CBL’s Introduction 

This NDRC policy breakdown, translated by CBL into American English, provides official insight from policymakers into the legislative intent of the Foreign Investment Act of the PRC and how it will apply. The breakdown, written during the passage of the Act, describes the prior foreign investment law regime that applied in China and its inadequacies and explains the problems under the prior regime the superseding Act is intended to address. International investors wanting insight into China’s goals for foreign investment regulation in the 21^st century can find it in the NDRC’s detailed breakdown. This guidance is translated to American English using the User Centered Translation approach.

Breakdown of China’s Foreign Investment Legal Policy – NDRC Governance Standard

 

The Foreign Investment Act is divided into 6 chapters, the General Provisions, Investment Promotion, Investment Protection, Investment Management, Liability and Miscellaneous Provisions, and these overall contain a total of 42 Foreign Investment Acts.

In practice, the essential points of the Foreign Investment Law are the following:

① The consolidation of the Three Business Laws

Section 42 of the Foreign Investment Act provides the three laws governing foreign investment are to be repealed on the date the Foreign Investment Act takes effect. Section 31 of the Foreign Investment Act provides that the legal structure, governance framework, and principal business activities for entities that have foreign investors, shall be governed by the Company Law of the People’s Republic of China (“the Company Law”), the Partnership Law of the People’s Republic of China, and other applicable law, following the repeal of the Three Business Laws.

As provided under Section 42 of the Foreign Investment Act, entities that have foreign investors, which are already in existence and may retain their original legal structure for five years. The State Council is responsible for issuing particular rules.

The Three Business Laws governed of managed foreign investment , business organizations and foreign contracts prior to the consolidation. The Foreign Investment Act is now the uniform law in China for administration foreign investments following after the consolidation of the three laws, but it has been greatly slimmed down as it does not regulate business organizations and foreign contracts.

② Improving the coverage of foreign investment.

Foreign investment can be accomplished through investment activities including formation, acquisition, inception of a new project . Consolidating the three foreign business laws allows foreign investors to set up their companies in China, and does not impose rules for foreign investment through means like acquisitions. There are two sets of rules governing acquisitions. First is the Rules on the Acquisition of Domestic Business Entities by Foreign Investors (No.10 [2006] of the Ministry of Commerce）and the other is the Administrative Procedures for Strategic Investment by Foreign Investors in Public Companies issued by the Ministry of Commerce and other 5 ministries. Section 2 of the Foreign Investment Act affirms it governs investment activities such as foreign investment, including formation, acquisition, inception of a new project. Therefore, acquisitions and inceptions of new projects fall under Foreign Investment Act.

On the topic of direct investment and indirect investment, the Three Business Laws only governed foreign investors who form an entity within China, which is a direct investment, and contained no rules governing indirect investment. The Temporary Rules on the Domestic Investment by Foreign Investors in Entities is the main set of rules on indirect investment, which provides the conditions for foreign investors to invest in China through an entity,. However, it does not establish rules governing investment from the investor entity and its affiliates. Under the Foreign investment Law, foreign investment are divided into direct investment and indirect investment, but lacks rules on “indirect investment”.

③ The case-by-case review system was repealed by the establishment of new systems administrating foreign investment, specifically exception list, information reporting, and security reviews.

Under the traditional three business laws, the Ministry of Commerce reviewed foreign investment on a case by case basis. Each individual foreign investor would need approval from the Ministry of Commerce to form an entity. Sections 4 and 28 of the Foreign Investment Act provides that the government will implement the systems to provide the pre-establishment national treatment, exception list, information reporting, and security review. The case-by-case approval system was terminated on the repeal of the Three Business Laws.

The exception list administration system is governed by Section 4 of the Foreign Investment Act, which provides that the government will formulate administrative processes for pre-establishment national treatment and a foreign investment exception list. The exception list is approved and issued by the State Council. Section 28 of the Foreign Investment Act provides that the exception list should clearly state the sectors where foreign investment is prohibited or restricted. Foreign investors may not invest in sectors designed as prohibited, and for restricted sectors must comply with the investment conditions stated in the exception list. Sectors that are not on the exception list are those where the administration guarantees domestic investment and foreign investment are treated equally.

