The new Foreign Direct Investment Law (FIL) came into effect on January 1, 2020, simultaneously repealing the previous legal framework for foreign investment and unifying the legal regime for foreign investment in the PRC. It applies to both wholly foreign-owned enterprises (WFOEs) and those in which foreign investment is made through a partnership with a local entity ( Equity Joint Ventures or EJVs ).
The main objective of this law is to improve the business environment for foreign investors and ensure that their activities in China enjoy the same conditions as domestic companies. The new Foreign Investment Law (FILV) aims to completely reform the regulations governing access, promotion, protection, and management of foreign investment in China , which until now were governed by three laws: the Sino-Foreign Joint Venture Law, the Wholly Foreign-Owned Enterprise Law, and the Sino-Foreign Contractual Joint Venture Law.
What is foreign direct investment
Foreign investment refers to investment activity carried out directly or indirectly by a natural person, company or other organization (foreign investors), including the following circumstances:
- A foreign investor who establishes a foreign-funded company in the territory of China independently or jointly with any other investor.
- An investor who acquires common or proprietary shares, or other similar rights and interests of a company in the territory of China.
- An investor who makes investments to start a new project in the territory independently or jointly with any other investor.
- An investor who directs investments in any other manner provided by Chinese laws, administrative regulations or provisions of the State Council.
The main changes introduced by this law are the following (article 2 LIED).
New Law on Foreign Direct Investment (LIED) in China
This law introduces several positive changes such as a “pre-established national treatment and negative list” management system that implements the principle that foreign investors and their investments will receive treatment no less favorable than that granted to Chinese domestic investors in the initial phase of investment.
Thus, the number of prohibited sectors on the 2020 negative list for foreign investment access has been reduced (from 190 to 73), and a date has been set for removing the prohibition on other sectors (Article 4 of the LIED). Furthermore, the new LIED proposes establishing, for the first time, a system for notifying foreign investments.
Foreign investors and enterprises shall submit relevant information through the enterprise registration system established by the Ministry of Commerce and the enterprise credit information disclosure system established by the State Administration for Market Regulation (Article 7 LIED) .
This Law also establishes a national security review system to determine whether a foreign investment may affect national security. It is explicitly announced that any decision followed by a security review is final, and the decision made cannot be challenged or reviewed. Subsequent legislation will clarify the scope, content, procedure, deadlines and legal consequences of the review process.
In this vein, the General Meeting becomes the most important body of the company, replacing the Board of Directors. Furthermore, the new law no longer requires unanimity for amending the articles of association or for increasing or decreasing capital, for example. Substantial reserves are permitted. Corporate governance must comply with the corporate law of the PRC (People's Republic of China). The organizational form, governance structure, and operating rules of companies with LIEDs will be subject to the provisions of Chinese corporate law and other applicable laws (Article 31 of the LIED).
Likewise, the new LIED establishes that technical cooperation must be based on self-determination, and commercial standards in the foreign investment process. The terms and conditions of foreign cooperation will be established in accordance with the principle of equity and equality in negotiations. Government departments and personnel may not publish, or unlawfully provide to third parties, trade secrets of which they have become aware in the course of their duties. Finally, the LIED establishes a protection system for foreign investors.
As we see, the new LIED substantially improves the position of foreign companies in China.
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