Knowledge

FDI and M&A Overview – Foreign Direct Investment in China

2022-09-29


1. What are the principal laws and regulations applicable to FDI in China? Are there special rules for certain foreign investors, including state-owned enterprises (SOEs)?


The Foreign Investment Law of the People's Republic of China and the Regulation for Implementing the Foreign Investment Law of the People's Republic of China establish the basic framework of China's foreign investment legal system. It clarifies the management system of pre-establishment national treatment and the foreign investment negative list.


The organization form, organization structure, and activities of foreign-invested enterprises are subject to Company Law of the People's Republic of China (2018), Partnership Enterprise Law of the People's Republic of China (2006) and other laws; the same as those of domestic enterprises.


China implements policies to encourage and guide foreign investment. Foreign investment in industries under the Catalogue of Industries for Encouraging Foreign Investment (2020) can enjoy preferential policies in taxation and land utilization.


China's current laws and regulations applicable to foreign investment do not have special provisions for foreign investors that are SOEs.


2. Are there any governmental and regulatory approvals required for FDI? If so, please give brief details (such as trigger threshold, relevant authority, and timing requirements)?


The Ministry of Commerce and the National Development and Reform Commission (NDRC) are responsible for the filing or approval of foreign-invested enterprises (if applicable); the Administration for Market Regulation is responsible for the registration and change of foreign-invested enterprises and the establishment of foreign-invested partnerships; the Anti-Monopoly Bureau (under the Ministry of Commerce) is responsible for the review of concentration among business operators in M&A transactions (if applicable); foreign investment in special industries (e.g., financial institutions, aviation, etc.) also requires the approval of the relevant authorities.


Negative list review: In addition to the market access negative list prohibiting investment in certain industries, foreign investment is required to comply with the Special Administrative Measures (Negative List) for the Access of Foreign Investment .


National Security Review: According to the Security Review Measures for Foreign Investment, an investment affecting national security should be actively declared to the Office of the Working Mechanism of the NDRC before implementing the investment.


Information reporting system: According to Measures for the Reporting of Foreign Investment Information and Notice on Foreign Investment Information Reporting, foreign investors or foreign invested enterprises must submit annual reports to the competent commerce departments through the enterprise registration system and national enterprise credit information publicity system.


3. Are there any industry sector controls on foreign investment?


Restrictions on foreign investment in industries mainly fall into two negative lists. First, China has implemented a market access negative list that all enterprises are required to follow. Second, foreign investment should also comply with the regulation of Negative List for Foreign Investment Access.


According to the Market Access Negative List (2022) issued by the National Development and Reform Commission and the Ministry of Commerce, there are 6 prohibited items and 111 items requiring permission for access.


The Special Administrative Measures (Negative List) for the Access of Foreign Investment (2021), issued by the NDRC and the Ministry of Commerce, took effect from January 1, 2022. The negative list covers 31 sub-items under 12 major categories, including mining, manufacturing, electric power, heat, gas, and water generation and supply. The restrictions include prohibiting investment, permitting investment but restricting operation of the business, permitting investment with shareholding limits, etc. The Pilot Free Trade Zones have a single negative list, excluding "manufacturing" items and allowing for a more relaxed range of investment.


4. Are there any government free carry interest requirements for special industry sectors?


None. However, according to the Special Administrative Measures (Negative List) for the Access of Foreign Investment (2021), foreign investment in certain restricted industries has a proportional requirement for Chinese parties to hold shares.


5. Are there any localization requirements (e.g., minimum ratio of local employees, minimum ratio of local procurement) for FDI in China?


There is no local ratio requirement for foreign-invested enterprises.


According to Special Administrative Measures (Negative List) for the Access of Foreign Investment (2021), key personnel like the legal representatives in specific industries are required to be Chinese citizens (e.g., legal representatives of public air transport companies and general aviation companies).


6. Are there any exchange control restrictions in terms of remittance of capital, profits and dividends?


China implements strict foreign exchange control measures, and the RMB is not freely convertible. However, profits and dividends of foreign-invested enterprises that comply with the relevant foreign exchange management regulations can be converted into foreign currency and remitted out of China after paying corporate income tax and social security.


In general, foreign-invested enterprises are relatively free of restrictions in conducting transactions under the current account while still subject to strict control under the capital account.


