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On 26 December 2019, the Regulations for the Implementation of the Foreign Investment Law of the People's Republic of China (Regulations) was issued by the State Council, which came into force on 1 January 2020. In the new era of the Foreign Investment Law of the People's Republic of China (Foreign Investment Law), there are several key points in the Regulations, investors should pay attention to the several key points in the Regulations which bolster the former.
(A) The Regulations clarify major issues of concern to foreign investors
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Five-year transitional period arrangement The Foreign Investment Law provides a transitional period of 5 years for enterprises established in accordance with the original law for the three types of foreign-funded enterprises, while the Regulations specify specific arrangements for the transitional period.
Specific matters concerning the registration of changes of the existing foreign-funded enterprises, including changes of their organisational form and structure, are also clarified in a Notice issued by the market regulatory department of the State Council, which are summarised as follows:
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Allow Chinese natural persons to establish new foreign-funded enterprises with foreign investors directly According to the Law of the PRC on Chinese-foreign Equity Joint Ventures and the Law of the PRC on Chinese-foreign Contractual/Cooperative Joint Ventures, Chinese natural persons are unable to establish equity joint venture or contractual/cooperative joint venture with foreign investors directly, they must set up a domestic enterprise first and then establish the foreign-funded enterprise with foreign investors through the domestic enterprise. Article 2 of the Foreign Investment Law lists the specific circumstances of the “foreign investment”, including:
Article 3 of the Regulations explicitly includes Chinese natural persons into the scope of “other investors”, that is to say, Chinese natural persons are able to establish foreign-funded enterprises or invest in new projects with foreign investors directly. Yet, the Regulations still have not clarified the detail form and content of the “investment in new project”. |
3. |
Application of the Regulations to other circumstances The Regulations clearly stipulate that the Foreign Investment Law and the Regulations shall also apply to the following circumstances:
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(B) Strengthening the protection of foreign investment
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Emphasis on the free remittance of the legitimate income of foreign investors and foreign employees
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Detailing the protection of intellectual property rights and trade secrets The Regulations stipulate that:
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Government’s implementation of policy commitments and contracts The Foreign Investment Law stipulates that “local people's governments at all levels and their relevant departments shall fulfill the policy commitments made to foreign investors and foreign-funded enterprises in accordance with the law and the various types of contracts concluded”. The Regulations further clarify the scope of “policy commitments” as “the written commitments made by local people's governments at all levels and their relevant departments within their respective statutory powers on supporting policies, preferential treatment and convenience applicable to investment made by foreign investors and foreign-funded enterprises in their regions”. In addition, the Regulations also point out that the government shall not violate the contracts concluded with foreign investors on the grounds of adjustment to administrative division, change of government, institutional or functional adjustment or replacement of the relevant persons responsible, etc. |
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Defining the compensation standard for expropriation under special circumstances The Regulations define the compensation standard payable by the State in the event the State expropriates the investment of foreign investors for the sake of public interest under special circumstances as “timely compensation based on the market value of the expropriated investments”, and emphasise that if foreign investors are not satisfied with the expropriation decision, they can apply for administrative reconsideration or institute an administrative lawsuit in accordance with the law. |
(C) Detailing the measures for investment promotion
1. |
Equal treatment for domestic and foreign enterprises Various policies of the State for supporting the development of enterprises shall equally apply to foreign-funded enterprises established under the Foreign Investment Law. The Regulations specify the areas in which the foreign-funded enterprises enjoy equal treatment, including government fund allocation, land supply, tax reduction and exemption, qualification licensing, formulation of standards, project reporting, and human resources policies, etc. Specific provisions on the equal treatment are summarised as follows:
The above provisions put the principle of equal treatment of domestic and foreign-funded enterprises into practice and elaborated on the equal treatment enjoyed by foreign investment. |
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Clarifying fund raising means for foreign-funded enterprises The Regulations further stipulate that, on the premises of enjoying equal treatment with domestic enterprises, foreign investors can enjoy preferential treatment in terms of fiscal, tax, finance, land use etc., and confirm that a foreign-funded enterprise may legally raise funds by means of issuing stocks, corporate bonds and other securities, public or private offering of other financial instruments, and using debts in foreign exchange etc., which not only retains fund raising through borrowing in foreign exchange, but also opens up other fund raising means. |
Conclusion
Derived from the Foreign Investment Law, the Regulations enhanced the operability of the legal system. Moreover, the Regulations clearly stipulate that: “In the event of inconsistency between the provisions on foreign investment formulated before 1 January 2020 and the Foreign Investment Law and these Regulations, the provisions of the Foreign Investment Law and these Regulations shall prevail”. The current regulations on foreign investment are under review. It is expected that any regulations, rules and normative documents inconsistent with the Foreign Investment Law or the Regulations will be abolished or revised. Investors having specific questions should seek legal advice according to their own circumstances.
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