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Photo Credits: Shutterstock.com TABLE OF CONTENTS ACKNOWLEDGEMENTS 2 GLOSSARY 3 1. INTRODUCTION 5 2. OVERVIEW OF INVESTMENT POLICY FRAMEWORK 7 A. Domestic Legal Instruments Regulating Foreign Investment 7 B. International Legal Instruments Regulating Foreign Investment 8 C. Key Institutions for Investment Promotion 11 D. Foreign Investment Promotion Strategy 12 3. INVESTMENT ENTRY AND ESTABLISHMENT 14 4. INVESTMENT PROTECTION 20 5. INVESTMENT INCENTIVES 22 6. INVESTMENT LINKAGES 24 7. OUTWARD FOREIGN DIRECT INVESTMENT 25 8. RESPONSIBLE INVESTMENT 26 9. RECENT POLICIES ON NEW TECHNOLOGIES 27 10. CITY SPECIFIC REVIEW - SHANGHAI 28 11. COMPETITION LAW & POLICY 29 A. Merger Control 29 B. Leniency Program 32 ENDNOTES 34 LIST OF REFERENCE MATERIALS 36 2019 INVESTMENT POLICY AND REGULATORY REVIEW – CHINA |1 ACKNOWLEDGEMENTS A team led by Priyanka Kher and Peter Kusek The report benefited from the comments of these prepared this report. The team core members were World Bank Group colleagues: Martin Raiser, Luan Maximilian Philip Eltgen and Azza Raslan. The Zhao, Xavier Forneris, Dongwook Chun, Tanja team would like to thank Caroline Freund (Global K. Goodwin, Sara Nyman, Mariana Iootty De Director, Trade, Investment and Competitiveness), Paiva Dias, Guilherme De Aguiar Falco, Emma Christine Zhenwei Qiang (Practice Manager, Verghese and Abhishek Saurav. The team would Investment Climate), Ivan Nimac (Global Lead, like to thank Nick Younes for editing, and Aichin Investment Policy and Promotion), Georgiana Jones and Brew Creative Pte Ltd for providing Pop (Global Lead, Competition Policy) and design, layout, and production services. Graciela Miralles Murciego (Senior Economist, Competition Policy) for their guidance. The report was prepared under the Analyzing Barriers to Investment Competitiveness Project, Legal research for the preparation of this report supported with funding from the Prosperity Fund was carried out by the international law firm Baker of the United Kingdom. McKenzie. | 2 2019 INVESTMENT POLICY AND REGULATORY REVIEW – CHINA GLOSSARY AML Anti-Monopoly Law AMB Anti-Monopoly Bureau ASEAN Association of Southeast Asian Nations CA Competition Authority CEPA China-Hong Kong Closer Economic Partnership Agreement CIPA China Investment Promotion Agency CJV Cooperative Joint Venture CIT Corporate Income Tax DFCUOI Department of Foreign Capital Utilization and Overseas Investment DFIA Department of Foreign Investment Administration DPIIT Department of Promotion of Industry and Internal Trade DTAA Double Taxation Avoidance Agreements EJV Equity Joint Venture FIL Foreign Investment Law FDI Foreign Direct Investment FIE Foreign-Invested Enterprise FEMA Foreign Exchange Management Act FET Fair and Equitable Treatment FIFP Foreign Investment Facilitation Portal GATS General Agreement on Trade in Services ICSID International Centre for Settlement of Investment Disputes IIA International Investment Agreement IPR Intellectual Property Rights IPRR Investment Policy and Regulatory Review ISDS Investor-State Dispute Settlement MECU Measures for Examination of the Concentrations Between Undertakings 2019 INVESTMENT POLICY AND REGULATORY REVIEW – CHINA |3 MFN Most-Favored Nation RMB Renminbi (currency) SAFE State Foreign Exchange Administration SAIC State Administration for Industry and Commerce SAMR State Administration for Market Regulation SCM Agreement on Subsidies and Countervailing Measures SDS Step Down Subsidiary SEZ Special Economic Zone SHFTZ China (Shanghai) Pilot Free Trade Zone SOE State-Owned Enterprises SOP Standard Operating Procedure TDRs Transferable Development Rights TIP Treaty with Investment Provisions TRIMs Agreement on Trade-Related Investment Measures TRIPS Agreement on Trade-Related Aspects of Intellectual Property Rights UNCTAD United Nations Conference on Trade and Development WFOE Wholly Foreign-Owned Enterprises WTO World Trade Organization Y Yuan (currency) | 4 2019 INVESTMENT POLICY AND REGULATORY REVIEW – CHINA 1. INTRODUCTION This Investment Policy and Regulatory Review on a review of currently applicable policies, laws (IPRR) presents information on the legal and and regulations. In some cases, consultations with regulatory frameworks governing foreign direct regulators were conducted to collect up to date investment (FDI) and competition that affect information. businesses and foreign investors in China. Since legal and regulatory frameworks are constantly The research was guided by a standardized evolving, a cut-off date was set for the research. questionnaire, covering a limited set of This country review therefore covers information topics, including foreign investment entry, available as of May 31, 2019, unless otherwise establishment, protection and select competition indicated in the review. IPRRs are available for related aspects. The questionnaire focused on the following middle-income countries (MICs): de jure frameworks as generally applicable to a Brazil, China, India, Indonesia, Malaysia, Mexico, foreign investor, not located in any specialized Nigeria, Thailand, Turkey, and Vietnam. or preferential regime (such as special economic zones). It primarily focused on national, economy- The research for preparing this IPRR was wide (rather than sector-specific laws) and undertaken by the international law firm Baker regulations. For the purpose of the research, it McKenzie, under the supervision of the World was assumed that the foreign investor is a private Bank Group. The research was primarily based multinational company with no equity interest or Figure 1. Overview of Topics Covered in IPRR Merger control Leniency ■ Key institutions for investment policy/rule ■ Remedies to limit ■ Extent of immunity on making, implemention and FDI promotion anticompetitive fines and damages ■ Key legal instruments effects of merger ■ Ease of admin ■ Transparency/consultation in laws and Main Policy & ■ Ease of admin in leniency regulations Legal Instruments procedures application and Institutions ■ Prohibited and Restricted Select Investment Entry Sectors ■ Equity ceiling Competition and ■ Minimum investment Policy Aspects Establishment requiremeent ■ FDI approval IPRR ■ R&D, local sourcing, ■ Schemes to increase Questionnaire employment, quantitative, local sourcing and geographic, export build capacity of local Other Areas suppliers (Linkages, OFDI, ■ Restrictions on OFDI Investment Responsible Protection ■ Measures on technology Investment, New Tech) ■ Expropriation ■ Transfer of currency Investment ■ Dispute Settlement Incentives ■ Fair administrative conduct ■ Source of Tax and financial incentives ■ Accessibility of tax and financial incentives 2019 INVESTMENT POLICY AND REGULATORY REVIEW – CHINA |5 management control by the government of its home key institutions involved in investment country (that is, not state-owned enterprise). promotion, as well as the country’s foreign investment promotion strategy; it also delineates There are aspects that this IPRR does not the country’s international investment legal cover. It is not a comprehensive review of framework, including the country’s commitments the entire legal and regulatory framework under the World Trade Organization (WTO) and affecting investment. Information presented is select international investment agreements (IIAs); not exhaustive, but illustrative of the main topics and issues covered (for example, it does not n Sections 3-6 cover the country’s policies and exhaustively list all available tax and financial domestic legal framework concerning different incentives in the country). It does not present dimensions of the lifecycle of an investment: recommendations on reform areas. Notably, it entry and establishment (Section 3), protection does not capture de facto implementation of (4), incentives (5) and linkages (6); laws and regulations in the country. Given these limitations, information presented in this IPRR n Sections 7-9 explore emerging investment policy should be interpreted and used while keeping in and regulatory areas — Section 7 considers view the overall country context and realities. outward FDI, Section 8 responsible investment, Further, it contains information in summary form and Section 9 considers recent policies on new and is therefore intended for general guidance technologies; only. It is not intended to be a substitute for n Section 10 focuses on city-specific investment detailed legal research. policy and regulatory measures in the largest This IPRR is organized as follows: commercial center; and n Section 2 provides an overview of the country’s n Section 11 covers select aspects of competition investment policy framework, including the law and policy, specifically merger control and legal instruments regulating foreign investment, leniency frameworks. | 6 2019 INVESTMENT POLICY AND REGULATORY REVIEW – CHINA 2. OVERVIEW OF INVESTMENT POLICY FRAMEWORK A. Domestic Legal Instruments The FIL applies to “foreign investment” in the Regulating Foreign Investment country, which refers to investment activities directly or indirectly conducted by a foreign China has a new foreign direct investment law natural person, enterprise, or other organization that governs foreign investment in the country. (referred to as a foreign investor) in China. This In addition to this recent law both sector specific includes establishing a foreign-funded enterprise, laws and international agreements also regulate FDI the acquisition of shares, equities or property shares, in China (alongside the general legal framework the initiation of a new project, or any other means that applies to all businesses). stipulated by laws, administrative regulations or provisions of the State Council. FDI Law and Regulation Foreign investment in certain industries is On March 15, 2019, the People’s Republic of expressly encouraged, prohibited or restricted China (China or PRC) passed a new Foreign pursuant to the Special Administrative Measures Investment Law (FIL). The FIL sets out the for Access of Foreign Investment effective as of general principles applicable to foreign investment July 28, 2018 (Negative List) and the Catalogue for covering, among others, investment promotion, the Guidance of Foreign Investment Industries equal treatment with domestic investors, as well as effective as of July 28, 2017 (Catalogue). The FIL protection of investment, income, and intellectual states that when international treaties or agreements property. On January 1, 2020, the FIL entered into to which China is a party contain provisions more force and repealed the following three primary preferential to the admission of foreign investors, pieces of legislation that served as the core of those provisions will take precedence over the China’s foreign investment laws: existing FDI regulations. n Law on Sino-Foreign Equity Joint Ventures Sector Specific Laws (EJV Law) (effective as of July 8, 1979 and last amendment effective October 1, 2016). Foreign investors are subject to sector-specific laws and regulations, depending on the sector n Law on Sino-Foreign Cooperative Joint Ventures in which the investment is contemplated. For (CJV Law) (effective as of April 13, 1988 and example, the FIL specifically states that foreign last amendment effective October 1, 2016), and investment in banking, securities, insurance and n Law on Wholly Foreign-owned Enterprises other financial industries and in the securities or (WFOE Law) (effective as of April 12, 1986 and foreign exchange markets are subject to sector last amendment effective October 1, 2016). specific regulations. There are a number of implementing regulations, Public Access to Foreign Investment M&A regulations and sector specific regulations Laws and Policies based on the EJV, CJV and WFOE Laws. These regulations are also expected to be repealed or The FIL mandates timely announcement replaced by the new implementing regulations for and publication of normative documents and the FIL. The rules and other ancillary regulations judgments relating to foreign investment in for implementing the FIL are expected to be accordance with Chinese laws. The term “timely” formulated in the near future, which will provide is not defined. Normative documents, which are not details on how the new law will regulate foreign formally recognized as a source of law, are specific investment in China. directives, notices or circulars that are formulated 2019 INVESTMENT POLICY AND REGULATORY REVIEW – CHINA |7 and issued by various administrative authorities in Having become a member of the WTO on order to provide detailed implementing rules or an December 11, 2001, China has commitments explanation of legal principles and administrative under several WTO Agreements. Under the regulations. Further, the PRC Legislative Law General Agreement on Trade in Services (GATS), (effective as of March 15, 2015) requires all laws, China grants rights to services suppliers from other administrative regulations and issued departmental WTO member countries. This includes services rules to be timely published on the relevant supplied through commercial presence (defined government websites and in nationally or locally as establishment of a territorial presence), in circulated newspapers. For example, both enacted other words through FDI. These rights are granted laws and administrative regulations are publicly through commitments undertaken in “schedules”. accessible at the PRC government’s website. New The “schedules” list sectors being opened, the or amended laws, administrative regulations and extent of market access being given in those sectors departmental rules are supposed to be posted (for example, whether there are any restrictions on once they are passed or amended. Certain specific foreign ownership), and any limitations on national rules and regulations are also