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 in the case of establishing TV and film production companies
• restrict them by imposing joint venture requirements, shareholding caps and other conditions, such as in the case of establishing public transport companies

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

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

• issue new implementation regulations and rules
• revise or abolish old rules in conflict with the FIL 

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

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• Doing business in China
• Contact the Canadian Trade Commissioner Service in China