On December 26, 2019, Premier Li Keqiang of the State Council signed a State Council decree promulgating the Implementation Regulation on Foreign Investment Law of the People's Republic of China (hereinafter referred to as the Implementation Regulation), which will come into effect on January 1, 2020. A few days ago, officials of the Ministry of Justice, the Ministry of Commerce, and the National Development and Reform Commission answered questions from journalists on issues related to the Implementation Regulation.

Q: Why is it necessary to formulate the Implementation Regulation and implement it in sync with the Foreign Investment Law?

A: On March 15, 2019, the Second Session of the 13th National People's Congress passed the Foreign Investment Law of the People's Republic of China, which will come into effect on January 1, 2020. The Foreign Investment Law takes stock of the experience of China's foreign investment legal system in the past 40 years of reform and opening up, adapts to the new situation and requirements, and establishes the basic framework of China's new foreign investment legal system. The Foreign Investment Law is the new basic law in the field of foreign investment in China covering access, promotion, protection and administration of foreign investment. It serves as a strong legal guarantee for pursuing higher-level opening up.

Establishing and improving supporting regulations and refining the main legal system identified by the Foreign Investment Law are of great significance for ensuring the effective implementation of the Foreign Investment Law. The CPC Central Committee and the State Council attach great importance to the implementation of the Foreign Investment Law and the establishment of supporting regulations. General Secretary Xi Jinping pointed out that it is necessary to bring forward supporting regulations, ensure the strict implementation of the Foreign Investment Law, continue to improve the market-oriented, law-based, and international business environment, and promote opening up at a higher level. Premier Li Keqiang emphasizes that it is necessary to speed up the formulation of supporting regulations, refine the main legal system identified in the Foreign Investment Law, set feasible specific rule, and ensure that they are implemented simultaneously with the Foreign Investment Law. Formulating a supporting regulation of the Foreign Investment Law was incorporated in the State Council's legislation work plan in 2019. In order to implement the decision and arrangement of the CPC Central Committee and the State Council, the Ministry of Justice, together with the Ministry of Commerce, the National Development and Reform Commission and other ministries, drafted and formed the Implementation Regulation on Foreign Investment Law of the People's Republic of China (Draft) based on considerations of opinions from various parties and repeated revisions. The Implementation Regulation was deliberated and approved by the 74th executive meeting of the State Council on December 12, 2019. On December 26, 2019, Premier Li Keqiang signed the State Council decree No. 723 and promulgated the Implementation Regulation, which will come into effect concurrently with the Foreign Investment Law on January 1, 2020.

Q: What is the general idea of formulating the Implementation Regulation?

A: The Implementation Regulation is formulated with Xi Jinping Thought on Socialism with Chinese characteristics for a New Era as guidance. The formulation is a step to thoroughly implement the CPC Central Committee and the State Council's decision and deployment to pursue a higher level of opening up. It fits the legislation positioning of the supporting administrative regulations of the Foreign Investment Law and strictly follows the principles and purposes of the Foreign Investment Law. The Implementation Regulation highlights promotion and protection of foreign investment and aims to continue to improve the foreign investment environment, further boost foreign investors’ confidence and stabilize investment expectations. In terms of the content, the Implementation Regulation contains provisions on as many matters as possible that need to be made clear by the administrative regulation to ensure effective implementation of the Foreign Investment Law. Meanwhile, the Regulation also leaves room for relevant regulators to issue rules or make decisions in actual implementation on pertinent matters.

Q: What about seeking comments in the formulation of the Implementation Regulation?

