How to Set Up Foreign-invested Enterprises in the Era of China’s New Foreign Investment Law

September 1, 2020

The writer, Liu Zhiqiang, is a equity senior partner lawyer at Beijing Yingke Law Firm and earned a master’s degree in law from Temple University in the United States. He can be contacted at liuzhiqiang@yingkelawyer.com.

The Foreign Investment Law of the People’s Republic of China (“FIL”) was promulgated on March 1, 2019 and came into effect on January 1, 2020. On the same day, the State Council implemented the Regulations on the Implementation of the Foreign Investment Law of the People’s Republic of China (“Implementing Regulations”). The Implementing Regulations clarifies and expands on provisions and principles stated in the FIL. The Ministry of Commerce and State Administration for Market Regulation, also on the first day of the year, issued supporting regulations for the FIL including the Measures for Reporting Foreign Investment Information of the People’s Republic of China (“Reporting Measures”) and the Ministry of Commerce issued the Notice Regarding Foreign Investor Information Reporting Related Matters (“Reporting Notice”). The Reporting Measures and Reporting Notice enact a new system for foreign investors to submit investment information. In addition, The Catalogue of Encouraged Industries for Foreign Investment (“Catalogue of Encouraged Industries”) has been updated to a 2019 edition and the Special Administrative Measures for Foreign Investment Access (“Negative List”) to a 2020 edition. The Catalogue of Encouraged Industries identifies industries such as technology and manufacturing in which foreign investment is preferred and investors are eligible for certain preferential policies and treatment. The 2019 edition listed 67 new items and 45 revised items. The Negative List enumerates industries in which foreign investment is prohibited or restricted. The 2020 edition has further reduced the number of restrictions on foreign investment especially in service, manufacturing, and agricultural industries. With the adoption of these new laws and regulation, the following FIE regulations were appealed: The Law of the People’s Republic of China on Sino-foreign Joint Ventures, the Law on Foreign-funded Enterprises of the People’s Republic of China, and the Law of the People’s Republic of China on Sino-foreign Cooperative Enterprises.

The adoption and implementation of the FIL and other foreign investment regulations on January 1, 2020 officially marked a new era of foreign investment law. It also indicates China’s commitment to open markets, promotion of foreign investment, and equalizing market access for foreign enterprises. The FIL consolidated and replaced the former three laws regulating foreign enterprises, and the new system under FIL significantly simplified and optimized the previous system. FIL no longer distinguishes between wholly foreign-owned enterprises, equity joint-ventures, and cooperative joint ventures but rather refers to foreign investment as foreign-invested enterprise (FIE). The FIL also does not regulate foreign enterprise organization and foreign contracts. The FIL establishes a pre-establishment national treatment system and negative lists for foreign investment. The significance of the pre-establishment national treatment is that non-negative foreign investment is subject to the same treatment as domestic enterprises. Non-negative investments no longer require pre-investment government approval instead investors simply need to register their investment with the appropriate agencies. Thus, the “case-by-case approval” system has been abolished, and a foreign investment management system based on the negative inventory management system, the foreign investment information reporting system, and the foreign investment safety review system erected. Under the new system, the legal framework for foreign investment activities in China is more robust and clearer, and the barriers for establishing foreign enterprises is reduced.

There exists many interpretations of the changes and improvements of the foreign investment laws and regulations too numerous to mention. Instead, the author uses the example of a Sino-foreign equity joint venture project, handled by the author at a time when the new law superseded the old law alternate, to briefly describe from a practical  point of view how to establish foreign investment in mainland China under the new Foreign Investment Law. This project is still in the planning stage; therefore, the project information is anonymized in the description below. The principal is a Chinese investor, a subsidiary company of a central enterprise, and the foreign investor is a Czech company. Both parties intend to establish a Sino-Czech joint venture (hereinafter referred to as “the enterprise” or “proposed joint venture”) in a district of Beijing to produce and sell air traffic control systems.

After carefully and thoroughly combing through relevant laws, administrative regulations, departmental rules and local regulations currently in force from the perspective of a lawyer in the process of establishing a foreign-invested enterprise, this article outlines important steps that need to be taken in order to establish foreign-invested enterprises and develop business relations with relevant government authorities. Although not all of these steps will inevitably occur, nevertheless investors and lawyers must be cognizant of them.

