Business set-up and consulting in China

China 2024 Company Law and foreign investment regulations

By C.i. Process (Shanghai)
 
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China 2024 foreign regulations explained
 
  Publication updated on January 09, 2024      


1. Overview of the 2024 China Company Law

Approved on December 29, 2023, the sixth amendment to the China Company Law will take effect on July 1, 2024. This Law is the reference text also governing foreign investment and shareholdings in China. It impacts all companies in the PRC and introduces significant changes.

It also replaces al lthe previous laws, which differentiated between companies with 100% owned company or subsidiary (ex-WFOE) and those with mixed capital (sino-foreign joint venture). As a quick guide, the 2024 key amendments include:

 


China 2024 foreign company Law explained


  • Capital contribution timeline: the New Company Law introduces a 5 year maximum period for capital contributions in LLC to enforce actual contributions and protect creditors' interests. Registered companies shall adjust their schedules to comply. The company registration authorities are empowered to examine and request adjustments in capital contributions.

  • Enhanced rights and obligations against outstanding capital contribution: new rules are introduced to ensure full capital contribution by shareholders. This includes acceleration rights for the company and creditors, joint liability for shareholders in case of failure to pay. It also points out the directors' responsibility for verifying contributions, forfeiture of shareholders' equity interests for non-compliance, and joint liability for illegal capital withdrawal.

  • Reconstruction of corporate governance, board and representatives: significant adjustments are made to the governance rules. This includes the requirement for employee representatives as supervisors or directors in mid-large scale non-state-owned companies. The introduction of an audit committee is an alternative to the board of supervisors. Specification that the legal representative must be a director or general manager actively executing business operations.

  • Enforcement of duties of loyalty and diligence: the law reconfirms the duties of loyalty and diligence for directors, supervisors, and senior management. It extends these duties to controlling shareholders and actual controllers of the company.

  • More flexibility in distribution of responsibilities within a company:

    • Responsibilities of the Shareholders' Meeting: deciding on a company’s business policies, investment plans, annual budget plan are removed from the shareholders' meeting’s remit. The decision is transferred to the board of directors.

    • Delegation to the Board of Directors: The power to decide on the issuance of corporate bonds, previously rested with the shareholders' meeting, may now be delegated to the board of directors. Also, the full list of responsibilities assigned to the general manager is now removed in the new Company Law. This indicates a change towards greater flexibility in defining his role and functions.


  • Improvement of Rules on Transfer of Equity Interest: simplifies the right of first refusal process for equity interest transfer, and specifies rules on capital contribution liability related to transferred equity interest.

  • Stricter Quorum requirements: the new Law sets mandatory quorum requirements for 2 key matters. First, for the shareholders' Meeting, at least half of the equity interest of a company must be represented at a meeting. Second, half of the directors of a Board of Directors must be present for a board meeting. These requirements are particularly significant for sino-foreign JVs having foreign and Chinese partners.

  • Optimization of registration and liquidation procedures: the new chapter on company registration clarifies establishment, change, deregistration, and public announcement procedures, requiring improved registration efficiency and transparency. Additionally, the liquidation system is improved, setting out directors' obligations and responsibilities in liquidation.


The 2024 China Company Law aims to improve capital adequacy, protect rights and interests, optimize governance, facilitate equity transactions, enhance transparency, and aims to simplify the corporate setup and liquidation procedures.

It's part of China's ongoing reforms and opening-up policy to support investments and adapt to a quick changing market. We advise foreign investors to seek counsel to ensure compliance with the New Company Law.


 

 

2. A new 2024 Catalogue and guide for investments in China

In addition to the new Company law, a 2024 Catalogue for Guiding Industry Restructuring is also announced by China's National Development and Reform Commission (NDRC). Representing a strategic orientation in China's economic policy, it focuses mainly on high-tech industries and environmental priorities.

This Catalogue is effective February 1, 2024. Targeting all domestic and foreign invested companies operating within China, it serves as a restructuring guide for numerous industrial sectors and production activities in China. Since its first introduction in the early 2000's, the Catalogue regularly evolved to meet market challenges and demands, shaping investments and government projects in China.

 

a. Essential insights on current China business orientation



On August 13, 2023, the Beijing State Council issued a circular on measures to promote the environment for foreign investment. In 24 points, it pragmatically calls for intensified efforts to attract foreign investment. These include protection of intellectual property rights, tax incentives, equal treatment before the law and access to public tenders for Chinese subsidiaries of foreign companies. Even for Chinese companies, access to public tenders in China is subject to varying conditions. Depending on the sector, these may include guarantees, a specific corporate purpose, or a minimum capital requirement, for example.

