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Perspectives on Foreign Investment Law

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Perspectives on Foreign Investment Law

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1. Changes of the legal system on foreign investment

China has developed its earliest legal system on foreign investment, i.e. the approval system along with the enactment of three laws on foreign investment from 1979 to 2016. In this period, China adopted strict approval rules for foreign investment. Under the supervision of the Ministry of Commerce, the period from 2016 to 2019 witnessed the gradual transformation from the approval system to a dual system of approval and filing. Namely, the setup and change of foreign-invested enterprises in the fields covered by the Negative List are still subject to the approval system, and those not covered by the Negative List are subject to the Filing System. Since the Foreign Investment Law and its Implementation Rules become effective on 1st Jan. 2020, and along with the release of "Foreign Investment Information Reporting Measure" jointly promulgated by the Ministry of Commerce and State Ministry for Market Regulation, China will adopt formally the information reporting system.

2. Changes of the supervision method by the commercial department under the foreign investment law?

The commercial department will change its supervision method under the current legal system for foreign investment since 1st Jan. 2020. The commercial department will no longer be responsible for approval and filing of setup and change of foreign-invested enterprises and it is no longer necessary for foreign invested enterprises to handle the setup and change with the commercial department. The foreign investor or foreign-invested enterprise only need to report the investment information in accordance with the "Reporting Method", and the commercial department will supervise the foreign investment through the investment information reported by the foreign invested enterprises.

3. What obligations does the foreign investor or foreign-invested enterprises have with regards to information reporting? What penalty they will face in they violate these rules?

Foreign invested enterprises shall report the investment information to the commercial department through the Corporate Registration System and Corporate Credit Information Public Disclosure System, and the information reported shall be truthful, accurate and complete. The information report shall be divided to initial report, change report, cancellation report and annual report.

If a foreign invested enterprise violates the rule of reporting, the commercial department will request it to correct within 20 working days in accordance with the “Information Reporting Method”.  If it refuses to correct, it will be imposed a fine from RMB 100,000 to RMB 300,000. If it still fails to correct and has also some aggravating situations (like avoiding the reporting obligation, hiding the truthful information, providing misleading or wrong information, or the wrong information provided is related to Negative List, Investor or Actual Controller, or violates again within two years after the first penalty), it will be imposed a fine from RMB300,000 to RMB 500,000.

4. What is the transitional period for a foreign-invested enterprise? What penalty an enterprise will face after the transitional period if it fails to change its type and structure of organization?

 

Foreign invested enterprises that were set up in accordance with three investment laws before the implementation of "Foreign Investment Law" has a five-year transition period. Namely, they could adjust their original form and structure of organization in accordance with the Company Law and Partnership Law within five years after implementation of  the "Foreign Investment Law", and register properly such change. Anyway, it can still keep the original form and structure of organization. However, if it fails to finish and register the change of type and form of organization before 1st Jan. 2025, the Market Regulator will not handle other registrations that it might apply and will disclose such information to the public. It should be noted that a foreign-invested enterprise could keep the transfer method of equity or interests, distribution of residual property as agreed after adjustment of its form and structure of organization in accordance with the law.

5. Changes on the governance mode of foreign invested enterprises under the foreign investment law?

Although a foreign-invested enterprise has five years to change its form and structure of organization to comply with the Company Law, Partnership Law and other applicable laws and regulations after implementation of the Foreign Investment Law, we recommend that foreign invested enterprises make such adjustment and amendment ASAP to avoid conflict within existing legal requirements during corporate governance and daily operation.