TerraLex Guide to Foreign Direct Investment - NEW

In China, FDI is subject to unified regulation at the national level. Its core characteristics are unified central legislation, coordinated supervision by multiple authorities, and implementation and service primarily undertaken by local governments. The core mechanism is the “pre-establishment national treatment plus negative list for foreign investment access” regime.

China’s FDI regulatory framework is based on several core laws and regulations, around which a series of specific regulatory regimes have been established.

• The Foreign Investment Law of the People’s Republic of China (《中华人民共和国外商投资法》)and the Implementing Regulations of the Foreign Investment Law of the People’s Republic of China(《中华人民共和国外商投资法实施条例》), which came into effect on 1 January 2020, constitute the fundamental legislation in the field of FDI. They establish the foundational status of the pre-establishment national treatment plus negative list management system, and emphasise equal treatment and protection for domestic and foreign-invested enterprises.

• The Company Law of the People’s Republic of China(《中华人民共和国公司法》): the organisational forms, governance structures and related matters of foreign-invested limited liability companies and joint stock limited companies are uniformly governed by the provisions of the Company Law.

• The Foreign Exchange Control Regulations of the People's Republic of China (《中华人民共和国外汇管理条例》)and other foreign exchange regulatory rules.

• The Special Administrative Measures (Negative List) (《外商投资准入特别管理措施（负面清单）》) for Foreign Investment Access set out sectors in which foreign investment is prohibited or restricted. Foreign investment outside the negative list, in principle, enjoys treatment equal to that of domestic investment.

• The National Development and Reform Commission and Ministry of Commerce periodically issues the Catalogue of Encouraged Industries for Foreign Investment (《鼓励外商投资产业目录》). Foreign-invested enterprises operating in industries listed in the catalogue may, in accordance with law, enjoy preferential policies such as tax incentives and land use benefits.

The authorities responsible for the application of FDI rules are National Development and Reform Commission and the Ministry of Commerce under the State Council, which, in accordance with the law and their respective divisions of responsibility, undertake the promotion, protection and administration of foreign investment. Other relevant departments under the State Council are responsible for related work within the scope of their respective functions, while at the local level, the relevant departments of the people’s governments at or above the county level implement such responsibilities in accordance with the prescribed division of duties.

China’s foreign direct investment review regime is not limited to the market entry stage, such as the establishment of new companies, but also extends to subsequent transaction stages involving already established foreign-invested enterprises.

Foreign investment in China includes: the establishment of foreign-invested enterprises; the acquisition of shares, equity interests, property shares or similar rights and interests in domestic enterprises; investment in new projects; and investment through other means as prescribed by laws, administrative regulations or the State Council. Investments of the above types constitute the basic scope of application for subsequent review mechanisms.

The circumstances that trigger foreign direct investment review mainly include:

• Foreign investment access review for entry into negative list sectors – foreign investment entering sectors on the negative list is subject to access review, while foreign investment outside the negative list is granted national treatment
• Foreign investment national security review – security review of foreign investment that affects or may affect national security
• Merger control antitrust review for concentrations of undertakings that meet the notification thresholds

Foreign investment includes investment activities carried out directly or indirectly by foreign investors within China, including the following circumstances:

• Foreign investors investing, independently or jointly with other investors, in new projects or establishing enterprises within China
• Foreign investors acquiring equity interests or assets of domestic enterprises through mergers and acquisitions
• Foreign investors investing within China through other means

With respect to the criteria for identifying foreign investors, the law clearly provides that foreign natural persons, enterprises or other organisations constitute foreign investors. The Implementing Regulations of the Foreign Investment Law further clarify that “other investors” may include Chinese natural persons; however, this provision serves the wording “joint investment with other investors” under the Foreign Investment Law and does not alter the core definition of “foreign investors”.

As regards exempted categories of transactions, laws and regulations do not provide an enumerated list of exemptions, nor do they set uniform transaction value or turnover thresholds. The triggering criteria are based on whether the investment affects or may affect national security and whether actual control is obtained.

