On 31 December 2019, the Implementing Regulations of the Foreign Investment Law of the People's Republic of China (“Implementing Regulations”) have finally been promulgated by the State Council of the People’s Republic of China (“PRC”). Such promulgation was made virtually at the last minute before the implementation of the Foreign Investment Law of the People's Republic of China (“FIL”), which had been promulgated by the National People's Congress on 15 March 2019. Both the FIL and its Implementing Regulations have entered into effect on 1 January 2020. The content of the Implementing Regulations largely corresponds to the provisions of the FIL, while providing more details on certain aspects.

In addition to the Implementing Regulations, various other supporting documents regarding foreign investment have also entered into effect on 1 January 2020, i.e. the Interpretations of the Supreme People's Court on Several Issues Concerning the Application of the Foreign Investment Law of the People's Republic of China promulgated on 26 December 2019, the Measures for the Reporting of Foreign Investment Information promulgated on 30 December 2019, the Announcement on Matters Concerning the Reporting of Information on Foreign Investment promulgated on 31 December 2019, the Circular on Effective Work on Registration of Foreign-invested Enterprises for the Implementation of the Foreign Investment Law promulgated on 28 December 2019, and the Notice on the Reform of “Multi-Report Integration” of Annual Reports promulgated on 16 December 2019. The FIL, its Implementing Regulations and the other above-mentioned legal stipulations have brought considerable changes to the foreign investment regime in the PRC.

Below we summarize some of the key issues of the new regulations and their impact on foreign investment in the PRC:

1. Foreign Investment by Participation of Chinese Individuals

In the past, Chinese individuals were, generally, not allowed to jointly establish cooperative joint venture or equity joint venture companies in the PRC with foreign investors in the form of greenfield projects. This appears to have changed after entry into effect of the Implementing Regulations. Article 3 of the Implementing Regulations clarifies that Chinese individuals are included in the term “other investor” as used in Article 2, paragraph 2, items 1 and 3, of the FIL. According to such provisions of the FIL, foreign investment refers to investment activities directly or indirectly conducted by foreign natural persons, enterprises or other organizations, including, inter alia, the establishment of a foreign-invested enterprise (“FIE”) by a foreign investor within the territory of the PRC, independently or jointly with any other investor, as well as investments by a foreign investor to initiate a new project within the territory of the PRC, independently or jointly with any other investor. Consequently, Chinese individuals should now be allowed to directly establish joint venture companies together with foreign investors. In some regions in the PRC this has already been confirmed by local regulations, e.g. the Administrative Measures on Permitting Domestic Natural Persons to Invest in and Establish Foreign-Invested Enterprises jointly issued on 26 December 2019 by the Shanghai, Jiangsu, Anhui and Zhejiang Market Supervision Administrations (“MSA(s)”).

While the initial draft for comments of the Implementing Regulations provided in Article 35 that a round-trip invested entity would be exempted from the Negative List regulations under the FIL and, thus, de facto be treated as a domestic company, if its investor is an offshore entity which is wholly owned by Chinese individuals, entities or other organizations, and such investment is reviewed by a state-level authority and approved by the State Council, such stipulation has not been implemented in the actual Implementing Regulations as now effective. Thus, it appears rather likely, but not entirely clear, that under the new provisions foreign entities controlled by Chinese individuals are deemed as foreign investors.

2. Emphasis of Equal Treatment for Domestic and Foreign-Invested Enterprises

Based on the FIL, the Implementing Regulations further emphasize that domestic enterprises and FIEs shall be treated equally. FIEs shall be treated equally to domestic enterprises with regard to government funding arrangements, land supply, tax/fee reductions and exemptions, qualification licensing, project declarations and human resources policies (Article 6 of the Implementing Regulations). Equal treatment shall further be ensured regarding applications to PRC authorities and their treatment (Article 6 of the Implementing Regulations) as well as in the fields of formulating and amending national standards, industrial standards, local standards and group standards (Article 13 of the Implementing Regulations), the application of mandatory standards (Article 14 of the Implementing Regulations), participating in government procurement (Articles 15 to 17 of the Implementing Regulations), the protection of intellectual property (Article 23 of the Implementing Regulations) and licensing formalities (Article 35 of the Implementing Regulations).