The foreign investment information reporting system is governed by Section 34 of the Foreign Investment Act, which provides the government will develop a foreign investment information reporting system. The business registration system and the National Business Credit Lookup System will provide a means for foreign investors or their entities to file investment information with the commerce agency with jurisdiction over their area.

The security review process is governed by Section 35 of the Foreign Investment Act. The government will set up a security review process, and will perform a security review of any foreign investment that threatens national security.

Traditionally, the Ministry of Commerce is responsible for these three roles. Furthermore, the Foreign Investment Act provides that foreign investments are also administered by other government agencies, and this includes the required verifications and filings for a foreign investment case (Section 29). A foreign investor must request a license from the agency with jurisdiction for any investments in an industry or sector where license is required by law (Section 30). Foreign owned entities must follow the law to process requirements such as tax, accounting, and foreign exchange with the agency that has jurisdiction (Section 32). Foreign investors acquiring a company within in Mainland China shall file for market concentration review under the PRC Antitrust Law (Section 33). Foreign investment in financial industries like banking, securities and insurance or in managing any investment in financial markets as securities and foreign exchange market are subject to additional regulation (Section 41). These Foreign Investment Act sections provide the statutory framework for foreign investment administration.

④ The legal rights of foreign investors and their entities in China are fully protected, and legal rights already determined or added are as follows:

All national policies that provide economic support to businesses will equally apply to foreign owned entities and domestic entities (Section 19);

The government will guarantee foreign investment can join equally in establishing industry standards, and mandatory governmental standards created by the State will be applied equally to foreign investments (Section 15);

The government will guarantee that foreign investors can lawfully participate in government procurement. The goods that produced and services that rendered by foreign investment in Mainland China shall be afforded equal treatment in government procurement (Section 16);

Foreign investors’ intellectual property will be protected; the legal rights of right holders of intellectual property and other interested persons will be protected; the government will prosecute any violation of intellectual property to the full extent of the law. The government will encourage technical collaboration with foreign investors while respecting their autonomy and business practices. Technology collaborations will be negotiated by the parties to the investment, and will be fair and equitable. No government agencies or their employees may force any technology transfer through administrative means (Section 22);

Government agencies and their employees that learn any trade secrets of a foreign investor or their entities while performing their duties, must maintain confidentiality and will not reveal or illegally provide those secrets to others (Section 23); Local governments and their agencies shall not use regulation of foreign investment to impair the legal rights of or impose additional obligations on foreign investment (Section 24);

Local governments and their agencies will keep policy commitments made to foreign investors and their entities and to lawfully perform all contracts entered into. If the policy commitment or contract must be changed on basis of state or public interests, such changes will be made by following the process mandated by law, and the foreign investor or foreign owned entities involved will receive compensation according to law for losses incurred as a result(Section 25).

Part 2

Legal Counsel for navigating the Foreign Investment Act

Changes and Challenges

The Foreign Investment Act ushers in a new era of national administration for foreign investment and redefines the landscape. However, the Foreign Investment Act only establishes fundamental rules for foreign investment, and leaves implementation to agencies like the State Council and Commerce Ministry. Below, we humbly describe the changes and challenges brought by the Foreign Investment Act to foreign investment practices, offering with explanations and recommendations.

① Can a Chinese individual can set up a foreign owned entity with foreign investors in China?

The Law on Joint Venture Entities and the Law on Sino-Foreign Cooperative Enterprises only permits foreign investors to operate joint venture entities and cooperative enterprises with Chinese companies, but a Chinese individual is not allowed to operate a joint venture entity or cooperative enterprise with foreign investors.

Document No. 10 allows an individual shareholder to obtain approval to continue to be a local investor of an acquired domestic company that converted to a foreign owned entity. The purpose of the rule is to facilitate the merger and acquisitions of domestic companies by foreign investors.

