Haworth & Lexon Law Newsletter
No.5 2010 (Total:No.101) June.15th, 2010
Edited by Haworth & Lexon
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“Haworth & Lexon Law Newsletter ” is issued every month, mainly introducing the legal change in the fields of Corporate, Securities, Foreign investment, E-commerce, International trade etc. with necessary comment. All the comments do not mean the legal opinion of our firm and the firm does not have any legal liability for such comment. Should you have any interest in any topics or any questions please feel free to contact the firm. You will be expected to have satisfactory response from the professional attorney of our firm.
Guidelines:
Latest Laws and Regulations:
Several Opinions of the State Council on Encouraging and Guiding the Healthy Development of Private Investment.
Circular of the Ministry of Commerce on Relevant Issues Concerning Delegating the Examination and Approval Authority of Foreign Investment.
Interim Measures for Administration of Online Commodity Trade and Related Service Activities.
Regulations on the Standards of Case Filing and Prosecuting of Criminal Cases under the Jurisdiction of Public Security Administration (No. 2).
Administrative Measures for the Information Disclosure by Insurance Companies.
Notice on Issues Relevant to the Settlement of Land VAT.
Notice on Printing and Distributing the Administrative Measures for Export Tax Rebate for Vessels Financial Leasing.
Notice on the Interim Measures for the Administration of Rewarding Funds from the Public Finance on Contractual Energy Management Projects.
The Ministry of Finance Issued Several Application Guidelines on Enterprise Internal Control.
Several Opinions of the 2nd Civil Courtroom of Shanghai Superior People’s Court on Trying Cases Involving the Rejection of Corporate Personality of Legal Persons.
Opinions of the 2nd Civil Courtroom of Shanghai Superior People’s Court on Several Issues Concerning the Handling of Property Preservation in the Trial of Commercial Cases.
Legal Practices:
Original Wallpaper Designs Are Protected By Copyright Law and Three Infringers Were Ordered to Pay Compensation.
Tax Supervision on Equity Transfer of Offshore SPVs.
Procedures and Key Points of Normal Liquidation of Foreign-invested Enterprises.
New Regulation on Foreign Enterprise Permanent Representative Organization.
Other Offices of Haworth & Lexon:
Summary for the Lecture Regarding Legal Issues In Relation to Industrial Parks.
Latest Laws and Regulations
Several Opinions of the State Council on Encouraging and Guiding the Healthy Development of Private Investment
On May 7, 2010, the State Council issued the Several Opinions of the State Council on Encouraging and Guiding the Healthy Development of Private Investment (“Opinions”).
The Opinions broadens the scope of private investment, specifically encouraging and guiding private capitals to enter the industries and areas which are not expressly prohibited by laws and regulations, and also encouraging private capitals to enter the infrastructure, municipal engineering and other public service areas which can implement market operation.
In terms of encouraging and guiding private capitals to enter the basic industries and the infrastructure, the Opinions encourages private capitals, in the form of sole investment, investment by controlling equity and equity participation, to invest in such projects as road construction, water transport, port, civil airport, general aviation facilities, etc.; encourages private capitals to invest in the construction of water engineering projects, and new energy industries, such as wind energy, solar energy, geothermal energy and biomass energy; encourages private capitals to enter the exploration and development of oil and gas, and the cooperation in exploring and developing oil and gas with state-owned oil enterprises; encourages private capitals to participate in the construction of storage and pipeline transportation facilities and network for crude oil, natural gas and oil products; encourages private capitals to enter the basic telecom operation market by equity participation; supports private capitals to develop the value-added telecom business; actively guides private capitals to participate in such construction projects as land consolidation and reclamation through bidding; encourages and guides private capitals to invest in the recovery and management of the mining geological environment, and insists on the full opening of the mining rights market to private capitals.
The Opinions also encourages private capitals to participate in the construction of municipal public utilities and policy-related housings. The Opinions supports and guides private capitals to invest in the construction of policy-related housings such as affordable housings, public rental housings, and to participate in the reconstruction of shantytowns, and to enjoy the relevant policies of the policy-related housing construction.