3. Enhancement of the Foreign Investment Protection

The Implementing Regulations also emphasize the strengthening of protection of foreign investments:

• According to Article 10 of the FIL, normative documents and judgment documents relating to foreign investment shall be published in accordance with the law in due time. Articles 6 and 7 of the Implementing Regulations further state that the government and relevant departments shall disclose the conditions, procedures and timelines, etc. for applications, and review and treat application documents of FIEs and domestic enterprises equally. Further, no foreign investment-related normative documents which have not yet been published may be used as basis for implementing administrative management on foreign investment. In the past, PRC authorities sometimes referred to and based their administrative management of foreign investment on internal, not publicly available rules and guidelines. It is to be hoped that such practice will stop and that the above-mentioned stipulations of the FIL and the Implementing Regulations will be implemented in practice. If so, this will lead to more clarity and improved legal certainty.

• With regard to the expropriation of a foreign investors’ investments by the State for public interests as prescribed by the law in special cases, the FIL stipulates that such expropriation shall be made pursuant to statutory procedures and that fair and reasonable compensation shall be provided in a timely manner. Article 21 of the Implementing Regulations further stresses that the expropriation shall be proceeded in accordance with the statutory procedures and in a non-discriminatory manner with compensation timely made based on the market value of the expropriated investment. Compared to a “fair and reasonable compensation” as stated in the FIL, a “compensation based on the market value” as stated in the Implementing Regulations appears clearer, more specific and more in favor of concerned foreign investors.

• As to cross-border remittances, according to Article 21 of the FIL, a foreign investor may, in accordance with the law, freely transfer inward and outward its contributions, profits, capital gains, income from asset disposal, royalties for intellectual property rights, lawfully obtained compensation or indemnity, income from liquidation and so on within the territory of the PRC in RMB or any foreign currency. Article 22 of the Implementing Regulations adds that such transfers shall not be subject to any illegal restriction by any unit or individual with regard to the currency, the amount and the frequency of the transfers.

Article 22 of the Implementing Regulations further states that the remittance of the income of individuals employed by FIEs, i.e. salary income and other lawful income of foreign employees and employees from Hong Kong, Macau and Taiwan, may be transferred out of the PRC freely after taxation according to PRC tax laws and regulations.

Despite the above, it remains to be seen whether in the future such cross-border remittances will indeed become easier. Such remittances are still subject to foreign exchange control regulations. In order to facilitate remittances, it is not sufficient to only stipulate so in the Implementing Regulations, but the relevant foreign exchange control regulations also need to be amended accordingly.

• According to Article 22 of the FIL, the State shall protect the intellectual property rights of foreign investors and FIEs and protect the legitimate rights and interests of holders of intellectual property rights and relevant right holders. In case of any infringement of intellectual property rights, legal liability shall be investigated strictly in accordance with the law. Further, during the process of foreign investment, the State shall encourage technology cooperation on the basis of free will and business rules. The conditions for technology cooperation shall be determined by all investment parties upon equal negotiations under the principle of fairness and no administrative department or its staff shall force any transfer of technology by administrative means.

To enhance the protection in this regard, Article 24 of the Implementing Regulations further clarifies this stipulation by providing examples of such forbidden administrative means. I.e. no administrative authority (including an organization authorized by law or administrative regulations to administer public matters) or their work personnel may force or force in a disguised way any foreign investor or FIE to transfer its technology by implementation of administrative licensing, implementation of administrative inspection, imposition of administrative punishment, administrative enforcement or other administrative acts of performing administrative duties. Article 43 of the Implementing Regulations stipulates legal liabilities in case an administrative authority or its staff by performing administrative duties, directly or in a disguised way, forces any foreign investor or FIE to transfer its technology. In such case, the main personnel directly in charge of the matter and other personnel directly responsible for the matter shall be imposed with penalties.

Article 23 of the Implementing Regulations further stipulates, in a rather general manner, that the State shall intensify the efforts in punishing intellectual property infringements, that it shall continue to strengthen the enforcement of protection of intellectual property rights, promote the establishment of a mechanism involving different authorities for a fast and efficient protection of intellectual property rights, improve the mechanism for diversified settlement of disputes over intellectual property rights, and equally protect the intellectual property rights of foreign investors and FIEs.

