Draft foreign investment law aims to clarify status of VIE

If foreign investors are ultimately identified as de facto owner by the foreign investment authority, an application for a license for market access must be made, and such licenses will be granted or denied accordingly.

Both the draft legislation and the draft explanation are silent on whether such foreign investors are eligible for the relevant licenses at the current stage.

The current language only contemplates a case-by-case approach.

While the fate of VIEs with foreign investors is uncertain, these new procedures are good news for entities with domestic investors. The inherent defects and potential legal and regulatory risks endemic to the previous VIE model will vanish, to the extent that the de facto investors are domestic, since they will be considered identical to domestic investors.

No foreign investment restriction/prohibition will apply.

They would no longer be in a gray zone and the domestic de facto investors will no longer need to worry about not having the support of authorities.

One intent of the draft legislation may be to shut down the VIE structure by identifying the nationality of the de facto investor. Under the draft legislation, foreign enterprises will be given pre-establishment national treatment and foreign investment will be evaluated with a negative list approach as opposed to the current "positive" list approach.

Foreign investment will be welcome in more industries. We believe this approach would be very helpful to revitalize the economy. However, industries on the negative list will not be open to foreign investment.

This line of thinking is consistent with that behind the national security review. Therefore, the VIE structure might be less popular in the future as it will be less feasible for foreign investors to bypass government review and regulation and invest in such prohibited industries.

We believe that the draft legislation and the draft explanation are milestones for China and its further expansion into the world economy.

The author is a partner of Dacheng Law Offices in Shanghai.