MEMORANDUM OF

ADVICE
Protection of Foreign Investors by Chinese Law

[DATE]
[COMPANY NAME]
[Company address]
 Table of Contents

Introduction............................................................................................................................................2
Summary About the Law......................................................................................................................2
Foreign Investments Under FIL..........................................................................................................2
Highlights of The New Law..................................................................................................................3
Investment Promotion..........................................................................................................................3
Investment Protection...........................................................................................................................4
Investment Administration...............................................................................................................4
Legal Liabilities..................................................................................................................................5
Negative Lists........................................................................................................................................5
Key Authorities to Oversight Foreign Investment.............................................................................6
Key Concerns........................................................................................................................................6
Interpretation of FIL by Supremes’ People Court.............................................................................7
Actions to Consider..............................................................................................................................8
Conclusion & Recommendation..........................................................................................................8
References.................................................................................................................................................10
Introduction

1. A leading City law firm is on the lookout for analysis of Chinese law which
delivers protection to the investment of overseas investors. The utmost concern is about
the recent legislation and further reflection of the outcomes affecting both China and
foreign investors. Additionally, whether this legislation has capacity to provide either of
them on more level playing field. Henceforth, an advice will be furnished to the company
as desired to establish further pronouncements or actions as deemed appropriate.

Summary About the Law

2. China has always been keen to persuade foreign investments for the past 30
years which resulted in the economic boom which ultimately lead the China at the peak.
Foreign Investment Law (FIL) reflects the commitment by Chinese government to open
up her economy and foreign investment streamline introduced by Peoples’ Congress of
People Republic of China (PRC) and hence became effective since 01 January 2020.
Prior to FIL, there were three laws regulating the foreign enterprises. These laws
include; Wholly Foreign Owned Enterprise (WFOEs), Sino-Foreign Contractual Joint
Venture (SJVs), Sino-Foreign Equity Joint Ventures (EJVs). On the other hand, FIL now
serves as the baseline of laws to prescribe the principles of investment in China. Under
this law foreign enterprises would fall under the same law as domestic enterprises in
China. FIL further unifies different forms of foreign investments like M&A (Merger &
Acquisition) and investments in new projects. Therefore, this new law has brought great
changes to foreign investments regulatory regimes in China

Foreign Investments Under FIL

3. Foreign investment can be of several types, but investments covered under

Foreign Investment Law are delineated below for further clarification:
 FIE (Foreign Investment Enterprise)
Be it jointly with any other investor or established independently.
 Shares acquisition, equities or any other property and interest of an enterprise in
China
 New Project in China be it joint with any other investor or commenced
independently
  Investment in any other under the Foreign Investment Law and Administrative
Regulations
However, all the companies listed in Hong Kong, Macao and Taiwan are treated as
foreign for the determination of Chinese protocols governing the overseas investments.

Highlights of The New Law

4. All the overseas companies functioning in China had criticized about the biased
investment & trade as equated with the Chinese businesses. Foreign investors were
proscribed from capitalizing in certain areas but may perhaps invest in the same unless
the businesses are in joint venture with any Chinese business. This process was
hepatic for the overseas investors which directs the route through Chinese-Foreign
Equity Joint Venture Law, Chinese Foreign Cooperative Joint Venture Law, and Wholly
Foreign Owned Enterprise Law and were cooperatively labelled as “Old FIE Laws”. But
the recent progress of the FIL (Foreign Investment Law) has finally shouldered the
concerns of the foreign investors as their apprehensions have been taken seriously this
time. This law exercise and shields the enforced technology allocation, intellectual
property fortification and fair competition for foreign businesses.

5. Foreign Investment Law (FIL) covers 6 chapters and 42 Articles and the base
concentration of the law is on Foreign Investments Promotion together with protection
and administration. In case of PRC law defilement, this law regulates the legal
accountabilities on both foreign investors and Chinese law. It is pertinent to mention that
implementation has been in effect since January 01, 2020.

Investment Promotion

6. Article 6 in Chapter I and Article 9 in Chapter II of Foreign Investment Law which

describe the Implementation & Regulations and Promotion of Foreign Investments
respectively specifies the equal dealing of foreign investors with respect to access to
Government funds & subsidies, licensing, project applications and so on. As designated
by the Chinese establishments under Article 14 of this law 1 also facilitates the foreign
investors to relish privileged policies in certain sectors and regions. Article 15 directs
FIEs must not be decremented against in such procurement processes with respect to

1
Foreign Investment Law
their manufactured products and provided services. Further following the Article 16 of
FIL which instructs the FIEs to take part in the government procurement through fair
competition. Article 17 of the FIL enables the FIEs to raise capitals through public equity
contributions and debt securities. All the afore-mentioned provisions persuade the
foreign investors to capitalize further in China.