• With regard to trade secrets, according to Article 23 of the FIL, administrative departments and their staff members shall keep confidential any trade secret of foreign investors or FIEs they are aware of during the performance of their duties and they shall not divulge or illegally provide trade secrets to others.

Article 25 of the Implementing Regulations further provides that administrative authorities shall, when performing their duties in accordance with the law, where it is definitely necessary for a foreign investor or a FIE to provide any material or information involving trade secrets, limit the provision thereof to the extent essentially necessary for the performance of duties, and strictly control the scope of access thereto and ensure that no personnel unrelated to the performance of duties may access the relevant materials or information. In addition, administrative authorities shall establish a sound internal management system and take effective measures to protect the trade secrets of foreign investors and FIEs that are acquired during the performance of duties. Where it is necessary to share information with other administrative authorities according to the law, the trade secrets contained in the information shall be treated in a way to prevent disclosure.

• Regarding policy commitments, Article 25 of the FIL stipulates that local People's Governments at all levels and their relevant departments shall strictly keep their policy commitments made to foreign investors and FIEs and that they shall perform all contracts entered into in accordance with the law. If any policy commitment or contract needs to be amended due to national interests or public interests, such change shall be made in accordance with statutory authority and relevant procedures, and the foreign investor or FIE concerned shall be compensated for losses incurred thereby in accordance with the law.

Article 27 of the Implementing Regulations now defines “policy commitments” as any written commitment made by a local People's Government at any level or its relevant departments to foreign investors and FIEs with respect to supporting policies, preferential measures and other means of facilitating foreign investment. Article 28 of the Implementing Regulations further provides that governments shall ensure that no contract is breached due to administrative division adjustments, organization or function adjustments or the replacement of relevant responsible personnel, etc. The above articles provide for more specific guidelines regarding agreements concluded between foreign investors/FIEs and governmental authorities than the FIL and make clear that such commitments and related contracts shall, generally, be kept. Article 41, paragraph 4, of the Implementing Regulations provides for relevant legal liabilities of the governments and their officials in in case they fail to perform their policy commitments made towards foreign investors or FIEs or any legally-executed contracts with foreign investors or FIEs, in case they make policy commitments beyond their statutory authority, or in case they make policy commitments the content of which is not in compliance with laws and regulations. Due to such potential liability, it may be expected that the governments will make policy commitments more cautiously in the future.

• While Article 26 of the FIL only provides for short and general stipulations regarding a complaint mechanism for FIEs, the Implementing Regulations now provide for more specifics. The local People’s Governments above the county level shall designate a department or agency to accept complaints filed by FIEs or their investors within the local area. The PRC Ministry of Commerce (“MoC”) with other departments under the State Council will establish a joint-conference system involving different ministries (which are not further indicated yet) concerning complaints filed by FIEs. The handling of complaints by the local governments shall be guided and supervised at the level of the central government. Article 26 of the FIL and Article 30 of the Implementing Regulations further clarify that, in addition to the complaint mechanism described above, foreign investors and FIEs may apply for administrative review or file for administrative litigation, if an administrative act of an administrative department or its staff infringes the foreign investor’s or the FIEs’ legitimate rights and interests. However, the above-mentioned stipulations are still rather vague, and we expect the relevant authorities to issue additional measures or circulars on how such complaint system will actually work and be implemented in practice.

4. Information Reporting System of Foreign Investment

According to Article 34 of the FIL and Article 38 of the Implementing Regulations, investors or FIEs shall submit relevant information regarding their investment to the competent Authority of Commerce through an online enterprise registration system and the National Enterprise Credit Information Publicity System. The submission of relevant information through an online enterprise registration system and the National Enterprise Credit Information Publicity System is nothing new. Such kind of online systems have already been implemented since October 2016.