The relevant activities or sectors include: （1）National defence and security-related sectors: military industries, military supporting industries, and investments in areas surrounding military facilities and military industrial facilities are key focuses of security review （2）Important sectors related to national security (triggered upon obtaining actual control): important agricultural products, important energy and resources, major equipment manufacturing, important infrastructure, important transport services, important cultural products and services, important information technology and internet products and services, important financial services, critical technologies and other important sectors; investments obtaining actual control in these sectors are subject to prior filing （3）National treatment and negative list management: the state implements a pre-establishment national treatment plus negative list management system; national treatment is granted outside the negative list; licensing and approval are conducted under the same conditions and procedures as for domestic investment, without discriminatory requirements; mandatory standards apply equally to domestic and foreign investment （4）Information reporting administration: foreign investors or foreign-invested enterprises are required to submit investment information to the competent commerce authorities through the enterprise registration system and the enterprise credit information publicity system

China’s substantive review of foreign direct investment is centred exclusively on “national security” as the sole core substantive standard, with the assessment focusing on whether the investment affects or may affect national security.

China’s FDI regime involves both pre-closing filings and post-closing filings.

National security review constitutes a pre-closing filing. China conducts security reviews of foreign investments that affect or may affect national security. Prior to formal filing, the parties may consult the Office of the Working Mechanism in relation to the proposed foreign investment. A formal filing must be submitted before implementation of the transaction and should include, among other things, the application form, the investment plan, and an explanation of whether the investment affects national security. The regime is positioned as a pre-implementation filing requirement. Upon receipt of the filing materials, the Office of the Working Mechanism conducts a preliminary review within 15 working days. If it decides to initiate a security review, such review will generally be completed within 30 working days. Where a special review is initiated, the review period may take 90 working days or longer. No investment may be implemented before the security review decision is issued.

Post-closing filings are further divided into information reporting submitted concurrently at the time of registration, supplementary filings and annual reporting. An initial report is submitted at the time of registration for establishment or mergers and acquisitions; where changes do not involve registration matters, a filing shall be made within 20 working days after the change. Annual reports shall be submitted each year between 1 January and 30 June.

Normally, no. In China, filings relating to foreign direct investment, including statistical reporting, foreign exchange filings, joint annual reporting and security review filings, are administrative regulatory filings in nature and generally DO NOT involve the filing fees. Only in circumstances where an investment falls within the scope of security review and the investor fails to make the required filing in accordance with the law, and is ordered to take remedial action, may penalties or corrective measures be imposed; such consequences do not constitute fees charged for ordinary filings.

China has a foreign investment information reporting system under which foreign investors or foreign-invested enterprises are required to submit investment information to the competent commerce authorities through the enterprise registration system and the National Enterprise Credit Information Publicity System. Upon establishment or registration of an acquisition, foreign investors are required to submit an initial report, including basic enterprise information, information on the investors and their ultimate controllers, and details of the investment transaction. In addition, an annual report must be submitted each year through the National Enterprise Credit Information Publicity System within the prescribed timeframe, covering, inter alia, basic enterprise information, investors and ultimate controllers, and the enterprise’s operations and assets and liabilities.

Foreign-invested enterprises established within China, as well as entities with external financial assets or liabilities, are also required to report to the foreign exchange authority their external financial assets and liabilities, changes thereto, and income and expenditures relating to profits, dividends and interest. Financial institutions are further required to report, on a quarterly and annual basis, information on foreign direct investment into China and outbound direct investment.

Where a national security review is triggered, the relevant filing materials must also be submitted, such as the application form, the investment plan, an explanation of whether the investment affects national security, and other materials as required by the Office of the Working Mechanism. The application form must specify the foreign investor’s name, domicile, business scope, basic investment information and other relevant matters.

Foreign investors or foreign-invested enterprises are responsible for submitting investment information through the enterprise registration system and the National Enterprise Credit Information Publicity System, with such information being received and processed by the competent commerce authorities. Where a foreign investment falls within the scope of national security review, the parties concerned are required to proactively submit a filing to the Office of the Working Mechanism prior to implementation and to provide the required filing materials.

Foreign-invested enterprises and other relevant entities within China are required to directly report to the State Administration of Foreign Exchange or its local branches their external financial assets and liabilities, changes thereto, and income and expenditures relating to profits, dividends and interest.

Yes. Under the applicable laws and regulations, where a foreign investment entity fails to submit investment information in accordance with the information reporting system and, after being notified by the competent commerce authority, still fails to make the required supplementary submission or correction, the competent commerce authority shall order it to rectify within a prescribed time limit. If the entity fails to rectify within such time limit, it shall be subject to a fine of not less than RMB 100,000 but not more than RMB 300,000; where the circumstances are serious, a fine of not less than RMB 300,000 but not more than RMB 500,000 shall be imposed.

