CBL’s Introduction

This is the Act of Congress passed in China that establishes the modernized regime for foreign direct investment regulation in China, translated by CBL into American English and annotated with links to explain legal concepts in depth. The Act has rules to prevent discrimination against foreign investors in China. The Act is largely modeled on the United States and NAFTA regimes, however, the rules have been heavily adapted for Chinese policy objectives. Note that additional requirements and exceptions are introduced by approximately 25 other regulations, available in American English on CBL’s Foreign Investment Law page.

 

Foreign Investment Act of the People’s Republic of China

(Enacted during the second session of the 13th National People’s Congress on March 15th, 2019)

Table of Contents

Chapter I General Rules

Chapter II Investment Attraction

Chapter III Investment Protection

Chapter IV Investment Administration

Chapter V Legal Liability

Chapter VI Miscellaneous

Chapter I General Rules

Section 1 This Act is made under the Constitution of the People’s Republic of China, with a purpose to enhance national internationalization policy, to encourage foreign investment, protect the legal rights of foreign investors, regulate foreign investment administration, encourage new internationalization strategies, and to improve socialist market economy development.

Section 2 This Act shall apply to foreign investment within the jurisdiction of the People’s Republic of China (hereinafter referred to as “China”).

Foreign investment is defined as any direct or indirect investment activities conducted in China by foreign nationals, foreign entities, or other organizations (hereinafter, a “foreign investor”), which includes the following types:

1) A foreign investor forms a foreign owned entity in China, either independently or jointly with other investors.

2) A foreign investor acquires the shares, equity, community property partition, and other rights and interests of a domestic entity.

3) A foreign investor, either independently or jointly with other investors, makes new investments in China.

4) Any other investments provided by applicable law or administrative regulations.

Foreign owned entities refer to any entity formed and registered in China under Chinese law with full or partial foreign investment.

Section 3 The internationalization policy is implemented to encourage foreign investment within China pursuant to law.

The objective of high-level policy implementation for investment liberalization and facilitation is to establish and develop procedures for foreign investment to create a stable, transparent, predictable, and fair market environment.

Section 4 The government shall adopt a nationwide process for administrate pre-establishment national treatment and exception list for foreign investments.

Pre-establishment national treatment refers to investment access treatment for foreign investors and their investments no less favorable than that offered to Chinese investors and their investments. The Exception List refers to the Special Administrative Procedures for the Admission of Foreign Investments that governs certain industries. Foreign investment in fields not covered by the Exception List shall be eligible for national treatment.

The State Council shall issue or approve Foreign Investment Exception List.

International treaties and agreements made or entered into by the People’s Republic of China that provide for more favorable treatment on the entry of foreign investors should also apply.

Section 5 The State shall protect the investments, profits, and other legal rights of foreign investors within China pursuant to law.

Section 6 All foreign owned entities and foreign investors conducting business in China shall comply with Chinese law and must not threaten national security or the public interest.

Section 7 The cabinet-level jurisdictional commerce agency and investment agency shall be responsible for coordinating foreign investment attraction, rights protection, and administration based on the division of labor. Other cabinet level agencies shall be responsible for coordinating foreign investment attraction, rights protection, and administration falling within their functions.

Investment attraction, protection, and administration shall be the responsibility of the appropriate regional government agencies at or above the county level in accordance with their function as determined by the People’s Governments and legal requirements.

Section 8 Employees of the foreign owned entities shall form a workers’ committee pursuant to law to conduct trade union activities and protect employee legal rights. Foreign owned entities shall provide the necessary conditions for trade union and organization activities.

Chapter II Investment Attraction

Section 9 Foreign owned entities must comply with national industry development policies pursuant to law in a manner equal to local entities.

Section 10. Foreign owned entities will be asked to provide feedback during when formulating new foreign investment laws, rules, and regulations.

Regulatory and judicial documents related to foreign investment shall be promptly published.

Section 11 The State shall provide foreign investors and foreign owned entities with guidance and services on the laws, regulations, and information related to investment projects by creating the foreign investment services system.

Section 12 The State will cooperate with other nations, regions, and international organizations to create bilateral and multilateral investment attraction partnerships for international trading and investment banking.