Because tasks such as the drafting of the joint venture contract and the articles of association of the joint venture company, determination of senior management personnel’s’ qualification, state-owned equity settings, due diligence of foreign investors, verification of restrictions on the transfer of foreign technologies and data, determination of intellectual property rights, etc., are not directly related to the enactment and implementation of the FIL or have yet to be carried out in the project, this articles does not offer an in-depth discussion on these topics.

  1. Check whether the business scope of the proposed foreign-invested enterprise is listed on the negative list

Article 4 of the Foreign Investment Law stipulates that the State shall implement a management system of pre-established national treatment and negative list for foreign investment. As mentioned previously, the Negative List bans or limits markets access for foreign investors in critical industries. Therefore, checking whether the business scope of the enterprise is prohibited or restricted by the Negative List is the first step and a prerequisite for the advancement of the follow-up procedure.

If the business scope is listed on the Negative List, the next course of action taken depends on whether it belongs to the prohibited category or the restricted category. If it belongs to the prohibited category, foreign investors are not allowed to invest, and the follow-up procedures are not carried out. If it belongs to the restricted category, it is necessary to meet the special access management measures set out in the Negative List, such as the foreign share ratio or the executive qualification requirement, etc.

The business scope of the enterprise is the production and sale of certain air traffic control products. Article 18 of the Negative List prohibits investments in air traffic control. This begs the question, does the enterprise belong to this category? Investing in the production and sale of an air traffic control product is not an investment in air traffic control operations. Article 18 states that foreign investors should be prohibited from investing in air traffic control business, but not in the production and sales of products in related industries. According to Item 311 of the Catalogue of Industries Encouraged by Foreign Investment (2019 Edition) issued by the National Development and Reform and Ministry of Commerce, air traffic control system equipment manufacturing is an industry encouraged by foreign investment. On the 2020 edition of the Negative List, air traffic control was not even listed indicating China commitment to further open up its economy. It also demonstrates how frequently regulations are revised and updated.

After the above analysis and in communication with the relevant authorities and personnel, we have concluded that the business scope of the enterprise is not a prohibited or restricted foreign investment project on the Negative List. The foreign investors can invest in air traffic control system without the fear of the special management measures for access being imposed.

  1. Check whether approval and filing of the foreign investment project are required

The Foreign Investment Law Article 29 stipulates that if the foreign investment project requires approval and filing, it shall be implemented in accordance with the relevant provisions of the State. The relevant documents in force at present are the Measures for the Approval and Filing of Foreign Investment Projects, the decision of the National Development and Reform Commission on amending the relevant provisions of Administrative Measures on Approval and Filing of Foreign Investment Projects and the catalogue of investment projects approved by the government (2016 edition). Accordingly, restricted projects with total investment (including capital increase) of US$ 300 million and above shall be approved by the investment department under the State Council, and projects with total investment (including capital increase) of US$ 2 billion and above shall be reported to the State Council for filing. Restricted projects with a total investment (including capital increase) of less than 300 million US dollars shall be approved by the provincial government.

The above provisions are designed for enterprises to carry out fixed asset investment projects. If the proposed foreign investment enterprises do not involve fixed asset investment projects, there is no need for project approval and filing. After communication with the investors, the company plans to employ an asset-light strategy at the initial stage of establishment, and temporarily do not need to invest in land acquisition, factory building, and other fixed asset investment, so foreign investment project approval and record is not necessary.

  1. Check whether administrative licensing matters are involved

Article 30 of the Foreign Investment Law stipulates that “foreign investors who invest in industries and fields that require a permit in accordance with the law shall go through the relevant licensing procedures in accordance with the law.” The competent departments concerned shall examine the foreign investor’s application for license with the same conditions and procedures governing domestic investment, unless otherwise provided by laws and administrative regulations.

On February 11, 2018, Notice of the State Administration for Industry and Commerce on Adjusting the Catalogue of Pre-Approval Items for Industrial and Commercial Registration was issued, according to the documents, 28 items including the establishment approval of securities companies and the issuance of licenses for tobacco monopoly production enterprises were listed as pre-approval items for industrial and commercial registration.