In addition, where violations of laws or regulations are investigated and dealt with by the relevant authorities in accordance with the law, such violations may be incorporated into the national credit information system in accordance with state regulations. This means that the relevant illegal or non-compliant conduct will be recorded and used for credit risk assessment purposes in future transactions, commercial activities or public administration contexts.

Within the scope of China’s foreign investment security review filing regime, the filing party must suspend implementation of the transaction during the review period and prior to obtaining a clearance decision. No investment may be implemented before the review is concluded and a clearance decision is issued.

Where a decision approving the investment following security review is issued, the parties may implement the investment. Where a decision prohibiting the investment is issued, the parties shall not implement the investment; where the investment has already been implemented, the parties shall be ordered to dispose of the relevant equity or assets within a prescribed time limit and to take necessary measures to restore the status quo ante. Where a conditional approval decision is issued, the investment shall be implemented in accordance with the attached conditions.

Where a foreign investment falling within the filing scope is implemented without filing in accordance with the relevant provisions, the Office of the Working Mechanism shall order the parties to make a filing within a prescribed time limit. Where the parties refuse to file, they shall be ordered to dispose of the relevant equity or assets within a prescribed time limit and to take other necessary measures to restore the status quo ante and eliminate the impact on national security.

Approval and regulatory powers over foreign investment operate in parallel in China. On the one hand, negative list access control, licensing and registration, information reporting, national security review and antitrust merger review each have their own statutory bases and independent filing and approval procedures.

For transactions that do not meet mandatory filing thresholds, the competent authorities generally may not reject them solely on the ground that the thresholds have not been met; however, where a transaction falls within statutory circumstances under which the authority may require a filing or order a filing ex officio, or where it violates the negative list or information reporting obligations, the authorities are entitled to intervene and adopt corrective measures, including ordering rectification or restoration to the pre-transaction state.

In foreign direct investment security review, the competent authorities may render the following four types of decisions, each of which takes effect in the form of a final decision:

• No review required
• Approval
• Conditional approval
• Prohibition of the investment

In addition, in cases involving failure to file, false filing, or failure to comply with attached conditions, the authorities may issue revocation decisions and order restorative measures, such as requiring the disposal of equity or assets within a prescribed time limit.

Where the competent authorities initiate a review of a filed foreign investment and determine that the impact on national security can be eliminated through the imposition of conditions, and the parties provide written undertakings to accept such conditions, a decision of “conditional approval of the security review” may be issued, with the conditions expressly specified in the decision. There is no statutory list of prescribed conditions; rather, such conditions are typically designed to ensure that sensitive sectors are not subject to improper influence, to achieve security and controllability, and to ensure the enforceability of information reporting and on-site inspection requirements.

Failure to comply with the imposed conditions may result in orders to rectify, requirements to dispose of equity or assets within a prescribed time limit, or the adoption of other necessary measures to restore the status quo. In serious cases, the approval may be revoked or the investment may be treated as an investment implemented without filing, with corresponding legal consequences.

In China, foreign-invested enterprises can apply for administrative reconsideration or initiate administrative litigation in accordance with the law if they are dissatisfied with the decision of the FDI authorities, but there is no special procedure for "appealing" to a higher level of examination and approval authority, and it is difficult for the judiciary to overturn the original decision.

Decisions made by the competent authorities with respect to specific investment matters constitute administrative acts. Foreign-invested enterprises or their investors have 2 avenues of recourse:

1. They may apply for coordination through the foreign-invested enterprise complaint working mechanism. Where a complaint working body refuses to accept a complaint or where the complainant is dissatisfied with the handling outcome, further complaints may be lodged progressively within the complaint system. Complaints may be filed in advance of or in parallel with other remedies and do not affect the initiation of administrative reconsideration or litigation; that is, the complaint mechanism does not replace existing statutory remedies.

2. Foreign-invested enterprises or their investors may apply for administrative reconsideration in accordance with the law. Where a party is dissatisfied with the reconsideration decision, it may institute administrative litigation within 15 days from the date of receipt of the reconsideration decision. Where the reconsideration authority fails to render a decision within the statutory time limit, the party may bring a lawsuit within 15 days from the date on which the reconsideration period expires.

In most cases, foreign investors are only required to submit an application for establishment to the State Administration for Market Regulation, which will coordinate the approval procedures of other government authorities to ensure that the required operating permits are obtained after the business licence is issued and before the foreign-invested enterprise commences operations. Certain industries (such as power projects) are subject to specific approval procedures and supporting documentation requirements.

