Maria Kotova Presents on the Effects of China’s New Foreign Investment Law on British Businesses
On December 6th, Maria Kotova, Head of UK and Ireland Business Development at Dezan Shira & Associates, provided insight on the new draft of the Foreign Investment Law (“FIL”) at the British Business Briefing Shanghai 2019 Q4.
The British Business Briefing is organized by China-Britain Business Council (CBBC) on a quarterly basis and provides an in-depth overview on the major issues and developments in the area of regularity, industry trends and trade between two countries. It has been a privilege for us to be invited as one of the experts introducing the FIL’s impact on existing foreign invested structures.
We also wanted to thank the CBBC team for their excellent organization and we particularly appreciate the support provided by Nicolas Zhai, the Assistant Director of Business Development (East China), to make this event a success.
Maria discussed key highlights of the new Foreign Investment Law that will come into effect on January 1st, 2020 and the effect on existing UK Foreign Invested Entities (FIEs). She also discussed key concerns and areas where the draft still lacks clarification.
Key Takeaways on China’s New Foreign Investment Law
The FIL will replace existing laws on wholly foreign-owned enterprises, Sino-foreign contractual joint ventures, and Sino-foreign equity joint ventures.
One of the major changes under the FIL is the definition of the foreign investment itself. It has been defined as any investment activity “directly or indirectly” carried out by a foreign natural person, enterprises or other institutions. However, the new FIL keeps the specific definitions vague such as failing to clarify “other investors” or whether a “foreign investor” will be defined based on the nationality, residency, citizenship, etc. The fact that the government added “indirect” control will have huge concerns for those foreign businesses that operate in China under Variable Interest Entities (VIEs) or Special Purpose Vehicles (SPVs).
The New Foreign Investment Law will have a strong effect on corporate governance, mainly EJV and CJVs. The entities enterprises established before the new law comes into effect will be allowed to keep their organizational form for five years within which they will need to make corresponding amendments.
The Foreign Investment Law seeks to improve the business environment for foreign investors and ensure that foreign invested enterprises participate in market competition on an equal basis. “Recent trade disputes have forced the PRC to address common complaints from foreign businesses and governments regarding forced technology transfer, intellectual property expropriation and unfair treatment,” Maria Kotova exclaimed in her speech. The framework of the new law enhances intellectual property rights for foreign businesses and threatens legal penalties if government officials breach the law.
Besides intellectual property considerations, the law states that foreign investors will receive equal treatment, which was defined on the newly updated negative list as “national treatment”. The new FIL has a provision that any foreign investment on the negative list will undergo case-by-case review, which creates an opportunity for decisions that lack solid legal ground.
Moreover, there are several pro-investment initiatives mentioned including fair trade and equal participation for FIEs in defining standards and government procurement projects.
Administrative organizations are prohibited from forcing the transfer of technology by administrative means, but what about non-administrative means? Maria also stated, “it remains unclear how communication channels between government agencies and foreign entities will be managed if there are complaints for infringement.”
Maria made note of the vague language of the new FIL and many areas mentioned in the FIL will need to be further clarified on implementation enforcement, governing bodies, etc..
To learn more, please click here to download a copy of Maria’s presentation.
More Resources on the new Foreign Investment Law
We also have several articles on the FIL including:
- How to Stay Compliant under China’s New Foreign Investment Law
- China Releases Draft Implementation Regulations for New Foreign Investment Law
- How to Read China’s New Law on Foreign Investment
- China’s New Foreign Investment Law: A Backgrounder
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