In terms of encouraging and guiding private capitals to enter the social undertaking area, the Opinions supports private capitals to invest in the establishment of various medical institutions, such as hospitals, community health services, sanatoriums, outpatient departments, clinics and health centers, and the establishment of various educational and social training institutions, such as higher education institutions, primary and secondary schools, kindergartens, and vocational schools. Meanwhile, the Opinions encourages private capitals to invest in the construction of professional service facilities, the establishment of various social welfare agencies, such as eldercare services, and recovery and fostering services for the disabled, and the development of cultural, tourism and sports industries.
In addition, the Opinions also imposes regulations regarding encouraging and guiding private capitals to enter financial services, business circulation, defense industry, the reorganization, coalition, and participation in state-owned enterprise reformation, and the active participation in international competition.
Circular of the Ministry of Commerce on Relevant Issues Concerning Delegating the Examination and Approval Authority of Foreign Investment
On June 10, 2010, the Ministry of Commerce promulgated the Circular of the Ministry of Commerce on Relevant Issues Concerning Delegating the Examination and Approval Authority of Foreign Investment (“Circular”).
According to the Circular, the establishment and change of any foreign-invested enterprise, which has a total investment of USD 300 million in the encouraged and permitted industries or a total investment less than USD 50 million in the restricted industries listed in the Catalogue for the Guidance of Foreign Investment Industries, shall be examined and approved by the commerce departments of the provinces, autonomous regions, State administered municipalities, cities with specific designation, Xinjiang production and construction corps, sub-provincial cities, or national economic and technological development zones. The establishment and change of any foreign investment company with the registered capital below USD 300 million, and the foreign investment venture capital enterprise or the foreign investment venture capital management enterprise with a total capital below USD 300 million shall be examined and approved by the local approving authority. The threshold of the capital investment for a foreign investment corporation shall be calculated according to the registered capital; the threshold of the capital investment for the restructured foreign investment company shall be calculated according to the evaluated net asset amount; the threshold of the capital investment for foreign investors acquiring a domestic company shall be calculated according to the transaction amount. Each increase in the registered capital by the amount below the threshold shall be examined and approved by the local approving authority.
The establishment and change of the encouraged foreign-invested enterprise, where the investment is above the threshold and which does not need the comprehensive balance from the State, shall be examined and approved by the local approving authority.
Unless it is otherwise specified that all the examination and approval shall be conducted by the Ministry of Commerce, the establishment and change (including increasing the registered capital by the amount above the threshold) of any foreign-invested enterprise in the service industry shall be examined and approved by local approving authorities according to the relevant regulations of the State. If any pre-licenses or comments are required to be obtained from the State Administration for Industry & Commerce according to the relevant regulations, the required documents or opinions shall be obtained. The establishment and change of the foreign-invested enterprise in finance or telecom area shall still be processed according to the current laws and regulations.
Interim Measures for Administration of Online Commodity Trade and Related Service Activities
The State Administration for Industry and Commerce promulgated the Interim Measures for Administration of Online Commodity Trade and Related Service Activities (“Interim Measures”) on May 31, 2010, which shall come into force as of July 1, 2010.
The online commodity operators shall refer to those legal persons, other economic organizations and natural persons that sell commodities through the Internet. The online service operator shall refer to those legal persons, other economic organizations and natural persons that provide relevant commercial services through the Internet and website operators that provide platform services for online trade.
The Interim Measures have many provisions in protecting the consumer interests:
1. In the administration of identification of the online commodity operators and the online service operators, (1) any legal person, other economic organizations or individually-owned business that has registered at the administration for industry and commerce and collected the business license, engages in commodity trade and related service activities through the Internet shall disclose information indicated in the business license or electronic linkage identifier of the said business license at a notable position of the homepage of its website or the web-page used to engage in commercial activities. (2) any natural person, who engages in commodity trade and the relevant service activities through the Internet shall file an application to the operator providing platform services for online trade and provide his/her name, address and other authentic identity information; The operators that provide platform services for online trade shall examine and register the true identity information of natural persons who are not qualified for industrial and commercial registration and apply for provisions of commodities and services through online trade platform, set up registration files and check and update them on a regular basis. The operators shall examine and issue a mark to verify the truth and legality of the individual identity information, which shall be loaded in the web page used to engage in commodity trade or service activities.
