The Foreign Investment Law Spells Big Changes

道可特法视界第1196篇原创文章

Abstract: 

China’s opening to the outside world started from foreign investment related legislations. Over 40 years, along with the deepening of the reform and open-up, the current laws and regulations prescribing the foreign investment issues have been in great difficulties to be adapted to cover the needs of the practice in the new era. 

On March 15, 2019, the National People's Congress of the PRC (the “NPC”) adopted and promulgated the Foreign Investment Law of the PRC (the “FIL”), which will come into force on January 1, 2020. Upon taking effect, the FIL will replace the trio of the existing laws regulating foreign investment in China, to wit, the Law of the People's Republic of China on Sino-Foreign Equity Joint Ventures (the “EJV Law”), the Law of the People's Republic of China on Wholly Foreign-owned Enterprises (the “WFOE Law”) and the Law of the People's Republic of China on Sino-Foreign Cooperative Joint Ventures (the “CJV Law”) will then be repealed simultaneously. At the closing press conference of the Two Sessions in this year, Premier Li Keqiang explained that this FIL is designed to better protect and attract foreign investment through legislative means.

Specific provisions provided in the FIL are set forth in response to the general legislative purpose, reflecting the following principles which will be enforced on foreign investors and foreign invested enterprises (the “FIEs”):

1. National Treatment before market access: the State will implement the management systems of national treatment on pre-establishment and negative list for foreign investment;

2. Equal Treatment during operation: all national policies on supporting the development of domestic enterprises will equally apply to FIEs in accordance with the law, including:

(1) The State will guarantee that FIEs can equally participate in setting standards, and the compulsory standards formulated by the State will equally apply to FIE;

(2) The State will guarantee that FIEs can participate in government procurement activities through fair competition. Products produced and services provided by FIEs within the territory of China shall be treated equally in government procurement activities.

3. Preferential Treatment under certain circumstances: foreign investors and FIEs may enjoy preferential treatments in accordance with laws, administrative regulations or rules and regulations of the State Council;

4. Financing Channel Expansion Treatment: FIEs may conduct financing through public offering of shares, corporate bonds and other securities or by other means.

Besides promotional treatments, the FIL also targets on reforming the corporate governance structure of FIEs. According to the Article 31 and the paragraph 2 of Article 42 of the FIL, since the effective date of FIL, FIEs will be granted with five-year transitional period for adjusting their organization form, institutional framework and standard of conduct according to the provisions of the Company Law of the PRC (the “Company Law”), the Partnership Enterprise Law of the PRC and other laws. Actually, since 2006, according to relevant rules and opinions issued jointly by the State Administration for Industry and Commerce, Ministry of Commerce (the “MOFCOM”), General Administration of Customs and the State Administration of Foreign Exchange, joint ventures solely invested by foreign investors and WFOEs have gradually reformed and standardized their corporate governance structure in accordance with the provisions of the Company Law. Therefore, in current practice, under the new requirements of the FIL, Sino-foreign JV enterprises (the “Sino-foreign JVs”) are left to take further adjustment measures towards their governance structures to get in conformity with the provisions of the Company Law. According to the statistics issued by the MOFCOM, more than sixty thousand FIEs were established in 2018, and in recent ten years, the newly FIE setups are mainly the Sino-foreign JVs and WFOEs. It is foreseeable that after the implementation of the FIL, a large number of Sino-foreign JVs will be in need of adjusting their corporate governance structures by way of re-negotiation with their Chinese partners and revising their JV contracts and Articles of Association.

Although the new FIL generally sounds good to foreign investors and FIEs, devils may exist during the course of law enforcement. If you go through the whole texts of the FIL, you may easily find out that many details are in absence or in doubt. For example:

1. As the effective date of the FIL will be January 1, 2020, may the existing Sino-foreign JVs start to modify their corporate governance structure now? What about the new foreign investors who are planning to set up new JVs in China? Do they have to wait until the FIL takes effect?

2. What if the five-year transitional period is not long enough for all FIEs to get in pace with the law changes?

3. The EJV Law, CJV Law and WFOE Law introduced the concept of the “total investment”, and it is used in calculating the limit on the amount of foreign debts borrowed by FIEs. However, in the current texts of the FIL, there is no such concept at all. Would it be so eliminated entirely from the legal terms? Would it then cause any impact on supervision of foreign debts?

4. Pursuant to the Implementation Regulations on current JV Laws, the formation, validity, interpretation, execution and dispute resolution of the JV contract must be governed by the laws of the PRC. The same mandatory governing law requirement is also embedded in provisions of the Contract Law of the PRC. Nevertheless, the concept of "JV contract" was derived from the current JV laws and regulations. Once the FIL comes into force, it is predictable that all the current JV laws and regulations will be repealed at the same time. Therefore, the concept of "JV contract" will no longer exist. Without the legal basis, it is hard to determine whether it will be still mandatory for JV contract to apply the laws of the PRC.

5. There is a long term debase on the question whether the VIE structure should be governed as one type of the foreign investments as it is commonly used by foreign investors to access in China market where foreign investments are prohibited or restricted, and it is also used by Chinese domestic companies as a mean for offshore financing purpose.  In the Draft Foreign Investment Law in 2015, VIE structure was clearly provided as one type of foreign investments. However, in the promulgated FIL, contents reflecting VIE were all disappeared. Instead, a saving clause remains in Article 2 of FIL providing that “any other way of investment made by foreign investor stipulated under laws, administrative regulations or rules of the State Council” will fall into the scope of “foreign investment” under the FIL. This makes the supervision on VIE Structure still in vague.

6. Under the current foreign investment legal regime, supervision on investors coming from Hong Kong, Macao and Taiwan are referring to the same or similar provisions provided for foreign investors. However, the FIL does not contain any word on investment from Hong Kong, Macao and Taiwan. Whether or not the current supervision mode on investments from Hong Kong, Macao and Taiwan will remain in force is pending for clarification by relevant competent authorities.

Details in vague cannot be enumerated once for all. The FIL only sets out the general principles, and its actual and effective implementation is pending for further rules down to the ground. There will be a long way to run for clearing up all the discrepancies contained in different foreign investment related laws and regulations. We should admit the positives brought by this piece of legislation while keep a close eye on future steps taken by governmental authorities, and foreign investors need to patiently wait and see how the real practice will be and may expect a better business environment in China.

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