publicly accessible treatment (for example, whether some rights at the relevant ministerial or sectoral regulators’ granted to local companies will not be granted to websites. For example, the rules and regulations foreign companies). China has made commitments issued by the Ministry of Commerce (MOFCOM) on market access and national treatment in 9 out are published and publicly available here. of 12 services sectors in the WTO Classification:1 (i) Business services, (ii) Communication services, Consultation with Stakeholders (iii) Construction and related engineering services, (iv) Distribution services, (v) Environmental The FIL mandates that the government solicit services, (vi) Educational services, (vii) Financial comments and suggestions from foreign- services, (viii) Tourism and travel related invested enterprises (FIE) when formulating services, and (ix) Transport services. In these 9 laws, regulations and rules relating to foreign sectors, China has made partial market access investment. However, it does not specify a commitments for specific services in 35 sub- statutory comment period for such consultations. It sectors, as well as national treatment commitments is currently unclear whether the FIL implementing in specific services in 30 sub-sectors (23 full, regulations will specify a statutory period. The PRC 7 partial). “Partial” in this context means that Legislative Law, the Regulations on Procedures although commitments have been made there are for the Formulation of Administrative Regulations still limitations or reservations, which may differ (last amendment effective May 1, 2018), and the in their restrictiveness. For example, they may be Regulations on Procedures for the Formulation more restrictive by limiting the equity contribution of Rules (last amendment effective May 1, 2018), of the foreign investor or less restrictive by merely mandate public consultation for the passage of requiring foreign service suppliers become a laws, regulations and rules in general. The comment member of a union chamber. In addition, under period is generally not less than 30 days. GATS every member country is obligated to unconditionally extend to service suppliers of all B. International Legal Instruments other WTO members Most-Favored Nation (MFN) Regulating Foreign Investment Treatment. However, China has made reservations in that regard, allowing it to discriminate between China has undertaken legally binding different service providers of maritime transport international investment commitments through services, based on bilateral agreements. a variety of international investment agreements (IIAs) signed at the bilateral, plurilateral Under the WTO Agreement on Trade Related and multilateral level. These commitments Investment Measures (TRIMs), China has mainly cover entry and establishment conditions, committed to not apply certain investment protection, as well as the legality of specific types measures that restrict or distort trade (local of incentives (see Table 1.). content requirements, trade balancing | 8 2019 INVESTMENT POLICY AND REGULATORY REVIEW – CHINA Table 1. China’s International Investment Framework Agreement(s) as Basis of Commitments Type of Agreement Investment Policy Dimensions Covered WTO GATS Agreements Multilateral Entry and Establishment WTO TRIMs Agreement Multilateral Entry and Establishment, Incentives WTO SCM Agreement Multilateral Incentives WTO TRIPS Agreement Multilateral Protection Treaties with Investment Provisions Plurilateral or Bilateral May cover Entry and Establishment, (22 signed, 19 in force) Protection, Incentives Bilateral Investment Treaties Bilateral May cover Entry and Establishment (127 signed, 109 in force) Protection, Incentives International Centre for Settlement of Multilateral Protection Investment Disputes (ICSID) Convention Convention on the Recognition and Multilateral Protection (Dispute settlement) Enforcement of Foreign Arbitral Awards (New York Convention) IMF Articles of Agreement Multilateral Protection (Art VIII Acceptance) Double Taxation Avoidance Agreements Bilateral Taxation (92 treaties in force) Source: World Bank Analysis requirements, foreign exchange restrictions and Agreement, 2017), its IIA with the largest home export restrictions). These measures are prohibited country measured by that country’s share in both when the obligation for the foreign investors China’s total FDI stock (China-United Kingdom is mandatory, and when it is tied to obtaining BIT, 1986), as well as an IIA with expansive an advantage (that is, an incentive). Incentives regional coverage (ASEAN-China Investment are further regulated by the WTO Agreement on Agreement, 2010). The table shows that the main Subsidies and Countervailing Measures (SCM), protection guarantees are generally provided in which amongst others prohibits certain types of the reviewed agreements. The China-Hong Kong export subsidies. Under the WTO Agreement on CEPA Investment Agreement does not provide for Trade-Related Aspects of Intellectual Property international arbitration, either between investors Rights (TRIPS), foreign investors’ intellectual and the state (investor-state dispute settlement property rights are protected. In case of a violation or ISDS) or between states. Instead, claims are of any of its WTO commitments, China may be sued referred to domestic remedies or to a Committee under the WTO dispute settlement mechanism. on Investment that is set up under the agreement. The BIT with the UK does not offer national China has further entered into obligations treatment. through international investment agreements — 109 Bilateral Investment Treaties (BITs) and 19 Some of China’s reviewed IIAs contain Treaties with Investment Provisions (TIPs) are commitments to liberalize. Both the ASEAN- currently in force. The latter category comprises China Investment Agreement and the CEPA treaties that include obligations commonly Investment Agreement with Hong Kong include found in BITs (for example, a preferential trade such commitments, but with a different scope and agreement with an investment chapter). Table under reservations. The former provides MFN and 2. provides an overview of select IIAs China’s the latter both national treatment and MFN in the latest IIA (China-Hong Kong Closer Economic pre-establishment phase. The CEPA Investment Partnership Arrangement (CEPA) Investment Agreement includes a schedule that lists measures 2019 INVESTMENT POLICY AND REGULATORY REVIEW – CHINA |9 Table 2. Comparison of China’s Select IIAs Largest Home Country Latest IIA (date of entry Expansive Regional IIA (% of total FDI stock): into force): China – Hong Coverage IIA (highest China-United Kingdom Kong Closer Economic number of members): BIT (1986) Partnership Arrangement ASEAN-China Investment Investment Agreement Agreement (2010) (2017) Scope of Application Covers Pre-establishment No Yes Yes Exclusions from Scope No Sectors or investment Taxation (except covered by the CEPA expropriation and transfers), Agreement on Trade government procurement, in Services subsidies or grants, services supplied in the exercise of governmental authority Standards of Treatment National Treatment (NT) No Pre - and post - establishment Post-establishment Most-Favored-Nation Post-establishment Pre - and post - establishment Pre - and post - establishment Treatment (MFN) Fair and Equitable Yes Yes Yes Treatment (FET) Full Protection & Security Yes Yes Yes Expropriation Direct and indirect Direct and indirect Direct and indirect expropriation, payment expropriation, payment expropriation, payment of compensation of compensation of compensation Rights to Transfer Funds Yes Yes Yes Prohibition of No TRIMs+ (Prohibiting a larger TRIMs+ (Prohibiting a larger Performance number of performance number of performance Requirements requirements than TRIMs) requirements than TRIMs) Dispute Resolution State-State Dispute Yes No Yes Settlement Investor-State Dispute Yes No Yes, limited to post- Settlement (arbitration) establishment Source: World Bank Analysis based on IIAs obtained from United Nations Conference on Trade and Development (UNCTAD) Investment Policy Hub that do not comply with the commitments, and a that does not conform to the commitments under schedule which lists sectors and activities in which the Agreement, thereby substantially diluting the countries may maintain existing, or adopt new or liberalization commitments. Both agreements more restrictive measures. It further includes a prohibit the use of performance requirements. The “ratchet mechanism”, which ensures that any future provisions go beyond TRIMs in scope and include regulatory or legal change that makes it easier for a higher number of performance requirements that investors from one party to access the other party’s are prohibited (a so-called TRIMs+ standard). market will automatically be locked-in under the Agreement and cannot be made more restrictive China is a member of treaties covering thereafter. The ASEAN-China Investment investment arbitration. It is a member of the Agreement does not include such lists but makes a Convention on the Recognition and Enforcement general reservation for any existing or new measure of Foreign Arbitral Awards (New York Convention) | 10 2019 INVESTMENT POLICY AND REGULATORY REVIEW – CHINA and the International Centre for Settlement of on coordinating with foreign counterparts, and Investment Disputes Convention, facilitating the implementing and organizing foreign investment enforcement of arbitral awards. It has to date been promotion strategies, plans and activities such as a respondent in three publicly known investor- trade fairs and exhibitions to promote FDI and State arbitrations. One of these disputes has been OFDI at the international, regional, national and decided in favor of the State, one has been settled, local levels. For a detailed overview of DFIA’s while one remains pending. functions, see Box 1. Acceptance of Art. VIII of the International Further, an internal department of the NDRC Monetary Fund (IMF) Articles Agreement called the Department of Foreign Capital requires China to maintain current account Utilization and Overseas Investment (DFCUOI) convertibility, enabling investors to transfer is charged with consolidating analysis of the certain payments related to their investments. utilization of foreign capital, promotion, strategy, China is also party to 92 Double Taxation Avoidance planning, and setting goals and policies on the Agreements that are in force, influencing its ability utilization of foreign investment. to tax foreign investors and their investments. Sub-National Investment Promotion C. Key Institutions for Agencies Investment Promotion The national MOFCOM has its local counterparts The FIL mandates the government at all levels, at provincial, municipality, city and district levels including its relevant competent departments, charged with foreign investment promotion to optimize and provide foreign investment functions at the local level. Certain provincial services and facilities to foreign investors, governments also have established foreign without specifying the services to be provided. investment promotion agencies as counterparts It is unclear whether the implementing regulations of the CIPA for coordinating with industry will further clarify this area. The FIL also associations, other governmental departments and empowers the local governments in the country to foreign organizations to host investment promotion formulate policies and measures for the promotion events such as trade fairs, investment presentations and facilitation of foreign investment within their and exhibitions. Local governments, management statutory jurisdictions. committees of industrial park zones, development zones and free trade zones may also set up foreign investment promotion bodies or charge an existing National Level Institutions body with foreign investment promotion functions, The MOFCOM and the National Development such as the investment promotion bureaus. and Reform Commission (NDRC) are the two most important national agencies for The national MOFCOM oversees and directs foreign investment promotion in the country. its local counterparts. The CIPA also cooperates More specifically, an internal department with local investment promotion agencies. One within the MOFCOM called the Department of CIPA’s functions is to guide the work of local of Foreign Investment Administration (DFIA) investment promotion agencies and carry out and a public institution directly under the investment promotion activities in cooperation MOFCOM supervision called the China with local governments and other departments, Investment Promotion Agency (CIPA), are both institutions and enterprises. tasked with promoting foreign investment at the national level. The DFIA is also charged D. Foreign Investment Promotion with the regulatory function of reviewing and Strategy approving foreign investment proposals and managing FDI recordals. The CIPA on the other The MOFCOM and the NDRC jointly publish hand is responsible for promoting both inbound and periodically update the Catalogue for the FDI and outbound FDI (OFDI), and focuses Guidance of Foreign Investment Industries, 2019 INVESTMENT POLICY AND REGULATORY REVIEW – CHINA | 11 Box 1. DFIA’s Functions The DFIA’s main functions are to: n Provide macro-guidance to and carry out general management of nationwide efforts in foreign investment promotion. n Analyze and study cross-border and FDI trends, and report relevant developments to the State Council on a regular basis, coordinate opinions among relevant departments, and develop suggestions on key issues concerning the promotion of foreign investment. n Participate in the formulation of development strategies and mid-term and long-term plans for foreign investment utilization as well as the