2. The Interim Measures provide that when providing commodities and services to consumers, the online commodity operators and the online service operators shall state in advance the name, type, quantity, price, freight, distribution mode, payment method, commodity change or return mode and other major information of such commodities and services, adopt safety guarantee measures to ensure transaction safety, and shall provide such commodities and services as promised. The online commodity operators and the online service operators shall not set out any provisions by using electronic standard contract or by other means that are not fair or reasonable for consumers, relieve or exempt operator’s obligations or responsibilities or exclude or retrain consumers’ major rights.
3. The Interim Measures provide that purchaser vouchers or service bills issued by the online commodity operators and the online service operators shall comply with the state relevant provisions or business practices; These vouchers or bills may be issued in electronic form if agreed by the consumers. The electronic purchase vouchers or service bills may be taken as grounds for making consumer complaints.
4. The online commodity operators and the online service operators shall be obligated to keep safe, reasonable use, hold for a limited time and properly destroy consumer’s information they gather and shall not collect information irrelevant to the commodities and services, misuse the information or disclose, lease or sell the information, unless otherwise provided for by the laws and regulations.
The Interim Measures impose a number of obligations on the operators who provide the platform services for online trade. These include, to examine the identities of legal persons, other economic organizations and natural persons that apply for provision of commodities and services through online trade platform, to enter into contracts with the operators applying for entry into the online trade platform and to provide the rights, obligations and responsibilities of each party in regard to entry into and exit of the online trade platform, quality and safety guarantee of commodities and services, protection of consumers’ rights and interests, etc, to set up a self-disciplined system for consumption dispute settlement and consumption right protection, to adopt necessary measures to protect exclusive rights of registered trademarks, rights of enterprise name and other rights, to adopt necessary measures in accordance with the Tort Law for infringement carried out by the operators in the online trade platform on the obligee’s exclusive rights of registered trademarks, rights of enterprise name and other rights, for which the obligee has evidence and the operator’s unfair competition activities infringing on the obligee’s legal rights and interests.
Regulations on the Standards of Case Filing and Prosecuting of Criminal Cases under the Jurisdiction of Public Security Administration (No. 2)
The Regulations on the Standards of Case Filing and Prosecuting of Criminal Cases under the Jurisdiction of Public Security Administration (No. 2) (the “Regulations”) was jointly promulgated by the Supreme People's Procuratorate on May 7, 2010. The Regulations came into force on the date of promulgation.
The Regulations have established a unified standard for prosecuting against 86 types of economic crimes, and has made some amendment to the original Regulations on Standards for Prosecuting against Economic Crimes and the Supplementary Regulations on Standards for Prosecuting against Economic Crimes, such as:
1. False Declaration of Registered Capital:
In the following circumstances, cases shall be filed for prosecuting against using forged certifications to apply for company registration or using other fraudulent means to falsely declare registered capital with intent to deceive company registration departments:
(1) The actual amount of the contributed capital is still less than the statutory minimum registered capital after the expiry of the capital contribution period required by the laws, and the capital falsely declared by a limited company is more than RMB 300,000 Yuan and more than 60% of the total capital which shall be contributed, or the capital falsely declared by a joint stock limited company is more than RMB 3 Million Yuan and more than 30% of the total capital which shall be contributed；
(2) The actual amount of the contributed capital has reached the statutory minimum registered capital after the expiry of the capital contribution period required by the laws, but still part of the registered capital is falsely declared, and the amount falsely declared by a limited company is more than RMB 1 Million Yuan and more than 60% of the total capital which shall be contributed, or the amount falsely declared by a joint stock limited company is more than RMB 10 Million Yuan and more than 30% of the total capital which shall be contributed；
(3) The accumulative economic loss of the investors or other creditors directly caused by the false declaration is more than RMB 100,000 Yuan;
(4) The conditions set forth above have not been satisfied, but:
false declaration occurs again after administrative punishment for false declaration of registered capital has been imposed more than twice within two years;
a bribe is given to the person in charge of company registration; or
the company is registered for illegal purposes.