In addition, Section 2 in the Foreign Investment Act uses the ambiguous term “other investors” and does not exclude Chinese individual investors. Does this imply it allows the Chinese individual investor to cooperate with foreign investors to set up a new foreign owned entity?

Section 18 of the PRC Constitution (amended in 2018) permits foreign investors to enter into a variety of business arrangements with Chinese companies organizations. Chinese individuals are not addressed in these laws; therefore, further clarification is needed to determine if Chinese individual can cooperate with a foreign investor to form a new foreign owned entity.

As second issue is whether change of nationality by a Chinese individual means that their domestic investment be reclassified as a foreign investment and thus be governed by the Foreign Investment Act? The Foreign Investment Act (draft version) that was issued in 2015 by the Ministry of Commerce answers yes, unless the State Council provides otherwise. The Foreign Investment Act does not directly address this issue. However a literal interpretation of the Foreign Investment Act also answers the question with a “yes”. Therefore, the Foreign Investment Act applies to a Chinese individual who obtains foreign nationality and therefore is a foreign national person.

Another issue related to a Chinese individuals, if a Chinese individual uses an overseas investment vehicle to invest in China, is that considered a foreign investment? The draft 2015 Foreign Investment Act treats foreign investment in which the beneficial owner is a Chinese investor, as an investment made by Chinese investors. There are no exceptions under the Foreign Investment Act for the determination of foreign investor status, which is based on finding the foreign business entity is registered abroad.

② “Indirect” investment need to be explained

The three foreign capital laws governed only the first layer of domestic investment in China by a foreign investor. A foreign owned entity’s domestic reinvestment is only addressed in the Temporary Rules on the Domestic Investments Made by Foreign Owned Entities. However, this regulation is limited to the investments made by the foreign owned entity; there are no rules governing investment made by the investor entity and its subsidiaries in deeper layers of entity structure.

Section 2 of the Foreign Investment Act defines that foreign investment to include both direct investment and indirect investment of foreign investors, but no further rules on indirect investment.

The exception list system is the primary administrative system for indirect investment, to prevent foreign investors’ use of indirect investment methods to circumvent the exception list. Hence, the following questions need further guidance from the appropriate agencies, including whether China will adopt a look-through rule, to what extent as to whether China will implement look-through rule, if so, will control be the criteria to determine such, whether it’s limited to the sectors provided in exception list, and what administrative methods that will be used: license or filing?.

③”Investment in new projects” need further definition

Under Section 2 of the Foreign Investment Act includes a definition of what can be considered an investment, which includes “investment in new projects”, in addition to new establishment, mergers, and acquisitions. It’s unclear whether an “investment in new projects” refers to investment projects which are based in contractual relationships where entity formation or acquisition in China is not necessary (i.e., natural resource exploration and development concession agreements or infrastructure construction and operation concession agreements). More definition is needed about how the foreign investment management system applies to newer projects (such as processes for information reporting and security reviewing ).

④ There is insufficient definition of the processes for the exception list, information reporting, and security reviews

China started implementing of the exception list management process for foreign investment after the revision of the foreign capital laws in 2016. The Special Administrative Procedures for Foreign Investment Access (Exception List) (2018 Version) (2018 Exception List ) issued by the National Development and Reform Commission (“NDRC”) and the Ministry of Commerce developed a specific process for administering the exception list for foreign investment in China.

With the implementation of the exception list management system, sectors categorized as restricted to foreign investment in the exception list will continue to be administered using the case-by-case review system from the foreign capital laws. The filing system will be used for sectors listed in the exception list as encouraging or allowing foreign investment. The Temporary Procedures for the Establishment and Change of Foreign Owned Entities issued by the Ministry of Commerce govern the implementation of the filing system.

The repeal of the foreign capital laws means there is no legal basis for the existence of approval process, thus new administrative procedures that establish a specific process for administering the foreign management of exception list, must be issued by the State Council and the Ministry of Commerce.

