Foreign investment issues

Investment restrictions

What restrictions, fees and taxes exist on foreign investment in or ownership of a project and related companies? Do the restrictions also apply to foreign investors or creditors in the event of foreclosure on the project and related companies? Are there any bilateral investment treaties with key nation states or other international treaties that may afford relief from such restrictions? Would such activities require registration with any government authority?

Foreign investment in real property and projects in China needs to follow the ‘business presence principle’ (ie, an onshore project company needs to be set up to hold the assets). China adopts the ‘negative list’ control on foreign investment, while foreign investment in areas outside of the negative list are allowed.

According to the negative list for foreign investment published in 2018, foreign investment in the following project areas is restricted: (1) the exploration and development of oil and natural gas (excluding coalbed methane, oil shale, oil sands, shale gas, etc) are limited to Sino-foreign joint ventures and cooperation; (2) it is prohibited to invest in exploration and mining of tungsten, molybdenum, tin, antimony, and fluorite; (3) it is prohibited to invest in rare earth exploration, mining and beneficiation; (4) it is prohibited to invest in the exploration, mining and beneficiation of radioactive minerals; (5) it is prohibited to invest in the smelting and processing of radioactive minerals, or production of nuclear fuel; (6) the ground receiving facilities and key parts production for satellite TV broadcasting are restricted; (7) the construction and operation of nuclear power plants must be controlled by the Chinese party; (8) the construction and operation of the gas, heat and water supply and drainage pipe network for a city with population of more than 500,000 must be controlled by the Chinese party; (9) the construction and operation of civil airports must be controlled by the Chinese party, and it is prohibited to invest in air traffic control; (10) foreign ownership in value-added telecommunications service companies must not exceed 50 per cent (excluding e-commerce); and (11) companies engaged in basic telecommunications services (infrastructure) must be controlled by the Chinese party.

Provision of debt financing by foreign investors to project companies in China is generally not deemed as investment, and therefore the foregoing restrictions do not apply, as long as the financing terms do not contain a mechanism for the foreign investor to own the project under some conditions. If the project assets as collateral for the loan must be foreclosed then the assets are usually sold to others, and the proceeds will be applied toward the debt owed.

China has entered into bilateral investment treaties, free trade agreements, or both, with more than 100 foreign countries, and these treaties and agreements all contain provisions on protection to foreign investors. Foreign investment in China generally requires incorporation of an onshore entity, which requires registration with the applicable Administration for Market Regulation, and record filing with the applicable branch of the Ministry of Commerce; approval is required only in certain restricted areas that are listed under the negative list.

The negative list has been updated very recently on 30 June 2019 with further reductions, including, among others, removal of items (1), (2) (except for tungsten) and (8) (except for water supply and drainage pipe network), and adding the following to the exclusion list under item (10): domestic multi-party communications services, store and forward services and call centre services (ie, these areas would now be allowed for foreign investment with no ownership restriction).

Insurance restrictions

What restrictions, fees and taxes exist on insurance policies over project assets provided or guaranteed by foreign insurance companies? May such policies be payable to foreign secured creditors?

The provision of insurance policies in China is a regulated business, so that only insurance companies (including foreign invested insurance companies in China) with a proper licence may provide such services. Reinsurance to foreign reinsurance companies is generally permitted. Insurance policies procured by the project company are usually for the benefit of the project company; there will be difficulties in naming a foreign creditor to be co-insured and have the proceeds from the domestic insurance policy to be paid to the foreign creditor without going through the project company. Foreign creditors may also procure insurance offshore to cover its exposure and risk to the project; the proceeds from such offshore policies will not be subject to any restriction or tax in China.

Worker restrictions

What restrictions exist on bringing in foreign workers, technicians or executives to work on a project?

Foreigners are classified into three categories for the purpose of obtaining a work permit in China. Class A foreigners are considered as highly skilled people, including achieved scientists, entrepreneurs, artists, athletes, doctors and senior executives; class B foreigners are considered as professionals, with at least a bachelor’s degree and two years working experience; other foreigners and those who wish to work in China for a short period (less than 90 days) are put under class C. Class A foreigners are encouraged to work in China and there is no quota limit or age limit; class B foreigners are generally accepted based on market needs, and should not be older than 60; and class C foreigners are subject to quota limitation as may be set by relevant government authority from time to time.

Equipment restrictions

What restrictions exist on the importation of project equipment?

Generally, there are no restrictions on the importation of project equipment, provided that customs clearance is obtained and applicable customs duties and taxes are paid. Equipment meeting certain requirements may enjoy exemption from or reduced rate of customs duties and taxes, provided that they should be subject to supervision by the customs office for a number of years, and cannot be sold or transferred during the supervision period.

It is also possible to import certain equipment for a temporary period (six months, up to two renewals) subject to customs supervision, without incurring customs duties or taxes, by paying a refundable bond to the customs office.

Nationalisation laws

What laws exist regarding the nationalisation or expropriation of project companies and assets? Are any forms of investment specially protected (from nationalisation or expropriation)?

The new PRC Foreign Investment Law, which will come into force on 1 January 2020, reiterates the provisions in existing laws on foreign investment that that state will not expropriate investment made by foreign investors, while under special circumstances, the state may, for the need of the public interest, expropriate or requisition the investment of foreign investors according to law; in the case of expropriation or requisition, it is specified that statutory procedures shall be followed, and fair and reasonable compensation shall be made in a timely manner.

In addition, in the bilateral investment treaties and free trade agreements signed between China and foreign countries, typically there are provisions to protect foreign investment against nationalisation or expropriation, and to require that nationalisation or expropriation must meet the following conditions: for public interest; done in accordance with legal process; without discrimination; and with compensation.