Similar provisions are stipulated for cases of false contribution or withdrawal of capital.
2. Issuance of Stocks and Bonds by Fraudulent Means:
In the following circumstances, concealment of material facts or fabrication of major fraudulent contents in share-soliciting prospectuses, share-subscription applications, and bond solicitation by companies and enterprises for the purpose of issuing shares or company or enterprise bonds shall be prosecuted:
(1) The amount issued is more than RMB 1 Million Yuan;
(2) Governmental documents, certifications or relevant vouchers of government agencies are forged or distorted;
(3) The fund raised through issuance of shares or bonds is used for illegal purposes;
(4) The fund raised through issuance of shares or bonds is transferred or concealed; or
(5) There are other severe consequences or other serious circumstances.
Administrative Measures for the Information Disclosure by Insurance Companies
The Administrative Measures for the Information Disclosure by Insurance Companies (the “Measures”) were issued by China Insurance Regulatory Commission on May 12, 2010, which shall come into force as of June 12, 2010.
In accordance with the Measures, insurance companies shall disclose its basic information (including company overview and corporate governance summary), financial accounting information, risk management information, business operation information on insurance products, solvency information, information on major affiliated transactions, and information on material issues. The Measures have given specific regulations on disclosure of each type of information.
As to the method and time of disclosure, in accordance with the Measures, an insurance company shall disclose its basic information on its website. If any basic information changes, the insurance company shall update it within 10 working days from the date of change. An insurance company shall, prior to April 30 of each year, release its annual information disclosure report on the company’s website and in the newspapers designated by the CIRC. Where an insurance company cannot disclose information on time, it shall, before the prescribed disclosure deadline, announce on the company’s website the reasons for its failure to disclose information on time and the anticipated time of disclosure. The date of delayed disclosure by an insurance company shall be no later than the 20th workday after the prescribed disclosure deadline. Disclosure of information shall be made in Chinese.
Insurance companies shall establish its information disclosure management system and report it to the CIRC. The information disclosure management system of an insurance company shall include:
(1) contents and basic formats of information disclosure;
(2) information examination and release processes;
(3) division of responsibilities for information disclosure issues, department handling information disclosure issues, and an evaluation system for information disclosure issues; and
(4) an accountability system.
Notice on Issues Relevant to the Settlement of Land VAT
The Notice of the State Administration of Taxation on Issues Relevant to the Settlement of Land VAT (the “Notice”) was promulgated on May 19, 2010.
In respect of the determination of incomes for the settlement of land VAT, according to the Notice, at the time of settlement of land VAT, if invoices have already been issued for the sale of commercial properties in full amount, the amount as indicated on the invoices shall be determined as the income. If no invoice is issued or if the invoices issued fail to cover the full amount, the income shall be determined on the basis of the amount of the properties as indicated in the sales contract concluded between the buyer and the seller as well as other proceeds. If the area of the commercial property as indicated in the sales contract is not the same as that actually measured by the relevant department and if any amount of money is made up or refunded for the property prior to settlement, adjustment shall be made when the land VAT is calculated.
After the acceptance check of a project, the real estate development enterprise shall, according to the contractual stipulations, retain a certain proportion of the project payment to the project installation and construction contractor as the quality guarantee deposit for the developed project. If the project installation and construction contractor issues to the real estate development enterprise an invoice for the quality guarantee deposit, the amount as indicated on the invoice may be deducted when land VAT is calculated. If no invoice is issued, the retained quality guarantee deposit shall not be deducted when land VAT is calculated.
For the interest expense in the financial expenses, if it is possible to calculate and amortize it under the item of “transfer of the real estate project” and a certificate of the financial institution is provided for it, the actual amount of the said interest expense may be deducted to the extent of not exceeding the amount calculated at the interest rate of the commercial bank for the same type of loan during the same period. For any interest expense which cannot be calculated and amortized under the item of “transfer of the real estate project” or for which no certificate of the financial institution is provided, it shall, as a real estate development expense, be calculated and deducted within 10% of the summation of “the amount paid for obtaining the land use right” and “the amount of real estate development costs”. Other real estate development expenses shall be calculated and deducted within 5% of the summation of “the amount paid for obtaining the land use right” and “the amount of real estate development costs”. Land non-development fee paid by real estate enterprises for late development shall not be deducted.
