New Law to Prevent Compulsory Technology Transfer

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For foreigners aiming to invest in China, much attention must be paid to a big change coming about in legislation that is the Foreign Investment Law (Draft), issued by the National People’s Congress on December 26, 2018, presenting a new blueprint for foreign investment law. The Draft would seem to indicate that the overall legislative goal for the Foreign Investment Law has shifted, from its previous highly detailed operational approach to one that is now focused on principles and guidance.

Main Changes

The expected new Draft may be passed and promulgated in the very near future, thus replacing the original three foreign-invested enterprise laws (the original “three foreign laws” being the People’s Republic of China Foreign Investment Enterprise Law, the Chinese-Foreign Cooperation Enterprise Law of the People’s Republic of China, and the Chinese-Foreign Joint Venture Enterprise Law of the People’s Republic of China), becoming the basic law for promoting, protecting and managing foreign investment in China.

The implementation of the national treatment principle for foreigners and the equal management of domestic and foreign investment has caught much attention. In the near future, China’s foreign-funded management model and openness will be fully integrated with countries with higher levels of openness in the international arena, in order to achieve high-level investment liberalisation and facilitation.

Highlights of the New Draft

Among the highlights of the Draft are clear responses to various long-held concerns from foreign investors, which should go some way to improving the environment for foreign investment and shoring up foreign investors’ confidence therein.

(i) National Treatment: Unless otherwise stipulated, national policies to support of the development of enterprises will apply in the same way to foreign-invested enterprises as they do to domestic-invested ones (Article 9);
ii) Prevention of compulsory technology transfer: The terms of any technology cooperation associated with foreign investment shall be determined by all investment parties through negotiation. Administrative means should not be used by administrative agencies or their officers to compel the transfer of technology transfer (Article 22); and

iii) Governmental commitment: Local governments and their relevant departments shall strictly keep all policy commitments made according to law, and perform contracts concluded according to law (Article 24).

Comments

The definition of “foreign investment” in the Foreign Investment Law (draft) is not very clear. Even though foreign investment includes foreign investors investing in China through laws, administrative regulations or other methods prescribed by the State Council, whether providing more than 1 year of financing for domestic enterprises is included still remains to be further studied and observed. Note that this kind of investment was accepted in previous laws, but has been deleted in the new draft.

The new draft temporarily puts aside issues related to the legality and oversight model of the Variable Interest Entity (VIE) structure, but allows future rule making to address these issues by including comprehensive provisions. It is also speculated that the VIE structure regulation may be temporarily suspended in all aspects or will be implemented as a pilot program for certain sensitive industries (such as the private education industry).

The definition of the Foreign Investment Law (Draft) does not distinguish between wholly foreign-owned enterprises and Sino-Foreign joint ventures that have existed for many years. The handling of the convergence of the original laws and the current draft is essential and will bring about a significant impact to enterprises’ management systems. We therefore look to more detailed and operational regulations to solve this problem.

DISCLAIMER
This article is intended solely for informational purposes and does not constitute legal advice. Although the information in this article was obtained from reliable official sources, no guarantee is made with regard to its accuracy and completeness. For more information please visit dandreapartners.com or WeChat: dandreapartners

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Legal columnist Carlo D’Andrea is Chair of the Legal & Competition Working group of the European Union Chamber of Commerce in China; Shanghai Chapter, Coordinator of the Nanjing Working Group of the Italian Chamber of Commerce in China and has taught Chinese law (commercial and contractual) at Rome 3 University. 法律作家代开乐担任中国欧盟商会上海分会法律与竞争工作组主席,中国意大利商会劳动集团的协调员与曾经在罗马三大担任企业咨询课程中中国商法、合同法的课程教授。