Section 13 To encourage foreign investment, the State shall create special economic zones or adopt experimental foreign investment policies and regulations in certain parts of China as needed.

Section 14 The state shall encourage and attract foreign investors to invest in specific industries, fields, and regions based on socioeconomic development needs. Foreign investors and foreign owned entities may be entitled to special treatment under applicable law, administrative regulations, or the State Council policies.

Section 15 To improve information disclosure and social supervision, the State guarantees that foreign owned entities shall participate equally in standards formulation pursuant to law.

National mandatory standards shall apply equally to foreign owned entities.

Section 16 The State guarantees the just and equal participation of foreign owned entities in government procurement. All products and services rendered by foreign owned entities in China shall be treated equally and fairly during government procurement as required by law.

Section 17 Foreign owned entities may conduct financing through public stock offerings, securities such as corporate bonds, and other means prescribed by law.

Section 18 Regional governments above the county level have the authority to adopt policies to encourage and facilitate foreign investment in accordance with the statutes, and central and local regional government regulations.

Section 19 The people’s government at all levels and the appropriate agencies shall simplify the procedures, improve efficiency, and optimize government services to provide quality services for foreign investment in accordance with the principles of convenience, efficiency, and transparency.

Foreign investment guidelines, which provide facilities to foreign investors and foreign owned entities, must be amended and published by jurisdictional agencies.

Chapter III Investment Protection

Section 20 Governmental takings of the  investment property of a foreign investor is not permitted.

The State may encounter situations where the investment property of a foreign investor must be subject to a permanent taking or temporary taking for a public use in accordance with law. Such permanent or temporary takings shall be done in accordance with the law, and just compensation must be promptly provided.

Section 21 Liability of foreign investors within China, such as capital contributions, profits, capital gains, proceeds from liability disposal, intellectual property royalties, damages or restitution obtained pursuant to law, as well as the proceeds from liquidation, can be freely remitted in RMB or any other foreign currency permitted under law.

Section 22 The State shall protect the intellectual property of foreign investors, foreign owned entities, intellectual property holders, and other holders of associated rights. Any infringement upon the intellectual property rights of others shall be prosecuted to the full extent of the law.

The State shall encourage technical collaboration in foreign investment, grounded in voluntariness and business norms. Pursuant to the principle of fairness, the investing parties shall determine equally the terms of the technical collaboration. No administrative agency may use administrative powers to force the assignment of a technology.

Section 23 Administrative agencies and their employees shall keep trade secrets of foreign investors and foreign investment, obtained while performing their duties and responsibilities, confidential and refrain from disclosing such to other parties.

Section 24 Foreign investment regulatory documents amended by the people’s government at all levels and other appropriate agencies, shall conform with all applicable laws and legislation. Without the basis of the laws and the administrative regulations, any deviation from the legal rights of foreign owned entities, any changes in the obligations, interference with market access and normal business activities, and production of foreign-invested entities is not allowed

Section 25 All Local people’s government and other appropriate agencies shall fulfill the policy commitments made to foreign investors and foreign owned entities under any agreements executed pursuant to law.

Any changes to policy commitments or agreements related to national or public interest shall be lawfully processed and foreign owned entities and foreign investors shall be indemnified against any resulting losses pursuant to law.

Section 26 A national foreign investment entity complaint mechanism shall be implemented to promptly coordinate, process, and resolve any complaints reported by foreign owned business entities or their investors.

A foreign owned entity or a foreign investor may request coordination and resolution through the foreign investment entity complaint mechanism should an administrative agency or its employees infringe upon their legal rights.

In addition to the above, any administrative action taken by administrative agencies and their employees deemed to be an infringement of the legal rights of a foreign owned entity or a foreign investor may be reviewed and litigated, in addition to seeking coordination and resolution through a foreign investment entity complaint mechanism.

Section 27 Foreign owned entities may set up and voluntarily join chambers of commerce associations pursuant to law. The chambers of commerce and associations are permitted to carry out the related activities pursuant to law and the Articles of Incorporation shall protect the legal rights of its members.

Chapter IV Investment Administration

Section 28 Foreign investors may not invest in sectors where the Foreign Investment Access Exceptions List prohibits foreign investment.

