Investment in China – General Instruction of FDI

By Of-Counsel Ms. Qin Zhao

Foreign Direct Investment (FDI) is highly welcome in China; however, it is also highly regulated. Although all the industries are divided into different catalogs which will face the scrutiny by Chinese government in different levels, all FDI must obtain approval in the same government branches.

The Ministry of Commerce classifies the industries into four parts: the encouraged industry, the restricted industry, the forbidden industry, and the permitted industry. The first three catalogues are listed, and all the other non-listed industries belong to the last catalogue. In the year of 2007, MOC updated the classification. We can perceive the following changes through the modification.

  1. More industries are open to the foreign investment. The encouraged industries list in the new version includes 351 items, 94 items of which are newly added. After the modification, the encouraged industries occupy 73% of the whole industries.
  2. Foreign investors are required to adopt higher technical criteria. For example, the investment from the foreign investors is required to adopt higher technical criteria. For example, the investment in the manufacture area of equipment and material requires new high-tech, and the manufacture with better capability of manufacture whose matured techniques has been grasped is not encouraged.
  3. The investment concerning the environmental protection and energy resource saving is highly welcome. In contrast, those industries with high pollution are not allowed.
  4. The permitted industries whose all products are exported overseas are not treated as the encouraged industries.
  5. All the encouraged industries limited into the middle and western part of China are deleted. They are merged into other documents.

Chinese government plays a very positive role in FDI. Approvals in three governmental branches must be obtained in China; those are from the Ministry of Commerce (MOC), the National Development and Reform Commission (the Commission), and the State Administration of Foreign Exchange (SAFE). Industries in different catalogues require the approval in different levels. Normally, the investment for the encouraged industries can be approved by provincial government branches, while that for the restricted industries shall be approved by the government in the national level. The investment in some industries might need more approval.

Tax of the foreign invested enterprise (FIE) is changed as well. After the income tax is uniformed, the FIE needs to pay 25% income tax as the local company, but the preferential tax treatment still exist for those encouraged industries. Exportation might bring tax refund. And the investor to develop the western China will enjoy more and higher benefits.

FIE normally takes one of three permitted enterprise types, equity joint venture (EJV), cooperative joint venture (CJV), and wholly owned foreign enterprise (WOFE). EJV and WOFE must be a limited liability company, while the CJV can be a non-company. Except the WOFE, to enjoy the preferential tax treatment, the foreign investment shall take no less than 25% equity. For those FIEs where the foreign investment is less than 25%, a special note will be posted in the business license. It means that foreign investor is allowed to take equity less than 25%, but such entities can not enjoy the preferential tax treatment. Another alternative of the foreign institution investor is to establish a representative office in China. Such an entity is not a legal person, nor does it not take legal liability independently. The business of the rep. office is narrowly tailored. It focuses on the communication and the ancillary tasks for the overseas headquarter.

As most of the countries, arbitration and litigation are the main dispute resolutions. Except the CJV who is not a legal person and the rep. office, all the FIEs can initiate a lawsuit in China. The dispute arising from the contract to establish EJV or CJV must be governed by Chinese law and Chinese court with jurisdiction. Parities in other contract disputes may choose the governing law and the venue of the case.

The parties who decide to arbitrate are allowed to choose a foreign law and a foreign arbitration penalty. The parties choosing the litigation, however, only have limited alternatives. Each trial is subject to one level of appeal. The same case can be tried only twice. Rare case can be re-tried more times according to the instruction of the Supreme Court in China or the court one level higher than the court which hears finally.