objective of improvements in regional-level industrial structures. n Draft laws and regulations on foreign investment absorption, formulate relevant rules, policies and reform schemes and organize the implementation, and supervise and examine any subsequent enforcement. n Participate in the formulation and release of the Catalogue Guiding Foreign Investment in Industry. n Formulate policies concerning the transfer of assets, equity rights and management rights to foreign investors as well as related merger and acquisition, contract operation and leasing issues. n Administer and guide the examination and approval, as well as filing, of foreign investments nationwide. n Work with relevant agencies to establish the inter-ministry joint meeting for security review of merger and acquisition of domestic enterprises by foreign investors, and participate in the formulation of the catalogue of security review of merger and acquisition of domestic enterprises by foreign investors. n Monitor and examine foreign-funded enterprises’ compliance with the relevant laws and regulations. n Establish multilateral and bilateral investment promotion mechanisms and organize major cross- region activities on investment promotion and presentation of foreign investment policies, lead the coordination of China’s positions on investment issues in multilateral, bilateral and regional negotiations. n Guide and coordinate national economic and technological development zones, industrial parks and cross-border economic cooperation areas, formulate and implement development strategies, policies, laws and regulations, liaise in special economic zones for foreign investment attraction. n Study, draft and implement programs and policies on regional FDI and investment cooperation, guide and coordinate the construction of platforms like industrial transfer and investment promotion center and demonstration parks, optimize the pattern of foreign investment, coordinate, guide and monitor the complaints of foreign investment enterprises nationwide. setting out the industries where foreign 2004, 2007, 2011, 2015 and 2017. The Catalogue investment is encouraged, restricted or is expected to remain in force after the FIL comes prohibited. The Catalogue is divided into two into effect on January 1, 2020. At present, only the parts: (i) encouraged category, and (ii) the Negative “encouraged” industries section in the Catalogue List that itemizes the prohibited and restricted remains effective (with the other two sections categories. Industries that are not specifically listed repealed by the Negative List as described in within the Catalogue are considered “permitted” Section 3, below). by default without any foreign shareholding caps or other restrictions. The Catalogue may specify The Catalogue includes a comprehensive that foreign investment take certain forms or list of 12 industries with 348 subsectors and that the foreign shareholder’s proportion of the business activities in which FDI is encouraged investment in the enterprise be limited to a certain (Encouraged Sectors), reflecting a significant equity threshold. The Catalogue was first issued emphasis on manufacturing industries. FDI in in 1995 and subsequently amended in 1997, 2002, the Encouraged Sectors is eligible for incentives and | 12 2019 INVESTMENT POLICY AND REGULATORY REVIEW – CHINA preferential treatment specified in the relevant laws China (2017 Revision). This catalogue sets out the and administrative regulations. The Encouraged industries where foreign investment is encouraged Sectors are listed in Box 2. below. for the central and western parts of China. The MOFCOM and the NDRC have also jointly MOFCOM’s DFIA and NDRC’s DFCUOI are published the Catalogue of Priority Industries primarily responsible for proposing reforms to the for Foreign Investment in Central and Western country’s foreign investment regime and policies. Box 2. Encouraged Sectors listed in the Catalogue for the Guidance of Foreign Investment Industries n Agriculture, Forestry, Animal Husbandry and Fishery n Mining Industry n Manufacturing Industries n Agricultural and Sideline Food Processing n Food Manufacturing n Manufacturing of Wine, Beverage and Refined Tea n Textile Industry n Textile, Clothing and Apparel Sectors n Leathers, Furs, Feathers and Related Products and Shoemaking n Wood Processing and Wood, Bamboo, Rattan, Palm Fiber and Straw Products n Manufacturing of Supplies for Culture and Education, Industrial Arts, Sports and Entertainment n Petroleum Processing, Coking and Nuclear Fuel Processing n Manufacturing of Chemical Raw Materials and Chemical Products n Pharmaceutical Industry n Chemical Fiber Manufacturing n Rubber and Plastic Products n Nonmetallic Mineral Products n Nonferrous Metal Smelting and Rolling Industries n Metal Products n General Equipment Manufacturing n Special-Purpose Equipment Manufacturing n Automobile Manufacturing n Manufacturing of Railways, Ships, Aircrafts and Other Transportation Equipment n Electric Machinery and Equipment Manufacturing n Manufacturing of Computers, Communication and Other Electronic Equipment n Manufacturing of Instruments and Meters n Comprehensive Utilization of Waste Resources n Production and Supply of Electric Power, Heating Power, Fuel Gas and Water n Transportation, Warehousing and Postal Service Industries n Wholesale and Retail Industries n Leasing and Commercial Service Industries n Scientific Research and Technical Services n Water Conservancy, Environmental, and Public Facility Management Industries n Education n Health and Social Services n Cultural, Sports and Entertainment Industries 2019 INVESTMENT POLICY AND REGULATORY REVIEW – CHINA | 13 3. INVESTMENT ENTRY AND ESTABLISHMENT Market Entry and Sectoral Limitations Prohibited and Restricted Sectors Foreign investment is expressly prohibited in Table 3 lists the Prohibited and Restricted certain sectors or business activities (Prohibited Sectors based on the Negative List. Sectors) and restricted in certain others (Restricted Sectors) pursuant to the Negative A foreign investor may establish a wholly foreign List published jointly by the MOFCOM and owned enterprise, except in restricted industries in the NDRC. The Negative List originated from the the Negative List that require a Sino-foreign joint Catalogue for the Guidance of Foreign Investment venture or impose foreign shareholding caps. A Industries. In July 2018, the Negative List was foreign investor may not bypass these restrictions issued as a standalone document to repeal the through mergers and acquisitions. “restricted” and “prohibited” industries sections of the Catalogue. The Negative List also sets out Restrictions on Non-Equity Contract in a centralized manner special administrative Based Investments measures applicable to FDI in restricted sectors, Foreign investors may be subject to specific such as limits on proportion of foreign investment restrictions on non-equity contract based and the requirements on senior management, investments on certain sectors. For example, and the transition periods for some sectors to pursuant to the Administrative Measures for the abolish restrictions. Compared to the prior list Registration of Enterprises of Foreign Countries of prohibited and restricted sectors, the 2018 (Regions) Engaging in Production and Operation Negative List decreased the number of items that Activities within the Territory of China (last require special administrative measures from 63 amendment effective October 27, 2017), without to 48. It also expressly empowers the MOFCOM the approval of the sectoral regulator, foreign and the NDRC to interpret the list in concert with enterprises may not conduct any production and related departments. Since the negative List is not operation activities within the territory of China. a law, amending it does not require the approval Moreover, foreign enterprises must complete of the PRC national legislative authority, the registration formalities for performing the National People’s Congress (and its standing following non-equity modes of production and committee). operation activities, or alternatively set up a FIE For industries not included in the Negative List, for these activities: the general position is that foreign investors Engineering n contracting, including for are accorded equal treatment as afforded to construction and decoration of buildings and domestic investors and FDI is permitted without civil engineering or installation of lines, pipes restrictions (unless the relevant industry or and equipment; sub-sector is closed to both foreign and Chinese investors). FDI in regulated sectors (such as n Contracting for or accepting entrustment of telecommunications, energy and banking) may the operation and management of foreign- require the sectoral regulators’ approval, including funded enterprises. for transfer of shares, change in shareholders and/ or activities relating to mergers and acquisitions, While foreign investors can outsource services even if 100% FDI is encouraged and permitted in to, or enter into licenses with qualified Chinese such sector. enterprises, foreign enterprises cannot conduct production or operation activities in China without completing relevant registrations and obtaining approvals as necessary. | 14 2019 INVESTMENT POLICY AND REGULATORY REVIEW – CHINA Table 3. List of Major Prohibited and Restricted Sectors Prohibited Sectors Scope Agriculture n Research, development, breeding and planting of China’s rare and unique precious quality varieties and production of relevant breeding materials (including quality genes of plants, animal husbandry and subjects of aquaculture) n Selection of genetically modified varieties and production of genetically modified seeds (fingerlings) in respect of crops, breeding stock and poultry, and aquatic fingerlings Fishery Fishing aquatic products in sea areas under Chinese jurisdiction and in inland waters Mining n Exploration, mining and mineral processing of rare earth and radioactive minerals n Exploration and exploitation of tungsten, molybdenum, tin, antimony and fluorite Manufacturing n Smelting/processing of radioactive minerals; production of nuclear fuels n Application of processing techniques of traditional Chinese medicine decoction pieces and manufacturing of Chinese patent medicine products with a secret formula n Production of rice paper and Chinese ink ingot Wholesale and Retail Trading Tobacco leaves, cigarettes, re-dried tobacco leaves, and other tobacco products Transport Air traffic control Postal Services Postal service companies and the business of delivery mail domestically Internet Internet news services, online publishing services, online audio-visual program services, internet culture operation (excluding music), and internet public-oriented information releasing services (excluding services permitted under China’s WTO accession commitments) Consultation and Investigation Services Social surveys Legal Services n Engagement in Chinese legal affairs (except for the provision of information relating to the impacts of China’s legal environment) n Becoming the partner of a domestic law office Scientific Research and n Development and application of technologies of human stem cell and gene Technical Services diagnosis and treatment n Humanistic and social science research institutions n Geodetic surveying, hydrographic surveying and charting, surveying and mapping via aerial photography, ground mobile surveying, surveying and mapping of administrative area borders, compiling of certain maps and regional investigations in terms of geological mapping, mineral geology, geophysics, geochemistry, hydrogeology, environmental geology, geological disasters and remote sensing geology Education Compulsory education institutions and religious education institutions Press and Publishing n News agencies (including but not limited to press agencies) n Editing, publishing and production of books, newspapers, periodicals, audio- visual products and electronic publications Radio and TV Broadcasting n All levels of broadcasting stations, television stations, radio and television channel and frequency, radio and television transmission networks and engagement in video on demand business and provision of services of installation of ground receiving facilities for satellite television broadcasting n Radio and television program production and operation 2019 INVESTMENT POLICY AND REGULATORY REVIEW – CHINA | 15 Prohibited Sectors Scope Entertainment Film production companies, distribution companies, cinema companies and the introduction of films Cultural n Enterprises selling cultural relics by auction, cultural relics stores and state- owned cultural relic museums n Cultural and artistic performance groups Wildlife Development of wildlife resources originating in China and under national protection Restricted Sectors Restrictions on Foreign Equity (some of these restrictions will be phased out in the next 2-3 years, as noted below) Agriculture—Seed Industry Selection and cultivation of new varieties of and production of seeds of wheat and corn — up to 49% Oil and Natural Gas Exploitation Only permitted via joint ventures and cooperatives Printing Printing of publications — up to 49% Automobile manufacturing Up to 50% foreign equity (except in special vehicles and new-energy vehicles) and a single foreign investor may establish up to two joint ventures in China to manufacture same type of vehicle n Foreign equity restrictions in commercial vehicle manufacturing to be removed in 2020 n Foreign equity restrictions in passenger vehicle manufacturing to be removed in 2022 n Cap on number of joint ventures to be removed in 2022 Nuclear Power Generation Construction and operation of nuclear power plant — up to 49% Pipe Network Facilities Construction and operation of urban gas pipe, heating power and