In addition, for a taxpayer who prepays land VAT under the relevant provisions, he/she will not be subject to any late fee if he/she makes up a payment of the land VAT after settlement of land VAT within the time limit as given by the competent tax authority.
Notice on Printing and Distributing the Administrative Measures for Export Tax Rebate for Vessels Financial Leasing
The Administrative Measures for Export Tax Rebate for Ship Financial Leasing (the “Measures”) was printed and distributed by the State Administration of Taxation on May 18, 2010 and has come into force as of April 1, 2010.
The background for the promulgation of the Measures is the issuance of the Notice of the Ministry of Finance, the General Customs Service and the State Administration for Taxation on Enforcing the Pilot Export Tax Rebate for Vessels in Financial Lease in Tianjin Municipality in March 2010, which provides that the transfer of title of vessels in financial lease from financial leasing enterprises in Tianjin to foreign enterprises shall be entitled to pilot export tax rebate (free) for a term of one year commencing from April 1, 2010.
The recognition, verification, examination and approval and cancellation of export tax rebate of vessels in financial lease shall be undertaken by the competent state tax authority in charge of the financial leasing vessels export enterprise, which is Tianjin Municipal State Taxation Administration and its affiliates.
Before enjoying the export tax rebate, the financial leasing vessels export enterprises shall complete the formalities for the recognition of export tax rebate qualification. Enterprises engaging in the business of exporting vessels by financial lease shall, within 30 days after the execution of the first Financial Leasing Contract, handle the formalities for recognition of export tax rebate for vessels in financial lease with the materials necessary for the recognition of export tax rebate (free) and the certificate of financial lease, the Financial Leasing Contract (Chinese version that has come into legal force) and other materials required by the tax authorities. Besides, the formalities for modification recognition and cancellation recognition shall be handled in the circumstances specified by the Measures.
Where the preliminary reservation purchase is adopted, the export tax shall be refunded by steps, which means that the export tax shall be refunded in accordance with the schedule of the payment of rent as specified in the lease contract. Where the financial leasing vessels export enterprises is general VAT taxpayer, the competent tax refund authority shall refund the tax after confirming the audition information without anything wrong on the VAT invoice. Where the financial leasing vessels export enterprises is not a general VAT taxpayer, the competent tax refund authority shall make an investigation by letters, and thereby refund the tax only by confirming the fact that the invoice is real and the enterprise has declared and paid the relevant taxes for the vessels listed in the invoice.
Notice on the Interim Measures for the Administration of Rewarding Funds from the Public Finance on Contractual Energy Management Projects
The Interim Measures for the Administration of Rewarding Funds from the Public Finance on Contractual Energy Management Projects (the “Interim Measures“) was printed and distributed by the Ministry of Finance and the State Development and Reform Commission on June 3 , 2010.
The Interim Measures have expressly specified the object, scope, supportive conditions, supportive methods and standard for rewards, applications and payments of rewarding funds, and the standards and conditions for supervisions and penalties.
The contractual energy management which specified in the Interim Measures shall refer to the energy saving target determined by an energy saving company and energy consuming company, by which, the energy saving company provides necessary services, while the energy consuming company pays the profit resulting from the energy savings to the energy saving company to cover its costs and reasonable profit.
The Interim Measures mainly supports the contractual energy management in the form of sharing the energy saving profit. The object shall refer to the energy saving service company that has implemented the contractual energy management project in the form of sharing the energy saving profit. It includes energy reconstruction projects in such fields as industry, construction and transportation and the public institutions. Any contractual energy management project applying for rewarding funds from public finance shall satisfy the following conditions:
the investment in energy saving conducted by energy saving company shall account for more than 70%, and it is specified in the contract to share the energy saving profit;
the amount of annual energy saving (refers to energy saving capacity) for each project shall be less than 10,000 tons of standard coal but equal to or more than 100 tons of standard coal, in which, the amount of annual energy saving for industrial projects shall be more than 500 tons of standard coal;
having full set of energy consumption calculation equipment, and implementing a perfect energy statistics and management system, so as to calculate, supervise and verify the energy savings.
