2.2.3.2.1 Introduction to FIEs in China

There is no systematic or codified foreign investment law in China. No definition of FlEs can be found in laws or regulations. Each type of FIE is subject to its own specific regulatory law. Academically, FlEs are usually defined as enterprises incorporated by foreign investors themselves or with the joint capital from their Chinese partners, within the territory of China and governed by Chinese laws.1 Currently, FlEs usually and mainly take the form of Chinese—foreign equity joint ventures, Chinese-foreign contractual joint ventures, and wholly foreign owned enterprises.2 The first two forms are usually together termed as joint ventures in China.3 The introduction to these three types of enterprises can be found in section 2.2.3.2.2.

There are no exact statistical data on the amount of legislation and regulations that have been passed by the central and regional governments in relation to foreign investment.4 Only a small part of significant pieces is listed below to give the reader a rough idea of the Legislative framework of the FlEs.

Basic laws for the three traditional kinds of FlEs are: (1) Law of the People's Republic of China on Chinese-Foreign Equity Joint Ventures, amended in 1990; (2) Law of the People's Republic of China on Chinese-Foreign Contractual Joint Ventures, amended in 2000; and (3) Law of the People's Republic of China on Foreign-Capital Enterprises, last amended in 2001. Each of them has supplementary "Detailed Rules for Implementation".

As mentioned above, regulations from administrative bodies and regulatory commissions, though lower than law in hierarchy, are also of great importance in practice. Some important regulations from the State Council and the Ministry of Commerce are: Provisions on Guiding Foreign Investment Direction, Catalogue for the Guidance of Foreign Investment Industries, Regulations on Merger and Division of Foreign—Funded Enterprises, and Provisions on Mergers and Acquisitions of Domestic Enterprises by Foreign Investors. It has been noticed that efforts to achieve equal treatment of wholly domestic invested companies and foreign investment enterprises are being made. Previously, there were special regulations for FlEs in the aspects of tax and insolvency. Since 2008, however, FlEs are regulated onder the same tax law and insolvency law as wholly domestic invested enterprises.

Now, as we already know, FlEs and companies with only domestic investment are subject to different sets of laws in China. Provisions of the Company Law 2006 are applicable to FlEs only when legislation of FlEs is silent on a certain issue. This standing is reiterated by Article 218 of the new company law: where laws concerning foreign investment have different provisions, such provisions shall prevail. This means that FlEs must not only comply with laws and regulations especially drafted for FlEs, but are also subject to company law under certain circumstances.

In developed countries, all companies, whether with foreign investment or wholly domestically invested, are subject to the company law, and the WTO also requires national treatment of FlEs. The current situation in China can be attributed to historical reasons. Instead of coming into effect after the promulgation of the PRC company law 1993, the legislation on FlEs came into force earlier owing to the pressure of economic development in China.5 Gradually, the legislation formed a system and functioned independently before PRC company law was promulgated.

Later on, when drafting the company law, legislators did not adopt the foreign way to integrate laws of FlEs into the company law but, instead, they inserted an article which read: "Limited liability companies with foreign investment are subject to this Law, provided that where the provisions of national statutes goveming Sino-foreign equity joint venture enterprises, Sino-foreign cooperative joint venture enterprises, and wholly foreign owned enterprises stipulate otherwise, the stipulations therein shall prevail."6 The reason for doing so was to maintain the stability of FlEs laws and to continue to offer preferential treatment to FlEs.7 There was supranational treatment, especially in the tax area, but there were also restrictions on market access and management decisions. Such considerations for FlEs, however, have not won support but are under fire because it is deemed as differential treatment of enterprises, especially because the revised Company Law 2006 is more flexible in terras of forms of capital contribution, voting arrangements, dividends schemes, and so on. Major differences will be briefly explained in the following section.

In brief, the FIE laws and regulations in China were an expedient measure. In order to make use of foreign investment, legislations on FlEs were pressed into being during the initial period of transition from socialist planned economy to market economy. But since then, 20 years have passed. The economic and legal foundations on which those FlEs laws are based have fundamentally changed. The social and legal landscape has been much improved and China is on an irreversible way to become more integrated with international practice. As a result, it is time to think about the termination of the parallel regimes. The generally accepted idea is that the part of the mies on business organization of the FIEs laws should be integrated with company law and mies on national economie safety as well as investment guidance should go to the need-to-bedrafted PRC investment law.8