The circular also reminds that foreign companies are invited to participate in the elaboration and development of Chinese standards. At this indicative stage, this document serves as a basis for the next concrete measures concerning foreign investment. These should be published in the coming months. One section also deals with the taxation of expatriates in China.

At the same time, the National Development and Reform Commission (NDRC) had submitted a proposal for the revision of the master catalogue (official Chinese version). While a regulatory update can be expected in 2024, no official version is yet available. No entry into force date has been announced. Its content, which gives pride of place to green energies, bears witness to the major trends we can expect to see in a near future. These guidelines apply equally to domestic companies and foreign investors.

On October 18, 2023, at the opening ceremony of the third Silk Road Forum for International Cooperation, President Xi Jinping declared that China will:

  • Negotiate and sign free trade agreements and investment protection agreements with more countries.

  • Remove all restrictions on foreign investment in manufacturing activities.

  • Take the initiative to refer to high-level international economic and trade rules, promote high-level opening of cross-border trade and investment. Finally, expand market access for digital and other products.

  • Organize an annual World Digital Trade Expo.

    The President also declared that over the next 5 years (2024-2028), China's import and export volume should exceed 32,000 billion USD (goods) and 5,000 billion USD (services).

On November 16, 2023, Li Chao, NDRC (Reform Commission) spokesperson, stated that China would accelerate the publication of comprehensive measures to attract more foreign investment and raise the level of foreign investment liberalization.

Then, the recent official announcement of a new Catalogue for 2024 indicates a policy transition with a double focus on the green economy and high-tech industries. Companies operating in these sectors should align with the new policies to capitalize on emerging business opportunities. And enjoy potential preferential treatments.



 

 

b. How to understand China's regulations governing the investments?

The Catalogue is a key reference for domestic and foreign investors that provides insights into market dynamics, China priorities, and associated new opportunities for investment. It is part of an global system that includes :

c. Guide and highlights of the 2024 edition

  • High-tech industries: there's a significant focus on advancing technology with various high-tech sectors now encouraged. This includes  advanced agricultural machinery and smart manufacturing.

  • Focus on green economy: sustainability is a major concern, increasing emphasis on green technologies (energy storage, clean hydrogen production, etc).

  • Modern service industries: the Catalogue encourages the integration of services for advanced manufacturing and agriculture. They are regarded as a key high-end element of the production value chain.

  • Specific restricted projects: new restrictions for some particular types of alumina and copper fusion.

 

3. Activities and industries classified as encouraged, restricted or obsolete

The encouraged category focuses on advanced technologies and industries crucial for high-quality economic and social development. The restricted one pertains to outdated technologies and products. The obsolete category includes technologies and products that go against environmental and waste key concerns. In clear, the activities that exceed a certain level of pollution.

a. Encouraged industries and activities

The encouraged category refers mainly to technologies, equipment and products that have a significant promotional effect on economic and social development.

  • Petrochemical and chemical industry: Development and production of biomaterials such as high-molecular-weight products using non-cereal biomass as a raw material. Low-carbon environmental protection technologies such as carbon dioxide to produce polycarbonates and biodegradable plastics. Environmentally-friendly coatings, low in Volatile Organic Compounds (VOCs).

  • Textile industry: production of materials based on degradable fibers.

  • Automotive industry: new energy vehicles (NEVs) such as electric vehicles, plug-in hybrids, fuel cell vehicles, composite fiber applications and bio-based composite materials.

  • Circular economy industry: full utilization of resources, recycling of renewable resources, clean production.

  • Energy-saving services industry: transformation of energy-saving technologies, diagnosis and evaluation of energy savings, control and management of energy savings.

  • Inspection, testing and certification services: analysis, testing and related technical consulting and R&D services. Design services for global intelligent product solutions, human-machine engineering design, systems simulation.

  • Prevention of animal epidemics and control of crop diseases and pests: prevention and control of major diseases and pests, invasive species and animal diseases. Development of new diagnostic reagents, vaccines and low-toxicity, low-residue veterinary drugs for animal diseases. Development and application of new processes. Construction of bases for the cultivation, domestication and breeding of wild animals and plants. Surveillance and warning systems for sources of epidemics and diseases. Development and application of technologies for automatic monitoring of crop and forest pest density.

  • Green agriculture: demonstration and application of fully biodegradable plastic films, resistant and recyclable plastic films on farmland. Risk control and remediation of contaminated farmland. High-quality, safe and environmentally-friendly agricultural inputs such as animal feeds, feed additives, fertilizers, pesticides, veterinary drugs that meet the requirements of a low-carbon, green cycle. Development of authorized feed additives for green food production. Development and application of environmental monitoring technologies for agricultural products and their production areas. Treatment of organic waste. Development and application of technology for the valorization and industrialization of organic fertilizers.

