Investing In... 2021

Last Updated January 18, 2021


Law and Practice


Fangda Partners has over 700 lawyers across five offices in Beijing, Guangzhou, Hong Kong, Shanghai and Shenzhen. The firm is widely acknowledged as the leading foreign direct investment (FDI) practice in China. It has extensive experience in advising foreign investors on making their investments in China, including greenfield investments, joint ventures, and share and cash acquisitions. Its FDI expertise also extends to equity and asset restructuring of foreign-invested entities, as well as liquidation and deregistration. Clients also benefit from the firm’s transactional capabilities and expertise in antitrust, IP, employment and data compliance in FDI transactions. Recent highlights include Nomura Holdings’ establishment of a Sino-foreign securities joint venture, Anheuser-Busch InBev’s acquisition of a majority equity interest in Jebsen China and Spirit AeroSystems International Holdings’ acquisition of a minority stake in Zhejiang Xizi Aviation. Other clients include GE, Honeywell, ABB, Hershey, Cargotec, Ford, Lear, Boeing, AMD and Philips.

China's legal system (excluding that of Hong Kong, Macau and Taiwan for the purpose of this article) is commonly accepted to be a civil law system.

China's legislative framework is premised on its Constitution, which designates the National People's Congress and its Standing Committee as the supreme source of legislation. Regulations are promulgated at the central level, as well as the local provincial or municipal levels, with national-level laws taking priority over provincial and municipal-level laws. Under China's Constitution, the National People's Congress and its Standing Committee may annul or override any laws promulgated by other administrative bodies.

The judicial system in China comprises the Supreme People's Court (the final appellate court), local people's courts (at provincial, municipal, district or lower-level) and special people's courts (courts designated for military, intellectual property or financial matters). Notwithstanding that the Chinese legal system is commonly accepted to be more aligned with civil law frameworks with no principle of binding judicial precedent like in common law jurisdictions, the Supreme People's Court has issued guidelines requiring lower courts to conform their judgments to the judicial interpretations of the Supreme People's Court and the Supreme People's Procuratorate. Such prior decisions are referenced in civil proceedings. The introduction of the Chinese Case Guidance System, to promote consistency in judicial decisions at various levels, may in the future increase the persuasive value of judicial precedent in Chinese legal proceedings.

FDI Review and Approval

During the past three decades, foreign investments have been subject to a case-by-case approval system. Consistent with the recent trend towards market liberalisation, the Foreign Investment Law of 2020 marked the evolution of China's case-by-case approval system for foreign-invested companies to a system that does not distinguish between foreign-invested companies and local companies for the purposes of establishment and registration, except in a limited number of sectors regarded as highly sensitive. Going forward, both foreign and local-invested companies can submit application for their incorporation and establishment applications to the State Administration for Market Regulation of China or their local counterparts (AMR) without prior approval.

Negative List

Foreign investors have the same access as locally-owned enterprises to the PRC market except for sectors identified in the Special Administrative Measures for Market Access of Foreign Investment (Negative List) (2020 Version), the latest version of which was issued on 23 June 2020. Foreign investment restrictions fall into the following two categories:

  • prohibited sectors – in which foreign investment is fully prohibited; ie, postal services, tobacco wholesale, compulsory education, and online publication services; and
  • restricted sectors – in which foreign ownership is limited ie, vehicle manufacturing, publishing, civil airport construction and operation, and telecommunications.

Sectors Subject to Additional Rules and Scrutiny

Sectors subject to additional review and approval requirements and scrutiny include the education sector (from kindergartens to higher-education institutions), telecommunications, media, publishing and healthcare.

Investing in Public Companies

Investments in Chinese public companies will also be subject to prior review and approval by the China Securities Regulatory Commission (CSRC). Please refer to our answers in the following sections for details about investing in public companies.

Other Approvals

In addition to the approvals mentioned in this section, foreign investors should note that certain investments may be subject to prior merger control clearances required under the Anti-Monopoly Law or national security review, as further explained in Sections 6 and 7 below.

China has generally suffered less than other jurisdictions in terms of impact of the COVID-19 pandemic, but it has nonetheless been affected by the global fallout from COVID-19. This is due to the overall global contraction in economic activity as a result of pandemic prevention measures.

Based on newly released data from the United Nations Conference on Trade and Development, global foreign direct investment (FDI) decreased by 49% in the first half of 2020, with FDI in China contracting by approximately 11% in the first quarter of 2020. Based on data published by China’s central government, FDI in China grew by 8.4% year-on-year in the second quarter of 2020. This was largely attributable to COVID-19 having been controlled nationwide and, in the third quarter of 2020, FDI grew by 20% from the preceding quarter, representing year-on-year growth of 2.5% as compared to the third quarter of 2019. Analysts widely predict that China will continue to experience positive growth in the near-term and will be one of the few countries to experience overall positive growth in 2020.

Going forward, the Chinese government has emphasised on several occasions its ongoing commitment to integrate with the global economy and to further liberalise the China market. This commitment has been supported through several initiatives in 2020, including the promulgation of Foreign Investment Law and the opening up of the financial sector to allow full foreign ownership of certain financial services companies. More recently, the Regional Comprehensive Economic Partnership was announced between ASEAN Countries and six major economies, including China.

The impact of these liberalisation measures remains to be seen, given the state of the global economy due to COVID-19, subsequent worldwide quarantine and travel restrictions. Also, there has been an increase in volatility of China's foreign and trade relations with the United States, Australia and India, which have led to several retaliatory and protectionist measures being promulgated by such jurisdictions. The heightened concern expressed by various countries about data privacy and espionage risks associated with Chinese manufactured telecommunications equipment — and the steps taken by certain countries to limit Chinese access to advanced technology — may continue to push China to focus on developing these technologies independently, and to take retaliatory or self-protective measures such as the recent promulgation of export control laws.

