China has been quite successful in encouraging foreign investments since the Sino-Foreign Equity Joint Venture Enterprise Law was promulgated in the beginning of the country’s economic reform in 1979.
With the passage of time, the Chinese government has recognized the limitations of the old case-by-case approval regime which is typically time-consuming and burdensome for foreign investors. The government has sought to test various reform measures as seen through the establishment of several Free Trade Zones and new rules that only applied within the boundaries of these Free Trade Zones.
In early 2015, The Ministry of Commerce of the Government of China (MOFCOM) published a draft Foreign Investment Law for public comments. The draft attracted great attention and extensive discussions as it would represent a complete overhaul of the then existing regime and would supersede the previous foreign investment laws that had been in force for decades. Some drastic reform proposals contained in the draft law were 1) allowing foreign investors pre-establishment national treatment subject to a “negative list” control; 2) establishing a record filing system for foreign investments and post-filing supervision mechanism; 3) introducing the concept of “actual controller” for determining the origin of investments.
To the surprise of many, in October 2016, after almost two years from the announcement of the draft law, the government instead issued amendments to the existing laws which practically provide a pre-establishment national treatment to foreign investors as contemplated for most of foreign investment activities, and effectively establish a “negative list” filing system under the current regime. Both the establishment of a Foreign Invested Enterprise (FIE) and major changes to it must be filed. Major changes include a change of basic information of the FIE and investors, change of equity interest, and transfer of assets, etc. For establishment of a new FIE, the filing procedure should be completed either prior to or within 30 days after the formation of the FIE. For any change of company particulars to the FIE after its formation, filings should be completed within 30 days of the change. Foreign investors are required to submit documents electronically on an online platform. The filing will be reviewed and processed by municipal or provincial MOFCOM offices within three working days.
The recent amendments represent an incremental step toward the direction of reform. While eliminating the approval requirements for the majority of foreign investment activities, disappointingly foreign investors will still be subject to the previous foreign investment laws and regulations. Potential conflicts remain to be seen and will need to be addressed; the uncertainties in the legal status of many variable interest entities (VIEs) continue to linger. It’s clear that the Chinese government has decided to tackle the issues with a compromise, and will likely continue on the path to re-examine the existing laws and statutes and hopefully make further reforms to lead to a more efficient and transparent system.
The International Practice Group of Garvey Schubert Barer is a cross-disciplinary group of attorneys practicing in areas ranging from business transactions, immigration, maritime, government regulatory work, transportation and logistics, and estate planning. The group members include bilingual and multicultural attorneys who are well-versed in handling these subject matters in a cross-border context. The firm’s attorneys have been actively practicing in the international arena since the early 1970s.