China introduced its Foreign Investment Law in March 2019, which can inherit effect on 1 January 2020.
The Foreign Investment Law sets out a variety of general principles associated with investment facilitation and protection. for instance, governmental policies in support of enterprise development shall apply equally to FIEs; FIEs may equally participate within the standards formulation procedure and should participate in government procurement activities through fair competition, and governmental officials shall keep confidential the trade secrets of FIEs.
The Foreign Investment Law also seeks to deal with some foreign investors’ concerns about IP protec- tion in China. It encourages the business parties to barter the terms and conditions of technology cooperation under the principle of fairness and prohibit governmental authorities from using administrative means to force foreign business to transfer their technology.
Foreign investments in China had long been subject to a “case-by-case” approval system. Such a “case-by-case” approval system was replaced with a “Negative List” system in 2016.
The Negative List is that the list(s) issued and updated by the State Council of the PRC (or ministries duly authorized by the State Council), which specify the industries during which foreign investments are prohibited or restricted.
The Negative Lists are going to be updated from time to time. Any foreign investor meaning to invest in China should consult the Negative Lists and therefore the Catalogue to verify which category the proposed investment falls within and whether any restrictive measure will apply. There are specific requirements on the company structure, e.g., equity joint venture, and shareholding, e.g., Chinese interest, for a few industries.
Normally the trade Zones will have a separate Negative List, during which there’ll be less restrictive measures than the national Negative List.
FOREIGN INVESTMENT INFORMATION REPORT SYSTEM
Along with the relief of entry restrictions, more emphasis is going to be placed on the post-establishment monitoring of FIEs. One major foreign investment administrative mechanism established under the Foreign Investment Law is an information reporting system, i.e. foreign investors and foreign-invested enterprises are required to report investment information through online systems. Breach of such reporting obligation, if not corrected timely, may end in a fine starting from RMB 100,000 to 500,000.
NATIONAL censoring SYSTEM
China began to establish its national censoring system for foreign investments in 2011, but the system wont to apply to
i. projects where foreign investors acquire or merge Chinese companies; and
ii. foreign investments within trade zone.
The application of the national censoring system are going to be expanded pursuant to the Foreign Investment Law.
In order to encourage foreign investment in specific industries, MOFCOM and National Development and Reform Commission (“NDRC”) have jointly published a listing of Encouraged Industries for Foreign Investment (“Catalogue”), which incorporates an industry catalogue for encouraging foreign investment nationwide and a listing of encouraging industries for foreign investment in 22 specified provinces, most of which are located within the coun- try’s central and western regions. Pursuant to the present Catalogue, a far off investor may enjoy some tax or land-related preferential policies.
Local Investment Guidelines
Apart from the above Negative Lists and Catalogue at the central government level, many local governments have also promulgated their own investment guidelines covering certain industries – like mining, automobile and microcircuit sectors which can contain more detailed requirements and restrictions on foreign investment, and which can not necessarily be according to the above catalogues.
Industry-Specific Policies and Requirements
NATIONAL INDUSTRIAL DEVELOPMENT POLICIES
Although a selected business is open for foreign investment under the above catalogues, it’s going to still be restricted by national industrial policies and access requirements issued by NDRC from time to time, for instance, development policy and plan for the industry, industry and paper-making industry.
REQUIREMENTS UNDER SPECIFIC INDUSTRY REGULATIONS
Certain industries are subject to sector-specific regulations. for instance :
• a far off invested insurance firm is required to possess a minimum capital of RMB200 million.
• Foreign investors aren’t permitted to have a majority interest in car manufacturing or certain sort of telecommunications companies apart from certain pilot areas.
• FA foreign-invested construction company is merely allowed to contract surely sorts of construction projects that are foreign invested or foreign related.
Preferential Treatments In Special Zones
SPECIAL ECONOMIC ZONES
Since the Chinese central government established four Special Economic Zones in Shenzhen, Zhuhai, Shantou and Xiamen in 1979, 14 coastal open cities in 1984, and therefore the Hainan Special Economic Zone in 1988, a spread of “economic and technological development zones” or “new zones” are established throughout China to compete for attracting foreign investment. Local governments in these zones may provide various sorts of preferential treatment to foreign investors, like tax holidays and financial subsidies on a case-by-case basis.