Any energy saving company applying for rewarding funds from public finance shall satisfy the following conditions:
be an independent legal person, and take energy saving analysis, design, reconstruction and operation and other energy saving services as major businesses, and has passed the examination and approval of the State Development and Reform Commission and the Ministry of Finance.
have a registered capital in the amount of over RMB 5 Million Yuan (incl.), and has relatively strong financing ability;
have good business standing and credit record, and sound financial management system;
have compatible full time technicians and talents in contractual energy management, and be able to safeguard the smooth implementation and steady operation of the projects.
The reward shall be paid in one payment according to the amount of annual energy saving and the relevant standard. The rewarding funds shall be mainly used in the contractual energy management project and the development of energy saving industry. The standard and method of reward shall be as follow: the rewarding standard of the central public finance shall be RMB 240 Yuan per ton of standard coal, and that of provincial public finance shall be not less than RMB 60 Yuan per ton of standard coal.
The Ministry of Finance Issued Several Application Guidelines on Enterprise Internal Control
Eighteen (18) application guidelines on enterprise internal control have been issued by the Ministry of Finance in May 2010, which have covered the fields of organization structure, development tragedy, human resources, social responsibility, enterprise culture, financial activities, purchase, sale, research and development, engineering project, guaranty business, outsourcing business, financial report, overall budget, contract management, internal information communication, information system, etc.
Several Opinions of the 2nd Civil Courtroom of Shanghai Superior People’s Court on Trying Cases Involving the Rejection of Corporate Personality of Legal Persons
Several Opinions on Trying Cases Involving the Rejection of Corporate Personality of Legal Persons have been promulgated by the 2nd Civil Courtroom of Shanghai Superior People’s Court on June 25 , 2009, which is applicable to civil or commercial cases by adopting Paragraph 3 of Article 20 or Article 64 of the Company Law by which the creditor of a company initiates a lawsuit against the shareholder of the company and requests the shareholder to be jointly and severally liable for the infringement acts committed by the company or the contractual debts of the company.
In terms of litigation, where the infringement or contractual debts between the creditor of the company and the company have been recognized by valid legal instrument, and the creditor brings another lawsuit for the rejection of corporate personality of the company and requests the shareholder to be jointly and severally liable for debts, the shareholder shall be held as the defendant and the company shall be held as the third party; where the creditor of the company claims for the rejection of corporate personality of the company and requests the shareholder to be jointly and severally liable for the debts at the same time when bringing the lawsuit in respect of the infringement or contractual debt between the creditor and the company, the company and the shareholder shall be held as co-defendants; where the infringement or contractual debts between the creditor of the company and the company has not been recognized by any valid legal instrument, and the creditor directly brings another lawsuit for the rejection of corporate personality of the company and requests the shareholder to be jointly and severally liable for the debts, the court shall make explanations to the creditor and add the company as the co-defendant according to the application of the creditor.
According to Paragraph 3 of Article 20 of the Company Law, when rejecting the corporate personality of a company, the people’s court shall examine whether the following three requirements are satisfied: (1) the shareholder of a company is abusing the independent status of legal person or the shareholder’s limited liabilities; (2) the shareholder is evading debts; (3) the shareholder is seriously causing harm to the interest of any creditor. Where the registered capital of the company is obviously insufficient, or the shareholder is confusing with the corporate personality of the company, or the shareholder is unfairly commanding or controlling the company, it may be deemed that the shareholder is abusing the independent status of legal person or the shareholder’s limited liabilities as provided by Paragraph 3 of Article 20 of the Company Law. If the creditor of the company knows that the shareholder is abusing the independent status of the legal person or the shareholder’s limited liabilities, and still makes deals with the company, or if the company has the ability to pay off the debts even if it fails to pay off the debts that are due, and such failure is not seriously causing harm to the interests of the creditor, the people’s court shall not adopt the principle of rejection of corporate personality of the legal person.
