In China, a business entity is designated as a foreign owned business entity if it is a company fully or partially owned by a foreign party or a joint venture involving a foreign party. In 2023, China recorded the formation of approximately 54,000 foreign owned business entities with capitalization of 1 trillion CNY, representing a decline of 10% from the prior year. China’s foreign investment laws provide for several types of structures for such entities: joint investment, joint management, wholly foreign-owned, and foreign owned partnerships.
In machine translations, this is often referred to as a “foreign invested enterprise,” however no actual investment is required, only ownership, moreover the applicability is limited to business entities and does not extent to other kinds of enterprises.
Foreign owned business entities in mainland China can be legal parties and may also satisfy the requirements to have independent legal personalities. Additionally, these entities are both protected and governed by China law, with China’s foreign investment laws providing that foreign owned businesses must obey Chinese law and may not impair the public welfare. All Chinese foreign owned business entities are subject to regulation by the appropriate agency with authority to regulate. Under current Chinese law, the lead agency for regulating foreign investment in itself is the Ministry of Commerce.
Comparative Law
The Chinese legislative history states its foreign investment laws were based on the NAFTA and CFIUS regimes originated by the United States, but China has traditionally identified foreign investments based on the entity formed in China and not on the investor. That is to say, a government certification is issued to the entity itself to say it has been invested in by foreign investors. CFIUS on the other hand, refers only to foreign investors. This creates a tremendous divergence between the United States and Chinese regulatory regimes.
In China, a foreign investor can use a proxy shareholder agreement in order to designate their entity as a China owned entity, and a Chinese investor can use Cayman Island entities in order to designate their Chinese company as a foreign owned entity. Thus, foreign owned status for a business entity in China is a matter of personal choice, not nationality.
Further Reading
See our comprehensive resources on China’s Foreign Investment Law. and an overview of FDI regulation in our Foreign Investment Law FAQ.
Relevant Laws
Foreign Investment Act of China (& Administrative Regulations)
Rules on Mergers and Spin-off
Rules for Forming Investment Companies
Translation Guide
See: 外商投资企业