Acquisitions in China can be structured as asset or share acquisitions as in other jurisdictions, and such transactions are substantially similar to M&A deals conducted in other jurisdictions. Except for the prior review clearances and approvals mentioned under 2.1 Foreign Direct Investment in the Current Climate, and the foreign ownership limits in certain industries, foreign acquisitions of Chinese business would not be subject to any other significant restrictions.

Acquisitions of Chinese public companies are subject to further regulation, as is customary in other jurisdictions, for change-in-control transactions. These trigger tender offer requirements.

For companies engaged in businesses in which foreign ownership is restricted or otherwise prohibited, certain deal structures — ie, the variable interest entity arrangements (the VIE structure) –  have evolved to facilitate foreign investment in these businesses. These VIE structures typically involve investment by a foreign investor in an offshore entity that controls the onshore entity by way of contractual arrangements. These VIE arrangements are also typically used in companies listed outside of China.

Investors should also be aware of the procedural issues involved in acquiring business held by Chinese parties, exiting from investments in China and remitting proceeds across the border. In most cases, disposal and offshore remittance involve the remittance bank's examining  of it to ensure it satisfies procedural requirements. These procedures would require equity transfer to be registered with the company registry before the payment can be made. Accordingly, the closing execution for investments in China and divestments of Chinese investments may differ from the standard closing procedures in other jurisdictions.

Investing in Public Companies

Investing in public companies is subject to approvals, as elaborated under 5.2 Securities Regulation, and may trigger disclosure or general tender offer requirements pursuant to the securities laws and listing rules.

Merger Control Review

Depending on the turnovers of the concentrating parties, an M&A transaction may require clearance from the competition authority. Please refer to 6 Antitrust/Competition.

National Security Review

Depending on the nature of the transaction, a national security review may be triggered. Please refer to 7 Foreign Investment/National Security.

Review and Approval by Sector regulators

Prior approval from regulators may be required if the sector in which investment is made is regulated, as is the case with financial institutions.

State-Owned Asset Rules

If the target asset or company is deemed a state-owned asset, the transaction may fall within the purview of the State-owned Assets Supervision and Administration Commission (SASAC) or its local counterparts or delegates . It may then need to comply with certain requirements, such as asset valuations and appraisals, prior approvals or filings with SASAC or competitive bid requirements.

Under the PRC Company Law, companies may form as either a limited liability company (LLC) or a company limited by shares. Private companies may choose either of the two forms, but they typically form as LLCs, whereas public companies must form as companies limited by shares. LLCs are limited to a maximum of 50 shareholders, while the number of initial incorporators of a company limited by shares is limited to 200 shareholders.

Foreign investors typically prefer to form LLCs in China because LLCs have greater flexibility in allocating corporate governance and shareholder rights as compared to a company limited by shares.

Before the Foreign Investment Law, foreign-invested enterprises (FIEs) could be incorporated in various forms. These included Sino-foreign equity joint ventures, Sino-foreign contractual joint ventures and wholly-owned foreign enterprises. The corporate governance of these forms (especially joint ventures) was different from the corporate governance of domestic PRC companies.

From 1 January 1 2020, foreign-invested and domestic PRC companies have been subject to the same corporate governance requirements under the PRC Company Law. There is no longer any corporate governance distinction between FIES and domestic PRC companies. FIEs established using the historical forms before 1 January 1 2020 have a five-year grandfather period to convert into either an LLC or a company limited by shares.

Shareholders of Chinese companies are protected under Chinese company law and, in the case of public companies, securities laws and the listing rules and regulations of the Chinese stock exchange on which the company is listed. Statutory shareholder protections under the PRC Company Law include:

  • the right of shareholders holding 10% or more of the voting rights to request the court to revoke company resolutions on the grounds of defective procedures;
  • the right to initiate a derivative lawsuit by shareholders holding 1% or more of the voting rights for more than 180 days in a company limited by shares and by any shareholder in an LLC;
  • the right to request repurchase of equity interests or shares if the shareholder votes against certain resolutions; and
  • the right of shareholders holding 10% or more of the voting rights of the company to apply for voluntary liquidation.

Both domestic and foreign-invested companies are required to submit filings to the AMR when there are any changes to the company's corporate information. This includes changes to shareholders and shareholding structure, changes to registered capital, operation operating term, business scope, registered address, directors, supervisors, legal representatives and general managers. The information will, in the case of foreign-invested companies, be forwarded by the AMR to MOFCOM. Therefore, the foreign-invested company does not need to submit separate MOFCOM filings for these corporate change matters. In addition, FIEs are required to submit additional information – ie, changes –to the ultimate beneficial owners.

The two primary stock exchanges in the PRC are those of Shanghai and Shenzhen, on which shares and bonds are traded. Red-chip companies  are foreign-established companies, with an overseas shareholding structure, that have significant assets and businesses primarily in China. They may be listed on the Shanghai Science and Technology Innovation Board STAR Market), which was established in 2019.

PRC companies have historically been listed on a variety of overseas securities exchanges, notably NASDAQ or NYSE and HKSE, in addition to the Chinese stock exchanges.

Based on the latest data published by the People's Bank of China, the principal source of funding for Chinese enterprises is still considered to be bank loan financing. However, capital market funding has grown as an alternative source of capital since changes in capital markets regulations, allowing for registration-based securities offerings as opposed to a merit-based approval approach.

Companies listed on the securities exchanges of the PRC are subject to the Chinese Securities Law, in addition to the listing rules and regulations of its home securities exchange. The CSRC has oversight over the PRC securities markets and listed issuers.

In general, foreign investors are not subject to PRC securities laws unless the foreign investor intends to invest in a listed PRC company, which would require the prior written approval of the CSRC. If a foreign investor is a strategic investor, the investor must meet qualification requirements for strategic foreign investors. These include thresholds on total assets and sound financial management capability. The strategic foreign investor is also required to hold no less than 10% shares in the company.

A new draft of regulations for foreign strategic investors in public companies was released for comment in June 2020. The draft contains lower investment thresholds, eliminates the CSRC's prior approval requirement and relaxes the minimum shareholding percentage requirements. The draft regulations have not yet been passed.