Moreover, the Foreign Investment Act does not have rules on administrative procedures for filing implemented by the Ministry of Commerce for foreign investments not on the exception list. A related process is the foreign investment information reporting process but the Ministry of Commerce has not issued specific rules about it. The Temporary Procedures for Filing Management provides a foundation for improving information administrative procedures.. The Temporary Rules for Filing Administration will likely be invalidated when the Information Reporting Administrative Procedures are issued.

The current regulations on the security review process were issued by the State Council in 2011 in the Notice on the Establishment of the Security Review Process for Foreign Investors’ Mergers and Acquisitions of Domestic Businesses and Regulations of the Ministry of Commerce on the Implementation of the Security Review System for Foreign Investors’ Mergers and Acquisitions of Domestic Entities.

2015 Foreign Investment Act Draft included a chapter that aims to provide for a more comprehensive security review process at the national law level. However, the Foreign Investment Act only addresses fundamental principles in a single provision, Section 35. Therefore, specific rules on the security review process remain to be issued by the State Council.

⑤ Five-year transition period

A five-year transition period will begin when the Foreign Investment Act supersedes the foreign capital laws for entities that have foreign investment and were formed under the foreign capital laws. Those foreign owned entities may retain their original organizational form for another 5 years. Does this imply that despite the repeal of the foreign capital laws, the contracts or article of incorporation of entities that have foreign investment, will remain effective and can be performed during the transition period until amended?

There is a complex issue and requires analysis of the specifics. Some terms in the contracts or article of incorporation will be automatically terminated following the repeal of the foreign capital laws. In particular, there are terms that are derived from the foreign capital laws, such as the provisions delaying effectiveness of a joint venture contract until it has obtained approval. No disputes would arise, even if no amendment is made to those terms. Other provisions requires the agreement of the parties to amend, such as board meeting procedures. Some provisions are mandatory under the Company Law, such as setting up a shareholders’ meeting. Entities that have foreign investors are required to set up a shareholders meeting pursuant to the Company Law. Hence, the joint venture/cooperation contract must be amended, and a shareholders meeting be set up, during the transition period. Some provisions are not mandatory under the Company Law, such as rules of order for board meetings. An articles of incorporation may include provisions that deviate from the default rules of the Company Law so long as they do not contravene mandatory provisions. Therefore, no amendment is required during transition period, even if those provisions conflict with the Company Law.

Do entities transitioning from the three foreign capital laws and their counterparties have to amend joint venture governing documents and obtain (in during five-year transition period, joint venture contract, business collaboration contracts, articles of incorporation, or other documents) Some of those terms will present difficulty. What will be the consequences if the parties have not accomplished by the expiration of five-year transition period? (i.e. reach agreement, get the approval, file and register) This is not addressed by the Foreign Investment Act. Significant certainty lies ahead. For an example of issues that could come up following the expiration of five-year transition period, the business registrar may refuse register essential changes on any one of the following grounds: company’s articles of incorporation is out of compliance with the Company Law. Another possibility is registration is refused because a shareholder objects that the agreement are invalid on the ground it fails to comply with Company Law rules on equity assignments (i.e., in a the joint venture contract, collaboration contract, or articles of incorporation.. How will the law apply in courts or arbitration tribunals?

The five-year transition period’s provision may lead to disputes in the future. The legislative history contains a recommendation to replace the transition period provisions with a grandfather clause for existing entities that have foreign investors that remains in place through its operational term  or early termination. The recommendation was not adopted.

(6) A transition period runs between its enactment and effective date

The Foreign Investment Act will come into force on January 1, 2020. The foreign capital laws continue to govern foreign investment during the period between the dates of enactment and when it comes into force. Amendments to joint venture contract, business collaboration contract, and articles of incorporation will be needed following repeal of the foreign capital laws that previously governed these documents. Could joint venture contract, collaboration contract, or articles of incorporation be drafted directly under the Foreign Investment Act and the Company Law during the period between the interim period of the Foreign Investment Act? This needs further explanation from the jurisdictional agencies.

