China's new foreign investment law

From January 1 next year, a new Law on Foreign Investments, the Negative List and the Catalogue of Encouraged Sectors will come into force in China.

What do companies, private equity funds and other foreign investors need to know about innovations?

  • The law will regulate the activities of all individual foreign investors and enterprises with foreign investments, which include both fully foreign-owned enterprises and joint Chinese-Foreign enterprises. They also include investors from Hong Kong, Macau and Taiwan.
  • The law replaces and updates various existing laws in China governing foreign direct investment and foreign investment. The Chinese government thus seeks to promote foreign investment by better protecting the rights and interests of foreign investors and standardizing foreign investment management.

Changes introduced by this law will include:

  • Extension of national treatment to foreign investment in sectors not directly limited by the Negative List.
  • Providing preferential treatment for foreign investment in the sectors and regions listed in the Sectoral Directory.
  • Ensuring protection of foreign investment and access to domestic capital markets and government contracts in China.
  • Compliance of the law governing foreign investment with relevant corporate and other legislation (with a five-year transition period for existing firms with foreign capital).

The scope of the law covers all forms of interaction, including, inter alia, investments in greenfield projects, M&A transactions and investments in projects.

One of the main changes is the principle of equal treatment of Chinese domestic companies.

Foreign investors in sectors that are not on the Negative List will have equal rights with Chinese companies in the future and will receive the same market access conditions.

Sectors that are on the Negative List and are therefore mainly limited or blocked for foreign investors are excluded.

Protection of intellectual property

The central point of the law is to improve the mechanisms of intellectual property protection in foreign investments. For example, foreign companies will be given a direct right to protect them from government interference with compulsory technology transfer.

The new law explicitly provides that capital gains, royalties and other investment-related income can be freely transferred from mainland China. This protects against some arbitrariness on the part of local authorities, but does not change the fact that foreign companies are still subject to foreign currency and capital controls issued by the CCB.

Exceptions to the Equal Treatment regime

The law does, however, allow for exceptions to the principle of equal treatment depending on the country in which the companies are incorporated. Thanks to the new law, China now explicitly reserves the right to take "appropriate measures" against countries and regions that restrict or "discriminate" against Chinese investment. Thus, acute political conflicts can change the legal status of foreign companies from the affected countries and regions.

The new law also contains measures to protect foreign investment from arbitrary expropriation. However, in special circumstances, the state may expropriate or requisition foreign investments in the public interest. In such cases, the law requires expropriation and requisition in accordance with legally established procedures and with compensation.

In addition, some investments may be subject to national security checks for threats to China's national security. However, decisions taken on national security grounds are final and cannot be appealed.

Any questions about business with China? Please contact us!

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