Foreign investors must comply with the requirements restricting foreign investment in certain sectors, as mandated by the Foreign Investment Access Exceptions List.

The principle of equal treatment for domestic and foreign investments shall apply to all industries that are not on the Exception List for Foreign Investment Access.

Section 29 Foreign investor investment projects must be approved and filed in accordance pursuant to the applicable rules.

Section 30 Foreign investors are required to obtain a license prior to investing in certain industries.

Unless otherwise provided, jurisdictional agencies shall review applications submitted by foreign investors under the same conditions and following the same procedures as domestic investors.

Section 31 The Company Act and the Partnership Act shall govern the formation, corporate governance, and operations of foreign owned entities.

Section 32  A business entity that has foreign investors must comply with the law and central government regulations governing labor protection and social insurance, as well as manage taxation, accounting, foreign exchange, and other matters in compliance with the law, central government regulations, and applicable national regulations. They must also cooperate with lawful oversight and audits carried out by any agency with jurisdiction.

Section 33 Any foreign investor’s acquisition of a domestic entity or participation in a market concentration of domestic business entities shall be assessed under the Antitrust Law of the People’s Republic of China.

Section 34 The State shall establish a Foreign Investment Information Reporting System. Foreign investors or foreign owned entities must report their investment information to their jurisdictional commerce agency via the National Business Entity Filing System and the National Business Credit Lookup System.

The content and scope of the foreign investment information report shall be determined under the principles of necessity. Any information that can be obtained through inter-agency information sharing does not need to be reported again.

Section 35 A national foreign investment security review system will be implemented to conduct security reviews of any foreign investors that impact or may impact national security.

The security review decision made pursuant to law shall be final.

Chapter V Legal Liability

Section 36 Where a foreign investor invests in a field prohibited by the foreign investment Exception List, the appropriate jurisdictional agency shall order the cessation of any investment activities, the disposal of all shares and assets, or take other necessary action to achieve restitution and put the entity in the position prior to the investment, and any illegal income accrued as a result will be forfeited.

The jurisdictional agency shall issue any foreign investors or investments in violation of the Foreign Investment Access Exception List a deadline to make the necessary corrections and may take any other action necessary to fulfill the requirements under the Exception List. Any failure to make the necessary corrections shall be managed pursuant to the above paragraph.

Any foreign investment or foreign investor that violates the foreign investment Exception List shall be held liable pursuant to law, in addition to being subject to the management described in the above two paragraphs.

Section 37 Foreign investors and foreign owned entities that violate the Act and fail to comply with the foreign investment information report system shall be given a deadline for correction by the jurisdictional agency and will be subject to a penalty of between 100,000 and 500,000 Yuan per violation.

Section 38 Any violations by foreign owned entities or foreign investors shall be subject to penalties imposed by the jurisdictional agency and the violation shall be recorded in the National Business Credit Lookup System.

Section 39  Administrative agency employees involved in foreign investment attraction, rights protection, and administration who negligently perform their duties, abuse their power, engage in favoritism, or illegally disclose trade secrets to others shall be subject to penalties, including being held criminally liable if their action constitutes a crime.

Chapter VI Miscellaneous

Section 40 The State may take counter-measures against the country or region that takes discriminatory prohibitions, restrictions, or other similar measures as necessary.

Section 41 The State’s other rules for foreign investor investments in banking, securities, insurance, and other financial markets, or in securities or exchange markets shall apply.

Section 46 This Act shall take effect on January 1, 2020. The Law of the People’s Republic of China on China-foreign Equity Joint Ventures, the Law of the People’s Republic of China on China-foreign Collaborative Joint Ventures,  and the Law of the People’s Republic of China on Wholly Foreign-owned Businesses will be repealed.

Foreign owned entities formed and registered under the Law of the People’s Republic of China on China-foreign Equity Joint Ventures, the Law of the People’s Republic of China on China-foreign Collaborative Joint Ventures, and the Law of the People’s Republic of China on Wholly Foreign-owned Businesses prior to this Act taking effect may continue to operate under the same entity form for five years after the Foreign Investment Act takes effect. Specific implementation procedures shall be enacted by the State Council.