water supply and sewage networks in a city with more than 500,000 residents — up to 49% Water Transportation Domestic water transportation companies — up to 49% Air Transportation for passengers Public air transportation—minority shareholding permitted and investment by a and freight single foreign investor with its related party enterprises not to exceed 25% Airport and Air Traffic Control Construction and operation of civil airports — up to 49% Telecommunications n Value-added telecom (excluding e-commerce) — up to 50% n Basic telecom — up to 49% Capital Market Services Securities company, securities investment fund management company, futures company — less than 51% n Cap to be removed in 2021 Insurance Life insurance company — less than 51% n Cap to be removed in 2021 Market Surveys n Only permitted via joint ventures and cooperatives n Broadcasting and TV listening and rating survey — up to 49% Health Only permitted via joint ventures and cooperatives Film Distribution and Projection Construction and operation of cinema — up to 49% Cultural and Entertainment Performance brokerage institutions — up to 49% Source: Analysis by Baker McKenzie based on country’s laws and regulations Note: The table is based on a review of 32 specific sectors identified for the purpose of this research. The list of sectors is therefore not exhaustive.2 | 16 2019 INVESTMENT POLICY AND REGULATORY REVIEW – CHINA Forms of Establishment of Activities of Overseas Non-Governmental Organizations within the Territory of China Foreign investors are forbidden to engage in (last amendment effective November 5, 2017). investment activities as individual businesses, Foreign aviation companies are permitted to set investors of sole proprietorship enterprises up representative offices in accordance with the or members of farmers’ professional Administrative Measures for the Examination and cooperatives. In addition, there are specific Approval of Permanent Representative Offices regulations setting out the requirements or of Foreign Air Transport Enterprises (effective conditions when establishing entities via a type September 1, 2018). of legal form (for example, EJV, CJV, WFOE) or sector, as noted below. Minimum Investment and Paid-Up Capital Foreign investors can establish foreign funded joint Requirements stock companies and invest in listed companies. While there is no general minimum investment Foreign investors can also establish foreign or registered capital threshold for FDI, certain invested partnership and limited partnership industry specific regulations may impose a enterprises in sectors other than those restricted requirement on FIEs. For example, under the under the Negative List. Further, the new FIL Tentative Measures for Administration of Chinese- permits foreign investors to establish an LLC foreign Joint Venture and Cooperative Medical entity in accordance with the PRC Company Law Institutions (effective July 1, 2000), there is a instead of being limited to the entity types under minimum RMB20 million investment requirement the old EJV, CJV and WFOE Laws. The FIL also for a Chinese-foreign joint venture or cooperative provides a 5-year grace period to FIEs established medical institution to be established. Similarly, in accordance with the old EJV, CJV and WFOE under the Provisions on the Administration of Laws to reorganize their corporate structures. Foreign-funded Telecommunications Enterprises Specific implementation measures were not put in (last amendment effective February 6, 2016), if a place at the time of writing of this review. foreign funded enterprise is engaged in basic telecom Although the PRC Company Law contains business nationwide or beyond a single province, provisions that cover the establishment of autonomous region or municipality directly under branch offices of foreign enterprises in China, the Central Government, it must have registered in practice, foreign enterprises are not allowed capital not less than 1 billion yuan. If it is engaged to set up branch offices in the country. There are in the value-added telecom businesses, it must have certain exceptions: for example, foreign insurance registered capital not less than 10 million yuan. companies are permitted to establish branch Under the Provisions on Investment Companies offices in accordance with the Regulation on the Established by Foreign Investors (revised in Administration of Foreign-Funded Insurance 2015), a foreign investor who intends to establish Companies (last amendment effective February 6, a wholly owned investment company must meet 2016) and foreign banks are permitted to establish the following conditions: branches in accordance with the Regulation on the Administration of Foreign-Funded Banks (last n It has sound credit and the necessary economic amendment effective January 1, 2015). strength to establish an investment company, has not less than US$400 million worth of assets Certain foreign enterprises and organizations, during the year before the application, and it such as non-governmental organizations has established at least one FIE in the PRC, (NGOs), news agencies, etc. may set up with US$10 million or more paid-in registered representative offices in China, subject to capital; or specific additional regulations. For example, foreign non-governmental organizations are n It has sound credit and has the necessary economic permitted to set up representative offices in strength to establish an investment company, and accordance with the Law on the Administration it has established 10 or more FIEs in PRC, with US$30 million or more paid-in registered capital. 2019 INVESTMENT POLICY AND REGULATORY REVIEW – CHINA | 17 Quantitative Limits must be advanced and appropriate to the country’s needs. At the same time, a foreign party is not There are generally no mandatory quantitative obligated to contribute technology as a matter of limits on the number of foreign service law. The CJV law also permits the foreign party providers or enterprises that can operate in a to make contribution in the form of non-patented given sector. However, there may be certain sector technology but does not require such technology to specific quantitative limitations. For example, be advanced. pursuant to the Negative List, until 2022, a single foreign investor may only establish up to two joint ventures in China to manufacture the same type Foreign Investment Approval of vehicles other than special vehicles and new- China’s FDI regime has been undergoing energy vehicles. reforms to switch from an approval-based system to a recordal system. Under the approval- Restrictions on Expatriate Appointments based system regulatory approvals are required for FDI in a restricted industry or business There are some sector-specific limitations on activity on the Negative List, whereas under the appointment of foreigners to the board or the recordal system, no approvals are required to key managerial positions of local companies. for FDI in fields outside the Negative List, other For example, the Negative List mandates that legal than filings with the regulator. The general trend representatives of general aviation companies is that fewer FDI matters will require regulatory and public air transportation companies must be approvals. Depending on the industry/sector and Chinese citizens. Similarly, the Negative List the investment scale, approval from the national prohibits a foreign citizen from entering into or local counterparts of the MOFCOM, national or partnership with a domestic law office. Further, local counterparts of the NDRC, and/or industry/ the Regulations on the Management of the sector specific regulators may still be required. For Employment of Foreigners in China (revised in example, foreign investment equal to or greater 2017) require employers to hire foreigners for than US$300 million in a restricted industry on the openings with special needs that cannot be filled Negative List requires approvals from the national by domestic candidates at the time. MOFCOM and the NDRC. For foreign investment The process and specific timelines to obtain less than US$300 million in a restricted industry expatriate work permits are stated in the on the Negative List, approvals from provincial Service Guide on Licensing for Foreigners counterparts of the MOFCOM and the NDRC are to Work in China (effective March 29, 2017). required. For foreign investments outside of the The Guide requires a decision be made within Negative List only recordals are required with the 20 working days for work permits for a period local counterparts of the MOFCOM and the NDRC. of more than 90 days, with an extension of 10 Certain foreign investments may trigger working days allowed for special cases. For work the scrutiny of the Chinese anti-monopoly permits for a period of less than 90 days and an regulator if the investment thresholds exceed invitation letter to foreign experts, a decision must specific amounts. An investment may also trigger be made within 5 working days. a national security review by the MOFCOM and its local counterparts if it invokes national interest Local Sourcing and R&D Requirements issues. For instance, if a merger or acquisition falls within a key sensitive sector such as There is no overarching legal requirement that defense manufacturing, military equipment, subjects foreign investors to local sourcing key agricultural products, energy resources, requirements or local R&D investments in infrastructure and so forth, the investment will order to establish business in China. Article 5 of be subject to the scrutiny of an inter-ministerial the EJV law states that if the equity contribution joint committee comprised of the MOFCOM and by the foreign party is in the form of technology NDRC to oversee the review. and equipment, such technology and equipment | 18 2019 INVESTMENT POLICY AND REGULATORY REVIEW – CHINA Starting on June 30, 2018 the “One Window, Approval and Record-filing of Foreign Investment One Form” policy has been implemented for the Projects (effective June 17, 2014), and the Interim establishment of FIEs to simplify the process. Administrative Measures for the Record-filing Foreign investors can complete both the MOFCOM of the Incorporation and Change of Foreign- recordal and application for business license at the invested Enterprises (effective June 30, 2018). The local bureau of the State Administration for Market implementing regulations for the EJV, CJV, and Regulation to set up an FIE outside the scope of WFOE Laws specify a statutory time period of 90 the Negative List. The materials and information days for EJV and WFOE and a period of 45 days for required for these filings and the regulatory scrutiny CJV. The new FIL does not specify such a period. It have been scaled down significantly. is likely that the FIL implementing regulations will address this issue. Foreign investment approval is generally valid for the operating term of the FIE. Subsequent The Interim Measures for the Recordation investments or transactions following the Administration of the Formation and establishment of a FIE listed on the Negative List, Modification of Foreign-Funded Enterprises, such as a merger or division in a sector, change of published in 2016, establish a recordal based shareholder, increase of investment, extension of system for FIEs instead of approval on a operating term, or change of business scope, are nationwide scale. Historically, a FIE could only be subject to approvals by the MOFCOM. established after receiving approval from relevant MOFCOM authorities. Now, FIEs not falling The process of obtaining relevant approvals within the Negative List only need to complete is set out in the legal instruments that impose recordal with the MOFCOM, thus eliminating the the approval requirements. These are the old case-by-case MOFCOM approval system and implementing regulation for the EJV Law, CJV Law simplifying and speeding up the process for foreign and WFOE Law, the Administrative Measures for investors. 