On January 1, 2020, the PRC Foreign Investment Law (“FIL”) and the PRC Implementing Regulations for the Foreign Investment Law (“FIL Implementing Regulations”) became effective. The FIL and the FIL Implementing Regulations will reshape the foreign investment regime in China. We will introduce and explain the new foreign investment regime through a series of Q&A as follows.
What is the definition for foreign investment in China?
Under the FIL, foreign investment refers to the investment activities directly or indirectly conducted by foreign inventors. The investment activities include:
- The foreign investors establish a foreign investment enterprise (“FIE”) in China independently or jointly with other investors;
- The foreign investors acquire shares, equity interests, or any other similar rights of an enterprise in China;
- The foreign investors invest in a new project in China independently or jointly with other investors;
- Other investments stipulated by laws or administrative regulations.
Who can be the foreign investors?
Under the FIL, the foreign investors refer to any foreign natural person, enterprise or other organization. Under the existing laws and regulations in China, there is no restriction on the nationality (region), age, form of enterprise (organization) of the foreign investors.
What is the definition for foreign investment enterprise (“FIE”)?
Under the FIL, the FIE refers to the enterprise incorporated under the PRC laws that is wholly or partly invested by foreign investor(s). The foreign investor may set up a FIE by way of setting up a new enterprise or by way of a merger or acquisition of an existing PRC enterprise.
Does the government restrict foreign investment in China?
The government implements the regime of national treatment and negative list for foreign investment access. Except the industry sectors on the negative list, the government treats foreign investors equal with domestic investors.
The negative list refers to the special administrative measures for the access of foreign investment in some specific industry sectors. The latest negative list was issued on June 23, 2020. It consists of prohibited sectors and restricted sectors. Foreign investment is banned in the prohibited sectors. Foreign investment shall be subject to the restrictions on shareholding and investment form in the restricted sectors.
There have been 11 negative lists issued from 1995 to date. The evolution of the negative lists indicate that the government has kept liberalizeing the access for the foreign investment in past years.
Do the foreign investors need approval to invest in China?
As of January 1, 2020, the foreign investors do not need approval on the investment access stage as long as the investment does not fall into the negative list. If an investment falls into the restricted sectors of the negative list, the competent authorities will review the transaction according to the negative list.
The foreign investors may need approval from relevant authorities under the following circumstance:
If a foreign investor invests in a sector legally subject to licensing, the foreign investor will need to obtain the license even the sector is not on the negative list.
According to the FIL and the PRC Anti-Monopoly Law, when the foreign investors acquire a company in China or participate in the concentration of undertakings by other means, and the filing tests are triggered, they may need the anti-monopoly clearance prior to the closing.
- National security
Under the FIL and the FIL Implementing Regulations, the competent authorities shall conduct security review for foreign investment which affect or may affect national security. Under the existing PRC laws and regulations, in free trade zone (“FTZ”), security review applies to all foreign investment activities involving in military industry, important energy and other sectors. In non-FTZ, security review only applies to foreign investors’ merger and acquisition of domestic enterprises involving in military industry, important energy and other sectors.
What is the information reporting regime for foreign investment?
As of January 1, 2020，the information reporting regime has replaced the approval from the Ministry of Commerce (“MOFCOM”). In other words, approval will not be required from MOFCOM for access or any change of foreign investment. The foreign investors or the FIE shall submit information report to MOFCOM through information reporting system, including:
- Initial report: foreign investors shall submit initial report when they apply for incorporation of a FIE, or when they merger a non-FIE in China.
- Change report: when the information in initial report changes, foreign investors or the FIE shall submit a change report.
- Dissolution report: when the FIE is dissolved or turned into a non-FIE, the FIE shall submit a dissolution report.
- Annual report: the FIE shall submit annual report for the preceding year at any time from January 1 to June 30 of each year.
What kind of organization form can be used for FIE?
As of January 1, 2020，the organization form of all FIEs shall be in accordance with the PRC Company Law or the PRC Partnership Enterprise Law. In other words, the wholly foreign owned enterprise (“WFOE”) and Sino-foreign joint venture (“JV”) will not be a statutory organization forms for FIEs anymore.
For the convenience, we will continue to use the expressions of WFOE and JV in the following articles. WFOE refers to the FIE with all capital invested by foreign investor(s). JV refers to the FIE with capital partially invested by foreign investor(s). The foreign investors can choose either company or partnership as the organization form for their FIE, at their sole discretion.
What is the difference between a company and a partnership enterprise under PRC laws?
A company is a legal person with independent property. The company shall be liable for its debts to the extent of all its property.
Shareholders of a company undetake limited liability to the company.
Shareholders may contribute capital in cash, in kind, or with intellectual property rights, land use rights or other non-monetary assets the value of which can be assessed in financial terms, and the ownership of which can be transferred in accordance with the law, except for those assets that shall not be used as capital contributions under laws or administrative regulations.
Company shall pay enterprise income tax.
- Partnership Enterprise
Partnership enterprise is not a legal person.
General partners are jointly and severally liable to the partnership enterprise, and the limited partners undertake limited liability to the partnership enterprise.
Partners may contribute capital in cash, in kind, with intellectual property, land use rights, or other property rights, or with labor service.
Partnership enterprise is a transparency entity and shall not pay enterprise income tax.
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