Non-strategic foreign investors may also invest via QFII status (Qualified Foreign Institutional Investor); the thresholds for QFII qualifications were lowered in November 2020 to encourage further foreign investment in the PRC.

Foreign investment funds investing in PRC-listed public companies are generally required to invest as a QFII and are accordingly subject to compliance with the QFII-related requirements to invest. The QFII requirements also include post-investment obligations, such as the obligation to make certain information reports to the CSRC.

Foreign investment funds investing in non-listed PRC companies are not subject to the QFII requirements. However, if the fund establishes a domestic fund in the PRC or if a domestic fund has overseas investors, it will be designated a "Qualified Foreign Limited Partner" (QFLP) and the establishment of the fund will have to be approved by the finance office of the local government in the fund’s domicile. The rules governing QFLPs vary between cities and are not centrally regulated.

Rules permitting foreign investment in China's debt capital markets are also presently under consideration by the PRC authorities.

Overview of the Merger Control Regime

China has a “pre-notification” merger control regime. Under the PRC Anti-monopoly Law (AML), a “concentration of undertakings” that meets certain turnover thresholds must be notified to the State Administration for Market Regulation (SAMR) for merger control clearance and may not be implemented without SAMR’s approval.

Concentration of Undertakings

The following types of FDI transactions may constitute a concentration of undertakings for the purpose of merger control notification:

  • merger;
  • acquiring control over another undertaking by virtue of acquiring its equity or assets;
  • formation of a joint venture (JV) where at least two parties can exercise control over the JV; and
  • acquisition of control over another undertaking or the ability to exercise decisive influence over the other undertaking by virtue of a contract or any other means (eg, such as a VIE structure).

Definition of “Control”

There is no explicit definition of control under the AML. SAMR has broad discretion in determining control by considering different factors as set out in Article 4 of the Interim Regulations on the Review of Concentration of Business Operators. Such factors include the purpose of the transaction and future business plan, the target’s shareholding structure, the reserved matters, board composition and voting mechanism and the appointment and dismissal of senior management.

In practice, “control” could refer to:

  • holding 50% or more shares or voting rights; or
  • having approval or veto power over the target’s material business and management matters, for example: nomination, appointment or removal of senior management; approval or formulation of business strategy, investment plan or annual budget.

Turnover Thresholds

Where an FDI transaction constitutes a “concentration of undertakings”, the transaction is notifiable if the undertakings to the concentration also meet the following turnover thresholds:

  • the aggregate global turnover of all the undertakings to the concentration exceed RMB10 billion (approximately USD1.45 billion or EUR1.29 billion), or the aggregate Chinese turnover of such entities exceed RMB2 billion (approximately USD290 million or EUR260 million) in the last financial year; and
  • each of at least two of the undertakings to the concentration had a turnover in China exceeding RMB400 million (approximately USD58 million or EUR51 million) in the last financial year.

Special rules apply to the calculation of the turnover of undertakings in the financial sector.

No Possibility of Exemptions for Foreign Investors or Investments

Where the merger requirements are met, no exemption is available for foreign investors or investments.

Process and Timeline

The merger review procedures in China include the simplified procedure (expedited merger review procedure for certain types of transactions unlikely to raise concerns in China) and the normal procedure (standard procedure for the remaining types of notifiable transactions).

Upon notification, all transactions enter a pre-acceptance phase where SAMR may request further information about the transaction and the notification. There is no statutory time limit for the pre-acceptance phase; the actual duration depends on the questions and time needed to collect the requested information. In our experience, the pre-acceptance phase generally lasts four weeks on average under the simplified procedure, and four to eight weeks under the normal procedure. A notification will only be accepted once SAMR considers the information it receives to be complete and satisfactory.

Once the case is accepted, it will enter into a three-phase review period. Most cases undergoing the simplified procedure are cleared within Phase I, ie, 30 days upon case acceptance.

For cases undergoing the normal procedure, if the transaction does not raise competition concerns it is usually cleared within the review period for Phase II (90 days).

For transactions with competition concerns, the review extends to Phase III (60 days). In practice, SAMR's review of cases with significant competition concerns may exceed the maximum statutory period of 180 days for the three phases. In these cases, the parties will need to discuss with SAMR the withdrawal and refiling of the notification, which restarts the review (this is known as “pull and refile”). According to SAMR’s public record, some conditionally cleared cases have been pulled and refiled more than once.

Clearance and Transaction Closing

Merger clearance must be obtained before the closing of the proposed FDI transaction which, in the case of a greenfield JV, refers to the incorporation of the JV and, in the case of an equity or asset transfer, the registration of the equity or asset to be acquired.

Substantive Review of the Transaction

The Chinese merger control regime involves a substantive overlap and competitive assessment of the investment. The substantive test involves:

  • identifying the relevant markets based on the transaction parties’ horizontal overlap (ie, competing businesses), vertical links (ie, upstream/downstream relationship) or neighbouring relationship (ie, complementary products)
  • assessing the market share and market power of the transaction parties and the effect of the transaction on the level of concentration in the relevant markets;
  • assessing the transaction’s impact on market entry, technological development, suppliers and customers; and
  • assessing the transaction’s impact on market entry, technological development, suppliers, national economic development, industry policy and public interest.


SAMR may conditionally clear a concentration on remedies, including structural, behavioural or hybrid remedies, based on a case-by-case assessment.

Structural Remedies

Similar to the EU and US competition authorities, SAMR may require merging parties to commit to divest a business, assets or minority interests within a specified time frame post-closing. An example of such a remedy imposed by SAMR was Danaher/GE Biopharm in 2020.

Behavioural Remedies

Compared to the EU and US competition authorities, SAMR is more receptive to behavioural remedies despite them being more difficult to implement and monitor than structural remedies. Behavioural remedies can include “hold-separate” remedies that require the transaction parties to operate independently for a period of time until the remedy is lifted, FRAND commitments and commitments restricting tying and bundling. In 2019, SAMR imposed behavioural remedies on an FDI transaction creating a joint venture between Zhejiang Garden Bio-chemical High-Tech and Royal DSM. The JV was required to operate independently from its parents for five years.

