Specifically, the FIL describes four types of investment activities that represent foreign investment:

(i)        Foreign investors, separately or jointly, establishing foreign-invested enterprises in mainland China;

(ii)      Foreign investors acquiring shares, equity interests, shares of property or other similar interest in enterprises in mainland China;

(iii)    Foreign investors, separately or jointly, investing in new construction projects in mainland China;

(iv)    Foreign investors making investments through other means as provided by laws, administrative regulations or State Council provisions.

Market Environment：FIL emphasizes the aim of creating a stable, transparent, foreseeable and level-playing market environment (Article 3);

National Treatment: The FIL makes it clear that all national policies in supporting of the development of enterprises shall equally apply to foreign-invested enterprises in accordance with the laws (Article 9); foreign-invested enterprises can equally participate in setting standards in accordance with the laws, and the compulsory standards formulated by the State shall equally apply to foreign-invested enterprises (Article 15); the State shall guarantee that foreign-invested enterprises can participate in government procurement activities through fair competition in accordance with the laws. Products produced and services provided by foreign-invested enterprises within the territory of China shall be treated equally in accordance with the laws in a government procurement (Article 16);

Preferential Treatments: The State may encourage and guide foreign investors to invest in specific industries, fields and areas. Foreign investors and foreign-invested enterprises may enjoy preferential treatments in accordance with laws, administrative regulations or provisions of the State Council (Article 14);

Market Environment: The “investment environment” in the Draft is replaced by “market environment”. In addition, the FIL emphasizes the need to create a “level-playing” market environment;

National Treatment: The exception to the consistent application of national policies in support of the development of enterprises on foreign-invested enterprises, i.e. “except as otherwise provided in laws and regulations”, is replaced by “equally apply to foreign-invested enterprises in accordance with the laws”. The phrase “foreign-invested enterprises can fairly participate in government procurement activities” in the Draft is changed into “foreign-invested enterprises can participate in government procurement activities through fair competition in accordance with the laws”, emphasizing that the FIL only protects lawful activities, and the fairness mainly refers to the process of competition. It is further specified that not only the products, but also the “services” shall be treated equally;

Preferential Treatments: The preferential treatments offered to the foreign investors in the Draft is limited to those explicitly stipulated by laws, administrative regulations or State Council provisions. This can be understood as meaning that none of the national ministries and commissions, local legislature or government may, without a legal ground provided by upper laws, offer any preferential treatments to foreign investors in specific industries, fields or areas through department rules, local laws or regulations;

National Expropriation: The State shall not expropriate foreign investments. Under special circumstances, the State may expropriate or requisite an investment made by foreign investors for public interests in accordance with the laws. Such expropriation or requisition shall be conducted in accordance with legal procedures and fair and reasonable compensation shall be given in a timely manner (Article 20);

Profit Remittance: Foreign investors’ capital contributions, profits, capital gains, proceeds from assets deposition, intellectual property rights royalties, lawfully obtained compensation or indemnity, proceeds from liquidation may be freely remitted inward or outward of China in RMB or foreign currency (Article 21);

Intellectual Property Rights: The State shall protect the intellectual property rights of foreign investors and foreign-invested enterprises. The terms for any technology cooperation shall be determined through fair negotiation between the parties to the investment under the principle of equity. Administrative means shall not be used to compel the transfer of technology (Article 22);

Duty of Confidentiality: Administrative departments and their staff members shall keep confidential in accordance with the laws any business secret of foreign investors or foreign-invested enterprises they are aware of during the performance of their duties, and shall not divulge or illegally provide the same to others (Article 23). A penalty will be imposed in accordance with the laws in case of any violation; if a crime occurs, such staff will be held criminally liable (Article 39);

Administrative Intervention: Foreign investment rules formulated by the State shall be in compliance with laws and regulations, and shall not illegally (i) impair the legitimate rights of or impose additional obligations on foreign-invested enterprises; (ii) set any conditions for market access or exit, or (iii) intervene or influence normal production and operation activities of foreign-invested enterprises without provisions of laws and administrative regulations (Article 24);

Government Commitment: Governments shall strictly abide by all policy commitments made to, and contracts concluded with the foreign investors and foreign-invested enterprises in accordance with the laws (Article 25).

Foreign Investors’ Complaints: The State shall establish and improve a complaint mechanism for foreign-invested enterprises. In case that the mechanism fails to resolve a complaint, foreign investors may apply for administrative review, or institute administrative litigation in accordance with the laws (Article 26).