As to the burden of proof, the creditor who asserts that the shareholder is abusing the independent status of legal person or the shareholder’s limited liabilities shall bear the burden of proof to provide evidence that the shareholder is actually abusing the independent status of legal person or the shareholder’s limited liabilities. However, if a creditor of a one-person limited liability company claims that the property of the shareholder is mixed up with that of the company, the shareholder shall bear the burden of proof to prove that the property of the company is independent of his/her property.
If the court holds that the corporate personality of legal person of the company shall be denied after trial, the shareholder shall take joint and several liability for the debts of the company. Where the shareholder defends that it shall only take supplementary liability to the part that cannot be paid by the company on such ground that the creditor sues the company at first, the court shall not give any support.
Opinions of the 2nd Civil Courtroom of Shanghai Superior People’s Court on Several Issues Concerning the Handling of Property Preservation in the Trial of Commercial Cases
The Opinions on Several Issues Concerning the Handling of Property Preservation in the Trial of Commercial Cases has been promulgated by the 2nd Civil Courtroom of Shanghai Superior People’s Court on June 15, 2009.
If the respondent of the property preservation requests the court to release the preservation by providing surety, the court shall hear the opinions of the applicant. Where the applicant agrees to release the preservation, the court may make a decision to release the preservation according to the relevant provisions; where the applicant refuses, the court shall examine the cases carefully, and decide to release the preservation only when it is necessary to release such preservation and the respondent has provided sufficient surety.
Where the respondent of the property preservation requests the court to release the preservation regarding those that have exceeded the subject matter in the course of trial, the court shall make a decision after hearing the opinion of the applicant. The following circumstances shall be deemed as over-preservation of the respondent’s property: (1) the funds of the respondent actually frozen by the court is higher than the amount applied by the applicant; (2) the value of the property (which is separable) frozen or seized by the court is obviously higher than the amount applied by the applicant after deducting the depreciation and the possible expenses in the future to keep or sell the property by auction.
Where the property of the respondent has not been preserved by the court, or the applicant releases the preservation beforehand, the court shall return the deposit pursuant to the application; where the value of the property actually preserved by the court is lower than the preservation amount decided by the court, the court may return part of the surety as appropriate at its own discretion.
Legal Practices
Original Wallpaper Designs Are Protected By Copyright Law and Three Infringers Were Ordered to Pay Compensation
The plaintiff of the Case is Brewster International Trading (Shanghai) Co., Ltd. ( “Shanghai Brewster”), and the defendants of the Case are YU Zhaohui, Shanghai Venecia Decoration Materials Co., Ltd. (“Shanghai Venecia”) and Zhejiang Venecia Decoration Materials Co., Ltd. (“Zhejiang Venecia”) and the Case is about the copyright ownership. On May 28, 2010, the People’s Court of Shanghai Pudong New Area made the first instance judgment and held that the defendants constituted infringement collectively.
The plaintiff, Shanghai Brewster, made complaint that it was a sales company specialized in imported wallpaper. The defendant, YU Zhaohui, took the position of vice-general manager of the Company for the period from 2002 to 2008 and was responsible for the operation of the company. The defendant joined Shanghai Venecia immediately after resigning from the plaintiff and took the position of general manager. Shanghai Venecia and Zhejiang Venecia are wallpaper manufacturers and are competitors of the plaintiff.
In March, 2009, the plaintiff found that YU Zhaohui claimed himself as the author, and Shanghai Venecia claimed itself as the copyright owner and conducted the copyright registration at Shanghai Copyright Office. Moreover, Shanghai Venecia and Zhejiang Venecia sold the disputed wallpapers as the manufacturer and distributor. The plaintiff believed that the disputed wallpapers which the defendants used to conduct the registration, manufacturing and sales infringed its copyright. Moreover, the plaintiff believed that YU Zhaohui obtained the copyrighted information during his employment and disclosed to Shanghai Venecia and Zhejiang Venecia.