Hybrid Remedies

Often, SAMR imposes hybrid remedies, which are a combination of structural and behavioural remedies. SAMR most recently imposed hybrid remedies in the Novelis/Aleris case in 2019. SAMR believed the transaction raised competition concerns in overlapping markets and thus imposed structural remedies (divestment) and behavioural remedies (a requirement to supply products to competitors in China for ten years).

The Authority’s Ability to Block or Otherwise Challenge FDI

As described in 6.3 Remedies and Commitments, SAMR has the ability to challenge an FDI transaction (eg, impose remedies) before the investment is made, to the extent that the transaction substantially affects competition in China.

If conditions are not sufficient to address competition concerns, SAMR has the ability to block the transaction. Since the AML took effect in 2008, only two transactions have been prohibited by SAMR: (i) Coca-Cola’s proposed acquisition of Chinese fruit juice producer Huiyuan in 2009; and (ii) the Maersk/MSC/CMA CGM P3 Network shipping alliance in 2014.

Possibility to Appeal and Timeline

Under the AML, a transaction party may appeal to SAMR for administrative review within 60 days of receiving the decision. The time frame for administrative reconsideration is 60 days.

If a notifying party is not satisfied with an SAMR administrative review decision, it may bring an administrative action within 15 days of receipt of SAMR’s decision.

If still unsatisfied with the result of the administrative action, the party can seek judicial review within six months of the final administrative decision. However, to date, no court challenges have been brought against SAMR merger control decisions.

Sanctions for Closing before Clearance

The AML prohibits parties from implementing a notifiable transaction before filing a merger control notification (“failure-to-notify”) and obtaining a merger control clearance (“gun-jumping”).

For failure-to-notify or gun-jumping, SAMR can issue a maximum fine of RMB500,000 on the party that is required to notify the transaction.

In addition to imposing fines, SAMR can order the transaction parties to undertake the following steps to restore the situation to the pre-transaction state:

  • suspend the transaction;
  • dispose of shares or assets within a specified time limit;
  • transfer the business within a specified time limit; and
  • implement other measures as required.

SAMR has yet to exercise this power of requiring transaction parties to restore the pre-transaction state.

There are no criminal sanctions or sanctions on individuals for failure-to-notify or gun-jumping.

The draft amendments to the AML (currently being discussed) increase fines for failure-to-notify and gun-jumping to one to 10% of the undertaking’s turnover. Although the exact level for these increased fines cannot be considered final, the legislature has shown that it will likely increase fines to some degree.

National Security Review (NSR) Overview

In China, FDI that has an impact or a potential impact on national security is subject to national security review, as stipulated in both the National Security Law and the FIL. The review regime is established based on the rules issued by the National Development and Reform Commission (NDRC) and MOFCOM, and updated in the Foreign Investment Security Review Measures (the NSR Measures) published in December 2020 and effective from 18 January 2021.

In practice, only a small number of investments have been submitted for national security review.

NSR Industry Scope

China’s NSR regime targets foreign investments in two categories related to defense and national security in China.

  • Category A — defense-related sectors, which are notifiable regardless of whether the foreign investor will have control over the target:
    1. investment in sectors related to national security, such as the military and arms industry, or other ancillary industries;
    2. investment in areas adjacent to military or arms facilities; and
  • Category B — other sectors concerning national security, notifiable only if the foreign investor will acquire control —
    1. important agricultural products;
    2. important energy and resource;
    3. significant equipment manufacturing;
    4. critical infrastructure;
    5. critical transportation services;
    6. important cultural products and services;
    7. important information technology and internet product and services;
    8. important financial services;
    9. key technology; and
    10. other industries with national security importance (ie, assessed on a case-by-case basis with factors including whether the Chinese government has separately flagged or designated certain sectors or certain products or services as “strategic”).

In additional to the sectors above, the specific rules applicable to FTZs include two additional assessments: (i) important cultural services (eg, media and broadcasting services); and (ii) important information technology products and services.

FDI Types

The national NSR regime applies to direct or indirect investments by foreign investors (including those in the regions of Hong Kong, Macau and Taiwan) in Chinese domestic enterprises, primarily in the form of (i) investment in a greenfield project or establishment of a foreign-invested enterprise in China, independently or jointly with other investors, and (ii) M&A (ie, asset or equity acquisitions). The NSR regime can be extended to other transactions such as contractual control, trusts, multi-layer investments, overseas transactions, leases or convertible bonds,  created to achieve the same purpose as a direct share or asset acquisition.

NSR rules applicable to FTZs also require wholly owned or greenfield JV projects with investment from a foreign investor to be subject to NSR.

For an FDI transaction originally not subject to NSR, NSR approval will need to be sought before the parties can make any changes to, for example, the business structure, business scope or identity of foreign controllers, that result in the FDI falling within the scope of the NSR. Likewise, if an FDI transaction has already received NSR approval but the parties contemplate making changes to the transaction, the parties must seek new NSR approval before they make the changes.

Control Determination

With regard to "Category B" investment, a foreign investor is regarded as a controller if:

  • the foreign investor and its affiliates acquire 50% interest or more in an enterprise;
  • the foreign investor with another foreign investor acquires 50% interest or more in an enterprise; or
  • the foreign investor acquires less than 50% interest in an enterprise but has sufficient voting rights to materially influence shareholder meeting or board of director meetings; and
  • there are other factors allowing the foreign investors to make significant influence over the enterprise’s        operational decisions, human resources matters, financial matters and technology.

Monetary Thresholds

There are no monetary thresholds for a transaction to be qualified for NSR review.

Changes to Existing Transactions

As well as new transactions, changes to existing transactions that may affect national security (eg, changes to the foreign investor’s contractual rights, the business scope of the foreign-invested entity, or the foreign investor’s identity) may trigger NSR notification obligations afresh.

