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New PRC Investment Draft Law

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19th January saw the publication of the draft for the new Foreign Investment Law (FIL) for comments and discussion.This draft represents a further step to align the various, currently divided PRC laws. One governs domestic investments, while the other governs foreign investments in accordance with three main laws for equity joint-ventures (EJVs), cooperative joint-ventures (CJVs) and wholly-foreign owned enterprises (WFOEs). The new FIL looks to abrogate these three laws.

Definition of Investors
In the draft investors are identified as foreign entities / individuals by nationality and by a standard of “control” including “domestic enterprises controlled by any foreign entity or individual”. Furthermore, for the purpose of this law, controlling a domestic enterprise or holding the rights and interests of a domestic enterprise through contracts, trusts and other means is considered foreign investment. Regarding Chinese investors, this new law includes individuals, allowing them to be part of a Foreign Invested Enterprise; previous laws defined Chinese investors only as enterprises and institutions.

New Incorporation System
Under the draft all foreign investors and foreign-invested enterprises shall comply with Chinese domestic laws, namely the PRC company law and the other relevant laws governing domestic investments.With the exception of restricted and prohibited business to foreign investors, they will enjoy native treatment when investing in mainland China. The Catalogue of Special Management Measures will replace the current Catalogue for the Guidance of Foreign Investment Industries, which divides business and industry sectors into different categories; allowed, encouraged, restricted and prohibited. The new Catalogue represents a Negative list similar to that in the Shanghai Free Trade Zone, where the sectors not mentioned are completely open.

Moreover, FIEs shall not be subject to prior approval from MOFCOM to be incorporated; only foreign investment projects under the restricted category of this Negative list shall be subject to access approval by the competent foreign investment department of the State Council (art. 26).

National Security Review
Strong control of the authorities under the National Security Review remains. Under the new draft foreign investors may apply for national security review, but in some circumstances it may be triggered ex officio by any related authority and party, and in this case the authority shall notify the party. The review is proposed for any foreign investment that endangers or may endanger national security. Such a general statement suggests the authorities still maintain great discretion over which investment endangers national security, without any possibility for the foreign investor to apply for an administrative reconsideration or file an administrative lawsuit against the review.

Effect on current VIE and FIEs
This law will affect risky Variable Interest Entity (VIE) structures, used by Chinese and Foreign investors for several reasons, such as to avoid the restrictions and burdensome procedures imposed by Chinese laws on foreign investments, and to raise overseas financial funds in order to be listed on foreign exchange markets. Several well-known giant enterprises are using this kind of structure, but may have to convert, if the draft is enacted.

A FIE lawfully established under the previous regime shall within three years from the effective date of the Law change its organizational form and structure pursuant to Company Law and the other relevant provisions.

The new draft has been long awaited to beef up the liberalisation of certain sectors and ease the procedures and restrictions imposed on foreign investment. The initial purpose was to eliminate the difference in treatment between foreign and local investment. However, this draft does not deliver. The call for comments has ended; now authorities shall study the opinions and work on the draft, which we believe shall come into effect this year. We shall keep you updated.

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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