A: During the formulation of the Implementation Regulation, the drafting agency strictly followed the relevant requirements of democratic legislation and listened to the opinions of various parties, especially foreign-invested enterprises and relevant foreign chambers of commerce. When the drafting work began in April 2019, letters were sent to various ministries under the State Council, relevant local governments, industry associations, lawyers associations, and the chambers of commerce of the U.S., the European Union, Japan and others in China to collect their needs and suggestions on how to refine the Foreign Investment Law. A preliminary draft was produced on this basis. After the draft for comments was formed in October 2019, opinions from more than 200 organizations including relevant central authorities, local governments, foreign-invested enterprises, relevant associations and foreign chambers of commerce in China, law firms, research institutions, etc. were received in writing. A symposium was held to hear the opinions of more than 20 foreign-invested enterprises and relevant lawyers, experts and scholars. From November 1st to December 1st, 2019, the draft was published online for public comments. All parties have paid close attention to the formulation of the Implementation Regulation and put forward many insightful opinions and suggestions. The Ministry of Justice, together with the Ministry of Commerce, the National Development and Reform Commission and other ministries, looked carefully into those comments, absorbed and adopted them as much as possible and repeatedly revised and improved the draft for comments. It is fair to say that the process of soliciting opinions is also a process of building consensus, and the Implementation Regulation is an outcome of pooling wisdom of various parties.

Q: What detailed rules on investment promotion have been formulated by the Regulations for the Implementation of the Foreign Investment Law of China (the Regulations)?

A: The active promotion of FDI is one of the main purposes of the Foreign Investment Law. The Regulations have provided detailed rules on the Chapter of investment promotion under the Foreign Investment Law in the following areas.

First, foreign-invested enterprises will be treated equally in the application of various policies supporting business development by China in accordance with law. The Regulations provides that the government and its related departments shall treat foreign-invested enterprises and domestic-funded enterprises equally in accordance with law in terms of government funding arrangements, land supply, tax and fee reductions and exemptions, qualification permits, standard formulation, project declaration, and human resources policies. The policies supporting the development of enterprises should be published according to law. For matters that are handled based on business applications during the implementation of the policy, the government and its related departments should make public the requirements, procedures and time limits of the application, and shall treat foreign-invested enterprises and domestic-funded enterprises equally during the review in accordance with law.

Second, improve the transparency of policies related to foreign investment. The Regulations provides that during the formulation of laws, regulations, rules, and normative documents related to foreign investment, opinions and suggestions should be solicited from foreign-invested enterprises and related chambers of commerce and associations. Regarding opinions and suggestions on issues that widely reflected or involve major rights and obligations of foreign-invested enterprises, feedback should be provided through appropriate means. Normative documents relating to foreign investment shall be published in a timely manner in accordance with law, and those that have not been published shall not be considered as the basis for administration. For normative documents closely related to the production and operation of foreign-invested enterprises, the time between issuance and implementation shall be reasonably determined in light of actual circumstances.

Third, encourage and guide foreign investment. The Regulations provides that the state shall, in accordance with the needs of national economic and social development, formulate a catalogue for the guidance of industries for foreign investment, listing specific industries, fields and regions that encourage and guide foreign investors to invest in. Foreign investors and foreign-invested enterprises may enjoy preferential treatment in finance, taxation, finance, land use and other areas in accordance with laws, administrative regulations and rules of the State Council. Foreign investors who expand their investment in China with investment income from China shall enjoy corresponding preferential treatment in accordance with law.

Fourth, guarantee that foreign-invested companies could equally participate in standardization work according to law. The Regulations makes it clear that foreign-invested enterprises can participate in the formulation and revision of national standards, industry standards, local standards, and organization standards on an equal basis with domestic-funded enterprises in accordance with law. Foreign-invested enterprises may put forward proposals for standards to the standardization administrative department and relevant administrative departments, provide opinion and suggestions in the process of standard proposal, drafting and technical review, and feedback and evaluation of standard implementation, and conduct the relevant work of standard drafting, technical reviews and foreign language translation in accordance with regulations. The compulsory standards formulated by the state shall be applied equally to foreign-invested enterprises and domestic-funded enterprises, and technical requirements higher than the mandatory standards shall not be specifically applied to foreign-invested enterprises.