The business scope of the proposed joint venture is to produce and sell an air traffic control product, which does not involve pre-approval for industrial and commercial registration and does not require obtaining a special permit before industrial and commercial registration.

If the business registration involves administrative licensing matters, you can inquire whether the business to be carried out belongs to the reserved administrative licensing matters in the Decision of the State Council on the Administrative Permissions for Administrative Approval Items That Must Be Retained or check  the summary list of administrative examination and approval items of various departments in the State Council.

  1. Check whether the declaration of the concentration of undertaking is involved

Article 33 of the Foreign Investment Law stipulates that a foreign investor who acquires a company in China or otherwise participates in the concentration of undertakings shall be subject to centralized examination of the undertakings in accordance with the provisions of the Antimonopoly Law of the People’s Republic of China (the “Anti-monopoly Law”).

Article 21 of the Antimonopoly Law stipulates that if an undertaking meets the reporting threshold of declaration prescribed by the State Council, the undertaking shall declare it to the anti-monopoly law enforcement agency of the State Council in advance, otherwise the undertaking will not be implemented. The reporting standards stipulated in Article 3 of the Regulations of the State Council on the Standards for the Centralization of Operators (2018 revision) are as follows: (1) The total revenue of all global undertakings participating in the concentration that exceeds 10 billion RMB in the previous fiscal year, and at least two of them have a revenue in China exceeding 400 million RMB in the previous fiscal year; (2) The total revenue of all undertakings participating in the concentration in China exceeded 2 billion RMB in the previous fiscal year, and at least two of them had a revenue of more than 400 million RMB in China in the previous fiscal year.

It is not clear whether the proposed joint venture needs to apply for the concentration of undertakings, and it will be judged after obtaining the financial data of relevant parties. The Sino-Czech investment will no longer be referenced in the following steps as the drafting of the contract and registration have not yet reached these stages.

  1. Handling foreign investment information reports in accordance with the law

Article 34 of the Foreign Investment Law stipulates that the State shall establish a safety review system for foreign investment information. A foreign investor or a foreign-invested enterprise shall submit investment information to the competent commerce departments through the enterprise registration system and the national enterprise credit information publicity system.

The Reporting Measures expands on stipulations in the FIL stipulating that after foreign-invested enterprises submit investment information to the relevant departments, then the market regulatory department shall promptly push the above-mentioned investment information to the competent department of commerce; the enterprises do not need to submit separate reports. The report is divided into initial report, change report and annual report. The contents of the reports shall be determined in accordance with the principle of necessity as well as the relevant provisions on the actual situation of foreign investment and the relevant regulations on enterprise registration and enterprise information publicity. Foreign-invested enterprises shall submit the annual report of the previous year through the national enterprise credit information publicity system from January 1 to June 30 of each year. Foreign-invested enterprises established in that year shall submit annual reports from next year.

In accordance with the principle of necessity, the above measures effectively ensure that the foreign-invested enterprises do not bear the additional burden of information reporting. The foreign-invested enterprises to be established shall, in accordance with the above-mentioned laws and regulations, take the initiative to report the information in a timely manner in the daily operation at the time of establishment and after the establishment. Entities failing to comply with the information reporting obligations shall bear corresponding legal responsibilities, including a fine of up to RMB 500,000 from the commerce department.

  1. Check whether security review procedures are required

Article 35 of the Foreign Investment Law stipulates that the State shall establish a security review system for foreign investment and conduct a security review of foreign investment that affects or may affect national security. The provisions of the Regulations on the Implementation of the Foreign Investment Law are the same and are not detailed. Therefore, it is not clear how the security review system and procedures will be implemented.

I anticipate that China will adopt a model similar to that of the US Foreign Investment Commission’s Foreign Investment Commission, which combines proactive declaration with ex officio review. The factors that may be considered include: providing products or services to the government; potentially causing national security risks; involving critical infrastructure; involving some type of advanced technology, export-controlled technologies, goods, software, services, access to confident or sensitive government contract information, national defense, national security related law enforcement departments engaged in weapons, military supplies and other related activities; close to certain types of government facilities, etc.