  • Development, production and application of biodegradable plastics and their derivatives: water-saving equipment for agricultural plastics, development and production of long-lasting functional agricultural films (three years and more), fully biodegradable packaging materials.

  • Waste recycling: recycling of agricultural and forestry waste (straw, manure, pesticide packaging) and biomass energy technology equipment.

  • Technology services industry and business services industry: technology transfer services, technology information exchange, technology consulting and incubation, transformation of technological achievements and authentication services.

  • Artificial intelligence industry: platform for intellectual property services and artificial intelligence standards testing.

  • Audiovisual industry: development and application of high-tech videos such as interactive, VR and immersive videos. Development and application of ultra-high-definition broadcasting and cloud broadcasting. Construction of high-tech audiovisual industrial parks.

  • Pharmaceutical industry: development and application of key medical technologies. Production of new medicines and promotion of innovations in traditional Chinese medicine.

 

b. Restricted industries and activities

The "restricted" category refers mainly to obsolete processing technologies that are not conducive to achieving carbon neutrality objectives.

  • Petrochemical and chemical industry: propylene glycol with a capacity of less than 130,000 tonnes per year, ethylene glycol with a capacity of less than 200,000 tonnes per year. Polypropylene with a capacity of less than 70,000 tons per year, production tools for certain dyes and printing pigments, etc.

  • Light industry: PVC food packaging film, glass bottle production line with a capacity of 30,000 tons or less per year. Mono chemical paper pulp with a capacity of 300,000 tons or less per year.

  • Textile industry: spandex intermittent polymerization production equipment, conventional polyester dimethyl terephthalate (DMT) production process.

  • Agriculture, forestry, livestock and fisheries: Overgrazing, specific types of production equipment, animal and plant processing and aquaculture.

 

c. Obsolete industries and activities

Previously called eliminated category, it refers mainly to obsolete processes, equipment and products which do not comply with current regulations, which seriously waste resources and which pollute the environment.

  • Petrochemical and chemical industry: less than 100,000 tonnes per year of ammonium phosphate (excluding industrial grade). Coatings with excessive levels of harmful substances. Highly toxic pesticides. Other products disposed of in accordance with national directives and international conventions, such as perfluorinated and polyfluorinated alkyls (PFAS).

  • Light industry: production of fatty acid tertiary amines, ultra-fine plastic bags, mercury batteries and some lead batteries.

  • Textile industry: Small Z114 jacquard machine, elastane production process, DC motor-driven printing and dyeing production line.

 

d. Industry focus : the shift for automobile manufacturing in China

China's restrictions on foreign investment in the car manufacturing sector date back to 1994. At that time, the Chinese regulation stipulated that foreign investors could only enter the car production industry in China through the setup of a sino-foreign equity joint-venture (EJV) with a Chinese partner. This partner had to hold at least 50% of the shares and the number of JVs under the name of a foreign investor was capped at two.

Since 2018, this sector has been gradually opened to foreign investors, depending on the type of vehicle built. By order of opening : special purpose vehicles, new energy vehicles (NEV), commercial vehicles, passenger vehicles. Since 2022, China has fully opened this sector to foreign investment without any restrictions.

In February 2022, BMW increased its stake in its Chinese production JV from 50% to 75%. This decision makes BMW Brilliance Automotive China the first majority producer of motor vehicles. In April 2018, the government published a timetable for opening up the automotive sector. As early as 2018, it already planned to remove caps on foreign participation for manufacturers of new-energy vehicles. Then, for commercial vehicle manufacturers in 2020 and for all carmakers in 2022.

Early 2023, Mercedes-Benz announced the launch of its Level 3 (steering wheel release) autonomous driving program in China. For the time being, this program is limited to highway driving.

 

4. List of encouraged foreign investments


Effective January 1, 2023, the National Development and Reform Commission (NDRC) and the Ministry of Commerce (MOFCOM) publish the up-to-date list of encouraged foreign investments. It is national in scope. Note there is a second (regional) encouraged list which applies to investments made in China's central, western and northeastern regions and in Hainan province. Here we examine the content of this list and the associated benefits and advantages. The list contains a total of 1,474 encouraged activities:

  • National list: 519 promoted activities (39 activities added and 85 modified)
  • Regional list (central, western, northeastern and Hainan): 955 activities (200 added and 82 modified).

 

a. the main features of the national list

  • Manufacturing: the list encourages investment in activities such as the manufacture of electronic components, parts and equipment. Find out more about setting up a foreign-owned production or assembly center in China.

