China’s Foreign Investment Law towards stability and long-term sustainability

In the next 18 months, the Chinese Foreign Investment Law should be reshaped around three main aspects to further liberalize the Chinese market accordingly to international standards.

  • Foreign and domestic industries will be treated equally;
  • Adjusted treatments of entities falling into the scope of the negative list, especially for Variable Interest Entities (VIEs);
  • National security review requirements will be loosened for foreign invested firms.

This follows the liberalization trend of the Chinese economy that started in 1980 with the gradual implementation of the free trade zones. It will generate significant savings for industries listed in the “negative list”, which currently suffer from restrictions and prohibitions, as they cannot settle in China without being partially owned or controlled locally.

However certain areas remain unclear:

Negative list VIEs Ownerships
  • What will there be in this list?

  • Will it be as reduced as the ones in the free trade zones?

  • How will VIEs interact in this new regulatory environment?
  • Will there be some legal provisions in terms of rights?
  • How will investments be structured for actual control and issues of firms to be assessed? 

Moreover, long terms investments will also be promoted throughout the implementation of exemptions of individual income tax on dividends of listed companies. This will apply to investors that acquired shares for more than 1 year. Instead of being entitled to a 5% individual income tax, those dividends will enjoy a temporary exemption thereby boosting investor’s confidence in the Chinese stock market for long-term benefits. The holding period will start on the day of the acquisition of the shares and end the day preceding the transfers.

Eligible companies:

Listed firms acquired through IPO or market transfer
Securities investment funds
Quoted companies on national equities
Restricted listed companies

This will further enhance tax policy’s role by promoting long-term value creation and curbing short-term speculation thereby enhancing growth and development of the Chinese stock market.

These recent measures exemplify China’s will to meet international standards in terms of development. Given the recent economic turmoil linked to the Chinese slowdown and crisis in stock markets, the authorities are intensifying structural reforms aiming at boosting investor’s trust for a more stable future with broader growth and development opportunities with clear c-global objectives.

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