Hot China legal topics for foreign investors/companies in China

Foreign-invested companies (FIEs) in China must balance compliance with Chinese laws while navigating growing tension with home country regulations. FIEs in China face a rapidly evolving legal and regulatory environment shaped by geopolitical tensions, domestic policy shifts, and China's long-term economic restructuring. Having robust legal risk assessment frameworks and regional strategy coordination is critical in 2025. From a current corporate legal perspective, here are the hot topics for FIEs in China:

1. Data Security & Cross-Border Data Transfers

China’s data regulation regime remains a top concern.

Laws Involved:

• Personal Information Protection Law (PIPL)
• Data Security Law (DSL)
• Cybersecurity Law
• Cross-Border Data Transfer Assessment Measures

Issues for FIEs:

• Whether their operations involve "important data" or large volumes of personal data that must undergo security assessments before export.
• Mandatory localization of certain data.
• Uncertainty around Standard Contract Clauses vs. government-led security assessments.

To-Do’s for FIEs:

• Assess compliance with the PIPL, DSL and Cybersecurity Law.
• Ensure data localization for sensitive or important data, including personal information and key business data.
• Conduct cross-border data transfer assessments and consider Standard Contract Clauses or government reviews.
• Review data-related contracts for data processing and privacy policies aligned with Chinese regulations.

2. National Security Reviews & Anti-Espionage Law

National Security Review Mechanism has been expanding in scope, especially for:

• Investments in sensitive sectors like semiconductors, defence, biotech, energy, and AI.
• Acquisitions of Chinese companies by foreign firms.
• Anti-Espionage Law (revised 2023) now includes broader definitions (e.g., data theft), impacting due diligence, audits, and market intelligence work by FIEs.

To-Do’s for FIEs:

• Review investment in sensitive sectors (e.g., tech, AI, semiconductors, defence).
• Evaluate acquisition targets for national security review risks and submit for approval when necessary.
• Train staff on espionage laws, particularly those handling proprietary data or conducting market intelligence.
• Ensure compliance with China’s Anti-Espionage Law; check protocols for sensitive information handling.

3. Corporate Governance & Compliance Under the Revised Company Law 

The amended Company Law impacts both domestic and foreign-invested entities:

• Capital Contribution Rules: Paid-in capital must be contributed within 5 years, not the open-ended terms allowed before.
• Increased Director Duties: Enhanced obligations on directors and supervisors for corporate misconduct.
• Stronger Compliance Culture: Regulatory expectations for internal compliance systems are increasing, especially in listed companies and FIEs in regulated industries.

To-Do’s for FIEs:

• Update company articles of association to reflect the latest Company Law revision, particularly around capital contributions, director duties, and supervisor roles.
• Enhance internal compliance systems for ensuring corporate governance practices meet legal standards.
• Establish and monitor an effective system for director responsibilities and liabilities under the new laws.

4. ESG, Supply Chain Transparency, and Forced Labor Allegations

Driven partly by Western regulatory pressure (e.g., U.S. Uyghur Forced Labor Prevention Act, EU CSDDD), foreign companies are under pressure to audit and verify supply chains.

China has pushed back, citing sovereignty, but companies need:

• Detailed supply chain due diligence.
• Legal strategies for reconciling Chinese anti-sanctions laws and Western compliance expectations.
• Legal complexity arises when complying with foreign extraterritorial laws might contradict China's Anti-Foreign Sanctions Law.

To-Do’s for FIEs:

• Conduct supply chain audits for forced labour risks, including compliance with the U.S. Uyghur Forced Labor Prevention Act and similar EU regulations.
• Ensure internal systems can track ESG criteria like emissions, human rights, and anti-corruption.
• Assess risk of reputational harm from not meeting global or domestic ESG standards.
• Review supplier contracts and ensure supply chain transparency practices are in place.

5. Foreign Investment Negative List & Encouraged Industries Catalogue

• Although the Negative List has been gradually reduced, some strategic sectors remain restricted or sensitive.
• There’s growing incentive alignment through the Encouraged Industries Catalogue, which offers tax and land policy incentives for investments in western/central China and green technologies.
• Companies must evaluate corporate structure and local partnerships carefully.