2019 INVESTMENT POLICY AND REGULATORY REVIEW – CHINA | 19 4. INVESTMENT PROTECTION Protection Against Expropriation regulations for current account transactions have become flexible but government approval is still The FIL, in Article 20, protects foreign required for certain capital account transactions investors against expropriation, subject to the (generally, items of a non-trade, non-recurring public interest exception. It states that under nature, such as investment in China, real estate special circumstances, the State may expropriate purchases, repayment of principal of foreign for public interest in accordance with the law currency loans and contributions to registered subject to timely and reasonable compensation capital). The general trend is to reduce government provided to the investor. The FIL also expressly approval and permit capital account transactions requires the State to protect the intellectual to be processed by the designated banks. Box 3. property rights (IPRs) of foreign investors and lists restrictions on specific types of payments/ FIEs. Further, it prohibits administrative agencies transactions. to force transfer of technology by administrative means. Instead, it mandates the State to encourage Currency can be converted at the market rate technical cooperation based on voluntary of exchange instead of an artificially fixed rate. principles and business rules, and the conditions FIEs also have access to the interbank market for for such cooperation are to be determined by equal the purchase and sale of foreign exchange through negotiation between the parties to the investment the designated banks. in accordance with the principles of fairness. Pursuant to the Provisions on the Foreign Similarly, the Constitution of the PRC Exchange Administration of Domestic Direct provides for the protection of private property Investment of Foreign Investors and the and permits the State, for reasons of public Supporting Documents (last amendment effective interest, to expropriate or requisition private 10 October 2018), international payments in property for its use, subject to compensation. foreign exchange and the transfer of foreign The PRC Property Law also establishes a exchange under the current items is not subject framework of property rights protection, including to any state control or restriction. In practice protection for moveable property and real estate however, procedural and documentary requirements (immovable property), permitting expropriation create de facto restrictions and inefficiencies. By for public interest, subject to paying reasonable way of example, for an FIE to allocate its profits to compensation. These protections apply equally to foreign shareholders, board resolutions and proof both domestic enterprises and foreign investors. of tax payment (on the profits) must be provided. The proof of tax payment can be time-consuming to Restrictions on Inflow and Outflow process and obtain in practice. In 2017, when China of Funds was tightening control of foreign exchange outflows, there were reports that banks were required to Pursuant to the FIL, a foreign investor may make prior filings with the State Foreign Exchange freely transfer inward and outward capital Administration (SAFE) and that for large remittances (net of applicable taxes and subject to other of profits, the applicant would have to meet face to standard compliances). This includes capital face with the SAFE for the relevant approval. For contributions, profits, capital gains, income remittances of licensing fees, for example, the SAFE from asset disposal, IPR royalties, lawfully requires documents authenticating the transaction, obtained compensation or indemnity, income such as contracts, invoices, and a technology import from liquidation and other similar proceeds in registration certificate. renminbi (RMB) or a foreign currency. In practice, | 20 2019 INVESTMENT POLICY AND REGULATORY REVIEW – CHINA Box 3. Restrictions on Specific Types of Payments/Transactions Inflow of initial equity investment — Pursuant to the Notice of the State Administration of Foreign Exchange on Issuing the Provisions on the Foreign Exchange Administration of Domestic Direct Investment of Foreign Investors and the Supporting Documents, the actual inflow amount must not exceed the permitted inflow amount by more than US$30,000 in aggregate. There are also various regulations on the permitted use of funds in the capital account. For example, the Circular of the State Administration of Foreign Exchange on Reforming the Management Approach regarding the Settlement of Foreign Exchange Capital of Foreign-invested Enterprises, stipulates that the capital of FIEs (RMB or foreign currency) cannot be directly or indirectly used for the following purposes: n Payment beyond the business scope of the FIEs or the payment prohibited by national laws and regulations; n Investment in securities unless otherwise provided by laws and regulations; n Granting entrustment loans in RMB (unless permitted by the scope of business), repaying inter- enterprise borrowings (including advances by the third party) or repaying bank loans in RMB that have been sub-lent to the third party; and n Paying expenses related to the purchase of real estate not for self-use, except for foreign-invested real estate enterprises. Inflow of foreign loan — Pursuant to the Interim Measures on the Management of Foreign Debts, the difference between total investment amount and the registered capital amount is the maximum amount of foreign debt an FIE may incur. A foreign loan exceeding this difference must be approved by SAFE. Further, all foreign loans are required to be registered with SAFE. It is unclear whether this will still be the case after the new FIL is implemented. Only medium-term or long-term foreign debt can be used for the approved purposes and any change in the purpose of use is subject to approval. Short-term foreign debt can be used mainly as circulating funds and cannot be used for medium-term or long-term purposes such as in fixed assets. Outflow of funds — China has introduced a form of current account convertibility under which FIEs may purchase foreign exchange for current account expenditures without the necessity of obtaining government approval. The country permits the conversion of RMB into foreign exchange for remittances of after-tax profits or dividends to foreign investors in FIEs. Foreign exchange remittances and receipts must go through authorized banks designated to handle foreign exchange transactions. Instead of government approval for foreign exchange remittances and receipts, the designated banks examine the documentation for the underlying transaction to ensure that the proposed payment or receipt qualifies as a current account item and other relevant requirements are met. Dispute Settlement Mechanisms Law of the PRC (last amendment effective July 1, 2017). A foreign investor in China can generally access dispute settlement through domestic courts, or The FIL mandates the State establish a complaint domestic or international arbitration. China’s mechanism for foreign-funded enterprises, bilateral investment treaties mostly do not include provide timely solution to the problems mandatory recourse to domestic courts before reported by foreign-funded enterprises or referring the dispute to international arbitration. their investors, and coordinate and improve In most cases, investors have the option to choose relevant policy measures. Yet it remains unclear between the domestic court and international how the new mechanism will be different from arbitration under the treaties. Foreign investors the existing systems of administrative review and may seek administrative review and administrative administrative litigation. The FIL implementing litigation in accordance with the Law of the PRC on regulation is expected to provide more details on Administrative Review (last amendment effective the scope of protection and how these provisions January 1, 2018) and the Administrative Procedure will be interpreted and applied. 2019 INVESTMENT POLICY AND REGULATORY REVIEW – CHINA | 21 5. INVESTMENT INCENTIVES China’s investment incentives regime applies Most tax incentives are in the form of tax equally to both domestic and foreign investors. holidays based on favored industry, technology Until January 1, 2008, domestic enterprises and or economic zone, not on the identity of foreign FIEs were afforded different tax treatment at the or domestic entities. For example, specified national and local level. The two different tax basic infrastructure projects in harbor, wharf, regimes were harmonized with the passage of airport, railways, highways, and electric power the PRC Enterprise Income Tax Law effective may be eligible for a 6 year tax holiday, with on January 1, 2008, pursuant to which domestic CIT exempted for first 3 years and 50% reduction and foreign enterprises are subject to a unified for the next 3 years. Similarly, zone specific corporate income tax (CIT) and benefits regime. investments may be eligible for tax incentives The existing regulations provide “tax deferral” and preferential treatment based on the region on reinvestment into China under which the 10% of investment. Other tax incentives may also be withholding tax can be deferred if the dividends available for enterprises using State specified raw from China subsidiaries are used for other materials as resources for the production of non- investments in China. restricted and non-prohibited items or investing in plants and machinery for State specified Investments in industries under the environmental protection, and energy and water “encouraged category” of the Catalogue enjoy conservation purposes. High-tech enterprises may preferential tax treatment. The Detailed Rules also be eligible for lower CIT rate and certain for the Implementation of Corporate Income R&D expense rebates. Tax Law and various tax circulars issued by the State Administration for Taxation set out the In addition to the national-level incentives, CIT incentives and eligibility criteria available state, provincial and local governments offer to investors at the central level. For example, incentives to foreign investors on an ad hoc, the Circular on Promoting the Implementation case-by-case basis to attract foreign investment. of Enterprise Income Tax Policies for Advanced They usually take into consideration factors such Technology Services Enterprises Nationwide as the scale of the investment, the number of jobs (No. 79, effective January 1, 2017), grants certain it creates, the tax revenue it will generate for the qualified enterprises that are engaged in advanced local government, and other benefits it may bring technology services a reduction in CIT rate and to the area. For example, under the Shenzhen sets out the eligibility criteria for this benefit. Administrative Measures for the Accreditation Similarly, the Announcement on the Third Party of High-tech Firms issued by the Shenzhen Enterprise Income Tax Policy Concerning Pollution government, firms wishing to be certified as Prevention and Control effective January 1, 2019, high-tech firms are required to meet Shenzhen- provides a lower CIT rate for qualified enterprises specific criteria to claim incentives. These commissioned by polluting enterprises or the include, among others, sectoral requirements (for government to operate or maintain environmental example, modern agricultural, bioengineering pollution control facilities. On May 21, 2019, the and new energy), annual R&D input percentage Chinese Ministry of Finance published a tax policy minima, minimum percentage of annual revenue notice introducing tax incentives for qualified attributable to high technology, sound corporate integrated circuit design and software companies governance practices, and good quality control established before December 31, 2018. measures, etc. It remains to be seen if, and to what extent, this practice will change under the FIL implementing regulations. The new FIL | 22 2019 INVESTMENT POLICY AND REGULATORY REVIEW – CHINA states that local governments at county level or Eligibility Criteria and Approval Process above may only formulate policies on promotion The tax and financial incentives offered at the and facilitation of foreign investment within their national level to foreign investors are generally statutory authorities, and in accordance with the contingent upon the satisfaction of the relevant laws. eligibility criteria set out in the specific circulars There is no uniform national policy providing and announcements of the applicable incentives. financial incentives such as cash grants to FIEs. These incentives do not automatically apply. Rather, However, local governments may publish their enterprises that qualify for the preferential corporate own policies providing such grants. Under the new tax rate may self-assess and self-declare to make use FIL, local government may only do so within their of the incentive, and the tax department may verify statutory authorities, in accordance with the laws. an enterprise’s eligibility after the fact. However at There is no readily accessible centralized portal the local government level, both tax and financial that serves as a repository of central, provincial incentives to FIEs are often granted on a case-by- or local tax and financial incentives available to case basis, and subject to negotiation with the FIEs. investors in the country. 2019 INVESTMENT POLICY AND REGULATORY REVIEW – CHINA | 23 6. INVESTMENT LINKAGES For the purpose of this section research was of Enterprise Income Tax on the Proceeds from focused on the availability of incentive schemes Technology Transfers issued on April 24, 2009, to increase local sourcing, technology transfer a “qualified technology transfer” must satisfy the and measures to improve information exchange following requirements: between foreign investors and domestic suppliers. Although not specifically intended n The party to the technology transfer that enjoys for FIEs (and equally applicable to domestic the preferential treatment must be a resident enterprises), certain tax benefits are available enterprise as prescribed in the Enterprise for qualified technology transfer. For example, Income Tax Law; pursuant to Article 90 of the Regulation on the n The technology transfer must fall within the Implementation of the Enterprise Income Tax scope stipulated by the Ministry of Finance and Law, income of resident enterprises (including the State Administration of Taxation; FIEs) from qualified technology transfer gets preferential treatment. The first RMB5 million in n A domestic technology transfer must be one tax year is exempted from enterprise income recognized by a department of science and tax and any portion exceeding RMB5 million is technology at or above the provincial level; taxed at half the applicable rate in one tax year. Similarly, under the Circular on Comprehensively n A technology transfer to a foreign country must Promoting the Pilot Program of the Collection of be recognized by a commerce department at or Value-added Tax in Lieu of Business Tax issued above the provincial level; on 23 March 2016, technology transfer is also n Any other requirement stipulated by the exempted from value-added taxes. Under the competent department of taxation under the Circular of the State Administration of Taxation on State Council. Issues Concerning the Reduction and Exemption | 24 2019 INVESTMENT POLICY AND REGULATORY REVIEW – CHINA 7. OUTWARD FOREIGN DIRECT INVESTMENT For this section, research was focused on whether n The following sectors: there are any legal instruments