Article 39 of the Implementing Regulations states that the content, scope, frequency and detailed procedures of reports on foreign investment information shall be determined and published by the competent department for commerce under the State Council in collaboration with the market supervision and administration department under the State Council in line with the principles of being indeed necessary as well as effective and convenient. Accordingly, the MoC and the State Administration for Market Regulation (“SAMR”) issued the Measures for Reporting of Information on Foreign Investment (the “Measures”), followed by the Announcement on Matters Concerning the Reporting of Information on Foreign Investment (the “Announcement”), a supporting document released by the MoC. Both regulations have also entered into effect on 1 January 2020. Simultaneously, according to Article 35 of the Measures, the Interim Administrative Measures for the Record-filing of the Incorporation and Change of Foreign-invested Enterprises were abolished. This means that the establishment of or corporate changes in FIEs, which do not fall into the Special Administrative Measures for Access of Foreign Investment (“Negative List”), from 1 January 2020 on do not need to be filed with the competent Authority of Commerce for recordal anymore. Instead, the mere reporting of relevant investment information shall be sufficient. These changes also have been confirmed by Article 6 of the Announcement.

According to the Measures, there are several kinds of reports, i.e. initial reports, change reports, de-registration reports and annual reports. To establish a FIE in the PRC, a foreign investor shall submit an initial report through the online enterprise registration system. For the acquisition of equity interests of a domestic enterprise in the PRC, a foreign investor shall submit an initial report through the online enterprise registration system when the investor applies for the registration of changes to the acquired enterprise. Where a change registration with the competent MSA is required in case of any change of relevant information of a FIE as stated in the initial report, a change report shall be submitted to the competent Authority of Commerce through the online enterprise registration system. If a change registration with the competent MSA is not required, still a change report shall be submitted within 20 days after the change. We understand that change reports are required, e.g., in case of a capital increase, relocation, change of the members of the board of directors, etc. De-registration reports do not need to be submitted by the foreign investor/FIE, since the relevant information will be forwarded by the competent MSA to the competent Authority of Commerce through an internal system. Further, the Measures require that a FIE shall submit an annual report for the preceding year through the National Enterprise Credit Information Publicity System between 1 January and 30 June of each year. According to the Notice on the Reform of “Multi-Report Integration” of Annual Reports issued by the SMAR, MoC and the State Administration of Foreign Exchange (“SAFE”), the content of the annual report is basically the same as under the current practice. In addition to the information to be submitted to the MSA, now also certain information for the MoC and the SAFE shall be included in the report. However, details on the items to be reported for the MoC and the SAFE are not clear yet. These new annual report items will not be disclosed to the public.

In addition, according to the Measures, foreign investors or FIEs shall bear relevant legal liabilities, including being ordered to make corrections and being fined, if they fail to submit relevant investment information as required by the Measures and if they do not supplement or correct the relevant information after having received a relevant notice from the competent Authority of Commerce.

The above changes are unlikely to lead to considerable changes for FIEs. Before 1 January 2020, instead of the above-mentioned reports, respective recordals were required to be made by FIEs through the online system. As far as we can currently see, the only real difference is that in the past the competent Authority of Commerce had to review the information submitted by a FIE for completion and obvious flaws, and then issue a recordal notice. Now, it appears that no such review will be made anymore and that no recordal notices will be issued. We have double checked this with Authorities of Commerce in Shanghai, and they have confirmed such understanding. It remains to be seen whether and what implications this will have in practice. Other authorities and institutions, e.g. the SAFE and banks, so far usually took reference to the recordal notice, e.g. for registration of foreign debts.

5. Clarification of Legal Liabilities of Governments and their Officials

Chapter V of the Implementing Regulations, Legal Liabilities, only deals with liabilities of the governments and their departments as well as of authorities and officials, but not with the liabilities of foreign investors or FIEs (which are subject to Articles 36 et. seq. of the FIL). Chapter V of the Implementing Regulations provides for legal liabilities in case of unequal treatment of FIEs, illegal restrictions on equal participation of FIEs in the formulation and amending of standards or applying technical requirements higher than mandatory standards specifically for FIEs, illegally restricting foreign investors from remitting funds into or out of the PRC, failing to fulfill policy commitments, forced technology transfers and unequal treatment of FIEs in government procurement. The above legal liabilities may have, to some extent, a deterrent effect on the relevant governments and their departments, authorities and officials and, thus, facilitate the proper implementation of the FIL. However, Chapter V of the Implementing Regulations fails to provide specifics on the liabilities and, in most instances, only states that the relevant subjects shall “assume legal liabilities in accordance with the laws”. However, the laws actually referred to are unclear and it is, thus, to be hoped that further guidance will be provided in the future.

