On 31 December 2019, the State Council of China officially rolled out the Implementation Regulations for the Foreign Investment Law of the PRC (“Implementation Regulations”). Both the Foreign Investment Law (“FIL”) and the implementation Regulations have entered into effect on 1 January 2020. The content of the Implementing Regulations largely corresponds to the provisions of the FIL, while providing more details on certain aspects.
In the early November of 2019, the Ministry of Justice released the draft Implementation Regulations for the Foreign Investment Law (“Draft Regulations”) for public comments. For details of the Draft Regulations, please check out our recent publication for reference.
Compared to the Draft Regulations, the Implementation Regulations expand the number of provisions from 45 to 49 and additionally add the Chapter V for legal liabilities in case of unequal treatment of foreign-invested enterprises (“FIEs”); while modifications are also made on various provisions.
In addition to the Implementation Regulations, various other related accompanying legislations have also entered into force on 1 January 2020, e.g. the Interpretation of the Supreme People's Court on Several Issues Concerning the Application of the Foreign Investment Law. The new FIL, its Implementing Regulations together with other accompanying legislations have brought profound impact on the foreign investment environment in China.
In this article, we will pinpoint the major highlights of the Implementation Regulations and analyze the issues that remain to be clarified.
1. Allowing Chinese Individuals to Participate in FIE
Article 3 of the Implementing Regulations clarifies that Chinese individuals are included in the term “other investor” as used in Article 2 of the FIL. Consequently, it is clear that Chinese individuals are allowed to directly establish joint venture companies together with foreign investors.
2. Emphasizing Equal Treatment for Domestic and Foreign-Invested Enterprises
Based on the FIL, the Implementing Regulations further emphasize that domestic enterprises and FIEs shall be treated equally with regard to government funding arrangements, land supply, tax/fee reductions and exemptions, qualification licensing, project declarations and human resources policies. (Article 6)
Equal treatment shall further be ensured regarding applications to PRC authorities and their treatment (Article 6) as well as in the fields of formulating and amending national standards, industrial standards, local standards and group standards (Article 13), the application of mandatory standards and participation in government procurement (Article 15-17).
3. Enhancing the Foreign Investment Protection
The Implementing Regulations emphasize the strengthening of protection of foreign investments through the following aspects:
4. Investment Administration
Chapter IV of Draft Regulations set out the administration measures carried out by competent administrative authorities as required for FIEs, among which the most noteworthy rules are the information reporting requirement and security review regime as follows:
5. Legal Liabilities of Governmental Authorities and Their Staff
Compared with the Draft Regulations, the Implementation Regulations has added a separate chapter on the responsibilities and liabilities of government authorities and their staff when in violations of the law.
Art. 41, among others, of the Implementation Regulations has set out the following circumstances where the relevant authorities and their staff are subject to legal liabilities:
Issues remain to be clarified
As much clarity as the Implementation Regulations provide as regards with the issues covered by the FIL, more defined interpretation and regulations are expected to be given to elaborate on the following issues:
Compared with the Draft Regulation released back in November 2019, the final version of the Implementation Regulations have incorporated changes with an effort to reflect public comment received and eventually level the playing field for foreign investors. With the effect of FIL and the Implementation Regulations since 2020, it is essential for foreign investors to review their business in China, assess the practical implications and get prepared for the new era so as to ensure a smooth transition.
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