specifically covering outward investment and if there are, n Real estate industry whether they impose any restrictions on outward n Hospitality industry investment. In China, both state-owned enterprises (SOEs) and private sector enterprises can undertake n Cinemas investments overseas in accordance with the OFDI regulations. China’s OFDI regulatory regime is n Entertainment industry complex and in a state of flux. The Circular on n Sports clubs Forwarding the Guidance Opinion of the National Development and Reform Commission, the n Equity investment funds or investment Ministry of Commerce, the People’s Bank of China platforms that are established overseas without and the Ministry of Foreign Affairs on Further specific industrial projects. Guiding, and Regulating Overseas Investment Direction, published in August 2017, codifies a OFDI by Chinese investors made directly or set of principles for the Chinese government to through offshore enterprises under their control follow when regulating OFDI. It also classifies in the OFDI Sensitive Sectors require NDRC’s overseas investments into three categories, namely approval. Such approval is also required if the OFDI “encouraged”, “restricted” and “prohibited.” would jeopardize national sovereignty/security or public interest or if it involves the export of The Administrative Measures for the Outbound prohibited products or technologies, etc. Investment of Enterprises published in December 2017 and the Interim Measures for the OFDI in other sectors is subject to filings under Reporting of Outbound Investments Subject to the recordal procedure. Investors are required Record-filing or Approval published in January to provide a substantial number of documents 2018 regulate OFDI activities in general, setting and information to various authorities that have a out requirements for approval/recordal for certain degree of discretion in deciding whether to such investments. The Code of Conduct for the accept a filing or not. Operation of Overseas Investments by Private The OFDI regulations have been relaxed over Enterprises published in December 2017 regulates time as a whole, but in recent years the PRC private sector OFDI. government has reasserted more control over In February 2018, the NDRC published the OFDI to curb capital outflow for investments Catalog of Sensitive Sectors for Outbound that do not directly contribute to China’s Investment (effective on March, 1 2018) that sets investment competitiveness and development out the following sensitive sectors where OFDI is goals (for example, OFDI in cinema studios and restricted (OFDI Sensitive Sectors): football clubs). Since China announced its “Going Out” strategy in 2001, the OFDI regulations have n Research, development, manufacturing and been incrementally streamlined and liberalized by maintenance of weaponry; measures such as simplifying approval procedure and documentation requirements, increasing n Exploitation and utilization of water resources currency thresholds for seeking approval, and across borders; delegating authority from national regulators to n News media; and their provincial counterparts, etc. In 2014, the general framework for OFDI was changed from 2019 INVESTMENT POLICY AND REGULATORY REVIEW – CHINA | 25 an approval-based system to a recordal system, 2017) and the Interim Measures for the Reporting similar to the Negative List approach for FDI. In of Outbound Investments Subject to Record-filing 2016, however, the PRC government announced or Approval (issued in January 2018), represent its intention to strengthen the OFDI regulations this trend of tightening the regulations and in response to certain OFDI investments in real reasserting control over the OFDI. estate, cinema, entertainment and sports clubs and so forth that drew the Chinese public’s The main authorities that administer OFDI are: attention and were perceived as relatively risky. (i) the NDRC, (ii) the MOFCOM, (iii) the State The subsequently-issued regulations, including Administration of Foreign Exchange, and (iv) the the Administrative Measures for the Outbound State-owned Assets Supervision and Administration Investment of Enterprises (published in December Commission, if SOE investments are involved. 8. RESPONSIBLE INVESTMENT For this section, research was focused on whether these other laws are the Environmental Protection there are any measures within the country’s Law (last amendment effective January 1, 2015) investment legislation that are specifically and the Product Quality Law (last amendment targeted to ensure responsible investment. effective December 29, 2018). These laws and There are responsible investment measures in regulations apply to all domestic and foreign other laws and regulations of the country, but invested companies in China, so there are no China’s foreign investment law and policy do measures specific to foreign investment. not include an explicit reference. Examples of | 26 2019 INVESTMENT POLICY AND REGULATORY REVIEW – CHINA 9. RECENT POLICIES ON NEW TECHNOLOGIES This section considers China’s recent policy Data Localization measures on new technologies (that may affect both domestic and foreign investors). Globally, China does not have an omnibus data privacy policy measures on new technologies tend to focus regulation that imposes data localization on the enabling (sectoral) regulatory framework, as requirements, but there are specific regulations well as on incentives, digital standards, and clusters. that apply to certain types of data. For example, At the same time, countries have taken measures according to Article 37 of the PRC Cyber Security that highlight their changing approaches to national Law (effective June 1, 2017), “key information security. Other emerging policies that, though not infrastructure” operators must store personal directly related to investment, nevertheless impact information and important data gathered and investments are data localization requirements produced during operations within China. The as well as rules and regulations concerning the “key information infrastructure” is broadly defined treatment and use of digital data. to include public communications and information service, energy, transport, water conservancy, In China several measures have been taken that finance, public services, e-government affairs and influence the development of the digital economy and other important and other important industries and investment in new technologies. Both the Internet of fields. It further includes other key information Things and 3D printing have been included in the infrastructure that will result in serious damage Catalogue for the Guidance of Foreign Investment to the national security, national economy and Industries, encouraging foreign investment in such people’s livelihood and public interests if they are sectors. Moreover, there have been discussions destroyed, there are lost functions or they are subject around China opening up cloud printing to foreign to data leakage. Where it is necessary to provide investment. Currently foreign investors can only such information and data to overseas parties due enter this sector via a Sino-foreign joint venture and to business requirements, a security assessment there is a 49% limitation on foreign shareholding. The must be conducted by the local provincial-level PRC Cyber Security Law came into effect on June 1, cyberspace department in accordance with laws 2017 and applies to all domestic and foreign invested and regulations. This applies to both domestic companies alike. The Cyber Security Law sets out enterprises and foreign investors. requirements and restrictions on the collection of Big Data and cross-border transfer of personal data. On June 13, 2019, the PRC Cyberspace Administration published the Circular of the Cyberspace Administration of China on Seeking Public Opinions on the Measures for Security Assessment for Cross-border Transfer of Personal Information (Draft for Comment). The draft measures set out the proposed detailed requirements for the security assessment of cross- border data transfer. 2019 INVESTMENT POLICY AND REGULATORY REVIEW – CHINA | 27 10. CITY SPECIFIC REVIEW — SHANGHAI Shanghai has consistently been at the forefront markets, foreign exchange, service industry, of the implementation of China’s reform and manufacturing of automobiles, aircrafts and opening-up policy over the past four decades. ships, intellectual property rights protection, trade As the economic hub of China, Shanghai leads the environment for goods and service imports. Yangtze River Economic Belt and serves as China’s center in multiple sectors such as finance, trade, Policies and regulations published at the transportation, technology and innovation. It is national level take precedence over policies also the location of the China (Shanghai) Pilot Free and regulations published at the subnational Trade Zone (SHFTZ), the first pilot free trade zone level. Traditionally, local governments (including in China, established in 2013. Shanghai) may publish their own policies and regulations to compete for foreign investment. The key local regulatory measures for promoting In the past, not all such measures were in strict foreign investment in Shanghai (excluding compliance with the law. To address this issue, the SHFTZ) are: new FIL explicitly states that local governments at county level or above may only formulate policies n The Opinions on Further Opening up and on promotion and facilitation of foreign investment Accelerating the Establishment of a New System within their statutory authorities, in accordance for an Open Economy (also known as the “33 with the laws. The new FIL also explicitly states new measures”), and that governments at all levels and their relevant n The Action Plan of Shanghai for Implementing departments may not impair the legitimate rights Major National Measures for Further Openness and interests of nor impose any additional obligation and Accelerating the Establishment of a New on a foreign-funded enterprise, set any condition System for an Open Economy (also known as the for market access and withdrawal, or intervene in “100 new measures”). any normal production and operation activity of a foreign-funded enterprise, unless supported by These were issued by the Shanghai Municipal relevant laws and regulations. Government on April 26, 2017 and July 10, 2018, respectively. The local policies and regulations in Shanghai do not generally impose additional policy and In particular, the 2018 action plan offers 100 regulatory barriers for foreign investment. As initiatives of preferential and favorable policies elaborated above, legally, any specific policy and for foreign investment in Shanghai. It covers regulatory barriers at the city level that contravene aspects of banking, security, insurance, financial national laws and regulations will be invalid. | 28 2019 INVESTMENT POLICY AND REGULATORY REVIEW – CHINA 11. COMPETITION LAW & POLICY For the purpose of this section research n Guiding Opinions on Documents and Materials was focused on merger control and leniency Required for the Notification of Concentration of frameworks in the country. Undertakings; The primary law governing competition in n Working Guidance for Anti-Monopoly Review China is the Anti-Monopoly Law (AML), on Concentration of Undertakings; which was adopted by the Standing Committee of the National People’s Congress (NPC) on n Explanation on the Implementation of the August 20, 2007 and came into effect on August notification Form for Anti-Monopoly Review of 1, 2008. It applies throughout the PRC with the Concentration of Undertakings; exception of the two Special Administrative n Guiding Opinions on the Notification of Regions of Hong Kong and Macau. The AML Concentration of Undertakings Subject to prohibits monopolistic conduct, which can be Simplified Procedure; divided into the following broad categories: n Guiding Opinions on Regulating the Titles of n Anti-competitive agreements between Cases on the Notification of Concentrations of undertakings; Undertakings. n Abuse of a dominant position; and The merger control regime under the AML applies n Mergers that may have the effect of eliminating or to all transactions: that (i) meet the definition of a restricting competition. “concentration” and (ii) where the parties meet the turnover thresholds. A foreign investor need not have Implementing rules and guidelines assist in a physical presence in China for a filing to be triggered. the application and interpretation of the Anti- A “concentration” arises where there is a merger Monopoly Law. between undertakings or an acquisition of control over one or more undertakings by acquiring equity interests, The Anti-Monopoly Bureau (AMB, Competition assets or being able to exercise decisive influence over Authority or CA) under the newly created State one or more undertakings by contract or any other Administration for Market Regulation (SAMR), means. There is no definition of “control”, however it established in 2018, is the main body in-charge of is understood to mean rights, contracts or other means implementing competition law and policy in the which, either separately or in combination, and in all the country. Enforcement powers had previously been factual and legal circumstances, confer on the acquirer vested in three agencies (the National Development the ability to exercise decisive influence on a business and Reform Commission, the State Administration operator. Under the Notification Guidance, a newly for Industry and Commerce, and the Ministry of established joint venture constitutes a concentration Commerce). if at least two undertakings jointly control the joint venture, including greenfield joint ventures and joint A. Merger Control ventures formed by way of acquisition or change of control. To meet the turnover thresholds, the parties Merger control in China is governed by the to the concentration must generate RMB10 billion AML, as well as by the following measures and globally or RMB2 billion in China, and two or more guidelines passed by SAMR on September 29, 2018 parties to the concentration must each generate (collectively, the China Merger Control Regime): RMB400 million in China according to the Provisions n Guiding Opinions on the Notification of the of the State Council on the Standards for Concentration Concentration of Undertakings; of Business Operators. 