In the late 1970’s, the People’s Republic of China (“PRC”) began encouraging foreign direct investment (“FDI”) and in 1979, the promulgation of the Law of the PRC on Chinese-Foreign Equity Joint Ventures resulted in the establishment of the first sino-foreign joint venture in 1980. Geographically, areas attracting foreign investment have spread inwards, from the coastal and Yangtze River areas to the interior and western regions of China.
In terms of industry type, there has been a shift from imported materials to technology-intensive manufacturing industries, infrastructure construction, and the financial and consulting sector. China now operates a unified foreign trade system, governed by the Foreign Trade Law of the People’s Republic of China, allowing the free import and export of an ever-increasing number of goods and technology. The new Enterprises Income Tax Law of the People’s Republic of China (the “Enterprise Income Tax Law”) ended the most preferential tax treatment available to foreign invested enterprises (“FIEs”) and marked the end of the early phases of China’s drive to attract foreign investment.
Currently the main laws governing foreign investments in China are:
- Law of the People’s Republic of China on Chinese-Foreign Equity Joint Ventures and related implementing rules;
- Law of the People’s Republic of China on Chinese-Foreign Contractual Joint Ventures and related implementing rules;
- Law of the People’s Republic of China on Foreign-funded Enterprises and related implementing rules;
- Directory of Industries for Foreign Investment;
- Company Law of the People’s Republic of China;
- Contract law;
- Regulation of the People’s Republic of China on the Administration of Company Registration;
- Enterprise Income Tax Law
- Implementation Opinions on Some Issues Concerning Law Application for the Administration of Approval and Registration of Foreign-funded Companies；
- Circular on Several Issues Regarding Dissolution and Deregistration of Foreign Invested Enterprises.
Generally, the majority of foreign investment is in the form of direct investment, by way of:
- sino-foreign equity joint ventures;1
- sino-foreign contractual (co-operative) joint ventures2; or
- wholly foreign-owned enterprises3.
Foreign investors will, in addition, often open representative offices and branch offices. The “Directory of Industries for Foreign Investment” forms the basis of the guidance and approval of foreign-funded projects, and carries four classifications – encouraged; permitted; restricted; and forbidden industries.
In applying for the establishment of a sino-foreign equity joint venture or a sino-foreign contractual joint venture, there are a number of steps that must be taken. Different levels of approval authorities have been delegated to local governments, whose policies will vary depending upon prevailing local, regional and national politics. However, major projects are always approved at the central government level.
In general, there are two steps in the establishment process for setting up a FIE in China:
- submission of an application to establish the enterprise, the feasibility study report, the joint venture contract and articles of association and other legal documents to the Ministry of Commerce of the People’s Republic of China (“MOFCOM”) or its lower reviewing offices for examination and approval; and
- once reviewed, and if approved, the reviewing authorities will issue a certificate of approval to the investor(s) of the foreign-funded enterprise. With this certificate, the investors can go through registration procedures with the Administration of Industry and Commerce for the establishment of the enterprise.
Article 126 of the PRC Contract Law sets out the applicable choice of law in foreign-related contracts and contracts subject to mandatory application of Chinese Law. For a Sino-foreign Equity Joint Venture Enterprise Contract, Sino-foreign Cooperative Joint Venture Contract, or a Contract for Sino-foreign Joint Exploration and Development of Natural Resources which is performed within the territory of the People’s Republic of China, PRC law should apply.
1 Please see article 1 of the Law of the People’s Republic of China on Chinese-Foreign Equity Joint Ventures
2 Please see article 1 of the Law of the People’s Republic of China on Chinese-Foreign Contractual Joint Ventures
3 Please see article 1 of the Law of the People’s Republic of China on Foreign-funded Enterprises