The current account refers to domestic and foreign economic transactions including foreign trade balance, non-trade exchanges, and transfers. Capital account refers to the increase or decrease of assets and liabilities arising from the export and import of capital in the balance of payments, mainly in the categories of direct investment, securities investment, and cross-border lending.


7. What are the most common types of corporate legal entities established for FDI? For each type of corporate legal entity, please introduce the internal corporate governance structure. What types of corporate legal entities are recommended for partially or wholly foreign-owned corporate legal entities?


Foreign investors can set up limited liability companies and joint stock companies in China.


A limited liability company refers to an economic organization established with the capital of not more than 50 shareholders, each of whom bears limited liability to the company within the limit of individually subscribed capital contribution, and the company bears limited liability to the debts of the company with all its assets. The internal governance structure includes shareholders' meeting, the board of directors (or executive director), the board of supervisors (or supervisors), and the manager (not required).


A joint stock limited company refers to an economic organization whose entire registered capital consists of equal shares raised by the issue of shares (or equity warrants). Each shareholder is liable for the company to the extent of their subscribed shares and the company bears limited liability to the debts of the company with all its assets. The internal governance structure includes shareholders' meeting, board of directors, board of supervisors, managers, and senior managers.


8. What is the procedure of registration and incorporation of foreign-owned companies?


The registration of foreign-invested enterprises is handled by the Administration for Market Regulation, or the market regulatory departments of the local people's government authorized by the State Council.


Step 1: Determine whether a pre-approval process is required.


For the following different types of pre-approvals the corresponding authority is as follows:


Project approval and record. Approval or record by the State Council and the National Development and Reform Commission.


Negative list. If it belongs to a prohibited category, the investment is not allowed in China; if it belongs to the restricted list, then it should be approved by the Ministry of Commerce or Administration for Market Regulation.


Industry pre-approval item. Approval by industry competent authorities.


Other approval procedures include National Security Review and Anti-Monopoly Review.


If no pre-approval procedure is involved, the following materials are submitted as required in Step 2.


Step 2: After completing the pre-process and obtaining the approval documents, the company shall submit the materials (please refer to 1.9) to the Enterprise Registration System of the Administration for Market Regulation (onsite or online) to apply for registration and obtain the business license.


Step 3: After obtaining the business license, an account may be opened according to the application form, the business license, the certificates of relevant personnel, and other documents certifying the opening of an account. Foreign exchange registration can be carried out after submitting the application form, copy of the business license, and approval documents. At the same time, sundry tasks include visiting the Public Security Bureau to carve the official seal, applying for invoices at the Tax Bureau, reporting information to the Ministry of Commerce and registering for social insurance.


9. What are the documents and materials that the foreign investors need to prepare for that purpose? Is notarization or certification required?


Required pre-approval procedures to relevant departments for approval or filing (project approval and filing; negative list; and pre-approval industry items).


The materials required to apply for a license in the Enterprise Registration System of the Administration for Market Regulation usually include:

  • Application for establishment registration;

  • Certificate of appointing or entrusting agent;

  • Articles of Association;

  • Qualification certificate of shareholder or identity certificate of the natural person;

  • Employment certificate of senior executives;

  • Legal representative's employment document and identity certificate;

  • Residence certificate of the company;

  • Power of attorney for service of legal documents;

  • Initial report;

  • Other documents.


Since China has not acceded to the Hague Convention Abolishing the Requirement of Legalization for Foreign Public Documents (the Hague Convention), consular/embassy certification is required for foreign documents sent to China for use in accordance with international practice, unless there is a bilateral or multilateral agreement or a unilateral waiver of certification by a jurisdiction.


10. How long does it normally take to complete the entire registration and incorporation process?


The duration of the process depends on the type of enterprises and the requirements of the local Administration for Industry and Commerce.


For foreign direct investment without approval requirements, the process of setting up a general company can be carried out according to the Company Law, and the fastest time period is 7 working days.


For a foreign direct investment that needs to be approved, the application and approval period could be more than 32 working days.


Authors:

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Disclaimer:                                


This article was written by the lawyer of DeHeng Law Offices. It represents only the opinions of the authors and should not in any way be considered as formal legal opinions or advice given by  DeHeng Law Offices or its lawyers. If any part of these articles is reproduced or quoted, please indicate the source. 

Relevant Lawyer

  • Wei (David) CHEN

    Partner

    Tel:+86 10 5268 2888

    E-mail:davidweichen@dehenglaw.com

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