  • Directing investment towards productivity: the list focuses on promoting the integration of services and manufacturing, adding or expanding headings such as design, research and development (R&D) and related technical services.

  • Optimize the regional distribution of foreign capital utilization: expand the scope of the Central and Western China Encouraged List by combining local resources.

 

b. examples of new activities encouraged at national level

  • Healthcare sector: production and development of textile products for therapeutic care, artificial skins, absorbable sutures, hernia care materials. New materials for dialysis membranes, venous treatment catheters and high-end biomedical dressings. Production of drugs for rare diseases and children's medicines.

  • Sports sector: inspired by the success of the 2021 Beijing Winter Olympics, the new list encourages foreign investment in the winter sports industry. It stipulates "research, development and production of snow and ice equipment for ski resorts, cable cars, snow cannons and other special equipment".

  • Elderly care sector: to promote the development of the elderly care industry, the List encourages investment in "the research, development and manufacture of intelligent healthcare products for the elderly". This includes the manufacture of geriatric and ancillary products and equipment, the manufacture of rehabilitation aids, and the manufacture of smart devices and cell phones for the elderly.

  • Rural revitalization sector (ZRR): water-saving irrigation systems, improvement of agricultural soils and ecological management, comprehensive use of farmland reserve resources (saline and alkaline land), innovations in green farmland. Improvement of the rural environment, treatment of wastewater and rural waste, management of the aquatic and ecological environment, construction of restoration projects.

  • Vocational training sector: to echo China's plans to strengthen its vocational education system, "non-academic language training institutions" and "non-academic art training institutions" have been added to the Encouraged List.

  • China's transition to a green, circular and low-carbon economy: production of new technologies and innovative products for wood structures and building materials, and recycling of wood waste. Green fuel preparation technologies. Production of biological hydrogen, by electrolysis of water from renewable energy sources, etc. Promotion of low-carbon production of petrochemical feedstocks.

 

c. examples of activities encouraged at regional level

 

In the secondary list for the central, western, northeastern and Hainan regions, new activities have been added or modified depending on the zone. Here are a few examples:

  • In Shanxi, Liaoning and Anhui provinces

    - manufacture of smartphones, smart terminal products and components.
    - manufacturing of textile accessories.
    - production of liquid crystal panels and organic electroluminescent display materials.

  • Inner Mongolia, Jiangxi, Guizhou and Heilongjiang provinces

    - research and development of coal mining technologies.
    - primary and secondary processing of horticultural products.
    - cultivation of selenium-rich agricultural products.

  • In Tibet, Xinjiang and the provinces of Yunnan and Qinghai

    - cross-border e-commerce.
    - desert-related industries.
    - development and exploitation of ecotourism.


d. business sectors promoted at provincial level

In addition, depending on the respective regional advantages and their local characteristics, the activities encouraged at provincial level can be sector-based. For example:

- Jilin province: automotive industry.
- Henan and Jiangxi provinces: agriculture, gardening and flower production.
- Shanxi province: energy sector.
- The province and free port of Hainan is keen to attract investment in the tourism sector.


e. what preferential policies can foreign companies benefit from?

  • Exemption from customs duties for imported equipment. For the import of eligible equipment intended for production, as part of the investment. Please note that this possibility is subject to the discretion of local chinese customs authorities, with whom it will be necessary to present and negotiate the case.

  • Access to preferential land prices and relaxed land-use regulations. Land can be provided as a priority to projects that make intensive use of land resources. The base price for land transfers can be lowered to 70% of the lowest national price for industrial land transfers.

  • Reduced corporate income tax (CIT). In the western regions and Hainan province, the corporate income tax (CIT) rate is reduced to 15% (national rate 25%).

 

5. What do we learn from the new updates for foreign investment?

The almost annual update of the negative list indicates that China is gradually demonstrating a higher degree of openness. It shows a willingness to offer more opportunities to foreign investors by easing restrictions in non-strategic sectors. Previous versions wanted to encourage projects that would bring new know-how, methods and technologies to China. These sectors include research and development in a large part of manufacturing and assembly activities. They concern in particular products with high added value or technology. Following the concrete project presented in the above, we are awaiting the next regulatory update applicable for the year 2024.

While the List updates the guidelines, some clarifications and interpretations are still needed. The Chinese authorities will decide, on a case-by-case basis of investment cases, what investment conditions are available. In particular :

  • the exact scope of activities allowed in a corporate purpose that must be carefully worked out
  • the minimum capitali requirements in relation to the of the total investment plan
  • any other special conditions required (additional license or special permit)
  • any tax benefits and customs declarations and clearance procedures

 

So far, most foreign investment projects in China were approved in the forms of:


 

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