Although the current security review process is not clear, it is very important and has the effect of a one-vote veto. Failure to take into account the relevant factors that may trigger a foreign investment security review or failure to comply with the appropriate procedures may result in a transaction failure and heavy losses. Investors should remain vigilant, but for most enterprise this should not be a significant concern. It is recommended to conduct special research on this issue in foreign investment transactions, fully investigating and considering whether there are factors that may trigger the safety review procedure. It is also advised to maintain active communicate with the regulatory authorities to prevent problems before they occur.

  1. No need to handle foreign investment filing in the competent departmentof commerce

The Provisional Measures for the Administration of the Establishment and Change of Foreign-invested Enterprises are invalidated by the Measures for the Reporting of Foreign Investment Information, therefore filing in the Commerce Department is no longer required and the enterprise only needs to submit to the reporting system and send regular updates to the Commerce Department.

  1. Submit to market supervision and administration department for industrial and commercial registration

After completing the above inspection items or procedures, the enterprise can be processed by the market supervision and management department for industrial and commercial registration in accordance with the “Regulations on the Registration and Administration of Companies in the People’s Republic of China” or “Administrative Measures on the Registration and Management of Partnership Enterprises in the People’s Republic of China”.

 

Major laws, regulations, and departmental regulations covered:

  1. Foreign Investment Law of the People’s Republic of China, Presidential Order No. 26, March 15, 2019
  2. Regulations on the Implementation of the Foreign Investment Law of the People’s Republic of China, Order No. 723 of the State Council, 2 Feb 26, 2019
  3. Measures for Reporting on Foreign Investment Information, Order No. 2, January 30, 2020
  4. Special Administrative Measures for Foreign Investment Access (Negative List) (2020 Edition), Order No. 32 by the National Development and Reform Commission and the Ministry of Commerce, June 6, 2020
  5. Catalogue of Encouraged Industries for Foreign Investment(2019 Edition), Order No. 27, June 30, 2019
  6. Administrative Measures for the Approval and Filing of Foreign Investment Projects, National Development and Reform Commission Order No. 12 of 2014, May 17, 2014
  7. Notice of the State Administration for Industry and Commerce on Adjusting the Catalogue of Pre-Approval Items for Industrial and Commercial Registration, Order No. 24 (2018), February 11, 2018
  8. Regulations on the Approval and Filing of Investment Projects of Enterprises of the State Council of the People’s Republic of China, Order No. 673
  9. Government-approved List of Investment Projects (2016 Edition), Guofa No.72, December 12, 2016
  10. Antimonopoly Law of the People’s Republic of China, Presidential Order No. 68, August 30, 2007
  11. Provisions of the State Council on the Standards for Declaration of Centralized Operators, Order No. 703, September 18, 2018
  12. Catalogueof Investment Projects Approved by the Beijing Municipal Government (2018), Beijing Zhengfa (2018) No. 13, March 21, 2018
  13. Catalogueof Prohibitions and Restrictions on New Industries in Beijing (2018 Edition), Beijing Government Office Order No. 35, September 6, 2018
  14. Regulations of the People’s Republic of China on the Administration of Company Registration, Order No. 666 of the State Council, February 6, 2016
  15. Measures for the Registration and Administration of Partnership Enterprises of the People’s Republic of China, Order No. 709 of the State Council, March 2, 2019

Also In The News

September 17, 2020

Key Considerations for Investing in Distressed Debt in USA

The Covid-19 pandemic has changed the world in unprecedented ways and nowhere is this more evident than in the decline or collapse of companies that were flourishing prior to the pandemic.  For would-be investors, however, this may be a great time to enter the distressed debt investment market. The economic downturn has left countless businesses […]

Read More
September 14, 2020

Greater Achievements Ahead As Expected Yinge Law Firm’s work summary meeting for t he first half of 2020 and Relocation Ceremony of Yingke Beijing Headquarters

Beijing headquarters relocation ceremony of Yingke Law Firm was held in CP Center. This relocation is not only a brand new upgrade of office environment hardware facilities and linkage management of intelligent equipment, but also a real “smart” office environment with multi-function, intelligence, leisure and fun. This is another milestone in the development history of […]

Read More