An example of the general establishment procedures and timeline for non-sector-specific industries is as follows:

（1）Establishment approval and registration track: the establishment of foreign-invested enterprises generally follows a step-by-step approval and registration system, with the specific process varying depending on the competent authority and the type of project.

（2）Foreign exchange and capital-related steps (capital contribution verification and accounts): monetary contributions must first be processed through an FDI foreign-exchange registration handled by a bank, which opens the capital account; the paid-in contribution must be confirmed within 5 working days after the funds arrive. Only after completion may proceeds from liquidation, capital reduction, equity transfers, profit distributions or reinvestment within China be remitted in accordance with the law. For the opening of margin accounts, asset realisation accounts and other accounts, registration of the entity’s basic information is subject to prescribed processing timelines (generally five working days, or 20 working days in special circumstances).

（3）Information reporting system and reporting timelines: foreign investors or foreign-invested enterprises are required to submit an initial report through the enterprise registration system and the National Enterprise Credit Information Publicity System. Where changes involve registration matters, reporting is handled concurrently with the registration; where changes do not involve registration matters, reporting must be completed within 20 working days after the change occurs. An annual report for the preceding year must be submitted each year between 1 January and 30 June.

Under Chinese law, administrative authorities and their staff members are required to keep confidential any commercial secrets of foreign investors or foreign-invested enterprises obtained in the course of performing their duties, and shall not disclose or illegally provide such information to third parties. The competent commerce authorities, relevant entities and personnel involved in merger and acquisition security review are required to bear confidentiality obligations with respect to state secrets, commercial secrets and other information requiring confidentiality obtained during the security review process.

The law further provides that administrative authorities shall establish and improve internal management systems and adopt effective measures to protect the commercial secrets of foreign investors and foreign-invested enterprises obtained in the course of performing their duties. Where information must be shared with other administrative authorities in accordance with the law, confidentiality measures shall be applied to any commercial secrets contained in such information to prevent disclosure.

In addition to FDI access review, the following regulatory measures are also worthy of the attention of foreign investors, including but not limited to:

1. Antitrust review - Enterprises involved in mergers and acquisitions are also subject to antitrust review conducted by the State Administration for Market Regulation and the Ministry of Commerce in accordance with the Anti-Monopoly Law of the People’s Republic of China. Such reviews are intended to assess changes in market concentration that may result from the transaction and their potential positive or negative impact on market competition. Through this review mechanism, fair market competition is maintained while safeguarding national security and the public interest.

2. Industry-specific regulatory regimes - For foreign-invested enterprises and domestic enterprises in certain sectors, obtaining the relevant qualification certificates is a prerequisite for lawful operation. Depending on the industry in which the enterprise operates, one or more licences or permits may be required to ensure the legality and validity of its business activities.

For example, enterprises providing internet services, including but not limited to paid information services, online advertising, website services, e-commerce and other online application services, must obtain a telecommunications business operation licence. In the food and beverage sector, enterprises are required to hold hygiene and safety permits to ensure compliance with public health regulations. In the construction and real estate sector, contractors, developers and agents must hold the relevant licences to demonstrate compliance with construction standards and legal requirements.

3. Foreign Exchange and Cross-border Capital Regulation - Foreign investment and business operations in China are subject to ongoing foreign exchange and cross-border capital regulation. Relevant regulatory requirements cover capital contributions and capital increases, repatriation of profits, cross-border lending and guarantees, as well as international balance of payments and foreign direct investment (FDI) reporting. In practice, the authenticity and compliance of cross-border fund flows remain a key regulatory focus, requiring foreign-invested enterprises to continuously monitor and fulfill applicable reporting and compliance obligations throughout the investment and operational lifecycle.

4. Data, Cybersecurity and Information Security Regulation - Foreign-invested enterprises operating in China are also required to pay close attention to regulatory requirements relating to data, cybersecurity, and information security. Key regulatory regimes include data export security assessments, filing of standard contracts for cross-border transfer of personal information, and compliance with personal information protection requirements. These regimes are subject to heightened regulatory scrutiny in sectors such as internet platforms, manufacturing, finance, healthcare, and autonomous driving, and have become a key compliance focus for foreign investors in China.

5. State-owned Assets and Special Transaction Regulation (Where Applicable) - Where a foreign investment transaction involves the acquisition of a state-owned enterprise or state-owned equity interests, the transaction is also subject to state-owned assets supervision and administration requirements. Such transactions generally require asset valuation and must be conducted through duly established property rights exchange platforms. These procedures are highly regulated and time-sensitive, and may have a material impact on transaction structuring, timelines, and closing arrangements.