New Foreign Investment Law, Company Law 1.1.2020 and Tendering in China
Foreign companies have long complained about China’s unfair treatment of foreign businesses operating in the country and have requested a more level playing field with domestic Chinese companies including entering into Tendering business and getting deals awarded.
The Chinese government has responded by enacting a new Company Law coming into effect on January 1st 2020. This Law is aimed at equal market treatment in promising a market-driven system that provides a “stable, fair, transparent and predictable environment” for all business. At the same time a new Foreign Investment Law will also come into effect aiming to provide foreign investors more predictable investment environment in China and clear rules related to Foreign Invested Enterprises. However, foreign companies are feeling skeptical about implementation of such promises and commitments to opening up market access for foreign businesses.
The following present key points at the Foreign Investment Law and Chinese Company Law:
I. Foreign investment law and Legal compliance
New Foreign Investment Law (FIL) regulations are applicable to foreign investors who are entering the China market after January 1st 2020 regardless of company format selected. Even though the impact of the new law to foreign investors is considered to be minimal.
The most relevant Articles to all foreign-invested enterprises concern governing structures, organizational formals and operating rules for foreign investments, which are covered by both FIL and Company law provisions and are based on equal treatment with domestic companies.
At the same time, laws covering Joint Venture Companies and Wholly Foreign- owned Enterprises will be repealed on January 1st 2020. However, a five- year transitional period will give foreign investors time to rearrange existing companies and current operations in Legal Compliance with the new FIL requirements.
On the one hand, the unified treatment of foreign domestic investments will make the investment path less complicated in the long run. However, on the other hand, it also means that anything foreign investors have learned about investment structures in China will become partially outdated.
A key target for enacting the new FIL is to create a national system, where foreign investment preferential conditions must follow statutory laws. Therefore local authorities are not able to provide more beneficial policies than according to laws, administrative and local regulations given by central national government.
II. New company law promises transparent and fair treatment
New Chinese Company Law promises transparency and fair treatment of foreign investment and establishment procedures in par with domestic investments will most likely make the investment process less complicated and more straightforward.
The legislation includes 72 parts ranging from equal protection of rights and fair play among state-owned, foreign and private companies, wide market access to fairness of judicial protection and punishments for intellectual property violations.
The New Company Law promises to maintain a fair and competitive market, cut red tape, corporate taxes and fees and streamline the business environment including access to financing in China. Forced technology transfer is banned by the law and a system to compensate of intellectual property infringement will be set-up. Settlement of disputes are to be improved, property rights and other legitimate interests of businesses protected and direct government intervention in market activities is promised to be declined.
This new approach addresses complaints by the US and European Union which have long complained about China’s preferential treatment of local companies, subsidies provided, government procurement and government interference in business activities.
III. Government procurement and equal treatment?
Foreign companies operating in China must be aware of government procurement process which is primarily regulated by two national laws the Government Procurement Law (GPL) and the Tender Law and local government procurement measures.
The new Company Law and Foreign Investment Law has the aim to increase transparency, fairness and integrity to the government procurement by standardization of the process and eliminating uncertain rules. Local government have issued their own rules for procurement under which public bidding is required for contracts to purchase goods or services in excess of certain set amounts.
In accordance with the regulations, government procurement may be conducted by use of the following methods: public tender, private tender or tender by invitation, competitive negotiation, single-source procurement, inquiry or special tender for restricted products. Winners are required to enter into written contracts under the PRC Contract Law and Tender documents typically include provisions to be included in government procurement contracts. The purchaser and the winner of successful bid are requested in 30 days to sign a government procurement contract.
The new Company Law and Foreign Investment Law are aiming to build equal opportunities for domestic Chinese and foreign suppliers. It remains to be seen whether the new legal enactment will decree domestic sourcing requirements as well as recent Buy China -drive targeted to provide stimulus to ailing Chinese enterprises and their bankers.
IV. How to plan new foreign investment 2020 onwards?
The impact of the new FIL is limited for foreign investors since investment principles remain the same even though some of the investment structures will no longer exist from January 1st 2020 onwards and will become partially outdated.
Legal Compliance and accounting rules for WFOE have certain clarification especially related to contributions to after-tax statutory surplus reserves and employee bonus and welfare funds since WFOE companies shall be operated under the new Law.
Most of professionally drafted WFOE documents have all required corporate governance measures, management structures and supervision in place and real impact of the new FIL is minimal. For companies not certain of their own documentary status, the enactment of Foreign Investment Law is a good occasion to update current documents and to gain more control over their operations in China.
The Chinese will most likely introduce Implementation Rules for both Foreign Investment Law and Company Law and foreign investors are well advised to follow-up closely these legislative enactments to stay in compliance with all Chinese rules and regulations.