Dec. 2014 to Feb. 2015 China Bulletin

Giving with One Hand, Taking with the Other:

The Ministry of Commerce released the PRC Foreign Investment Law (Draft for Comments) on January 19 for public comment.

On the positive side, the Draft Law 1) replaces the encouraged, restricted and prohibited industry lists with a single “negative list” of industries restricted or prohibited to foreign investment, 2) replaces the foreign investment approval system and its time-consuming procedures with a simpler reporting system for non-restricted industries, and 3) repeals the current three foreign-invested enterprise laws (for wholly-owned subsidiaries and joint ventures), reverting to the PRC Company Law as the uniform basis for corporate structure and governance.

Less helpfully, the Draft Law also 1) requires disclosure of detailed information about each foreign investment and the ultimate party controlling the investor; 2) includes civil and criminal penalties for filing false information, 3) implements an “effective control” test that prevents use of variable interest entities (VIEs) to invest in restricted or prohibited industries, 4) includes civil and criminal penalties for investing in such industries through VIEs or other indirect means, and 5) raises the level of the foreign investment security review from a departmental regulation to national law, broadening its scope and prohibiting any appeal from a negative determination.

Questions?  Please contact Allan Marson at china.desk@ishimarulaw.com or +1 408-738-0592 #719 for a complimentary consultation on compliance or establishing an office or subsidiary in China.