(7) Revision of the JV contract, business collaboration contract, and articles of incorporation; set up of new shareholders meeting, and amendment board meetings procedures

The most significant features of corporate governance for JVs and cooperative enterprises structured as LLCs is that the board of directors is the ultimate decision-making mechanism, Specific rules for unanimous resolutions of the board of directors are contained in the Administrative Regulations of the Chinese-Foreign Equity Joint Venture Law and the Administrative Rules of the Chinese-Foreign Cooperative Enterprises Law .

Those rules will become history with the repeal of the foreign capital laws. Subsequently, the shareholders meeting will no longer be the ultimate decision-making body in entities organized as an LLC that have foreign investors , and both the shareholders meeting and the board of directors will share authority as provided by the Company Law. Now, a two thirds vote in the shareholders meeting is required to make amendments to the article of incorporation, resolutions to increase or reduce the registered capital, and changes to corporate form such as mergers, spin-off or dissolution, whereas previously these could be unanimously resolved by the board of directors, but by . In addition, there are significant discrepancies between the foreign capital laws and Company law, particularly as to the number of directors, the term of office, and quorum to hold meetings. Thereafter, the Companies Act will govern all foreign entities structured as an LLC or corporation.

When the Foreign Investment Act comes into force, existing JVs/cooperative enterprises should amend their contract and its articles of incorporation as soon as possible to make the shareholders meeting the ultimate decision-making body of the entity, removing the board of directors . ii) Add terms on the powers and voting of the shareholders meeting. iii) Modify the power, functions , composition, voting, and quorum for the board of directors.

A new negotiation about the corporate governance provisions may need to take place among shareholders of a JV/cooperative enterprise when they make changes to the shareholders meeting and the board of directors; membership composition and voting procedures will differ substantially from Company Law..

The joint venture contract, business collaboration contract, or articles of incorporation and its amendment of foreign owned entities will come into force on the approval date, as provided by the foreign capital laws, administrative regulations and amendments. An equity assignment agreement & original contracts, or articles of incorporation will come into force when the approval certificate for the entity is issued, as provided the Rules on the Foreign Investor ‘s Change of Equity in a Foreign Owned Entity.

The NPC decided on amending the foreign investment laws on September 3, 2016, which determined that a filing system will replace the approval system, unless the investment is subject to the National Administrative Procedures for Access. The Ministry of Commerce will not conduct approvals of any joint venture contract, business collaboration contract, or articles of incorporation, unless it is subject to the National Administrative Procedures of Access since then.

The Foreign Investment Act does not make a distinction between contracts for joint venture vs business collaboration, let alone require reviewing a contract or articles of incorporation. This brings an end to requiring such entities to obtain pre-approval for a contract or articles of incorporation. The parties’ rights and obligations will be governed by the entity’s contract or articles of incorporation pursuant to applicable law. Regulatory agencies will not immerse themselves in the entities’ contract or articles of incorporation, but rather disputes will be left to the judiciary.

⑨Governing Law

Chinese law governs the formation, effectiveness, interpretation, performance, and disputes resolution of the joint venture and collaboration contracts under the Administrative Regulations of Joint Venture and the Administrative Regulations of Cooperative Entities. Document No.10 also provides that Chinese Laws governs equity purchase agreements, domestic company capital increase agreements, and asset purchase agreements.

The provisions of the Administrative Regulations on Joint Venture Entities and the Administrative Regulations on Collaborative Entities mentioned above were integrated into the 1999 Contract Law. Section 126 of the Contract Law provided that the laws of the People’s Republic of China govern Sino-Foreign joint venture contracts, Chinese-Foreign contractual joint ventures contracts, and Chinese-Foreign joint exploration and development of natural resources contracts conducted within the territory of the People’s Republic of China.