6. 5-Years Interim Period

On 1 January 2020, the previous special laws and implementing regulations for FIEs, i.e. the Law of the People's Republic of China on Sino-Foreign Equity Joint Ventures, the Law of the People's Republic of China on Sino-Foreign Cooperative Joint Ventures and the Law of the People's Republic of China on Wholly Foreign-owned Enterprises together with their respective implementing regulations, have all been abolished.

Both the FIL and the Implementation Regulations provide for an interim period of 5 years for FIEs to adapt to the new legal requirements and to implement relevant corporate changes. I.e., FIEs which have been established based on the above-mentioned special laws and implementing regulations for FIEs can choose to maintain their current organizational forms not in line with the FIL, its Implementation Regulations and the PRC Company Law (“Outdated Organization”) until 31 December 2024 (“Interim Period”). If relevant FIEs have not implemented the corporate changes within the Interim Period, their applications for any other corporate changes shall not be processed anymore by the competent MSA, and the non-compliant status of such Outdated Organizations shall be made public. Taking a Sino-foreign equity joint venture company as an example, some of the most important corporate changes required by the new legal requirements are as follows:

*Significant matters include amendment of the Articles of Association; increase or reduction of the registered capital; merger, demerger, dissolution or change in company form.

In order to implement the FIL, the SAMR also promulgated the Circular on Effective Work on Registration of Foreign-invested Enterprises for the Implementation of the Foreign Investment Law (“Circular”) which has taken effect on 1 January 2020. The Circular further stipulates that, during the Interim Period, resolutions made by company authorities of Outdated Organizations, even if the relevant company authority would not be competent for such resolution according to the new legal regime (e.g. a resolution by the Board of Directors of a Sino-foreign equity joint venture on an issue which according to the PRC Company Law falls within the responsibility of the shareholders’ meeting), shall still be accepted and processed by the competent MSA.

Article 46 of the Implementing Regulations further states that if joint venture partners have made an agreement on the transfer of equity, distribution of profits and distribution of remaining assets, such agreement will be still valid even after the Outdated Organization has changed its corporate structure in line with the PRC Company Law.

7. Investments by FIEs and Investors from Hong Kong, Macau and Taiwan

• According to Article 47 of the Implementing Regulations, investments to be made by FIEs within the PRC shall also be governed by the FIL and the Implementing Regulations. From a legal perspective, this constitutes a change since in the past, the entities invested by FIEs were regarded as domestic enterprises and not as FIEs. The practical implications in this regard are not entirely clear yet. However, the impact of the above-mentioned stipulation of Article 47 of the Implementing Regulations is likely to be minor since FIEs shall now, to a large extent, be treated equally to domestic enterprises and also in the past, enterprises to be invested by FIEs were subject to the Negative List.

• The FIL keeps silent on investments made by Hong Kong, Macau and Taiwan investors. To clarify this issue, Article 48 of the Implementing Regulations states that investments in the PRC made by investors from Hong Kong and Macau are also governed by the FIL and the Implementing Regulations, except as otherwise provided for by laws, administrative regulations or provisions of the State Council. For investments by investors from Taiwan, Article 48 of the Implementing Regulations further clarifies that the Law on the Protection of Investment by Taiwan Compatriots and its implementing regulations shall apply and that only for matters not covered therein, the FIL and the Implementing Regulations shall apply.

8. Validity of Investment Agreements

The PRC Supreme People's Court (“SPC”) has issued the Interpretations of the Supreme People's Court on Several Issues Concerning the Application of the Foreign Investment Law of the People's Republic of China (“Interpretations”) on 26 December 2019 which have entered into effect on 1 January 2020.

