resident enterprises also need to pay taxes for the transfer of the equity of Chinese resident enterprises indirectly held by them and the like, in the case of no special arrangement. In order to comply with the requirements of regulatory practice, the Foreign Investment Law has made it clear that the foreign indirect investment should also be put under regulation.
However, the Foreign Investment Law does not give a clear definition of indirect investment, and the criteria for determining indirect investment are still needed. In particular, the following issues need to be further clarified by the Legislature and regulatory authorities: (1) does “indirect investment in China” means that we need to determine whether it is a foreign indirect investment by tracing to the controlling shareholder; (2) prior to the Foreign Investment Law, the Ministry of Commerce published its draft for comments (“Draft”) in 2015, according to which, controlling domestic enterprises or holding their equity by means such as contracts, trusts, and VIE structure fell under the definition of indirect investment, but such statement is not retained by the Foreign Investment Law; (3) whether the re-investment conducted by foreign-funded enterprises and their subsidiaries in China should fall within the scope of foreign indirect investment.
ii. Specific situation of foreign investment
Generally speaking, for the specific forms of foreign investment, there are three legislative models: (1) the traditional model, i.e., foreign investment is only for newly established foreign-funded enterprises; (2) the 2015 Draft model, which lists six foreign investment situations; (3) the Foreign Investment Law model, which only lists the most common three investment situations while keeping the possibility of expanding the regulatory scope in the future by a catch-all provision.
The four situations provided by the Foreign Investment Law are: (1) the establishment of foreign-funded enterprises in China by foreign investors individually or jointly with other investors; (2) the acquisition of shares, equity, property shares, or other similar rights and interests of enterprises in China by foreign investors; (3) the investment of new projects in China by foreign investors individually or jointly with other investors; (4) investment by other means as prescribed by laws, administrative regulations or the State Council.
By contrast, Situations (3) to (6) in the Draft, i.e., Loan, Project Concession in China, Acquisition of Real Estate in China, and VIE Structure, were deleted.
We understand that legislators mainly consider the following two aspects:
1. There are still disputes about whether some investment forms should be regulated as foreign investment.
For example, Situation (3) of the Draft refers to that a foreign investor provides more than one year’s financing to the foreign-funded enterprise that the investor has invested in. However, whether the foreign debt administration system will continue to distinguish the foreign investor’s loan to Chinese enterprises from that to foreign-funded enterprises in the future remains controversial, so the situation is put on hold at present.  Situation (6) of the Draft describes the investment model of “controlled by agreement”, which will affect the stability of the VIE structure, so in order to stabilize the market sentiment, it will be put on hold temporarily. (For a detailed discussion, see an earlier post “Foreign Investment Law Series -05: the VIE Structure Remains in Grey Area”. )
2. Viewed from the legislative technique, the Foreign Investment Law tries to cover more specific situations with a broader classification of investment forms. 
For example, Situation (3) of the Foreign Investment Law “the investment of new projects” can partially cover Situations (4) and (5) in the Draft, because foreign investors often complete their investment by the natural resources exploration and development concession agreement, the infrastructure construction and operation concession agreement, and the acquisition of land use right or real property ownership involved in these two Situations.
 大队长金融：《解读<外商投资法>对外商投资实践之影响》2019年3月29日发布< https://mp.weixin.qq.com/s/AZMasD38qxCjCWLSQl8zWg >
 大成律师事务所：《大成研究 | 外商投资法（草案）初步解读与评论》2018年12月27日发布https://www.sohu.com/a/285000821_120053766
Photo by Ming Han Low (https://unsplash.com/@minghan1004) on Unsplash
Contributors: Xiaodong Dai 戴晓东