China’s New Foreign Investment Law

China’s New Foreign Investment Law

On 31 December 2019 the State Council published the Implementing Regulations for China’s new Foreign Investment Law.

The Regulations clarify the Foreign Investment Law which came into force on 1 January 2020. The law aims to promote more equal treatment of foreign and domestic enterprises, better protect investors rights and improve protection against compulsory technology transfer. It replaces existing legislation on Wholly Foreign Owned Enterprises (WFOE), Sino-foreign Cooperative and Equity Joint Ventures (CJV and EJV respectively).

Companies that were incorporated prior to the implementation of the new Foreign Investment Law have 5 years from 1st January 2020 to continue operating under the previous laws. After that, they are expected to comply with the new Foreign Investment Law and modify their Articles of Association and Joint Venture contracts. The process of modification still needs to follow the old regulations which means unanimous vote of the Board of Directors.

According to Article 31 of the new Foreign Investment Law, the organizational form and institutional framework of FIEs will be subject to the provisions of the Company Law. Because the existing WFOE law is already largely in line with the Company Law, there will be a limited impact for existing WFOEs. Sino-foreign equity joint ventures on the other hand need to make changes to comply with the new law’s requirements (see following table). If a WFOE has more than one shareholder, the same changes are applicable.

One important change is that the new law, at least theoretically, gives majority shareholders greater decision-making power compared to the past.

During the transitional period, local bureaus of the AIC may in practice require companies to update their articles of association and joint venture agreements to bring them in line with the New Foreign Investment Law before they will process registration of any corporate changes. It is not clear yet whether companies need to get a new approval, go through supplementary record-filing, or make relevant changes to its business registrations within the five-year period.

Company Law Law on Sino-Foreign Equity Joint Ventures (EJV Law)
Investment % of foreign investor No restriction Generally no less than 25%
Highest authority Board of Shareholders Board of Directors
Minimum number of members in the board Permitted to have one executive director No fewer than three directors
Quorum None for shareholding meeting

1/10 shareholder voting rights

1/3 director voting rights

Two thirds or more directors for board meeting
Term of directors No more than 3 years 4 years
Voting mechanism for major matters (e.g. increase or decrease of registered capital, amendment of AoA, liquidation of company) Approval by shareholders representing more than two-thirds of the voting rights, unless otherwise agreed in AoA Unanimous approval by directors present at the meeting
Profit distributions Distributions based on proportion of paid-in capital, unless otherwise agreed by all shareholders Distributions based on registered capital ratios
Equity transfer restrictions Approval by more than half of the other shareholders, unless otherwise agreed in the articles of association Unanimous approval by the other shareholders

During the transitional period, local bureaus of the AIC may in practice require companies  to update their Articles of Association and joint venture agreements to bring them in line with the New Foreign Investment Law before they will process registration of any corporate changes.  It is not clear yet whether companies need to get a new approval, go through supplementary record-filing, or make relevant changes to its business registrations within the five-year period.

The new law needs to be interpreted in the context of China’s negative list and restricted industries. Foreign investors should be given equal treatment to Chinese firms in sectors which are not prohibited or restricted. The law states that local governments must abide by the commitments made by them within their statutory authority on the support policies, preferential treatment and facilities applicable to foreign investors when attracting foreign investment.


JV Allowed With A Chinese Natural Person

JV Allowed With A Chinese Natural Person

Shanghai, Jiangsu, Zhejiang and Anhui provinces are to allow the formation of Sino-foreign joint ventures with a Chinese citizen.

The details were released on December 25th jointly by the State Administration for Market Regulation in these areas in notice No. 9 on “Allowing Chinese natural persons to set up foreigner-funded enterprises with foreign investors in Shanghai, Jiangsu, Zhejiang and Anhui ”

Previously Chinese natural persons were not permitted to enter directly into Sino-foreign joint ventures with foreign investors but instead needed to set up an entity to use as an investment vehicle. The new regulation allows a Chinese natural person to be a shareholder of a Sino-foreign JV with the approval of the authority.

The new law came into effect on 1 January 2020 and is valid until 31 December 2021.