The Interpretations mainly deal with the validity of investment agreements related to foreign investments. According to the Interpretations, investment agreements refer to the relevant agreements formed as a result of direct or indirect investments in the PRC by foreign investors (i.e. foreign natural persons, foreign enterprises or other foreign organizations), including contracts for the establishment of FIEs, share transfer agreements, equity transfer agreements, contracts for the transfer of assets or other similar interests, contracts for new projects, etc. The Interpretations also apply to contractual disputes arising from obtaining of corresponding interests by foreign investors in the form of gifts, the division of assets, the merger of enterprises, the division of enterprises, etc. The Interpretations mainly provide clarifications on the following issues.

• First, if a party to an investment agreement for any sector not covered by the Negative List claims that such agreement is null and void or has never become effective on the grounds that the agreement has not been approved by or registered with the relevant administrative authority, the People's Court shall not support such claim. Where a party concerned claims that an investment agreement is void on the ground that the investments made by foreign investors are in sectors in which foreign investment is prohibited by the Negative List, the People's Court shall uphold the claim.

• Second, where a party concerned claims that an investment contract is invalid because of violation of special administrative measures for sectors in which foreign investment is restricted by the Negative List, the People's Court shall uphold the claim. If, before the People's Court makes an effective judgment, a party concerned takes the measures which are required to meet the requirements for special administrative measures for access and claims that the investment contract set forth in the preceding sentence is valid, such claim shall be upheld.

• Third, even if an investment agreement does not comply with the requirements set out in the Negative List at the time of its execution, it shall be regarded as effective, if the Negative List relaxes the relevant restrictive requirements before an effective judgment of the Peoples’ Court is made.

The Interpretations shall ensure the fair and efficient implementation of the FIL in case of disputes regarding related agreements. From the above, it can be seen that the Interpretations are aimed to promote the validity of investment agreements to the largest extent possible and, thus, to protect the rights and interests of foreign investors.

Conclusion

The entry into effect of the FIL and the Implementing Regulations as well as the other supporting documents is sometimes described as a new era of foreign investment in the PRC. In our view, it is currently not entirely clear whether this will really be the case. While the Implementing Regulations and other supporting documents have, to some extent, provided further details and guidance regarding the implementation of the FIL, they are still rather vague in many aspects and there are still open issues. E.g. the meaning of “new projects” as referred to in the definition of foreign investment in Article 2, paragraph 3, of the FIL is still unclear and many provisions, for example the ones regarding the safety review system and complaints mechanism, still appear incomplete.

Further, it is to be hoped that it will be further clarified whether, and if so which, rules and regulations already implemented under the old foreign investment regime remain applicable after 1 January 2020. In this regard, it shall be noted that according to the Decision of the Ministry of Commerce on Repealing Some Regulations which was promulgated on 28 December 2019 and is effective from 1 January 2020, in total 6 regulations shall be abolished, including the Interim Provisions of the Ministry of Commerce on Capital Contribution in the Form of Equity by Foreign Investment Enterprises, the Several Provisions on Changes in Equity Interest of Investors in Foreign-invested Enterprises and the Provisional Regulations on Several Issues concerning the Establishment of Foreign Investment Companies Limited by Shares. According to the Announcement of the Ministry of Commerce on the Abolition of Certain Regulatory Documents which was promulgated on 25 December 2019 and is effective from 1 January 2020, in total 56 further regulatory documents, such as circulars, notices and announcements, shall be abolished. However, the above decision and announcement appear not to be exhaustive. It is, e.g., still unclear whether the Provisions on the Merger and Acquisition of Domestic Enterprises by Foreign Investors, the Interim Provisions on Investment in China by Foreign-invested Enterprises and the Administrative Measures for Strategic Investment by Foreign Investors in Listed Companies shall be abolished or remain applicable and valid. As set out above, it is, currently, also unclear whether the concept of the total amount of investment of a FIE shall continue to exist or not. To provide for clarity in this regard, relevant rules and regulations should either be expressly abolished, or it should be expressly stated that and to what extent they shall remain applicable and valid.

It is expected that considerably more rules and regulations will be issued in the nearer future to provide more clarity and guidance on the new foreign investment regime in the PRC. In our view, only after the publication of such additional rules and regulations, the real impact of the FIL (and the Implementing Regulations) will be seen and only then it can be assessed whether the new foreign investment regime brings along significant improvements for foreign investment in the PRC compared to the old system or not.