Reviewing Authority

The NSR review is undertaken by an inter-ministry office (the NSR office), led by the NDRC and MOFCOM. The NSR office may be joined by other government agencies depending on the specific sector involved. The NDRC is responsible for receiving application materials and consulting with foreign investors until April 2019; since then, the NDRC has assumed these responsibilities from MOFCOM.

Process and Timeline

The review process involves three phases:

  • Notification and pre-acceptance phase (15 working days): the transaction parties notify with the NSR office by submitting the following materials: (i) notification form; (ii) investment plan; (iii) explanation as to whether the foreign investment will affect Chinese national security; and (iv) other materials required by the NSR office. The NSR office shall determine within 15 working days from receiving the relevant materials as to whether NSR review is required.
  • General review phase (30 working days): if the NSR office determines that NSR review is required, it shall conduct a general review and determine in 30 working days whether to approve the FDI or extend to special review phase.
  • Special review phase (60 working days or longer if necessary under special circumstances): if the NSR office considers that the notified transaction may have national security concerns during the general review phase, it will launch a special review of 60 working days. The special review period may be extended if special circumstances apply. However, the NSR Measures do not specify the circumstances to trigger such extension or the time limit for the extended review period.

During the review process, the NSR office may request for additional information and the review period shall be suspended (ie, “stop the clock”) while awaiting materials from the transaction parties.

NSR review will consider the FDI’s impact on national defense and security, including the production of national defense products and relevant equipment, national economic stability, basic social stability, the research and development of key technologies related to national security, national cultural safety and public ethics and national network security. However, no specific criteria has been published for the substantive assessment. 

The NSR is a highly discretionary process and is subject to the opinion of the NSR office, in particular the specific industrial and regulatory authorities for the invested sectors.

Foreign investors can amend the investment structure to address NSR concerns. However, there are no specific rules or guidance on the types of concerns the NSR office may have and the restrictive conditions that may be required to address its concerns. The NSR is a highly discretionary process subject to the NSR office's opinions in case-by-case assessments.

NSR – Possibility to Block FDI

Where the FDI has or will likely significantly impact national security and could not be remedied by conditions, the NSR office may reject the investment. If the investment has already been implemented, the NSR office may unwind the relevant transaction.

Only a handful of investments have been blocked according to public information.

Consequences for Investing without Prior Notification to the Relevant Authority

The following consequences are possible:

  • Unwinding of the transaction: NSR office may order the transaction parties to make a NSR notification if a transaction has been implemented without the requested NSR notification. Failing to follow such order may result in the transaction to be unwound even if it does not raise national security concerns.
  • Adverse record in China’s credit information system: Failures to notify relevant transactions will be recorded in China’s credit information system and subject to associated penalties. This will also likely result in reputational risks and an impaired relationship with the Chinese government.

Foreign Exchange Control Regime

China has foreign exchange control regulations administered by the State Administration of Foreign Exchange (SAFE). Cross-border transactions are classified into two categories: capital items and trade items. Capital items – capital contributions, loans and dividend distributions – are subject to stricter scrutiny than trade items. SAFE has delegated most transaction review and oversight powers to PRC banks.

Outbound Direct Investment Regime

PRC enterprises, no matter whether foreign or domestically owned, must obtain approvals before investing overseas (ODI approvals). These approvals include those from NDRC, MOFCOM and SAFE. The procedures to obtain these approvals may take weeks or sometimes months.

Investment in Manufacturing

Domestic and foreign investment in manufacturing projects require additional governmental approvals, including from NDRC, which has oversight over manufacturing activities and production capacity nationwide. The project may also need to obtain EHS-related permits, zoning permits and construction permits.

Investment via Red-Chip Structure

A red-chip structure is a common holding structure used by Chinese companies to access overseas financing or to achieve a listing on offshore stock exchanges. It was used  especially in the past when China's domestic listing rules were more restrictive. In a typical red-chip structure, the holding company is incorporated in Hong Kong or Cayman and holds shares in the PRC subsidiaries.

If the target company engages in business restricted from or prohibited to foreign investment, a VIE structure is typically adopted. A VIE structure is a set of contracts that allow the foreign holding company to control target companies via contractual arrangements instead of holding shares in the target. PRC law has not recognised the VIE structure as a legitimate investment structure.

Investment in a red-chip structure sometimes allows foreign investors more flexibility in information reporting, share transfers, corporate governance and so on. This flexibility results from the investment in the overseas holding company not being considered as FDI. Thus, the filing and registration requirements for foreign investment in a PRC company are not triggered.

Enterprise Income Tax

Enterprise income tax (EIT) is one of the major taxes applicable to companies doing business in China.

Tax payers are classified into PRC resident enterprises and non-resident enterprises, as described below.

PRC resident enterprises are enterprises incorporated in China or having de facto management bodies in China. PRC resident enterprises are subject to 25% EIT on their income. Reduced EIT rates apply to (a) qualified high-tech enterprises;, (b) small micro-profit enterprises, and (c) enterprises in western China that engage in industries encouraged by the Chinese government. FIEs are subject to the same EIT rate as domestic companies.

Non-resident enterprises are enterprises that are not incorporated in the PRC, do not have de facto management bodies in the PRC, but either have an establishment in the PRC or have income sourced from the PRC. If the non-resident enterprise does not have an establishment in the PRC but has PRC-sourced income, or if the non-resident enterprise has an establishment in the PRC but has no PRC-sourced income connected to the establishment, the non-resident enterprise is subject to a reduced EIT rate of 10%.

Value Added Tax

Value added tax (VAT) applies to the sale or import of goods, provision of labour for the processing and repair of products, provision of services and the sale of intangible properties and immovable properties. The VAT rate depends on the type of business activity. Input VAT can be credited against output VAT under certain circumstances.

Other Taxes

In addition to EIT and VAT, companies are subject to other taxes such as stamp duty, consumption tax, land appreciation tax and real estate tax.