Investment Protection

7. Article 21 under Chapter III of Foreign Investment Laws (FIL) elucidates that all
the capital investments by the foreign investors including IP right royalties, legitimately
attained recompences and any gains from the insolvency or business process can be at
liberty remitted in and out of China in RMB 2 (Ren Min Bi) or in desired foreign currency.
Followed by the Article 22 of the same which implicate protocols disallow any
restrictions on the currency, amount and frequency of such remittances. Furthermore, a
instantaneous collective protection mechanism is provided through Implementing
Regulations which facilitate settlements on clashes ascended from IP (Intellectual
Property) and protection of IP rights of overseas Investors and FIEs under Article 23 of
FLE. More precisely, both the (Article 22 & 23) and Implementing Regulations (Article
24 & 25) discourage the government administrators to compel the FIEs and foreign
investors to unwillingly transfer their technology. It correspondingly empowers
establishments to take effective measures to shield the secrets of trade of foreign
investors that they have earned while performing. Article 25 of FLE guides local
government to must follow the commitment policies and agreements of investments
entered with foreign investors. Unending the protection, compensation shall be provided
to the foreign investors to meet the needed adjustments affecting the commitments.
This also includes the agreements owing to national or social public benefits.

Investment Administration

8. With reference to the prohibition on the investment for foreign investors in

numerous sectors of China, Article 4 & 28 of FLE works together with the Negative list 3
in setting forth the verboten areas of investment in China. It correspondingly directs the
foreign investors offering investment in China to fulfill with the restrictive requirements
relating equity ratios and top-level executives. As the Foreign Investment Law has been
2
Official Currency in China with base unit Yuan
3
2019 Special Administrative Measures for Foreign Investment
operative which subsequently made the Old FIE laws rescinded. FIEs are now subject
to Partnership and PRC Company law which require diverse laws on corporate
governance, profit sharing, voting, transfer of shares and so on. Subsequently, within
the five years of specified transition period, each FIE shall adapt to the appropriate
corporate form and bring up-to-date AoA (Articles of Association) and shareholders
agreements to conform with such rules which are now equally applicable to both foreign
and inland investors. As the adaptation process look as if complicated. Hence, some
instructions and guidelines with detailed executing rules are anticipated from the
commerce. Article 35 of the FLE highlights the requirement for national security
assessment in sensitive industries and sectors by certain foreign investments. Even
though a mechanism is placed since 2006 but enactment has been an immense mark
so far.

Legal Liabilities

9. If the foreign investors capitalize in prohibited investments by the law and fail to
conform with the admission of the investment restrictions in such case foreign investors
will be required whichever to divest or non-compliance may land the investors in critical
accountability under the Foreign Investment Law and PRC law. FIL on the other hand
levies further rigorous requirements on government authorities, directing fair,
transparent & effective dealing along-with facilitation for foreign investors. Government
establishments and people may face legal accountability for breaching specific
provisions of the Implementing Regulations and Foreign Investment Law. In addition,
FIL permits other countries to levy certain counter-measures against China in retort to
the prohibitive and deterring measures.

10. Encouraged Industries Catalogue has covered some sectors that foreign
investors will enjoy with preferential benefits in those sectors. It consists of the freedom
from custom duty on the equipment imported for self-use purpose. In certain regions
and sectors FIEs will enjoy 15% Tax on preferential enterprise revenue. Additionally,
this also counts with the priority land supply on qualified investments and a discount up
to 30% is as well being offered below the mandatory least value for granted land use
rights.
Negative Lists

11. First negative list was published by MFCOM (Ministry of Commerce) in 1995 as
Foreign Investment Catalogue (FIC) where different industries were labelled as
encouraged, restricted or prohibited for purpose of access to foreign investment.
Foreign Investment Catalogue was further replaced by Negative list which was piloted in
2013 at Shanghai, China and was later implemented countrywide. As of statistics of
2019 of Negative List state 40 Industries to be prohibited for foreign investment in
China. MFCOM is further working on updating the list as per their official announcement
made on 27 February 2020. It is predicted that the list will keep on shrinking overtime
especially in the financial sector. Negative List is marked nation-wide legislation
promogulated by Peoples’ Republic of PRC under Foreign Investment Law. Any
updating and amendment is the sole authority reviewed by State Council of People
Republic of China (PRC) on proposal by MOFCOM.

Key Authorities to Oversight Foreign Investment

12. Key authorities responsible to manage all the matter regarding foreign
investment and all the administration is primarily manages by the following:
 NDRC (National Development & Reform Commission)
Responsible for Industrial Policies
 MOFCOM (Ministry of Commerce)
Responsible for International Trade & Anti-trust regulations
 SAMR (State Administration for Market Regulation)
Responsible for Company Registration

Key Concerns

13. Even though the new FIL defines the basic principles pertaining to foreign
investments, but the law and its implicating regulations come with few critics like how to
protect the interest of foreign investors and legitimate rights. As indicated by the China’s
negative list in which certain investments are prohibited by the foreign investors.
Consequently, Foreign Investment Law will regulate indirect investments to prevent
foreign investment from evading negative list by indirect investment. However, the law
does not constitute further about the indirect investment. Hence, the presence of this
complex structure will cripple the law to function properly.