2019 INVESTMENT POLICY AND REGULATORY REVIEW – CHINA | 29 Note that foreign investments may trigger other Control Regime to stop the clock once a filing has filings and/or require approvals under other legal been accepted and the formal review clock begins. instruments such as the Foreign Investment Law from other entities such as the MOFCOM. Remedies Per Section 9 of the AML, the CA can accept Pre-notification Meetings remedies proposed by merger parties to address Before formally submitting a merger filing, the its concerns in respect of a given transaction. parties can request for a pre-filing consultation Remedies cases are relatively rare. Of the 448 with the Competition Authority. The parties need deals handled by the CA in 2018, only 4 required to submit a formal pre-filing consultation application remedies. In practice, it will fall to the parties to apply for meetings with the CA. Typically, these to actively propose remedies to meet the CA’s sorts of requests will arise where there is a doubt concerns. The CA can, and has, imposed both about whether a particular transaction is notifiable structural and behavioral remedies. or not. According to Art. 9 of the Guidance Opinion about the Concentration of Business Operators, File Access and Third Party Intervention State Administration for Market Regulation, 2018, any guidance provided by the CA is oral and non- There is no “formal” Statement of Objections binding. In most cases pre-notification contacts under the China Merger Control Regime. The with the CA are not necessary. CA will typically disclose its concerns at a state of play (that is, face to face) meeting with the parties. There is no statutory regime guaranteeing the parties Fast Track Procedure and Information the right to inspect the CA’s file/documents. The Requests parties are required to submit two versions of the Per Art. 1-3 of Interim Provisions Concerning notification — a confidential and a non-confidential the Application of Standards for Simplified version, according to the Guidance about the Procedure for Concentration of Business Anti-Monopoly Examination of Concentration of Operators, China Ministry of Commerce, 2014, Business Operators, China State Administration the CA provides for a simplified procedure for Market Regulation, 2018. The confidential known as the “Simple Case” review for deals version will only be accessible to the CA. The that meet certain criteria. The procedure closely CA may provide the non-confidential version to resembles the EU’s simplified procedure. In a other government agencies where such agencies Simple Case notification, the parties are required are requested to provide opinions as part of the to submit less information — that is, they do not stakeholder consultation. The CA may also provide have to provide analysis of the structure of demand non-governmental stakeholders (that is, industry and supply and so on. The CA does not publish associations, competitors, customers and suppliers) decisions except in cases where remedies are with the non-confidential version, however it would imposed or the concentration is prohibited. In terms be expected to canvass such stakeholders using a of the unconditional clearance decisions issued to short questionnaire. the parties, there is no difference between decisions made in fast track review and full review. The AML does not specify any rights for third parties with respect to the merger review process. There is no limit to the number of information However, Article 7 of the Measures for Examination requests the CA may issue during the merger of the Concentrations between Undertakings states review procedure. In practice the number of that the CA may convene a hearing to investigate, information requests can differ significantly collect evidence and hear the views of all parties depending on the nature of the products/markets concerned in response to a request by a party (or concerned, the extent to which the deal raises parties) concerned. However, neither the law nor any competition concerns, the experience/prior regulations provide details of how a third party can knowledge of the case handler etc. There is no make such a request and the procedure to follow. statutory mechanism under the China Merger | 30 2019 INVESTMENT POLICY AND REGULATORY REVIEW – CHINA Pursuant to the CA’s Interim Measures for on national economic development. In practice, Investigation and Handling of Concentrations the CA’s conditional approval decisions do not between Undertakings Not Notified in usually spell out explicitly that certain conditions Accordance, effective as of February 1, 2012, are required based on public interest/policy individuals and entities who suspect that considerations, as opposed to the need to prevent undertakings have failed to notify a transaction anticompetitive effects. may report their suspicion to the CA. It does not appear to be necessary for the complainant to However, a number of the CA’s prior remedy have “standing” (for example, potentially being decisions can be read as seeking to safeguard affected by anti-competitive effects arising from the the interests of certain sectors of the Chinese transaction). economy. Examples of the sorts of remedies that have been imposed include ensuring continued The CA will maintain the confidentiality of supply to Chinese customers on fair and reasonable the complainant. A report must be made in terms, to reduce prices, and to refrain from writing and provide basic information about the expanding production in China. whistle-blower as well as the facts and evidence concerning the suspected concentration. In March Penalties and Appeals 2014 the CA established a dedicated hotline so that whistleblowers can inform the CA of unreported Per Section 47 of the AML, the CA may impose a transactions. Under the simplified procedure, any fine of up to RMB 500,000 for failure to notify. The case seeking a fast-track review will be published on CA imposed penalties in fifteen failure to notify/gun the CA’s website and subject to public consultation jumping cases in 2018, the highest total on record. of 10 days. During this period any third party may Companies who breach commitments/remedies face comment on or object to the use of a simplified the same maximum fine: RMB500,000. According review for the particular case. The CA will verify to Article 53 of the AML, where an undertaking the comments and evidence from third parties, and is dissatisfied with the merger review decision, it may, on that basis, require the parties to withdraw may first apply for administrative reconsideration and re-file according to the normal procedure. within 60 days of becoming aware of the decision; and if it is dissatisfied with the decision made after administrative reconsideration, it may bring an Substantive Assessment administrative action before the court according to An assessment of a transaction under the AML the relevant Administrative Procedure Law. involves several steps. The CA will typically start by identifying the relevant market(s). In Publicity and Deadlines for practice, market definition is a key focus of Merger Decisions information requests during the review process, and the pre-acceptance phase in particular. The The CA publishes a list of unconditional, CA will examine whether the transaction has the conditional and prohibition decisions. The list effect of eliminating or restricting competition, of unconditional approval decisions includes and whether the concentration may generate only a brief description of the concentration, the efficiencies that significantly outweigh its negative date of the decision and the names of the parties effects on competition, or that the concentration is to the concentration. This is now published on a in the public interest. The CA will usually assess monthly basis. Individual approval decisions are potentially negative effects against this framework. not published. The CA only publishes decisions in It will not always fully develop a “counterfactual” conditional approval cases or where it has decided to in the way some overseas agencies would. When prohibit the transaction. These published decisions assessing a concentration (including any remedies include the CA’s reasoning. that may be appropriate), the CA is required to The merger approval process in China consists consider the factors set out in the AML, Article 27. of (i) a pre-acceptance review (where the These include the likely impact of the transaction CA reviews the filing and issues information 2019 INVESTMENT POLICY AND REGULATORY REVIEW – CHINA | 31 requests) and (ii) a formal review process, but program therefore only covers immunity from, only the formal review process is subject to a or a reduction of, administrative monetary statutory timetable. According to the Guidance punishment. Criminal fines and jail time do not about the Anti-Monopoly Examination of arise for violations of the AML. The leniency Concentration of Business Operators, China State program provides no immunity from, or reduction Administration for Market Regulation, 2018, the in, private damages that may be awarded as a timetable is as follows: result of the relevant conduct. n Pre-acceptance review: Generally 4-6 weeks Leniency can be granted to several applicants (but can be up to 12 weeks). under the AML. Per the Draft Leniency Guidelines, the first leniency applicant will n Phase I (initial review): 30 calendar days from receive no less than an 80% fine reduction or acceptance by the CA of a notification. full immunity, the second applicant will receive n Phase II (further review): 90 calendar days a 30% to 50% fine reduction, and the subsequent from the date of the decision to conduct further applicants will receive no more than a 30% fine review. reduction. Article 46 of the AML only allows for enforcement against companies and not against n Phase III: an additional 60 calendar days where individuals. As such, the leniency program does (i) the parties agree; or (ii) information submitted not apply to individuals. It should be noted that is inaccurate and requires further verification; or prior to the merger of the NDRC (competition (iii) a major change in the relevant circumstances bureau) and the State Administration for Industry occurs post-notification. and Commerce (SAIC) into the CA, each entity adopted its own leniency rules. There was some n Overall timing — long form: Generally, it takes discrepancy between the two, as in case of SAIC about 4-6 months to obtain clearance, including where leniency cannot be granted to the initiator pre-acceptance. The precise length of time will of a monopoly agreement while this was never a depend on the markets/industries involved, the requirement for NDRC. However, it is expected extent of any competition issues, the results of that the CA will streamline these rules. stakeholder feedback and so forth. Clearances of long form cases in Phase I are rare. The parties being penalized by the CA can initiate an administrative lawsuit against n Overall timing — short form: The CA aims the CA under the relevant Administrative to clear transactions which qualify for the Procedure Law if they are unsatisfied with simplified procedure within Phase I and to date the administrative decision. Pursuant to the all qualified simplified transactions have been AML, where an undertaking is dissatisfied with approved within Phase I. the decision made by the CA for the antitrust enforcement on monopoly agreements or abuse B. Leniency Program of dominance, it may apply for administrative reconsideration or bring an administrative action The leniency program in China is governed by before the court according to law. the AML. Further, the Draft Guidelines for the Application of the Leniency Program to Cases Marker System Involving Horizontal Monopoly Agreements, issued in 2016 by the National Development and The current AML regime does not have clear Reform Commission (NDRC) (Draft Leniency rules or guidance on marker system. However, Guidelines) shed light on how the ABM deals the Draft Leniency Guidelines specify how a with substantive and procedural issues relative to “marker” works in the context of the AML. China’s leniency program. Pursuant to these Guidelines, a preliminary report is equivalent to a “marker”. Business operators that The AML only provides for administrative temporarily cannot provide complete materials liability, not criminal liability. The leniency when they apply for leniency may submit a | 32 2019 INVESTMENT POLICY AND REGULATORY REVIEW – CHINA preliminary report regarding the monopolistic Confidentiality agreements to the CA. Business operators should explicitly confess in the preliminary report that In practice the NDRC and the State they have engaged in monopolistic agreements Administration for Industry and Commerce in violation of the AML, and briefly describe maintain confidentiality over the applicants the basics in relation to the conclusion and during the leniency process, but no formal implementation of the monopolistic agreements, or express guidance exists in this regard. The including the participants to the monopolistic anonymity is lifted when the leniency decision is agreements, the products or services involved, the rendered. Because there are no criminal penalties dates when these monopolistic agreements were for violations of the AML the leniency statement concluded and implemented and so on. cannot be accessed by the public prosecutor. The Draft Leniency Guidelines dictate that leniency The CA will provide written comments upon statements should not be disclosed to third parties, receiving the preliminary reports, requiring including other government agencies, without the the business operator to submit supplemental consent of the applicant(s) and/or unless mandated materials within a prescribed period. That by law. period is generally up to 30 days—extended to 60 days under special circumstances. If the business Cooperation with other competition operators have submitted the required supplemental authorities materials within the prescribed period, the CA will define the time when they received the preliminary Although the applicable leniency rules are reports as the time when the business operator made still in draft, in practice, the CA may ask the its leniency application. Disclosures can be made parties to provide full or partial waivers to orally or in writing. Oral applications will be reduced enable the CA to communicate with other to minutes and signed by the disclosed party. competition authorities to understand the overseas investigation status and other relevant information. 