Dividends and interest paid to a foreign investor, assuming the foreign investor is a non-resident, are subject to withholding tax at 10%. The withholding taxes may be subject to tax treaty arrangements that prevent double taxation or other applicable exemptions under tax treaties.

Restructuring transactions may be eligible for tax deferral treatment if they meet the prescribed requirements and are approved by the tax authorities.

Taxes are shared by the central government and local governments. To encourage investments, local governments sometimes provide subsidies based on the amount of estimated future tax payments by the foreign investor or the FIE. Therefore, foreign investors can negotiate investment agreements with local governments before investing to ensure the most favourable tax treatment possible.

Under the Law on Enterprise Income Tax, capital gains are deemed as taxable income and therefore subject to EIT.

Even if a transaction takes place overseas, as long as the target company holds equity interest or shares in a PRC subsidiary, the seller is also subject to EIT for the capital gains attributable to the equity interests or shares in the PRC subsidiary.

PRC tax law provides that all business transactions between related parties must be made on an arm's length basis; otherwise, the tax authority may apply special tax adjustments to the transactions. The tax authorities may also investigate in the related party transactions and review transfer pricing documents.

In China, the employment between an employer and an employee is mainly governed by:

  • national laws including the PRC Labour Law, PRC Employment Contract Law, PRC Social Insurance Law, PRC Law on Mediation and Arbitration of Labour Disputes, and certain provisions on the implementation of these national laws;
  • the PRC Supreme Court’s four interpretations issued on the resolution of labour disputes;
  • national regulations and policies issued by relevant governmental authorities, in particular, the Ministry of Human Resources and Social Security; and
  • local regulations and policies issued by local governmental authorities.

Under the PRC Trade Union Law, a basic-level trade union committee should be established in any enterprise with 25 or more members but, in practice, not all enterprises establish these trade union committees. According to the 2019 China Statistical Yearbook, around 2.7 million basic-level trade union committees had been established in China by 2018 and nearly 50% of all enterprises had their own trade union committees.

However, even in enterprises with trade union committees, collective bargaining is not common in practice in China.

Foreign investors should also pay attention to the immigration regulations in China, including work visa, work permit and residence permit requirements at national and local levels. Foreign investors who wish to initially establish representative offices instead of companies should note that PRC laws restrict representative offices of foreign enterprises from directly hiring local employees and require them to hire local employees through labour dispatch service providers.

Typically, employees in China are entitled to salary payments, statutory social insurance and housing fund contributions. Statutory social insurance contributions comprise basic pension, basic medical insurance, work-related injury insurance, unemployment insurance and maternity insurance.

Other benefits include statutory annual leave and certain benefits applicable to certain classes of workers. In addition, in tech and other start-up companies, equity-incentive compensation has also become rather common through employee stock options and restricted share awards.

Under PRC law, a change in the controlling investor or shareholder of an employer does not affect the validity or effectiveness of the employer's employment contracts. Neither does it entitle employees to additional compensation as a matter of law unless employment is terminated, in which case severance based on law and mutual consultation may apply.

Generally speaking, unless there are changes to the employment relationship or arrangements following an acquisition, change-of-control or other investment transaction, employees will not be entitled to additional rights or severance payments. However, if the employer wishes to terminate an employee, the employee will be entitled at minimum to the statutorily prescribed severance based on the duration of employment and, in most cases, 30 days' prior written notice. The employee’s salary and benefits terminate as of the termination date unless both parties agree otherwise.

The transfer of employment from one employing entity to a new entity requires mutual agreement between the employer and employee. In an asset or business sale, the employer and purchaser often offers employees the opportunity to transfer employment to the purchaser. If the employee agrees to the transfer, either the employer (ie, the seller) will pay the transferred employee's severance based on the employee's service years, with the employee then being deemed a new hire of the purchaser, or the purchaser will recognise the employee's previously accumulated service years in the new employment contract.

Employers deciding matters directly affecting the immediate interests of employees are required to comply with consultation and notification procedures prescribed in the labour laws. These consultation and notification procedures include seeking comments from the employee representatives’ congress or all employees, discussing the comments with the trade union or the representatives nominated by the employees, and notifying all employees of the final decision.

With tightened controls over technology exports, intellectual property can be a significant concern in screening FDI when technology export is involved. Technology export refers to the transfer of technology through trade, investment, or economic and technological cooperation from China to overseas. This includes the transfer of patent rights and patent application rights, patent licensing, know-how and other forms of technology transfer. Typical license-back clauses in a joint venture co-operation or a pure inbound licensing deal would likely be deemed technology exports under PRC law.

PRC export regulations categorise technology into three classes: prohibited, restricted and non-restricted (freely transferable). Technologies falling within the prohibited category cannot be exported, while any restricted technologies will require government approval prior to export.

MOFCOM and the Ministry of Science and Technology (MOST) maintain a Catalogue of Technologies Prohibited or Restricted from Export, which sets out specific technical parameters for export control. On 28 August 28 2020, MOFCOM and MOST updated the Catalogue, adding 23 restricted items among other changes. The 23 additional categories to the restricted list cover a wide range of technologies, including  D printing, drones, lasers, password security, high-performance detection and design and manufacturing technology of core components of petroleum.

China is becoming an increasingly favourable venue for intellectual property protection. The Chinese Patent Law grants three types of patents: inventions, utility models and designs. An invention patent covers new technical solutions for a product, a process or the improvement thereof. A utility model patent covers new technical solutions for the shape and structure of a product or the combination thereof. A design patent covers new designs, including shape, colour, pattern or the combination thereof of a product. In the past decade, China has witnessed a rapid growth in total patent applications, surpassing the United States as the country with the largest number of patent applications filed in nine consecutive years since 2011. This growth is partly due to the expansion of Chinese patentable subject matter and the various measures the government has taken to improve efficiency in processing patent applications.

Recent amendments to China’s IP laws aim to deter infringement and improve enforcement. In October 2020, China amended the Chinese Patent Law to:

  • increase statutory damages to RMB 5 million and punitive damages to up to five times the actual amount of damages for wilful infringement;
  • lower the patentee’s burden of proof for damages claims;
  • clarify the standards for pre-litigation preservation measures; and
  • enhance the protections for drug patents, including providing a patent term extension and a drug-patent linkage system.

