An overview of the key points of the Regulations for the Implementation of the Foreign Investment Law

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

1. 

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.

  • From 1 January 2020 to 31 December 2024, enterprises established in accordance with the original law for the three types of foreign-funded enterprises may adjust their organisational form and organisational structure in accordance with the Company Law of the People's Republic of China (PRC), the Partnership Law of the PRC, or any other laws, or retain their original organisational form and organisational structure.

  • As from 1 January 2025, existing foreign-funded enterprises that fail to adjust and register the change of their organisational form and organisational structure according to the law will not be able to process other registration matters in the market regulatory department, who may publicly announce the relevant circumstances.

  • After adjusting the organisational form and structure of an existing foreign-funded enterprise in accordance with the law, the methods for the transfer of equities or rights and interests, income distribution methods, and the methods for the distribution of the remaining property agreed upon in the contract by the original parties to the equity or contractual/cooperative joint venture may continue to be handled according to the contract.

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:

  • Foreign-funded companies and foreign-funded partnership enterprises established in accordance with the law before January 1, 2020 are not required to undergo the registration of organisational form change.

  • Foreign-funded enterprises formed in accordance with the Detailed Rules for the Implementation of the law of the PRC on Chinese Foreign Cooperative Joint Ventures or the Detailed Rules for the Implementation of the Law of the PRC on Foreign-funded Enterprises with no legal person status before 1 January 2020 may apply for restructuring into partnership enterprises within five years after the implementation of the Foreign Investment Law.

  • Foreign-funded companies established before 1 January 2020 shall, within five years after the implementation of the Foreign Investment Law, adjust their highest authority, legal representative, method for election of directors and voting mechanism etc., in accordance with the Company Law of the PRC. That is to say, existing Chinese-foreign equity joint ventures and Chinese-foreign contractual/cooperative joint ventures will need to amend their articles of association to change the highest authority from the board of directors to the shareholders' meeting, and change the voting mechanism accordingly.

2. 

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:

  • “A foreign investor establishes a foreign-funded enterprise in China either alone or jointly with other investor“; and

  • “A foreign investor invests in any new project in China either alone or jointly with other investor”.

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:

  • The relevant provisions of the Foreign Investment Law and Regulations shall apply to investment made by foreign-funded enterprises in China.

  • Investment in the Mainland made by investors from the Hong Kong Special Administrative Region and the Macao Special Administrative Region and overseas Chinese residing abroad (that is, overseas Chinese) shall be implemented by reference to the Foreign Investment Law and the Regulations. If there are other laws, administrative regulations or stipulations by the State Council, such provisions shall prevail.

  • Investment made in the Mainland by investors from Taiwan shall be governed by the provisions of the law of the PRC on the Protection of Investment by Taiwan Compatriots and its detailed implementation rules; matters not covered by the Law of the PRC on the Protection of Investments by Taiwan Compatriots and the detailed rules for the implementation thereof shall be governed by the Foreign Investment Law and the Regulations.

(B) Strengthening the protection of foreign investment

1.

Emphasis on the free remittance of the legitimate income of foreign investors and foreign employees

  • The Regulations reiterate that foreign investors may freely remit into or out of China in Renminbi or a foreign currency, their contributions of capital, profits, capital gains, proceeds from disposition of assets, and royalties derived from intellectual property rights, indemnity or compensation lawfully acquired, and income from liquidation within China, and explicitly prohibit any unit or individual from illegally imposing restrictions on remitting currency, amount, frequency, etc.

  • It further provides that wages and other legitimate income of the foreign employees of foreign-funded enterprises, and employees from Hong Kong, Macao and Taiwan can also be remitted freely according to law.

2. 

Detailing the protection of intellectual property rights and trade secrets

The Regulations stipulate that:

  • The administrative organs (including organisations authorised by laws and regulations to manage public affairs) and their staff shall not use administrative licensing, administrative inspection, administrative punishment, administrative compulsion and other administrative means to force or force in disguise any foreign investor or foreign-funded enterprise to transfer technology.

  • Where it is really necessary for foreign investors or foreign-funded enterprises to provide information relating to its trade secrets, the administrative organ shall limit the scope of provision to what is necessary for the performance of its duties, and personnel unrelated to the performance of duties shall not have access to the relevant materials and information.

  • If it is necessary to share information with any other administrative organ, the administrative organ shall keep confidential trade secrets contained in such information to prevent disclosure.

3. 

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.

4. 

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:

  • To improve the transparency of foreign investment policies, regulatory documents relating to foreign investment shall be published timely in accordance with law, and those that have not been published shall not be used as the basis for administration.

  • The State national mandatory standards shall apply equally to foreign-funded enterprises and domestic enterprises, and the technical requirements higher than mandatory standards shall not be targeted at foreign-funded enterprises.

  • To ensure foreign-funded enterprises’ free access to the government procurement market, the purchaser or procurement agencies of government procurement shall not implement differential or discriminatory treatment to foreign-funded enterprises in terms of government procurement information release, supplier qualification determination, qualification examination, bid evaluation criteria, etc., and shall not adopt ownership form, organisational form, equity structure, investors’ country of origin, products or service brands, and other unreasonable conditions whereby suppliers are restricted, and shall not treat products and services produced or provided by foreign-funded enterprises in China and domestic enterprises differently.

  • Where a foreign investor invests in any industry or field which requires approval by law, then, unless otherwise provided by law and administrative regulations, the approval application shall be reviewed in accordance with the same conditions and procedures consistent with domestic investment, and shall not set discriminatory requirements for foreign investors.

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.

2. 

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.