China’s Foreign Investment Law: What Canadian companies need to know

The Chinese National People’s Congress enacted China’s Foreign Investment Law (FIL) on March 15, 2019. It entered into force on January 1, 2020. The FIL is the new basic law governing foreign investment in China, marking a new era of China’s foreign investment legal framework.

The FIL replaces:

• the Wholly Foreign-Owned Enterprise (WFOE) Law
• the Sino-Foreign Equity Joint Venture (EJV) Law
• the Sino-Foreign Cooperative Joint Venture (CJV) Law

The FIL establishes core principles for the promotion, protection and market access of foreign investment. Many elements of the law are not new. However, by enshrining them in the law, China is showing a deeper commitment to treating foreign investors equally. For example, China commits to treating foreign-invested enterprises (FIEs) equally in:

• government procurement
• standard making
• industrial supporting policies

China also agrees to:

• protect intellectual property rights and trade secrets of foreign investors
• not force technology transfer from foreign partners to Chinese partners

If China fully implements these obligations, it will help create a more fair, transparent and predictable environment for foreign investors.

In addition, through the FIL, China aims to fully implement the principle of pre-establishment national treatment and the negative list for foreign investment. This means that if a sector is not included on the negative list, China will allow foreign investment in that sector to the same extent as domestic investment. 

For activities on the negative list, China could:

• prohibit them to foreign investment, such as TV and film production
• restrict them by imposing joint venture requirements, shareholding caps and other conditions, such as in the case of establishing medical institution.

China’s National Development Reform Commission and Ministry of Commerce updates the negative list regularly and has incrementally reduced it in the past years.

The FIL provides a five-year transition period for existing FIEs established prior to January 1, 2020 in order to convert their corporate structure according to the Company Law or the Partnership Enterprise Law. Such conversion may require the review and re-negotiation of existing agreements and articles of association. Currently, there is no concrete guidance from the central government on the process, but we expect that implementing corporate conversion of existing FIEs will be largely in the hands of local authorities.  

In order to implement the FIL, China has been taking gradual steps to:

• review its existing foreign investment system
• issue new implementation regulations and rules
• revise or abolish old rules in conflict with the FIL 

This process will likely take a few years. As such, we would like to share the following advice with Canadian business:

• Keep monitoring for new, revised, and abolished regulations and rules
• Explore new market access opportunities when the current restrictions on foreign investment in certain sectors are lifted
• In order to transfer capital contributions and profits outside of China, foreign investors must still fully comply with tax and foreign exchanges regulations 
• Always seek professional legal advice on investment and contractual issues in China
• The Canadian Trade Commissioner Service can help you find qualified legal experts
• Existing Canadian-invested enterprises in China should prepare early for the conversion process by:
  • reviewing contracts, articles of association and organization structures
  • engaging with business partners for possible re-negotiations
  • consulting with local officials for instructions on the formalities and the procedures of the conversion, and seeking professional advice from experienced lawyers

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• Doing business in China
• Canadian small and medium enterprise gateway to China
• Contact the Canadian Trade Commissioner Service in China