2019 INVESTMENT POLICY AND REGULATORY REVIEW – CHINA | 33 ENDNOTES 1 The WTO services sectoral classification list Services are categorized into 12 sectors: (W/120) is a comprehensive list of services sectors and sub-sectors covered under the GATS. It was 1. Business services compiled by the WTO in July 1991 and its purpose 2. Communication services was to facilitate the Uruguay Round negotiations, ensuring cross-country comparability and 3. Construction and related engineering services consistency of the commitments undertaken. The 160 sub-sectors are defined as aggregate 4. Distribution services of the more detailed categories contained in 5. Educational services the United Nations provisional Central Product Classification (CPC). The list can be accessed 6. Environmental services under the following link: http://www.wto.org/ english/tratop_e/serv_e/mtn_gns_w_120_e.doc 7. Financial services 8. Health related and social services 9. Tourism and travel related services 10. Recreational, cultural and sporting services 11. Transport services 12. Other services not included elsewhere | 34 2019 INVESTMENT POLICY AND REGULATORY REVIEW – CHINA 2 For the purpose of this research, 32 sectors have been identified. This is not an exhaustive list of all sectors of the economy. Primary: Services: 1. Agriculture, Hunting, Forestry, and Fishing 18. Electricity, Gas, and Water 2. Mining, Quarrying, and Petroleum 19. Alternative Energy Manufacturing: 20. Construction 3. Agroprocessing, Food Products, and Beverages 21. Wholesale and Retail Trade 4. Textiles, Apparel, and Leather 22. Hotels and Restaurants 5. Chemicals and Chemical Products 23. Other Travel and Tourism-related Services 6. Rubber 24. Logistics, Transport, and Storage 7. Plastic Products 25. Telecommunications 8. Pharmaceuticals, Biotechnology, and Medical 26. Computer and Software Services Devices 27. Financial Services including Insurance 9. Metals and metal products 28. Real Estate 10. Non-metal mineral products 29. Business Services 11. Wood and wood products (other than Furniture) 30. Professional, Scientific and Technical 12. Furniture Services (Engineering, Architecture, etc.) 13. Paper and paper products 31. Health Services 14. Printing and publishing 32. Media and Entertainment 15. Automobiles, Other Motor Vehicles, and Transport Equipment 16. Information Technology and Telecommunications Equipment 17. Machinery and Electrical and Electronic Equipment and Components 2019 INVESTMENT POLICY AND REGULATORY REVIEW – CHINA | 35 LIST OF REFERENCE MATERIALS Primary Sources n Interim Measures for the Reporting of Outbound Investments Subject to Record- 1. National FDI Policy filing or Approval 对外投资备案（核准） 报告暂行办法 n Catalogue for the Guidance of Foreign Investment Industries (revised in 2017) 外商 n Catalog of Sensitive Sectors for Outbound 投资产业指导目录 （2017年修订） Investment (2018 Edition) 境外投资敏感行 业目录. （2018年版） n Special Administrative Measures for Access of Foreign Investment (Negative List) (2018 n Code of Conduct for the Operation of Edition) 外商投资准入特别管理措施（负 Overseas Investments by Private Enterprises 面清单） （2018年版） 民营企业境外投资经营行为规范 n Catalogue of Priority Industries for Foreign n Guidance on questions on Recordation Investment in Central and Western China Administration of the Formation and (2017 Revision)中西部地区外商投资优势 Modification of Foreign-Funded Enterprises 产业目录(2017年修订) subject to Special Administrative Measures 关于涉及国家规定实施准入特别管理措施 2. Investment Law and Related Regulations (or 的外商投资企业设立及变更审批权限有关 similar instruments) 问题的指引 Laws n Announcement of the State Administration of Taxation on Issues Concerning Expanding n Foreign Investment Law of the People’s the Applicable Scope of the Policy of Republic of China (to be effected January 1, Temporary Exemption of Withholding Tax 2020) 中华人民共和国外商投资法 on the Direct Investment Made by Overseas Departmental Rules and Regulations Investors with Distributed Profits 国家税务 总局关于扩大境外投资者以分配利润直接 n Provisional Regulations on the 投资暂不征收预提所得税政策适用范围有 Establishment of Foreign-Funded Joint 关问题的公告 Stock Companies Limited (revised in 2015) 商务部关于设立外商投资股份有限公司若 Policies/Measures Published by Local 干问题的暂行规定(2015修正) Governments n Measures for the Administration of Strategic n Implementing Rules on the Awards Policy Investment in Listed Companies by Foreign for introduction of major foreign investment Investors 外国投资者对上市公司战略投资 projects in Shandong Province 山东省引进 管理办法 重大外资项目奖励政策实施细则 n Interim Measures for the Recordation n Measures for the Awards Policy for Administration of the Formation and procuring local products by leading Modification of Foreign-Funded Enterprises industrial enterprises in Chongqing City 重 (revised in 2018) 外商投资企业设立及变 庆市工业龙头企业采购本地配套产品奖励 更备案管理暂行办法 试行办 n Administrative Measures for the Outbound Investment of Enterprises 企业境外投资管理 办法 | 36 2019 INVESTMENT POLICY AND REGULATORY REVIEW – CHINA 3. Companies Act n General Principles of the Civil Law of the People’s Republic of China (revised in n Company Law of the People’s Republic of 2009) 中华人民共和国民法通则(2009修 China (revised in 2018) 中华人民共和国公 正) 司法(2018修正) n Enterprise Income Tax Law of the People’s 4. Constitution Republic of China (revised in 2018) 中华人 n Constitution of the People’s Republic of 民共和国企业所得税法(2018修正) China (revised in 2018) 中华人民共和国宪 n Cybersecurity Law of the People’s Republic 法(2018修正) of China 中华人民共和国网络安全法 n Law of the People’s Republic of China on 5. Foreign Exchange Related Laws and Regulations the Administration of Activities of Overseas Non-Governmental Organizations within the Administrative Rules Territory of China (revised in 2017) 中华人 n Regulation of the People’s Republic of 民共和国境外非政府组织境内活动管理 China on Foreign Exchange Administration 法(2017修正) (2008 Revision) 中华人民共和国外汇管理 n The Administrative Litigation Law of the 条例(2008修订) People’s Republic of China (2017 Revision) 中华人民共和国行政诉讼法(2017修正) Departmental Rules and Regulations n The Interim Provisions on the Management n Administrative Reconsideration Law of of Foreign Debts 外债管理暂行办法 the People’s Republic of China (2017 Amendment) 中华人民共和国行政复议法 n Notice of the State Administration of (2017修正) Foreign Exchange on Reforming the Mode of Management of Settlement of Foreign n Environmental Protection Law of the Exchange Capital of Foreign-Funded People’s Republic of China (2014 Revision) Enterprises 国家外汇管理局关于改革外商 中华人民共和国环境保护法(2014 修订) 投资企业外汇资本金结汇管理方式的通知 n Product Quality Law of the People’s n Notice of the State Administration of Republic of China (2018 Amendment) 中华 Foreign Exchange on Further Improving and 人民共和国产品质量法(2018修正) Adjusting Foreign Exchange Administration Policies for Direct Investment (2015 Administrative Regulations Amendment) 国家外汇管理局关于进一步 n Regulations on Procedures for the 改进和调整直接投资外汇管理政策的通知 Formulation of Rules (revised in 2017) 规章 (2015修正) 制定程序条例(2017修订) n Regulation on the Administration of 6. Sectoral Law/Regulations (only if necessary) Foreign-Funded Insurance Companies 中华 人民共和国外资保险公司管理条例 Laws n Property Law of the People’s Republic of n Regulation on the Administration of Foreign- China 中华人民共和国物权法 Funded Banks 中华人民共和国外资银行管 理条例 n Legislation Law of the People’s Republic of China (revised in 2015) 中华人民共和国立 n Regulation on News Coverage by Resident 法法(2015修正) Offices of Foreign News Agencies and Foreign Correspondents 中华人民共和国外 国常驻新闻机构和外国记者采访条例 2019 INVESTMENT POLICY AND REGULATORY REVIEW – CHINA | 37 Departmental Rules and Regulations 术转让所得减免企业所得税有关问题的 n Administrative Measures for the Examination 通知 and Approval of Permanent Representative n Circular on Enterprise Income Tax Offices of Foreign Air Transport Enterprises Policy Issues Relating to Transferring the 外国航空运输企业常驻代表机构审批管理 Technologies of Resident Enterprises财政 办法 部、国家税务总局关于居民企业技术转 n Service Guide on Licensing for Foreigners to 让有关企业所得税政策问题的通知 Work in China (Interim) 外国人来华工作许 n Circular on Comprehensively Promoting the 可服务指南 （暂行） Pilot Program of the Collection of Value- n Implementation Opinions of the Ministry added Tax in Lieu of Business Tax财政部、 of Finance on Promoting the Sound 国家税务总局关于全面推开营业税改征 Development of Public-Private Partnership 增值税试点的通知 财政部关于推进政府和社会资本合作规 Local Laws, Rules and Regulations 范发展的实施意见 n Shenzhen Administrative Measures for the n Catalog of Investment Projects Subject to Accreditation of High-tech Firms 深圳市高 Government Confirmation (2016)政府核准 新技术企业认定管理办法 的投资项目目录(2016年本) Others n Provisions of the Ministry of Commerce on n The Decision of the First Session of the M&A of a Domestic Enterprise by Foreign 10th National People’s Congress on the Investors商务部关于外国投资者并购境内 Institutional Reform Plan of the State 企业的规定(2009修改) Council 第十届全国人民代表大会第一次 n Provisions of the Ministry of Commerce on 会议通过国务院机构改革方案的决定 the Establishment of Investment Companies n The Provisions on the Main Functions, by Foreign Investors (2015 Amendment) 商 Internal Bodies and Staffing of the Ministry 务部关于外商投资举办投资性公司的规 of Commerce (No.77 [2008] of the General 定(2015修正) Office of the State Council) 国务院办公厅 n Tentative Measures for Administration 关于印发商务部主要职责内设机构和人 of Chinese-foreign Joint Venture and 员编制规定的通知 Cooperative Medical Institutions 中外合 资、合作医疗机构管理暂行办法 7. Competition Act n Tentative Measures for the Administration n China Antimonopoly Law (AML), 2007 of Wholly-Owned Hospitals Established Taiwan Service Providers 台湾服务提供者 n Interim Provisions Concerning the 在大陆设立独资医院管理暂行办法 Application of Standards for Simplified Procedure for Concentration of Business n Regulations on the Management of the Operators, China Ministry of Commerce, Employment of Foreigners in China (Revised 2014. in 2017) 外国人在中国就业管理规定(2017 修正) n Measures for Examination of Concentrations between Undertakings, Ministry of n Circular of the State Administration Commerce, 2009. of Taxation on Issues Concerning the Reduction and Exemption of Enterprise n Provisions of the State Council on the Income Tax on the Proceeds from Standards for Concentration of Business Technology Transfers国家税务总局关于技 Operators, 2008 | 38 2019 INVESTMENT POLICY AND REGULATORY REVIEW – CHINA n Provisions on the Concentration of n Convention on the Recognition and Additional Restrictions on the Concentration Enforcement of Foreign Arbitral Awards of Business Operators (trial), China Ministry (New York Convention) of Commerce, 2014. n International Centre for Settlement of n Guidance about the Anti-Monopoly Investment Disputes (ICSID) Convention) Examination of Concentration of Business Operators, China State Administration for n Articles of Agreement of the International Market Regulation, 2018. Monetary Fund n Interim Measures for Investigation and n China-United Kingdom BIT, 1986 Handling of Concentrations between n China – Hong Kong Closer Economic Undertakings Not Notified in Accordance, Partnership Agreement Investment China Ministry of Commerce, 2011. Agreement, 2017 n Guidance Opinion about the Notification n ASEAN-China Investment Agreement, 2017 of Concentration of Business Operators under Simplified Procedure, China State Secondary Sources Administration for Market Regulation, 2018. 9. Country Reports/Articles of Domestic and n Draft Guidelines for the Application of International Law Firms the Leniency Program to Cases Involving Horizontal Monopoly Agreements (Draft n Doing Business in China 2017 guide Leniency Guidelines) drawn up by the published by Baker & McKenzie LLP National Development and Reform Commission (NDRC), 2016 n MLEX (www.mlex.com) n PaRR (https://app.parr-global.com) 8. International Legal Instruments n Double Taxation Avoidance n General Agreement on Trade in Services Agreements (https://www.dits.deloitte. (GATS) com/#Jurisdiction/4) n Agreement on Trade-Related Aspects of 10. Databases Intellectual Property Rights (TRIPS) n UNCTAD Investment Policy Hub (https:// n Agreement on Trade-Related Investment investmentpolicy.unctad.org/international- Measures (TRIMs) investment-agreements) n I-TIP Services database (https://i-tip.wto. n Agreement on Subsidies and Countervailing Measures (SCM) org/services/default.aspx) 2019 INVESTMENT POLICY AND REGULATORY REVIEW – CHINA | 39 This Investment Policy and Regulatory Review presents information on the legal and regulatory frameworks governing foreign direct investment and competition that affect businesses and foreign investors. Since legal and regulatory frameworks are constantly evolving, a cut-off date was set for the research. This country review therefore covers information available as of May 31, 2019, unless otherwise indicated in the review. IPRRs are available for the following middle-income countries: Brazil, China, India, Indonesia, Malaysia, Mexico, Nigeria, Thailand, Turkey, and Vietnam.