China’s new Foreign Investment Law has changed the business landscape for WFOEs. This article discusses the law, its implications and its impact on starting a business in China.
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The Foreign Investment Law – What Does it Mean for WFOEs?
Since March 2019, when the FIL (Foreign Investment Law) was first enacted, many interpretations have been suggested. Launched in January 2020, the new FIL is already a fait accompli, and is being practically implemented. Here is what WFOEs in China need to know.
The new FIL is in fact a merge between 3 previous foreign investment regulating laws (that by now have become abolished). At its core, the law equals the legal status of foreign companies in China to the status of local companies, in order to send a positive message to the world and attract more foreign companies and investments into China.
Three main factors have fast-tracked the law’s legislation:
- The US-China trade war
- Global criticism against intellectual property theft and forced technology transfer
- A decline in foreign investments and economic growth
Immediate implications for WFOEs
The end of the old corporate regime & National Treatment
This is the biggest and most revolutionary change brought on by FIL. From now on, the corporate form is not determined by the identity of the investor. Rather, under the new system, there are only limited liability companies, which are subject to the Chinese Company Law, regardless of the investor’s identity.
The National Treatment: the law stipulates that companies cannot be discriminated against just because they are foreign invested. Foreign invested enterprises should get the same treatment from the government, which is at least as good as any other company that is completely domestic. In other words, China will treat foreign investments no less favorably than domestic investments, for all that it implies (government vendors, equity purchase, exit mechanisms, implementation of policies, etc.).
The Negative List
This is an exception to the National Treatment principle. The negative list leaves a certain level of discrimination against foreigners. The list includes industries in which foreign investments are restricted, or prohibited. It keeps updating and different industries are constantly being removed from the list.
“The list of encouraged industries” gives foreign companies certain advantages, benefits and incentives that domestically owned enterprises do not receive.
An adjustment period
WFOEs in China are given a 5-year adjustment period to establish their re-structuring. If they are unable to complete the transition by 2025, they will be granted another 6-month “grace period”.
Companies that will register within this 5-year timeframe will be registered as Chinese liability companies. They are still wholly foreign owned, but are subject to the Chinese Company Law.
IP protection and no forced technology transfer
The new law also prohibits direct or disguised forced technology transfer by government officials, and establishes a punitive system for IP violations. In practice, it is not yet clear if and how these intentions will be actually enforced.
WFOEs have a voice
When drafting new rules and regulations related to foreign investments, governments and legislators are asked to hold meetings with WFOEs and foreign investors, in order to allow them to voice their opinions. Another expression of the law is in the establishment of a new Complaints Handling Mechanism, to resolve complaints raised by WFOEs.
If you are considering a company registration in China, you should be excited about the new law. The law signals the Chinese government’s intent to level the playing field for foreign investment in the country, and therefore provides some hope among WFOEs and foreign investors. However, it is worth noting that the law also has a lot of gaps and raises numerous questions that will be answered with time.
Regulations in China change relatively frequently. For the most up-to-date regulations, please check in with us.