Foreign Investment Law
FOREIGN INVESTMENT LAW – NEW OPPORTUNITIES FOR FOREIGN BUSINESSES IN CHINA
The National People’s Congress of the People’s Republic of China passed the Foreign Investment Law on March 15, 2019, replacing an earlier version of the same law. The new law, which has been under negotiation since 2015, will come into effect on January 1, 2020. Although many provisions, such as relaxed approval requirements for foreign investment, are already in place under existing regulations, other provisions offer intriguing possibilities for California investors interested in accessing the large market for goods and services in China.
The “negative list” sets out industries in China in which foreign investment is prohibited or restricted. While no foreign investment is permitted in prohibited industries, investment is permitted in restricted industries subject to certain sector-specific conditions, such as, for example, a minimum percentage of local ownership.
The National People’s Congress of the People’s Republic of China passed the Foreign Investment Law on March 15, 2019, replacing an earlier version of the same law. The new law, which has been under negotiation since 2015, will come into effect on January 1, 2020. Although many provisions, such as relaxed approval requirements for foreign investment, are already in place under existing regulations, other provisions offer intriguing possibilities for California investors interested in accessing the large market for goods and services in China.
The new law, when effective, will complete the replacement of three laws that have applied to foreign investment in joint ventures and wholly-owned subsidiaries in China since the 1980s. Those laws limit investor flexibility. For example, the Chinese-foreign equity joint venture law requires distributions of profit and shareholder representation on the board to reflect investment percentages. Under all three laws, a shareholder wishing to transfer its interest to another party, including another shareholder, must obtain unanimous shareholder consent to the transfer and register or record the transfer with the Ministry of Commerce.
Under the new law, a foreign-owned business can, on the same basis as a locally-owned business, establish or acquire and operate a company in China in any industry that is not included on the so-called “negative list”. The new law mandates that foreign-owned companies and partnerships be established under the PRC Company Law
or Partnership Law
on an equal basis with locally-owned businesses and does not restrict share transfers, thereby affording foreign investors greater flexibility to choose their own corporate governance and profit distribution structures and to buy and sell interests in the business more freely.
The new law affords foreign-owned businesses equal treatment with Chinese-owned businesses in applying for sector-specific licenses, and should extend to restricted industries such as providing education or entertainment services, except as otherwise provided in the negative list or other regulations. Article 9 of the new law states that foreign-invested businesses can apply for government support, such as tax reductions and exemptions to encourage certain industries, on the same basis as locally-owned businesses.
Article 16 of the new law is interesting in that it mandates fair competition in government procurement. China (excluding Hong Kong and Taiwan) did not accede to the Agreement on Government Procurement
when it became a member of the World Trade Organization in 2001 and is not restricted from discriminating against foreign-owned providers. In practice, a foreign-owned company may be barred from bidding on government projects or required to offer substantially more favorable terms than local bidders in order to succeed. Given China’s vast state-owned sector, government procurement represents a very substantial market for goods and services. When the wording of Article 16 is implemented, new opportunities for foreign-invested businesses to supply government entities should open.
As is typical with Chinese laws, the provisions of the new law are quite general and will be supplemented with implementing measures setting out details. Given international pressure on China to level the playing field for foreign investors, some implementing measures should be promulgated within coming months, before the law comes into effect. If those measures are as favorable as provisions of the new law, they should generate substantial interest among businesses that wish to access China’s market.
By Allan Marson, Esq. Allan is principal and founder of Marson Law P.C.