14. As defined above, FIL will help in investments in new projects but there is no
further clarification about what constitutes by new project. It includes whether this
supports contractual investments in China or not, where an investor holds nothing and
relies on contracts and natural resources. How foreign investment management system
will be applicable for such new projects in China. Furthermore, in the past VIEs
(Variable Investment Entities) have been used to overcome all the restrictions in the
certain sector. How these investments would be considered going forward? All these
questions will remain unanswered until unless things are done practically. Further
amendments will follow as soon as government realizes and observe from a practical
level the necessity of recalibration.

Interpretation of FIL by Supremes’ People Court

15. Interpretation on certain issues regarding the implementation of the Foreign

Investment Law was issued on 26 th December 2019 by Supremes’ People Court China
which also took affect on 01 Jan 2020. This interpretation composed of all the guidance
on the questions pertaining to enforceability and effectiveness of foreign investment
agreements along-with all the other agreements like; shareholders agreements, share
transfer agreements and contracts regarding new projects that may arise due to the
negative list system for better administration of foreign investments. This interpretation
clarifies that Chinese courts have no authority to uphold any claim if agreement is void
or not on investments that are not under the negative list and hence are unrestricted. As
both the parties have not completed registration and relevant approval procedures. In
contradiction with the aforesaid statement, Chinese courts have authority to uphold a
claim to be invalid if capitalization is made on restricted sectors under the negative list
by this law. Foreign investors must be mindful about the National Security Review of the
China and focus on proposed transactions and investment be it direct or indirect in the
sectors that are supposed to be reviewed nationally. This should also include the time
required and general requirements needed to take acquire the National Security
approval. As special review is required for the investment, if the proposed investment
does not impact the national security in any way then investment proposal has greater
chances of being approved. While on the other hand, if the investment proposal affects
or impacts the national security in any way then investment will be labelled to be
prohibited. But if the impacts are eliminated effectively by undertaking the conditions in
writing by the investors to accept the condition whatsoever, then a decision may be
made to approve the said investment only if the proposed conditions are met as
mentioned earlier.

Actions to Consider

16. FIL and relevant new regulations entail many different changes. Therefore, all the
foreign investors and their subsidiaries are advised to consider the following in light of
the changes delineated below:
 New regulations taking effect should be monitored accurately along-with the old
regulations being repealed and superseded.
 Brief review of all the new announcements and guidance issued by the regulatory
authorities
 Consultation with the local authorities be considered appropriate about all the
requirements and specific systems being put in place locally for implementation
of the new regime.
 Pertaining to the implementations of new regime, a professional advice must be
sorted for further business steps that need to be considered necessary to comply
with the new regime.
 Long-term business plan which includes initial public offering schedules and exit
methodology.
Conclusion & Recommendation

17. It is still so early to see whether the objectives of the Foreign investment Law will
be seen or not. As details are deficient in the form of execution rules and rules at his
stage. Notwithstanding, this new law has already been received by International
Business Community at large. With the effectiveness of Foreign Investment Law and
various regulations in support, all the laws and regulations that have been effective for
decades and governed the foreign investment in China fall away and new foundation
has finally taken placed as elaborated above in brief. This undoubtedly marks a new era
pertaining to foreign investment in China where a foreign enterprise will be treated the
same as domestic enterprise in many important respects. This new enforcement will
subsequently manage and treat foreign investors with great transparency, accountability
and efficiently. Undoubtedly, there will be additional regulations and guidance by
various authorities to further implement and make the regime perfect every day. This
foreign investment law is a momentous step for China to persuade foreign investors to
capitalize more in China safely and effectively. China’s current foreign legislation
reflects the opening and promotion of foreign investment as the law provides fair and
convenient business environment. Foreign Investment Law protects the investment of
the foreign investor and ensures a fair treatment equated with the domestic businesses.
Keeping the above in view, a clear image arises which can lead to a better
understanding about how the new FIL of China is protecting the foreign investors and
provide both the Chinese and overseas on a more level playing field.
References
Day, J., FEBRUARY 2020. China Further Opens its Market with New "Foreign Investment Law". [Online]
Available at: https://www.jonesday.com

Elen, M., January 22, 2020. What’s Missing in China’s Foreign Investment Law?, s.l.: The Diplomat.

Hub, I. P., 2020. China - Foreign Investment Law of the People's Republic of China. [Online]
Available at: https://investmentpolicy.unctad.org/

masons, P., n.d. China's foreign investment regime. [Online]

Available at: www.pinsentmasons.com

Mckenzi, B., n.d. hina's Foreign Investment Law and Related Regulations Mark a New Era for Foreign
Investment in China, Beijing: Backer Mckenzi.

News, O., 27 February, 2020. Consequences of the new Chinese Foreign Investment Law, s.l.: ORBIS
News.