National Expropriation: The FIL specifically requires that the expropriation and requisition shall only be conducted in accordance with law, and that compensation shall be given in a timely manner;

Profit Remittance: “proceeds from assets deposition” and “proceeds from liquidation” have been included in the scope of remittance in this article, and free remittance “inward” has been added on top of “outward”;

Intellectual Property Rights: The terms for technology cooperation are required to be determined through “fair negotiation under the principle of equity”;

Duty of Confidentiality: The duty of confidentiality and the legal liability for a breach were not contained in the Draft, but a newly added content in the FIL;

Administrative Intervention:

Government intervention (such as impairment of rights, imposition of additional obligations, market assess or exist conditions) is limited to the extent that it is “in compliance with laws and administrative regulations”. This can be understood as meaning that none of the national ministries and commissions, local legislature or government may, without the legal ground provided by upper laws, intervene or restrict foreign investment through department rules, local laws or regulations;

Government Commitment: No substantial changes compared to the Draft.

Foreign Investors’ Complaints: Compared to the Draft, the FIL specifically provides that in case that the mechanism fails to resolve the complaint, foreign investors may apply for administrative review, or institute administrative litigation in accordance with the laws.

(i)        Pre-establishment National Treatment and Negative List administrative system (Article 28);

(ii)      Information Reporting system (Article 34); and

(iii)    National Security Review system (Article 35).

The FIL also adds a new article (Article 33) providing that foreign investors that acquire companies within the territory of China through mergers and acquisitions or participate in the concentration of undertakings by other means shall be subject to the scrutiny of merger control as stipulated by the Anti-Monopoly Law of the People’s Republic of China.

(i)      Violation of the Negative List: Foreign investors shall be ordered to rectify or stop investment activities, or dispose of shares and assets within the prescribed time limit, or take other necessary measures to restore to the original state prior to investment. If there have been any gains derived from such investment, such gains shall be considered illegal and confiscated by the government, and the foreign investors shall bear corresponding legal liability in accordance the laws (Article 36).

(ii)    Violation of the Information Reporting System: Foreign investors shall be ordered to rectify within a prescribed time limit by competent department of commerce; if rectification is not made in time, a penalty of between CNY100,000 and CNY500,000 shall be imposed (Article 37).

(iii)  Violation of laws and regulations: Foreign investors shall be subject to investigation in accordance with laws and blacklisted in credit information systems (Article 38).

(ii)    Exception of Special Industries: For foreign investment administration in financial industries such as banking, securities and insurance, or in financial markets such as securities market and foreign exchange market within the territory of China, where the State has special regulations, such regulations shall be applied for foreign investment in those industries (Article 41).

–    Existing enterprises that have been established without legal person status may, during the 5-year transition period, be transformed to partnerships in accordance with the Partnership Enterprise Law, or limited liability companies or joint-stock companies in accordance with the Company Law.

–    As for an enterprise invested in by a foreign natural person investor, such enterprise can be in the form of individual proprietorship enterprise provided that the Law on Individual Proprietorship Enterprise will be amended to be applied to foreign natural persons^[1].

–    Amendment of articles of associations;

–    Increase or reduction of registered capital;

–    Suspension or dissolution of the company;

–    Split-up or merger of the company.

–    Amendment of articles of associations;

–    Increase or reduction of registered capital;

–    Dissolution or change of company form;

–    Split-up or merger of the company.

–    The technology that can significantly improve the performance, quality or production efficiency of the current product; or

–    The technology that can significantly save raw materials, fuels or power.

–    Employee Bonus and Welfare Reserve

–    Enterprise Development Reserve

Ratio of the above reserves shall be determined by the Board

– Discretionary Reserve

Contribution of statutory reserve shall be 10% of the post-tax profit, but such contribution is not required if the aggregate sum of the statutory reserve reaches 50% of the registered capital.

 We suggest that the Implementing Regulations should further clarify the definition of “Foreign Investor” and “Foreign Investment” in the following aspects:

(i)       Whether “foreign investors” may include foreign or regional governments, and international organizations.

(ii)     Since, in addition to direct investment, the definition of investment includes “indirect investment”, it is not clear whether for an investment in China, the identity of its foreign investor shall be determined by such investor’s ultimate controlling shareholder.

(iii)   It needs to be clarified whether an investment made in China by an overseas company that is controlled by a Chinese company will be classified as “foreign investment”.

