On January 19th, 2015, the Ministry of Commerce of the People’s Republic of China ("MOFCOM")
released the "Foreign Investment Law of the People's Republic of China (Draft for Comments)" to solicit public opinions. The Draft has a total of 11 chapters and 170 clauses, setting forth the definitions of foreign investor and foreign investment, market entry management, national security review, information reporting, investment promotion, investment protection, coordination and settlement of complaints, supervision and inspection, legal liability for violations, etc.
The proposed law aims to unify laws and regulations on foreign investment and serves to deepen institutional reform, expand liberalization, promote foreign investment and regulate foreign investment management. Under Article 170 in this draft, when the law comes into effect, the Sino-foreign Equity Joint Venture Law, the Wholly Foreign-owned Enterprise Law and the Sino-foreign Cooperative Joint Venture Law will be simultaneously repealed. Foreign-invested companies will largely be subject to the same legal treatment as domestic companies.
Some key points of the draft are highlighted below.
1. Annual report replacing pre-approval
Most foreign investment, including setting up a new company, will no longer need pre-approval from the State Council. Instead, all foreign investors or foreign-invested enterprises need to submit a report upon making an investment. Annual reports will also be needed under the new law when it comes to investment involving the establishment or change of a foreign-invested enterprise, covering information such as the status of the investment, the performance of the venture, and any change in circumstances.
2. The “negative list”
Based on chapter 3 of this proposed law, the current case-by-case approval process for the establishment of foreign enterprises will be replaced by Catalogue of Special Management Measures. Catalogue of Restricted and Prohibited Industries for Foreign Investment (“negative list”) will be formulated and published by the State Council. It will also set limits on the investment amount. Only those investments exceeding the limit will need to be pre-approved by the State Council
3. Possible effect on VIE structure
Under the current legal framework, companies owned only by Chinese legal persons are regarded as domestic entities and are accessible to the restricted sectors such as telecommunication, media and internet etc. Thus some foreign investors use VIE structure which literally means Variable Interest Entities, to maintain actual control over the target company with a set of contracts, instead of direct ownership to get access to those fields. Although VIE structure was widely adopted in reality, it had never been legally recognized in China before.
In this draft, according to Article15.6, the definition of “foreign investment” expands to any form of arrangement that exerts foreign “actual control” over the business. That means, the investment enabled by VIE structures will therefore be recategorized as “foreign investment” under certain circumstances. Additionally, when a transaction done outside of China results in a foreign investor acquiring control over Chinese entity, this will be deemed foreign investment as well.
4. National Security Review (“NSR”)
The proposed law will significantly reduce barriers to foreign investment, whilst at the same time increasing scrutiny of foreigners trying to evade the regulations on investing in restricted industries. The NSR procedures can be initiated by the foreign investor itself, or by MOFCOM upon application from other government department, industry association, enterprises in the same industry or other upstream or downstream related enterprises. An NSR joint ministerial conference (Joint Conference) convened by MOFCOM and including another government authorities relevant to the foreign investment in question will be responsible for the NSR. The decision of the Joint Conference is final and not appealable.
Under the current agenda, there is still a long way to go before the draft Foreign Investment Law come into force. Thus, companies still have plenty of time to follow the revisions of the draft.
For more details of the draft, see: http://app.westlawchina.com/maf/china/app/document?&src=nr&docguid=i3cf76ad10000014b018b7f541082cf46&lang=bi
By Ding Ying
Category: Monthly Events