"On 15 March 2019, China finally adopted theForeign Investment Law (FIL) at the closing meeting of the second session ofthe 13th National People's Congress (NPC). This is a landmark legislationaiming to provide stronger protection and a better business environment forforeign investors.

This new FIL unified the separateprovisions regarding the entry, promotion, protection, and administration offoreign investment and will annul the Law on Sino-Foreign Equity JointVentures, the Law on Sino-Foreign Contractual Joint Ventures and the Law on WhollyForeign Owned Enterprises (Three FDI Laws) after it comes into effect on 1stJanuary, 2020, serving as the fundamental PRC law on foreign investment.

Compared with the very first draft FILpublished in 2015, the new FIL has adopted substantial amendments, includingbut not limited to, a streamlining of the content, an adjustment of thedefinition of “foreign investment”, and an introduction of brand-new provisionssuch as the prohibition of compulsory transfer of technology by administrativemeans. Here are several key highlights of the FIL:

1. Maintaining the scheme of“pre-establishment national treatment plus a negative list” which wasestablished in the first draft of FIL. For enterprises engaging in businesseswhich do not fall into the negative list, they could enjoy the nationaltreatment. Also, the FIL clearly stipulates in article 4 that treating foreigninvestment no less favorably than domestic investment during the “investmentaccess stage”. Other than that, the FIL removed “except otherwise provided bylaws or regulations” from the draft regulation, which prevents ministries orlocal governments from setting up additional regulatory restrictions on foreigninvestment;

2. Clarifying that the foreign investedenterprises (FIEs) can equally formulate standards, participate in governmentprocurement and raise funds through public stock offerings and corporate bonds,aiming to improve the business environment for foreign investors and enhancethe attractiveness of the Chinese market. This move received very positivefeedback from a large number of FIEs during the public consultation phase forthe draft FIL. It is a helpful extension of the equal treatment of domestic andforeign investments in those areas having significant impact on their dailybusiness operation;

3. Underlining protection on intellectualproperty rights of foreign Investors, and encouraging voluntary technologicalcooperation based on business rules. The new FIL at the same time clarifiesthat administrative organs and their staff members shall not use administrativemeans to force the transfer of technology, thus responding to the concerns offoreign investors on their intellectual property protection and compulsorytechnology transfer which could largely reduce the potential disputes;

4. Applying national security review systemon foreign investment. In the draft, there were a large number of detailedprovisions on this topic. However the final version only includes one clause ofprinciple provision mandating national security review of foreign investmentthat “affects or may affect national security” and also providing that nationalsecurity review decisions are final. Presumably it will not be subject to anyadministrative reconsideration or judicial review, which provides certainty onthe review result. We trust the detailed rules will follow in order for theeffective implementation of this regime.

5. Excluding the Variable Interest Entities(VIE) structure from the definition of foreign investment. The new FIL definesthe foreign investment as the investment activities directly or indirectlyconducted by foreign natural persons, enterprises or other organizations inChina. It’s worth noting that in the draft version of the FIL released forsoliciting public consultation in January 2015, controlling or holding equityof domestic enterprises by means such as contracts and trust explicitly fellinto the category of foreign investment, which indicated that foreign investorswere not allowed to engage in restricted or prohibited industries through VIEstructure.

After rounds of deliberations, the new FILdoesn’t eventually include investment through VIE structure into the definitionof foreign investment. Nevertheless, there’s a catch-all clause in the new FIL,providing that investment from foreign investors by other means stipulated bylaws, administrative regulations and the State Council can also be consideredas foreign investment, which leaves room for the government to regulate the VIEstructure by any implementation rules in the future. Having said that, atleast, at the moment, without explicitly including it into the foreigninvestment implies the enterprises using VIE structures may maintain theirstatus quo, which to certain extent is good for the stability of the corporatestructure of those companies; and

6. The new FIL provides that laws includingthe PRC Company Law and the PRC Partnership Enterprise Law will govern theFIEs’ “organizational forms, institutional frameworks, and standards ofconduct”, and also introduces a transition period of five years for theexisting FIEs to maintain their original organizational forms incorporatedunder the Three FDI Laws after the effectiveness of the FIL. This transitionperiod reserves time not only for FIEs to adjust their corporate forms pursuantto the new requirements in the FIL but also for the government to launch moredetailed implementation regulations tidying up the legacy resulting fromabolition of the Three FDI Laws.

The new FIL covers a broad range of fieldsfor protection of foreign investors’ legal rights and interests, especially theemphasis on fair competition, full cooperation with the trend of high-levelliberalization and facilitation of investment, effectively boosts marketconfidence.

We understand that the current provisionsin the FIL are generally principles. As the saying goes, “the devil is in thedetails”, how effective the FIL can be in practice as it expects largelydepends on how the detailed implementation rules and even the attitudes oflocal governments will be.

We will pay close attention to anydevelopments of the implementation rules in connection with the FIL and keepyou updated.