Fifth, guarantee that foreign-invested companies could participate in government procurement activities equally and according to law. The government and its relevant departments shall not obstruct or restrict foreign-invested enterprises from freely entering the government procurement market in their region and industry. The purchasers and agencies of government procurement shall not apply differential or discriminatory treatment to foreign-invested enterprises in terms of the publication of government procurement information, determination of supplier conditions and qualification review, and bid evaluation standards; the supplier shall not be restricted by ownership, form of organization, shareholding structure, investor nationality, product or service brands and other unreasonable conditions; products and services provided by foreign-invested enterprises within China shall not be treated differently from domestic-funded enterprises. Foreign-invested enterprises may make inquiries and raise questions about government procurement activities to purchasers and procurement agencies, and lodge complaints to government procurement supervision and administration departments.

Q: What detailed rules on investment protection, which have been closely followed by foreign investors and foreign-invested companies, have been formulated by the Regulations?

A: There are mainly rules in five areas: First, under special conditions the state may expropriate foreign investor's investment for the need of public interests, while the process shall be conducted in a non-discriminatory manner in accordance with legal procedures, and timely compensation shall be made according to the market value of such expropriated investment. If foreign investors are not satisfied with the decision on expropriation, they may apply for administrative review or bring an administrative suit in accordance with laws. Second, administrative organs and their employees may not use administrative licensing, administrative inspections, administrative punishments, administrative coercion, or other administrative means to force or disguisedly force foreign investors and foreign-invested enterprises to transfer technology. If administrative organs, in performing their duties in accordance with law, require foreign investors or foreign-invested enterprises to provide information involving trade secrets, it shall be limited to the extent necessary for the performance of their duties, and shall strictly control the scope of people with access to the information. Administrative organs shall establish and improve their internal management systems and take effective measures to protect the trade secrets of foreign investors and foreign-invested enterprises that are learned during the course of performing their duties. Third, normative documents formulated by the government and its relevant departments that involve foreign investment shall go through legality review in accordance with the provisions of the State Council. Fourth, policy commitment has been clearly defined and the government shall honor its policy commitments. It is clearly specified that the local governments at all levels and their relevant departments may not breach contracts on the grounds of administrative division adjustment, change of government, institutional or functional adjustment, and related personnel replacement. Fifth, the establishment and operation of a complaint mechanism for foreign-invested enterprises are further specified and detailed rules have been given.

Q: After the implementation of the Foreign Investment Law and the Regulations for its Implementation, are review, approval and registration still required for the establishment of foreign-invested companies and other matters?

A: The review, approval and registration for the establishment of foreign-invested companies and other matters are one of the FDI administration systems under the three laws on foreign investment, the Law of the People's Republic of China on Chinese-Foreign Equity Joint Ventures, the Law of the People's Republic of China on Wholly Foreign-owned Enterprises and the Law of the People's Republic of China on Sino-Foreign Cooperative Joint Ventures, and their supporting administrative regulations. The Foreign Investment Law and the Regulations for its implementation shall come into effect as of January 1, 2020 and the three laws above, their implementation rules and the Interim Provisions Concerning Contract Period of Chinese-Foreign Equity Joint Ventures shall be repealed simultaneously. The system of review, approval and registration for the establishment of foreign-invested companies under such laws and administrative regulations will no longer be implemented. This is an important reform to implement the administration system of pre-establishment national treatment plus negative lists under the Foreign Investment Law, making major changes to the foreign investment administration system. It will further simplify the procedure for the establishment of foreign-invested companies and create a more enabling environment for foreign investment.

Q: How to ensure that the negative list system governing market access for foreign investment is implemented in real earnest?