Amendments will take effect on 1 June 2021. 

Amendments to the Chinese Anti-Unfair Competition Law effective as of April 2019 broaden the definition of trade secrets, increase statutory damages to RMB 5 million and provide for punitive damages of up to five times the actual amount of damages.

Amendments to the Trademark Law effective as of November 2019 focus on attacking trademark squatting by providing both administrative and judicial punishments against trademark squatting. The amendments also increase the statutory damages to RMB5 million and provide for punitive damages of up to five times the actual amount of damages.

In November 2020, China amended the Copyright Law, featuring similar statutory and punitive damages and similar proof burdens as those under the Patent Law as well as improvements in digital rights management. The amendments will take effect on 1 June 1 2021.

The China Cybersecurity Law (CSL) is the existing primary cybersecurity and data protection law in China. In 2020, China proposed two additional drafts of legislation for public consultation, the Personal Information Protection Law (PIPL) and the Data Security Law (DSL). Both the PIPL and the DSL propose clear extra-territoriality application that will apply to data processing activities that take place outside China.

The DSL intends to address protection of personal information and non-personal data, which may result in more penalties and in other changes to various other laws.

Many provisions of the PIPL seem to be GDPR-inspired. These include hefty fines of up to 5% of the revenue of the preceding year of a company or individual that processes personal data for serious breach of the PIPL and more stringent personal liability for management personnel directly responsible for such a serious breach. China’s Civil Code also provides new personal information protection that will come into force on 1 January 1 2021.

Multiple Chinese regulators have been actively enforcing the CSL and its implementation measures since its promulgation. Areas of focus in these law enforcement actions include transparency and personal information protection, children’s privacy and consumer protection, implementation of security measures and protection of critical information infrastructure.

Violations of the CSL often result in fines and other penalties that may impact business continuity. The penalties imposed vary depending on which regulatory body enforces the law.

Privacy litigation is also on the rise in China and could increase even more whenever the PIPL takes effect.

There are no other significant issues to be mentioned that have not been addressed in the previous sections.

Fangda Partners

24/F, HKRI Centre Two
HKRI Taikoo Hui
288 Shi Men Yi Road
Shanghai 200041

(8621) 2208 1166

(8621) 5298 5599
Author Business Card

Trends and Developments


Fangda Partners has over 700 lawyers across five offices in Beijing, Guangzhou, Hong Kong, Shanghai and Shenzhen. The firm is widely acknowledged as the leading foreign direct investment (FDI) practice in China. It has extensive experience in advising foreign investors on making their investments in China, including greenfield investments, joint ventures, and share and cash acquisitions. Its FDI expertise also extends to equity and asset restructuring of foreign-invested entities, as well as liquidation and deregistration. Clients also benefit from the firm’s transactional capabilities and expertise in antitrust, IP, employment and data compliance in FDI transactions. Recent highlights include Nomura Holdings’ establishment of a Sino-foreign securities joint venture, Anheuser-Busch InBev’s acquisition of a majority equity interest in Jebsen China and Spirit AeroSystems International Holdings’ acquisition of a minority stake in Zhejiang Xizi Aviation. Other clients include GE, Honeywell, ABB, Hershey, Cargotec, Ford, Lear, Boeing, AMD and Philips.

Investing in China Getting Easier or Harder?

Foreign investors have easier market access but higher compliance costs

In the past three decades, foreign investments were subject to a case-by-case approval system. 2020 has seen tremendous transformation in China’s foreign direct investment regime. With the Foreign Investment Law taking effect at the beginning of 2020, China’s foreign investment regime has officially evolved from a case-by-case approval system — in place for over three decades — to a new system where foreign-invested companies and domestic companies are treated almost equally in terms of their establishment and corporate changes, with the exception of a small number of sectors under the negative list. To cope with the impact of COVID-19 and US trade tensions, the Chinese government has even demonstrated more willingness to embrace foreign investment.

However, as China’s legal system has been evolving, compliance costs for many market players — including domestic enterprises and foreign-invested enterprises — have also increased. For example, the Chinese government is more serious about enforcing environmental and labour. As a result, high pollution industries and labour-intensive industries have been relocating to South Asia where compliance and labour costs are lower. Law enforcement in competition and data compliance areas has also been tightened.

Enhanced IP protection to create a friendlier investment environment

China has expanded its efforts to protect IP rights and deter infringement. It recently amended its IP laws to broaden the definition of IP rights, increase damage awards in IP infringement cases and shift the burden of proof in IP litigations in favour of the right holders.

In addition, China has overhauled its IP court system to improve enforcement. In 2014, China created three specialised IP courts in Beijing, Shanghai and Guangzhou. By 2020, China has established 20 IP tribunals in intermediate people’s courts throughout the country. On 1 January 1 2019, a specialised IP appellate tribunal was established within the Supreme People's Court of China to hear appeals of technology-related intellectual property disputes. The centralisation and specialisation of IP courts and tribunals aims to unify standards and provide effective judicial protection for intellectual property.

Transactions are subject to stringent competition review

Despite its young age of 12 years, China’s merger control regime has become an important voice amongst M&A regulators. Amidst the uncertainty caused by the coronavirus and geopolitical tensions in 2020, China’s antitrust agency – the State Administration for Market Regulation (SAMR) has strived to maintain its professionalism and efficiency. We have seen no discernible change in SAMR’s review process, nor is there evidence to indicate that China’s merger control regime has become politicised.

Notwithstanding the above, certain sensitive sectors such as semiconductors and healthcare are still under strict scrutiny. SAMR may raise China-specific competition concerns while no competition concerns have been raised in other jurisdictions. In cases which lack horizontal or vertical concerns, SAMR has continued to scrutinise adjacent markets and favour behavioural remedies to address potential foreclosure impact on Chinese customers. In two high-tech mergers in 2020 – Infineon/Cypress and Nvidia/Mellanox – SAMR raised foreclosure concerns in adjacent markets, focusing on remedies that prohibit tying and bundling to ensure interoperability and access.