To-Do’s for FIEs:

• Ensure compliance with the Foreign Investment Negative List and Encouraged Industries Catalogue.
• Assess potential investments and verify capital structure (e.g., joint ventures, VIEs, wholly foreign-owned enterprises).
• Explore tax incentives and investment opportunities in western/central China or in green tech sectors.

6. Intellectual Property (IP) Protection & Technology Transfer

Enforcement is improving, particularly in IP courts, but:

• Concerns remain about compulsory licensing, local joint venture pressures, and protection of trade secrets.
• Legal scrutiny over non-compete clauses and employee mobility is increasing.

To-Do’s for FIEs:

• Review IP portfolios to ensure it is adequately protected under Chinese IP laws, including trademark, patent, and copyright laws.
• Evaluate risks around tech transfer requirements, especially in joint ventures or local partnerships.
• Strengthen trade secret protection measures for R&D operations in China.
• Stay updated on IP litigation trends in China and enforcement practices in specialized IP courts.

7. Employment Law and Workforce Localization

• Labor disputes are rising, particularly regarding layoffs, contract terminations, and salary adjustments.
• FIEs are being pushed to localize leadership or reduce expat headcounts due to cost and availability reasons.
• Social insurance audits and back payments are becoming more frequent.

To-Do’s for FIEs:

• Review labour contracts and employee handbooks to comply with Chinese labour law, including termination conditions, non-compete clauses, and social insurance.
• Prepare for potential labour disputes by establishing internal dispute resolution procedures.
• Verify social insurance contributions and ensure compliance with local regulations.

8. Exit Barriers & Capital Controls

• Repatriation of profits, dividends, or liquidation proceeds can be delayed due to forex controls.
• Government increasingly monitors suspicious outbound payments under FDI and transfer pricing rules.
• Legal due diligence is critical for structuring exits (e.g., sale vs. asset transfer).

To-Do’s for FIEs:

• Where needed, develop an exit strategy for potential sale, liquidation, or other exit events.
• Review capital controls and profit repatriation procedures to ensure compliance with foreign exchange regulations.
• Consider structure of divestments to minimize regulatory hurdles (asset vs. stock sale, etc.).
• Assess the impact of outbound investment restrictions and foreign exchange controls on your business in general and on any exit plan.

9. Anti-Monopoly Law & Fair Competition Review

China's Anti-Monopoly Bureau (SAMR) is actively reviewing:

• M&A deals involving foreign parties.
• Platform economies and abuses of dominance.
• New focus on fair competition reviews during tendering or market access, especially where foreign companies are bidding against SOEs or domestic champions.

To-Do’s for FIEs:

• Review mergers and acquisitions for potential anti-monopoly issues, especially for deals involving foreign players.
• Conduct fair competition review when participating in government tenders or other market access procedures.
• Evaluate market dominance risks if operating in platform-based businesses or highly regulated sectors.

10. Anti-Money Laundering Law and Disclosure of Beneficial Owners

• With the recent tightening of China's Anti-Money Laundering Law (last revised in 2024), foreign-invested enterprises (FIEs) are also increasingly coming under the scrutiny of regulators.
• A key innovation concerns the obligation to disclose ultimate beneficial owners (UBOs) to financial institutions and potentially also to competent authorities when establishing a company, changing its structure, or conducting certain business transactions.
• The definition of beneficial owner is increasingly aligned with international standards (e.g., FATF), but with local interpretations and implementation requirements.

To-Do’s for FIEs:

• Identify and document the beneficial owners of your Chinese companies in accordance with the current requirements. This includes, for example, natural persons who directly or indirectly exercise control over the company or receive significant economic benefits.
• Review group structures and shareholdings, particularly in complex holding structures, trusts, or cross-border constellations, to meet transparency requirements.
• Ensure compliance with disclosure obligations to banks, authorities, or business registrations, particularly for account openings, corporate actions, or other compliance-relevant events.
• Update internal compliance policies to meet anti-money laundering requirements and train relevant employees on identity verification and reporting requirements.

Susanne Rademacher
Dr Jenna Wang-Metzner