We believe that it is necessary to clarify in the Implementing Regulations whether the identity of a “foreign investor” will be determined by the place of registration of the foreign investor that directly holds shares, equity or interest of the invested enterprise in China, or by the place of registration of the ultimate controller of such foreign investor. If it is the latter, a definition of “control” is also required.

Given the increasing number of overseas investments emanating from China, a lack of such criteria may lead to severe confusion regarding whether investment in China conducted by overseas companies directly or indirectly controlled or wholly-owned by Chinese enterprises or natural persons will be governed by the FIL.

Moreover, with increasing numbers of Chinese citizens migrating overseas and foreign citizens becoming resident in China, we suggest that there is a need for clarification as to whether an enterprise invested in China by foreign individuals that acquire Chinese nationality or by Chinese citizens that obtain foreign nationality shall be governed by the FIL.

The FIL provides that there shall be a foreign investment national security review system, without further specifying any detailed rules, such as in terms of the scope and content of the review, requirements of application documents, procedure or time limit of the review, etc. Currently, the only rules that regulate a national security review of foreign investments are the Notice of the General Office of State Council on the Establishment of a Security Review System Pertaining to Mergers and Acquisitions of Domestic Enterprises by Foreign Investors[3] and the Notice of the General Office of State Council on the Promulgation of the Trial Measures on National Security Review for Foreign Investments in Pilot Free Trade Zones[4]. There is no clear legal basis for a national security review of foreign-invested enterprises that will be set up outside free trade zones. We suggest that the Implementing Regulations shall provide for the scope, content and procedures of the national security review for all kinds of foreign investment.

After the FIL comes into force, the Sino-Foreign Cooperative Joint Ventures as a legal form for enterprises shall not exist anymore. Article 21 of the Law on Sino-Foreign Cooperative Joint Ventures provides that “when the Chinese and foreign partners agree in the co-operative enterprise contract that, on the expiry of the term of co-operation, all the fixed assets of the co-operative enterprise shall be owned by the Chinese partner, methods to allow the foreign partner to recover its investment in advance within the term of co-operation may be stipulated in the co-operative enterprise contract.”

As for a Sino-foreign Cooperative Joint Venture adopting the above provision, when it is transformed to a limited liability company in accordance with the Company Law during the 5-year transition period, the investment recovery issue can be resolved by an agreement based on Article 34 of the Company Law, pursuant to which the shareholders may agree that the profit will not be distributed in proportion to their respective contributions to the company’s registered capital.

However, the Company Law does not provide a legal basis pursuant to which all the fixed assets of the company can be owned by the Chinese partner only on the expiry of the term of co-operation. Paragraph 2 of Article 186 of the Company Law provides that the residual assets of a company after liquidation “shall be distributed to shareholders in accordance with the ratio of capital contribution”, without any exceptions. Therefore, we suggest that the Implementing Regulations provide clear guidance on such issue in relation to the transition period.

Article 126 of the Contract Law provides that “parties to a contract with a foreign element may choose the law to be applied in the handling of contractual disputes, except where laws provide otherwise. Where the parties to a contract with a foreign element fail to choose the governing law of the contract, the law of the country with the closest connection to the contract shall be applied.

Sino-foreign equity joint venture contracts, Sino-foreign cooperative enterprise contracts and Sino-foreign contracts for the cooperative exploitation and development of natural resources which are to be performed within the territory of the People’s Republic of China shall be governed by the law of the People’s Republic of China.”

Hence, after the repeal of the FIE Laws, joint venture contracts of Sino-Foreign Equity Joint Ventures that are incorporated in accordance with the Company Law shall still be governed by the Chinese laws. However, in the absence of any rules in the Contract Law requiring the partnership agreement of Sino-Foreign Partnership under the Partnership Enterprise Law to be governed by the Chinese law, whether the parties to the Sino-foreign partnership agreement will be free to choose a foreign governing law, pursuant to the PRC Contract Law?

We suggest that the Implementing Regulations should further clarify this issue. Theoretically, the restriction in Article 126 of the Contract Law on the choice of law refers only to restriction made by laws, thus neither administrative regulations nor department rules may formulate provisions that are not in compliance with the Contract Law.

The definition of “foreign investor” in the FIL does not cover investors from Hong Kong, Macau or Taiwan, whose investments in mainland China were previously considered to be “foreign investment”. Therefore, we suggest that the Implementing Regulations clarify whether the FIL shall apply, by reference, to investment in mainland China made by investors from Hong Kong, Macau and Taiwan.