SAMR has also continued to actively investigate transactions which failed to notify according to the law. While the fines are currently low (up to RMB500,000), the proposed amendments to the AML (published in January 2020) increase the fines to 1-10% of the relevant undertakings' turnover.

In 2020, SAMR  confirmed for the first time that transactions involving VIE structures are notifiable. VIE structures allow foreign capital to invest into certain restricted sectors in China and control the onshore assets through a series of contracts (rather than shareholding). Historically, if a transaction party adopted a VIE structure, there would usually be difficulties notifying the transaction under China’s merger review process.

Trends in data protection and cybersecurity legislation and enforcement

Since the passage of China’s Cybersecurity Law (CSL) in 2017, personal information protection and cybersecurity have been an area of focus for legislative efforts and law enforcement. Apps and mini apps in China have been scrutinized for their personal information protection practices in many sweeping law enforcement campaigns during the past two years. We expect this law enforcement momentum to continue in 2021.

Some requirements in China for protecting personal information may be stricter than international practice. This is due to a large number of national standards and industry best practices that may also be considered by Chinese regulators in law enforcement. According to the CSL and the MLPS-related rules, technical and management measures to protect personal information and cybersecurity must be adopted and evidenced by a filing certificate issued by local police (known as MLPS 2.0). Failure to comply with the CSL and personal information protection rules may result in relevant companies being, for example, publicly named and fined, having their operation suspended or having their apps removed from the app store.

In 2020, China unveiled its draft Personal Information Protection Law (PIPL). This may apply to overseas companies that process personal data of data subjects in China for the purpose of either offering products and/or services to such data subjects in China or analysing or assessing the behaviour of such data subjects in China. The draft PIPL proposes hefty fines for both Chinese and overseas companies that violate the PIPL for their personal information processing. Fines could reach up to 5% of the preceding year's revenue of such company. Moreover, the draft PIPL proposes personal liability for management personnel directly responsible for the violation of the PIPL.

Data localisation requirements continue to be more far-reaching in China. Companies that operate in China must plan on storing relevant data (particularly personal data and important data) on servers located in China and must allocate more resources to meet other data localisation requirements.

Supervision strengthened in social insurance contributions

In China, every employer must pay social insurance for its employees in the place where the employer is registered. For foreign companies investing for the first time in China, this requirement can present a major problem. As most foreign companies commonly choose to establish their foreign-invested legal entity in one of a limited number of major cities in China (eg, Beijing, Shanghai, Shenzhen), the foreign-invested entity will not be able to pay social insurance for employees who work and reside in a city different than the one where the foreign-invested entity is incorporated. To solve this problem, a common practice for most foreign-invested companies is to have human resources service companies, registered in the city where the employee will work, pay the social insurance for the employee.

However, this practice has been gradually proscribed by local governments. In particular, in June 2020 Beijing's social insurance authority upgraded its social insurance management system for the purpose of preventing human resources service companies from paying social insurance for individuals who do not have a real employment relationship with the human resources service company. Accordingly, many foreign-invested companies using these services in Beijing have since received notice from the human resources service companies that their service contracts are being terminated.

In response to the new Beijing measures, the most legally compliant solution is to establish an affiliate or a branch company in Beijing for hiring employees and paying social insurance. A branch company can also act as a legal employer and pay social insurance for its employees.

Other options include transferring out the employment or social insurance relationship to third parties via labor dispatch or service outsourcing. However, the feasibility of any of these alternatives  should be assessed on a case-by-case basis.

Fangda Partners

24/F, HKRI Centre Two
HKRI Taikoo Hui
288 Shi Men Yi Road
Shanghai 200041

(8621) 2208 1166

(8621) 5298 5599
Author Business Card

Law and Practice


Fangda Partners has over 700 lawyers across five offices in Beijing, Guangzhou, Hong Kong, Shanghai and Shenzhen. The firm is widely acknowledged as the leading foreign direct investment (FDI) practice in China. It has extensive experience in advising foreign investors on making their investments in China, including greenfield investments, joint ventures, and share and cash acquisitions. Its FDI expertise also extends to equity and asset restructuring of foreign-invested entities, as well as liquidation and deregistration. Clients also benefit from the firm’s transactional capabilities and expertise in antitrust, IP, employment and data compliance in FDI transactions. Recent highlights include Nomura Holdings’ establishment of a Sino-foreign securities joint venture, Anheuser-Busch InBev’s acquisition of a majority equity interest in Jebsen China and Spirit AeroSystems International Holdings’ acquisition of a minority stake in Zhejiang Xizi Aviation. Other clients include GE, Honeywell, ABB, Hershey, Cargotec, Ford, Lear, Boeing, AMD and Philips.

Trends and Development


Fangda Partners has over 700 lawyers across five offices in Beijing, Guangzhou, Hong Kong, Shanghai and Shenzhen. The firm is widely acknowledged as the leading foreign direct investment (FDI) practice in China. It has extensive experience in advising foreign investors on making their investments in China, including greenfield investments, joint ventures, and share and cash acquisitions. Its FDI expertise also extends to equity and asset restructuring of foreign-invested entities, as well as liquidation and deregistration. Clients also benefit from the firm’s transactional capabilities and expertise in antitrust, IP, employment and data compliance in FDI transactions. Recent highlights include Nomura Holdings’ establishment of a Sino-foreign securities joint venture, Anheuser-Busch InBev’s acquisition of a majority equity interest in Jebsen China and Spirit AeroSystems International Holdings’ acquisition of a minority stake in Zhejiang Xizi Aviation. Other clients include GE, Honeywell, ABB, Hershey, Cargotec, Ford, Lear, Boeing, AMD and Philips.

Compare law and practice by selecting locations and topic(s)


Select Topic(s)

loading ...

Please select at least one chapter and one topic to use the compare functionality.