A: It is established in the Foreign Investment Law (FIL) that foreign investment will be granted pre-establishment national treatment on the basis of negative list, representing a major reform to the foreign investment regime in China. According to the FIL, foreign investors may not invest in areas prohibited by the negative list, or areas restricted by the negative list unless they meet the requirements set out in the negative list. The requirements refer to special administrative measures to limit market access, such as equity caps, nationality of senior management, etc., and must be satisfied throughout the process of investment. To ensure the implementation of the negative list, it is clearly set forth in the Implementing Rules that: as the authorities discharge duties, they must not grant license to, register businesses for foreign investors if they do not meet the requirements to invest in the restricted areas according to the negative list; they must not grant approval to fixed-asset investment projects unless the requirements in the negative list are met. The authorities should step up supervision of the implementation of the negative list. Foreign investments into prohibited areas or violations of the special administrative measures should be dealt with in accordance with Article 36 of the FIL. The rationale behind this rule is to implement the negative list within the current institutional framework, and make sure the authorities exercise supervision at each point as they discharge duties and step up compliance oversight, so as to put the entire process under supervision. They should both properly manage the areas within the negative list and keep to the spirit of pre-establishment national treatment and the reform to streamline administration, delegate power and improve government service. No new items should be subject to administrative approval.

Q: How can the Implementing Rules enable smooth transition of the organizational structure of the existing FIEs?

A: According to Article 31 of the Foreign Investment Law, forms of organization, organization structures and activities of FIEs shall be governed by the provisions of the Company Law and the Law of the Partnership Enterprise of the People’s Republic of China. According to Article 42, FIEs that were established before the implementation of this Law in accordance with the Law on Sino-Foreign Equity Joint Ventures, the Law on Wholly Foreign-owned Enterprises, and the Law on Sino-Foreign Contractual Joint Ventures may retain their original forms of business organizations within five years after the implementation of this Law. The details shall be prescribed by the State Council. To implement these provisions and enable smooth transition of the organizational structure of the existing FIEs, the Implementing Rules have set forth arrangement on transition period: Within five years after the FIL takes effect, FIEs may adjust their forms and structures of organization and register for changes in accordance with the law. They may also maintain the original forms and structures of organization; starting from January 1st 2025, for FIEs that have not registered for change, the authorities will not accept any application and will publish the information. To facilitate the registration for change for FIEs, the Implementing Rules sets forth that the State Council market supervision authorities should draft and publish rules on the specifics of the registration and provide guidance. Market supervision authorities in charge of the concrete operation should provide better services by various means to facilitate such exercise.

Q: Regarding concerns over the applicability to investment from Hong Kong, Macau and Taiwan, is there clear provisions in the implementing rules?

A: Since reform and opening-up, investments from Hong Kong, Macau and Taiwan have made important contribution to the economic and social development of China, and always deserve encouragement and protection. Investments from Hong Kong, Macau and Taiwan are by nature different than foreign investment and distinct from domestic investment. In practice, Hong Kong and Macau investments are administered with reference to laws applicable to foreign investment in principle, while Taiwan investments are subject to the Law on the Protection of Investments of Taiwan Compatriots and its implementing rules, or to the laws applicable to foreign investment should there be no provisions in the Law on the Protection of Investments of Taiwan Compatriots. To keep policy consistency and stability and leave room for policy adjustments, the Implementing Rules clarified the applicable law to investments from Hong Kong, Macau and Taiwan: investments from Hong Kong and Macau are administered with reference to the FIL and its implementing rules, and shall be subject to laws, administrative regulations or the State Council provisions should they stipulate otherwise. Investments from Taiwan are subject to the Law on the Protection of Investments of Taiwan Compatriots, and should be administered with reference to the FIL and its implementing rules regarding matters not stipulated by the former.

Q: How to treat the inconsistencies between numerous existing provisions on foreign investment and the FIL and its implementing rules?

A: This is a critical question. In keeping up with the trend of times, the FIL has made significant innovation and improvement on the existing legal framework for foreign investment. To ensure effective implementation and uphold the principle of “high-level law overrides lower-level law, new law overrides old law”, the Implementing Rules clarifies that: if provisions made before January 1st 2020 are inconsistent with the FIL and its Implementing Rules, the latter shall prevail. Following instructions from the State Council, MOFCOM, NDRC and the Ministry of Justice are pushing sub-national governments and authorities to sort out the existing provisions on foreign investment and abolish or revise the regulations, departmental rules and normative documents that are in consistent with the FIL. Initial progress has been scored, and we will continue to work on it.