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On December 23, 2018, the Draft of Foreign Investment Law of the People’s Republic of China (the “Draft”) was released and presented to the Standing Committee of the National People’s Congress for further review. Once approved, the Foreign Investment Law will replace the three existing laws concerning foreign investment: the Law of the People's Republic of China on Wholly Foreign-owned Enterprises, the Law of the People's Republic of China on Sino-foreign Equity Joint Ventures, and the Law of the People's Republic of China on Sino-foreign Cooperative Joint Ventures, and become the sole fundamental legislation in promoting, protecting, and managing foreign investment.
The Draft not only adheres to the principles of encouraging, promoting, and protecting foreign investments, but also constructs a general framework on the following key aspects: definition of foreign investment, investment management, investment promotion, and investment protection.
1、Definition of Foreign Investment
As the Draft prescribes, foreign investment refers to any investment activity directly or indirectly carried out by foreign natural persons, enterprises or other organizations (the “Foreign Investors”), including the following circumstances:
1) Foreign Investors invest in any new project, establish foreign-funded enterprises or increase investments, either alone or together with any other investors;
2) Foreign Investors acquire shares, equities, property shares or any other similar rights and interests of an enterprise within the territory of China by means of merger and acquisition;
3) Foreign Investors invest within the territory of China in any other way stipulated under laws, administrative regulations or provisions of the State Council.
However, the definition does not mention a foreign investor’s controlling domestic enterprises or holding equity in domestic enterprises by contracts, trust or other ways. Whether such arrangement will be accepted as the aforementioned “other way” of foreign investment remains to be seen.
The Draft lists measures for market access and investment management in the General Provisions and Investment Management sections:
1) the pre-establishment national treatment and negative list for foreign investment access (Article 4);
2) Domestic investments and foreign investments will receive equal treatment in the sectors beyond the negative list for foreign investment access (Article 27);
3) Foreign investments that require industry license will receive governmental review under the conditions and procedures equal to those for domestic investments (Article 29);
4) The foreign investment information reporting system will continue, which requires regular reporting on a necessity and strictness basis (Article 31);
5) The security review system will continue (Article 33).
However, the Draft does not clearly stipulate the approval and filing system for foreign-invested enterprises that is playing a key role in the current foreign investment administration. It is noteworthy whether it would indicate the cancellation of the approval and filing procedures for the establishment and change of foreign-invested enterprises.
The Draft clarifies the fair treatments that a foreign-invested enterprise may enjoy in the Investment Promotion section:
1) A foreign-invested enterprise may equally enjoy the governmental preferential policies and participate in standardization work (Articles 14 and 15);
2) A foreign-invested enterprise may equally participate in government procurement activities (Article 16);
3) A foreign-invested enterprise may equally conduct financing through public offering of shares, corporate bonds and other securities in accordance with the law (Article 17).
The Draft confirms the protections that foreign-invested enterprises may enjoy in the Investment Protection section:
1) Reasonable compensation in the event of expropriation (Article 20);
2) Free exchange of foreign currencies (Article 21);
Foreign Investors may freely transfer out, in Renminbi or any other foreign currency, their capital contributions, profits, capital gains, intellectual property royalties, lawfully acquired compensations or indemnities and so.
3) Prohibition of forced transfer of technology (Article 24);
The Draft explicitly prohibits the administrative authorities and its personnel from forcing the transfer of technology.
4) The complaint mechanism for foreign-invested enterprises (Article 25).
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