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Significant Amendments to Chinese Foreign Investment Law

Reflecting upon the experiences of the application of the negative list approach in the Free Trade Zones ("FTZ") in Shanghai, Tianjin, Guangdong and Fujian, the Central Government of PRC has decided to expand the application of such approach nationwide.

On 3 September 2016, the National People's Congress ("NPC") Standing Committee of the PRC adopted the Decision of the Standing Committee of the National People's Congress on Amending Four Laws including the Law of the People's Republic of China on Wholly Foreign-Owned Enterprises ("Decision"), which come into force on 1 October 2016. This will bring about significant amendments to the laws on wholly foreign owned enterprises, Sino-foreign equity joint ventures and Sino-foreign contractual joint ventures (collectively referred to as foreign invested enterprises or "FIEs").

The four laws have been amended, with the changes coming into force on 1 October are:

  1. Law of the People's Republic of China on Foreign-owned Enterprises;
  2. Law of the People's Republic of China on Chinese-foreign Equity Joint Ventures;
  3. Law of the People's Republic of China on Chinese-foreign Contractual Joint Ventures; and
  4. Law of the People's Republic of China on the Protection of Investments of Taiwan Compatriot.

The following FTZ regulations will cease to be effective after the implementation of the Decision on 1 October 2016 as these regulations will be replaced by the new laws:

  1. Decision of the Standing Committee of the National People's Congress on Authorizing the State Council to Temporarily Adjust the Relevant Administrative Approval Items Prescribed in Laws in China (Shanghai) Pilot Free Trade Zone, 30 August 2013; and
  2. Decision of the Standing Committee of the National People's Congress on Authorizing the State Council to Temporarily Adjust the Relevant Administrative Approval Items Prescribed by Law in the China (Guangdong) Pilot Free Trade Zone, the China (Tianjin) Pilot Free Trade Zone, the China (Fujian) Pilot Free Trade Zone, and the Expanded Zone of the China (Shanghai) Pilot Free Trade Zone, 28 December 2014.

The amendments will replace the existing Ministry of Commerce ("MOFCOM") approval requirements with the post-registration/post-event filing requirements in respect of the FIEs that are not subject to national market access restrictions.

What also occurred on 3 September 2016 was that the MOFCOM published "Provisional Administrative Rules on Foreign Invested Enterprises' Establishment and Changes (Draft for Comments)" with a consultation period ending on 22 September 2016 ("Administrative Rules"). The final version of the Administrative Rules is expected to become effective on 1 October 2016. The Administrative Rules, as a key measure to implement the Decision, apply to FIEs that are not subject to national market access registrations and apply mutatis mutandis to Hong Kong, Macau and Taiwan invested enterprises that are not subject to national market access restrictions. In addition, foreign-funded investment companies, venture capital enterprises and equity investment enterprises are deemed as FIE-equivalents and governed by the Administrative Rules.

Under the current draft of the Administrative Rules the formation of FIEs and changes to certain key items of the company registration shall be filed within the following time limits via an online filing system. One of the effects of such change in the regulatory regime is that the processing time related to FIE registration will be shortened.

Company formation

After a proposed to be established FIE obtains the pre-registration approval of its company name, an FIE Formation Report must be filed via the online filing system either before the issue of the FIE's business licence by a representative of all of its investors or within 30 days of the issue of the FIE's business licence by a representative of the FIE.

Changes in Company

If an FIE undertakes any of the following changes, a representative of the FIE should file the FIE Change Report via the online filing system within 30 days from the adoption of the relevant resolution of the FIE's internal body with the highest authority or within a period otherwise required by law:

  1. Change in basic FIE registration information including name, address, enterprise form, operating term, operating industry, nature and scope of business, nature of a project, registered capital, total investment value, organisational structure, legal representative, details of the ultimate controlling person and his contact details;
  2. Change in basic information of the FIE's investors including name, nationality, address, type of licence/certificate and licence/certificate number, value of subscribed shares, methods of capital contribution, term by which capital contribution must be fulfilled, source of funding and changes in the investor's type;
  3. Change in shareholding and cooperative interest including any liens, encumbrances or pledges thereof;
  4. merger, spin-off and termination;
  5. Pledges or transfer of foreign investors' proprietary interest;
  6. Pre-mature return of investment to the foreign investor(s) of a Sino-foreign Contractual Joint Venture; and
  7. Sino-foreign Contractual Joint Venture's appointment of a third-party management entity.

It is noteworthy that the change in an FIE's ultimate controlling person and his contact details should be reported through the online filing system. Accordingly, an offshore transaction resulting in a change of an FIE's ultimate controlling person needs to be filed. The interest in collecting information about an FIE's ultimate controlling person can also be found at the "Foreign Investment Law published in January 2015 (draft for comments)" whereby MOFCOM requires that a change in ultimate controlling person of FIEs that are subject to national market access registrations needs to be approved.

However, if, as a result of the change, the FIE becomes subject to national market access registrations, it shall apply for the applicable approvals, instead of making a filing online.

Unlike the previous approval requirements, the completion of the filing process is not a condition precedent to the validity of the formation of or a change in the relevant FIE. Nonetheless, FIEs are required to make accurate and timely filing online. If the online filing by the FIE or its investors is inaccurate or out of time, they could be required to rectify the defects and be fined up to RMB 30,000.

It is expected that the MOFCOM will issue a new negative list for the establishment of a new national standard for market access restrictions. Under the political mandate to further open the Chinese market, it is also expected that the new negative list will be narrower than the catalogues of restricted and prohibited industries for foreign investment under the "Catalogue of Industries for Guiding Foreign Investment".