China’s Foreign Investment Law is getting ready to come out
On January 19, 2015, China's Ministry of Commerce (“MOFCOM”) released the first exposure draft of its new Foreign Investment Law (中华人民共和国外国投资法). It has incorporated 170 articles in total and divided them into 11 Chapters. The proposed Foreign Investment Law (“FIL”) is intended to replace three existing laws which currently govern foreign investment in China: (i) the Sino-Foreign Equity Joint Venture Law (“EJV Law”), (ii) the Sino- Foreign Cooperative Joint Venture Law (“CJV Law”) and (iii) the Foreign Invested Enterprises Law (“FIE Law”). The new FIL will significantly change the existing regulatory landscape controlling all foreign investment in China. Also, it will impact on the Variable Interest Entities (“VIE”).
The purposes of the exposure draft are as follows:
1. The FIL shall be considered as the basic law which unifies the management and promotion of the foreign investments.
2. Innovating the management mode of the foreign investments.
3. Abolishing the case-by-case approval on foreign investments, drastically reduce the restrictions on foreign investments and strengthen the information report system.
4. Improving the promotion, protection and supervision systems on foreign investments, changing the governmental function.
The main contents of the exposure draft are as follows:
Definitions of the Foreign Investor and Foreign Investment
Regarding the Foreign Investor, on the one hand, the definition of “foreign investor” is based upon an “actual control” test, i.e. enterprises (whether based onshore or offshore) under the control of foreign investors will be treated as foreign investors. On the other hand, investments made by foreign investors within the territory of China but controlled by Chinese domestic investors, shall be deemed as the investment made by the Chinese investors.
Regarding the Foreign Investment, it covers investments on green areas, investments through merger and acquisition, medium and long term financing, investments on exploration and exploitation of natural resources, acquiring the control over domestic enterprises via contracts or trusts, etc.
Management mode on admittance of the foreign investor
The competent authority is abolishing the case-by-case approval on application for admittance raised by the foreign investors, and the approval will only focus on the special investments listed by correspondence special directory. Contracts or the Article of Association will no longer be examined by the authorities, while they will review the foreign investor itself and the investing conducts. In a meanwhile, the foreign investors shall fulfill their duty of report.
National Security Review
Compared with the existing regulations, the exposure draft expands the scope of matters that are subject to national security review. Any Foreign Investment that damages or may potentially damage national security is subject to a unified national security review regime, regardless of industry sector or whether it is controlled by a Foreign Investor. The exposure draft also improves the conditions for such review and the formalities during the review. Besides, it clears the possible solutions where it is helpful to eliminate the risk of the national security. The exposure draft further regulates that neither administrative reconsideration nor administrative action may be brought up against the decision on national security review.
Information Report System
In order to timely, accurately acquiring the information of foreign investments, the exposure draft provides that three kinds of report regarding information of the foreign investment shall be submitted by foreign investors: (i) Investment project report; (2) Modification Report for investment project; (3) Periodical Report.
Investment Promotion System
Promotional policies, institutions and relevant regulations on special economical zones have been incorporated in this exposure draft for promoting foreign investments.
Protection measures have been reinforced by the exposure draft in respect of protections on levy, expropriation, state compensation, transfer and the intellectual property right.
Complaints Settlement Regime
The draft consolidates the power of the Complaint Coordinating Institution for disposing/settling the disputes between foreign investors, foreign invested enterprises and administrative organs.
Supervision on Foreign Investment
The draft cancelled the advanced approval for the admittance but reinforced the periodical and post reviews on foreign investment and established the credit filing regime for foreign investors.
The draft explicitly stipulates the administrative liabilities and criminal liabilities for those foreign investors who are in breach of the stipulations therein.
According to Chinese Legislation Law, after collection for comments on this exposure draft of the FIL, revisions may be made, and the exposure draft will become the draft for deliberation. Then, a formal legislative bill may be formed. Then, the legislative bill will have to go through the procedure of revision and voting for final promulgation.