SHANGHAI trade ZONE
On 29 September 2013, the China (Shanghai) Pilot Trade Zone (“Shanghai FTZ”) was officially launched. The Shanghai FTZ consists of 4 existing bonded zones, which can be expanded from 1 March 2015, to hide certain areas in Lujiazui financial district, the Jinqiao development Zone and Zhangjiang Hi-Tech Park. The Shanghai FTZ will cover a neighborhood of 121 square kilometres.
Compared to other areas in China, a more flexible exchange regime, and a more efficient cross-border payment platform, are established within the Shanghai FTZ to facilitate funding of foreign investment. The Shanghai FTZ has also introduced streamlined customs clearance procedures.
In August 2010, the State Council approved the general plan of the Qianhai Shenzhen-Hong Kong Modern industry Cooperation Zone (“Qianhai Zone”) , which is found along the West Coast of the Shenzhen Special Economic Zone. Various policies are issued by the State Council, NDRC, and other government authorities, in support of the Qianhai Zone development.
These policies provide foreign investors, especially Hong Kong business service professionals, with access to certain service sectors that are otherwise restricted to foreign investment. that specializes in finance, modern logistics, information and technology, and other service sectors like education, medical, legal and accounting services, the Qianhai Zone offers investors preferential treatment – ranging from a more flexible exchange regime and cross-border payment system, more options for fundraising, like RMB-denominated bonds, to tax incentives.
Tax incentive is one among the highlights among the policies available within the Qianhai Zone. Eligible investors may enjoy tax preferential treatment including:
• Enterprise tax at a reduced rate of 15 percent (from the standard 25 percent generally applicable in China), for enterprises that engage in 21 designated sectors, including modern logistics, information service, technology service and cultural innovation.
• Individual tax rate capped at 15 percent for eligible foreign professionals – this is often substantially less than the very best rate of 45 percent under the national law.
OTHER trade ZONES
In addition to the Shanghai FTZ, 12 new trade zones are established from 2015 to 2018 in Tianjin, Fujian, Guangdong, Liaoning, Zhejiang, Hubei, Henan, Chongqing, Sichuan, Shaanxi and Hainan. These new zones adopt the Shanghai FTZ model – including the Negative List approach regarding the establishment of foreign investment enterprises (FIEs) – with each that specialize in different industry sectors. For example, the Guangdong zone focuses on co-operation with Hong Kong and Macau service providers; the Fujian zone focuses on co-operation with Taiwan investors; and therefore the Tianjin zone focuses on finance and shipping sectors. The FTZ Negative List applies to all or any trade zones, but the detailed preferential treatment and industrial policy adopted by each trade zone could also be different counting on its own industrial focus.
Since 2003, the govt has entered into a series of agreements with Hong Kong and Macau under the framework of Closer Economic Partnership Arrangement (“CEPA”) – these have granted greater access to the China marketplace for Hong Kong and Macau investors. Goods that originate from Hong Kong and Macau can enjoy reduced tariffs. Hong Kong and Macau investors have also been given greater access to variety of service sectors across the country.
Since 2014, the CEPA framework has been further developed through the conclusion of a series of latest agreements between the Mainland and Hong Kong/Macau, including the CEPA Agreement on Trade Services, the CEPA Investment Agreement, the CEPA Ecotech Agreement and therefore the CEPA Agreement on trade Goods.
These agreements are aimed toward expanding market liberalisation and facilitating trade and investment between the Mainland and Hong Kong/Macau.
The Mainland commits to providing national treatment to Hong Kong/Macau service providers and investors on par with Mainland service providers and investors but the special restrictive measures listed in relevant agreements. The Most-Favoured Treatment provision within the Agreement on trade Services and therefore the Investment Agreement specifies that any preferential treatment the Mainland accords to service providers and investors from other countries or regions are going to be extended to Hong Kong/Macau service providers and investors. In specified sectors, investors from Hong Kong/Macau can enjoy more preferential investment access than other external investors.