Preferential Treatment and National Treatment: The Evolving Status of FIEs

Llinks Law Office

Since China first set up its legal framework for foreign investment in the early 1980s, two fundamental issues have faced foreign investors - the 25% foreign investment threshold and preferential treatment enjoyed by foreign-invested enterprises (FIEs). Generally, foreign investors' shareholdings in a FIE shall be at least 25% of the registered capital of the FIE. And only by achieving this threshold is the FIE entitled to those preferential policies entailed in FIE status.¹ The same principles apply to B share listed companies. If foreign investors hold more than 25% of the total shareholdings in a B share company, the listed company can apply for entitlement to FIE preferential treatment. Foreign financial institutions, like commercial banks and insurance companies, also enjoy these privileges.

When these policies were first introduced, China was in desperate need of foreign investment. All market sectors were seriously underdeveloped and the legal system was inadequate to handle the complexities of modern commercial transactions. With two decades of development at the highest economic growth rate in the world, and with the effects of China's accession to the WTO, China expects to be the largest investment target in the world, with the estimated foreign investment amount exceeding US$50 billion in 2002.²