The Chinese Ministry of Justice (MOJ) released draft implementation regulations for the Foreign Investment Law on Nov 1st, 2019. The law itself was passed in March 2019 and will take effect on January 1st, 2020. Since the wording of the law was considered vague by many observers, the implementation regulation will play a significant role in shaping the law and its effect on foreign investment and existing foreign-invested businesses in China.
The Ministry of Justice made the draft available to Foreign Chambers in China in mid-October and invited comments from other stakeholders recently. Given the short time left until the law takes effect, we expect no major changes in the final version. Below we outline the rules from the draft implementation rules which we expect to have a significant impact on foreign-invested businesses operating in China or planning to come to China.
Profit repatriation will become easier
Profit repatriation will not be limited in terms of the amount repatriated, the frequency or currency used. Art. 23 stipulates, that various kinds of income such as capital gains, profit, asset disposal income, income from royalty and other kinds of income “may be freely remitted out”.
The same article also states that foreign staff of foreign-invested enterprises may freely transfer their income to countries outside of China, after all taxes have been paid.
No more unreasonable invalidations of agreements with local governments
Art. 29 stresses that commitments by local or provincial governments to foreign investors and companies must be honored. Invalidations of such agreements have been a problem in the past and are now addressed by this regulation. Often, a change in administrative zoning, organizational changes in a local government or even a change of government officials led to invalidations of previously concluded agreements.
Several changes affecting existing and new Joint Ventures
The Chinese partner in a Joint Venture can now be a natural person, according to Art. 3. In the past, the joint venture partner of a new Joint Venture had to be an officially registered company unless special conditions were met.
Further, Art. 42 states that existing Joint Ventures have to adapt their organizational structure. The highest decision making body has to be changed from the Board of Directors to the Shareholders Meeting in accordance with Company Law within five years and six months after the law takes effect. The resulting deadline for organizational changes is June 30th, 2025. The State Council’s market supervision and management department will publish guidelines on the specific process to make these changes, according to the draft implementation rules.
Despite the need to adjust the organizational structure in accordance with the new law, the profit sharing method of an existing Joint Venture can remain the same as it was agreed on in the original joint venture agreement (Art. 43).
Comments collected from international Chamber of Commerce representatives pointed out that again the regulations remain vague on various issues. It remains to be seen if there will be any substantial changes in the final version of the implementation regulation. We will keep our readers informed about any new developments.
Brad Liu – Legal Manager
Brad Liu has more than 10 years’ experience in the corporate and legal field. Prior to joining ECOVIS, Brad headed the Beijing corporate services team of a mid-tier international accounting and business advisory firm. He has been advising international SMEs from US, Europe and ASEAN countries in doing business in China. His main expertise includes market entry and incorporation advisory, holding structure, M&A, ICP, Intellectual Property Rights as well as ongoing legal and corporate compliance matters. He also advises Chinese companies, including some major Chinese state-owned companies, in doing business overseas.
About ECOVIS Beijing
Ecovis Beijing is the trusted tax and legal advisor to several embassies and official institutions in China. We are specialized in advising mid-sized international companies and focused on tax and legal advisory, accounting and auditing. We frequently publish articles on new regulations and recent developments in China and Germany on our website.
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