The concepts and definitions of Sino-Foreign Joint venture Contracts and Chinese-Foreign Contractual Joint Ventures Contracts provided in the Contract Law derive from the Administrative Regulations of Joint Venture and the Administrative Regulations of Collaborative Entities. These regulations will be repealed together with the foreign capital laws. Thus, the Sino-Foreign joint venture contracts and Chinese-Foreign contractual joint ventures contracts provided in the Contract Law will have no basis in law. I recommend the Contract Law be amended, so that the parties to such contracts may choose the law applicable to resolving their disputes arising from the contracts.

Furthermore, Document No.10 contains a provision that Chinese Laws governs equity purchase agreements, domestic company capital increase agreements, and asset purchase agreement; this provision should also be amended after the foreign capital laws are repealed.

⑩ Equity Assignment by Unanimous Consent

Existing law, Administrative Regulations of Joint Venture and the Administrative Regulations of Cooperative Enterprises, currently requires the unanimous consent of other shareholders to a joint venture or cooperative enterprise is required for any assignment of shareholder equity to a third party.

Section 71 of Company Law will govern all equity assignments after the foreign capital laws are repealed. The Company Law is more lenient than the foreign capital laws on the assignment of equity of limited liability companies, which requires majority consent instead of unanimous consent of other the shareholders. Moreover, an dissenting shareholder who is unwilling to buy out the other shareholders will be deemed to have consented to the equity assignment. A variety of approaches to equity assignment in an articles of incorporation is permitted by the Company Law. The Company Law initially gave rise to disputes as to whether consent to the assignment could be applied to a joint venture contract, business collaboration contract, or articles of incorporation. Some parties tried to draft around this risk, by excluding this Company Law rule from applying to their governing documents. The Rules of the Supreme People’s Court on Issues Concerning the Trial of Disputes of Foreign Owned Entities, determined this Company Law rule applies to an entity that has foreign investors. Disputes may nonetheless arise over whether that judicial interpretation will remain effective when the foreign capital laws are repealed.

⑪ Profits need not be distributed in proportion to capital contributions, but liquidation distribution must be done in proportion to capital contributions.

Section 4 of the Sino-Foreign Joint Ventures Law provides that the parties to the joint venture shall share profits and assume risk for losses in proportion to registered capital contributions. The Sino-Foreign Joint Venture Law provides Chinese and foreign investors may privately contract to determine distribution of profits. A cooperative enterprise instead of a joint venture enables parties to share profits disproportionately to the registered capital contribution, they usually can use.

Repealing the foreign capital laws implied applying the Company Law, which allows LLCs to distribute profits pursuant to a shareholder agreement.

The Administrative Regulations of Joint Venture Entities permit investors to negotiate an agreement governing liquidation distributions. The Sino-Foreign Cooperative Enterprises Law permits investors to determine the liquidation distribution in accordance with their contract.

Under the Company Law, liquidation distribution shall be done in proportion to capital contribution. If there is conflict of the liquidation distribution between the then contracts or articles of incorporation and the provisions of the Company Law, problems may arise in the distribution and remittance of funds overseas when the five-year transitional period expires, unless the Company Law is amended.

⑫The Uncertainty of VIE Structure Remains

There has been a vacancy in the oversight of Variable Interest Entity Structure (“VIE Structure”) under Chinese law. The 2015 Foreign Investment Act Draft ventured to regulate VIE Structure as a foreign investment.

VIE Structure is not mentioned in the Foreign Investment Act. However, under Section 2 of the Foreign Investment Act added a catch-all clause in the list of the forms of the foreign investment, namely, other investment provided by laws, administrative regulations, and the State Council. This makes room for VIE oversight in the future.

⑬Takeover between Related Parties

Under Section 11 of the Document No. 10, a takeover between related parties as a takeover in which a domestic business is taken over by an affiliated foreign business legally formed or controlled by a domestic business, entity, or individual is subject to the Ministry of Commerce’s approval. This Section forms the approval procedures of the Ministry of Commerce for a takeover between related parties.

