Ms Flora Luo
Director of Global Expansion & Tax Advisory
Nexia TS Shanghaifloraluo@nexiats.com.cn
Dr Scott Heidecke
Nexia TS Shanghaiscott@nexiats.com.cn
This new regulation consists of 23 articles outlining the types of foreign investments subject to security review, as well as the scope and procedures of security review. The goals of the regulation are to enhance the accuracy and transparency of security review, reduce the impact of security review on foreign investment activities, and protect foreign investors’ legitimate interests.
The new measures will apply when foreign investors directly or indirectly obtain controlling stake in businesses related to the military and national defense, as well as a variety of non-military related industries considered to be important to national security, including certain energy resources, certain infrastructure, and certain key technologies. A foreign investor would be deemed to obtain a controlling stake when obtaining 50% or more of the equity in a business, or where the foreign investor’s voting rights have substantial impact on board of directors’ resolutions.
Before such investments can be finalized, parties to the investment must make a declaration of intent to the authorities, submitting an investment plan and national security impact statement. Authorities will then take up to 15 days to decide whether to conduct a “general security review”. If the review is conducted, the authority can take another 30 days to either approve the investment or decide to conduct a “special security review”. The special review could take 60 days or more to complete, and the investment would not be allowed to proceed until a favorable determination is made. Even where an investment is found to have a potentially negative impact on national security, the regulation allows that the investment may still be viable if certain conditions can be imposed so as to eliminate the impact.
In addition to outlining the new security review requirements and process, the measures describe how the new regulations shall be enforced, as well as use of corrective actions or other punishment for violations. While these new regulations do not eliminate any of the investment types previously subject to security reviews, the process is greatly simplified and streamlined. Moreover, foreign investors should find that these measures offer considerably more clarity with respect to when and how they must comply with the security review rules.
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