As we entered into Jan. 1st,2020, Foreign Investment Law (“FIL”) officiallyreplaced Law of Wholly Foreign-OwnedEnterprises, Law of Chinese-ForeignEquity Joint Ventures and Law ofChinese-Foreign Contractual Joint Ventures (the “Old Three Laws”), andmarked the new legal landscape of foreign investment in China. Under theguideline of FIL, there are also implementation rules and administrative measuresfrom national and local administrative organs, as well as judicialinterpretation of the Supreme Court. In this article, we will have a look atthe legal panorama of foreign investment in China and highlight the favorablemeasures and policies from both national and local level, with the hope to shedsome light to foreign SMEs regarding the opportunities to do business in China.
I. Legalframework for foreign investment in China
If we compared the legal framework forforeign investment as a pyramid, FIL and Negative List are without doubtsitting on the top. FIL sets out the fundamental scheme of “pre-access nationaltreatment plus negative list”[1],which means that during the access evaluation period all foreign investors willenjoy treatment no less favorable than domestic investors, unless investing inspecific sectors stipulated in the Negative List, in which case will be subjectto special access evaluation.
After FIL is promulgated on March 15th,2019, the State Council of PRC issued Regulationfor Implementing the Foreign Investment Law of the People's Republic of China on Dec. 26th, 2019, to provide more details regarding theimplementation of FIL. On the same day, the Supreme Court of PRC issued Judicial Interpretation on Implementation ofForeign Investment Law, giving some general guidance from judicial trialperspective regarding the judicial recognition of the validity of investmentagreement under the legal background of FIL. Hence, these two documents,respectively from the highest level of administrative system and judicialsystem in China, supplement the FIL issued by the legislative system.
Further down to the base of the “pyramid”,there are departmental rules issued by authorities such as the Ministry ofCommerce, State Administration of Market Regulation, Ministry of HumanResources and Social Security, State Administration of Foreign Exchange, ChinaSecurities Regulatory Commission, covering different aspects includinginformation reporting measures, corporate establishment registration forforeign invested companies, as well as regulatory measures for securitiescompanies and human resources agencies with foreign investment. Of course, thisis not an exhaustive mention of all the rules and regulations of various levelregarding foreign investment, but just naming some of the most recent andimportant ones. And without doubt, there will be more to come to provide moredetails to this legal framework.
II.Favorable measures for foreign investment
The legal frame work for foreign investmentas of now has provided a considerable amount of favorable measure, in order tocreate a better environment and to further attract more foreign investment,which in general, can be summarized as the following types:
1. Equal treatment as domestic companiesin various aspects
FIL stipulates all government and itsdepartments shall equally treat companies with foreign investment and domesticcompanies in terms of government funding arrangements, land supply, tax and feereduction and exemption, qualification and license granting, establishment ofstandards, project applications, human resource policies.[2] Thisis the first time that equal rights of foreign invested companies in certainaspects are written black-and-white on legislative level document, which placecompanies with foreign investment and domestic companies in the same playgroundon some important aspects.
2. Reduction of Negative List 2020
China has been implementing the NegativeList since 2017, which is a document listing all the restricted and prohibitedsectors for foreign investment. For prohibited sectors, access of foreigninvestment is not allowed; for restricted sectors, there are percentagerequirement for equity share ratios of foreign parties.
Negative List 2020 was issued on Jun. 23rd 2020 jointly by National Development and Reform Committee and Ministry ofCommerce. Compared to version 2019, this year items on the list has beenreduced from 40 to 33, among which limitation of equity ratio held by foreignparties in securities companies, futures companies, life insurance companies,as well as in commercial cars has been eliminated; and in free trade zone, whollyforeign owned entity is allowed to establish professional education institution.This is just to name a few changes that could be of interest for most SMEs. It’simportant to have legal counsel to have better understanding of the prohibitionand restriction stipulated on Negative List before foreign SMEs to enter intoChina market.
3. Government obligation to honor theinvestment agreement
When foreign investors come to China, ifthe investment amount is considerable, especially when it involves land usingright purchase, the local government will want to sign an investment agreementwith the foreign investor and offer local preferential policy in exchange tosecure the investment amount and yearly tax contribution. However, there isalways fear from the foreign investors’ side about whether government will holdon to the other end of the contract and honor all the obligation stipulated. Inthe Regulation for Implementing theForeign Investment Law, it sets up the obligation for governments to complywith the investment agreement and promise made with foreign investors inaccordance with the law, and shall not breach contract using excuses such as adjustmentof administrative district, change of personnel or governmental institution,otherwise, relevant government, department, personnel shall be held liable.[3]
4. Simplified registration and reportingprocedure
Back in July 2017, China changed theadmission method for foreign investment and applied “registration” instead of “approval” for foreign investment not related to prohibited or restrictedsectors. If the foreign invested company is not involved in sectors on NegativeList, they are subject to formality check in the MOFCOM system and shallretrieve the registration receipt issued by MOFCOM after their checking. Incertain cities, like Shenzhen or Canton, the procedure for registration of aforeign investment could be completed in 3 to 5 working days.
Together with the entrance into effect ofFIL, the formality registration in MOFCOM has been eliminated. Now foreigninvested companies only need to file the investment information report in theenterprise registration system at the time of company establishment, change ofregistry and every year in the first semester, with much less informationrequired compared to before. In addition, authorities shall not impose theburden of repeated submission on foreign invested companies, but shall accessthe information desired in the enterprise registration system.
5. Relaxation on domestic equityinvestment using registered capital
In order to facilitate the finance offoreign capital, on Oct. 25th, 2019, the State Administration ofForeign Exchange introduced new measures which allow all foreign-investedcompanies to use the registered capital in domestic equity investment, whereasbefore, only foreign-invested companies whose business operation is “investment”or has “investment” in its business scope can use the registered capital indomestic equity investment. This provides convenience and better usage ofregistered capital for foreign invested companies whose business scope is notinvestment or does not include investment in the business scope.
III.Local preferential policy
FIL provides the legal ground for localgovernments up from district level to make local policies and measures withinthe scope of laws, regulations and local laws, in order to boost foreigninvestment.[4] Based on this, local government have made preferential policies to attractcapital from overseas. Here below we take the example of Guangdong province insouth china (near Hongkong, Macau, permanent population: 115 million, GDP: 10.7trillion RMB, both data from 2019) for a brief illustration:
1. Economic Reward
Some local government is willing to offereconomic reward equal to certain percentage of the total investment/yearly taxcontribution if the investment project/ yearly tax contribution reaches certainthreshold amount. For example, in Guangdong Province, the provincial governmentoffered reward equals to 2% of the foreign investment amount if the new foreigninvestment project reaches 50 million USD.
2. Secured land supply
For example, in Guangdong, for constructionproject of headquarter of world top 500 enterprise, manufacturing enterprisingwith investment of more than 1000 million RMB, worldwide sector leadingenterprises, the municipal and provincial government will make sure to arrangethe land supply.
3. Funding
Guangdong Industry Development Fund issupporting world top 500 enterprises, worldwide sector leading enterprises inthe province with equity investment. In addition, the Province is alsopromoting the pledge of intellectual property right as a finance method.
4. Tax incentive
Local government is willing to offer sometax incentive if the foreign invested company has made certain amount ofeconomic contribution.
The above is some common preferentialpolicies just as to give a general idea. Since local government has authoritiesto make their own policies best to their interest in terms of attraction offoreign investment, it’s recommended to have local legal assistance to checkand contact the local government (usually investment bureau) before the startof the investment project in order to have a better understanding and better negotiationleverage before choosing the investment destination.