Under the exceptions list regulation system of the Foreign Investment Law, only the foreign investment within the extent of restrictions and prohibitions in the exception list are subject to market access oversight. Logically, a takeover between related parties are not under market access oversight because the way it works is different from how an exceptions list works. Thus, there seems an absence of legal basis if takeovers between related parties are still subject to the approval of the Ministry of Commerce after the repeal of the foreign capital laws. If there is an amendment of No.10 file due to the repeal of the foreign capital laws, but the approval of the Ministry of Commerce in takeover between related parties remains, then authorization from central government regulations is required at least (for example, the exception list shall states such rather than citing the provisions in Document No.10).

⑭ Stock Swap

Under the foreign capital laws an investment is limited to cash, materials, and industrial property right, and excludes stock. Therefore, foreign investors were unable to start a foreign owned entity by stock swap for a while.

The Company Law, as amended in 2005, permitted shareholders to contribute non-monetary assets including stock that can be legally assigned; however, it only permits domestic and foreign investors to start foreign owned entity with their stock in domestic business entities for investment under the Regulations on the Registration of Company Registered Capital and Temporary Regulations of the Ministry of Commerce on Stock Swap of Foreign Owned Entity.

Under Document No.10, it allows foreign investors to take domestic companies with the shares or stock of foreign listed companies or of foreign special purpose vehicles. The provision mentioned above is also admitted under Section 8 of the Temporary Regulations for Filing Administration, it further provides that the required materials for filing includes Overseas Investment Certificate of domestic business entities which has acquired the equity of foreign business.

In 2018, the Ministry of Commerce requested for comments from the public regarding the amendment of the Administration of Strategic Investment，which also provides that the foreign investors can invest listed company for strategic investment with their shares in other foreign business entities or with their own shares issued in a follow-on offering.

With foreign capital laws being repealed, no legal restrictions on stock swap and cross-border stock swap. However, Document No. 10 and the Regulations on the Registration of Company Registered Capital are still valid. It depends on the regulatory agencies to amend such rules to make it clear whether cross-border stock swap will be allowed.

⑮Laws Applicable to Investment Made from Hong Kong, Macau, and Taiwan.

Pursuant to the current management on foreign owned entities, the investment made from Hong Kong, Macau, and Taiwan shall be administrated with reference to the foreign capital laws.

It is not provided in Foreign Investment Act because Hong Kong, Macau and Taiwan investors are not foreign investors. Confirmation is required from the State Council and the Ministry of Commerce to determine whether the investment made from Hong Kong, Macau, and Taiwan shall be administrated with reference to the Foreign Investment Act.

⑯ Repeal or Amend the Effective Regulations and Special Policies for Foreign Investment.

The Foreign Investment Act repeals the foreign capital laws, but provides nothing as to the validity of the administrative regulations, administrative codes, and regulatory documents (“Effective Foreign Investment Regulations”) that created based on the foreign capital laws. The most urgent stuff is to repeal or amend the Effective Foreign Investment Regulations regarding commerce, development and reforms, business filing, foreign exchange, finance and tax.

Furthermore, there are a lot policies relating to the original foreign owned entities. These policies include:          (i) rules of domestic reinvestment of foreign owned entities; (ii) rules of total investment, registered capital, foreign debt management of foreign owned entities; (iii) the investment companies and venture capital companies formed by foreign investors; (iv) merger and acquisition provided in Document No.10 and Measures of the Administration of Strategic Investment. Clarification is required on how such policies would be dealt with and amended.

Conclusions

The reformation of the foreign investment system is a systematic project. The cleanup and adjustment of Effective Foreign Investment Regulations, the development of details for transitional period, and other supporting rules is on the way before the Foreign Investment Act comes into force. We suggest the existing foreign owned entities to complete the adjustment of organizational forms, organizational structure and guidelines in accordance with the Foreign Investment Act, other supporting administrative regulations and administrative codes, so as to take the opportunity of foreign investment under the new system.

 

Authorship

The original Chinese version of this document was attributed to the local Shaoyang office of China’s economic development agency, the NDRC.