The three defendants defended that: (1) the plaintiff failed to prove that the copyright owner of the wallpaper in dispute was U.S. Brewster and there was a defect in the authorization letter issued by U.S. Brewster, and thus the plaintiff was not the qualified plaintiff for this case; (2) the wallpaper design claimed by the plaintiff was common flowers, which was not creative and shall not be protected by the Copyright Law; (3) the wallpaper in dispute was designed by the employee of the three defendants and the behaviors of the defendants shall not constitute infringement; (4) the amount claimed by the plaintiff was too high.
The court of the first instance held that: (1) the wallpaper claimed by the plaintiff highlighted the flowers as the subject matter, portrayed the different types of the branches and tendrils of roses, tulips and chrysanthemum by lines, used the combination of layout of the vines and different flowers, and the whole picture delivered a wonderful and soft visual effect. Though it is common to choose flowers as the subject matter in wallpaper, curtains and fabric products, and the technique of expressions of flowers are also similar, the choice, combination and layout of the flowers in the wallpaper in question shows the creativity of the author, which is creative and shall be protected by the Copyright Law. According to the design drawings of the wallpaper and the relevant wallpaper products in paper or electronic version, the sample product book containing the above wallpaper products shall be concluded as owned by U.S. Brewster. Now U.S. Brewster authorized the plaintiff to exclusively use the copyright and protect the rights in its own name, and thus the plaintiff had the exclusive right to use the wallpaper products in dispute in the mainland of China during the authorization term, and it had the right to bring the lawsuit against the conduct which infringes the copyright. (2) the subject matters of the design claimed by the plaintiff and the design of the defendant were both flowers, and both adopted branches and tendrils of roses, tulips and chrysanthemum, and they were totally the same on the lines of the flowers and the layout, and both parties used the design on wallpaper. Though there were differences in the bottom color and color of flowers for different types of wallpaper, these changes were not substantial and shall not affect the substantial similarity of the designs in general. Moreover, from the actual application of the design on wallpaper and sales records of the plaintiff, it could be presumed that the time of creation was earlier than September 8, 2005. But the time of registration of the copyright by Shanghai Venecia was March 9, 2009, and the time of creation on the copyright registration certificate was December 28, 2008, which was later than the time of creation of the design claimed by the plaintiff. In addition, the design claimed by the plaintiff was used in the wallpaper and the products were launched to the market, and thus the public, especially those designers, producers and sellers of the wallpaper, have opportunities to have access to the products which infringed upon the original design. Especially, YU Zhaohui was once the Vice General Manager of the plaintiff, and then came to Shanghai Venecia to be the general manager, who organized and participated in the production and sales of wallpaper. In addition, the defendant registered the copyright after YU Zhaohui came to its company, and YU Zhaohui was registered as the author. Therefore, it could be presumed that Shanghai Venecia infringed upon the design of the plaintiff and Shanghai Venecia should not have the copyright on the infringing works. (3). On the packaging labels of the two rolls of the wallpaper purchased by the plaintiff as notarized, not only the English and Chinese names, address, inspection certificate of Zhejiang Venecia were shown, the product barcode of Shanghai Venecia were also shown. Moreover, from the inspection report of the infringing products, the authorized inspection entity and the manufacturing entity were both Shanghai Venecia. Therefore, Shanghai Venecia shall be held as the co-producer for the infringing products. As to YU Zhaohui, according to the copyright registration materials submitted to Shanghai Copyright Office, YU Zhaohui was the author of the disputed works, and he designed the wallpaper under the authorization of Shanghai Venecia. Though the defendant defended that the works was not designed by YU Zhaohui himself, but by the staff of Shanghai Venecia collectively, the defendant failed to submit the relevant evidence. The disputed design was the same as the design of the plaintiff, which constituted substantial similarity, and the design of the plaintiff was applied on the wallpaper and sold to the public. The three defendants have opportunities to contact the design of the plaintiff, and particularly, YU Zhaohui took the position of the Vice General Manager at the plaintiff’s company and was responsible for the sales of wallpaper, so this court held that YU Zhaohui copied the design of the plaintiff during his creation. Meanwhile, YU Zhaohui had fault in submitting the design to Shanghai Venecia and Zhejiang Venecia, when he knew that the design he provided was used on the wallpaper. So, YU Zhaohui, Shanghai Venecia and Zhejiang Venecia constituted contributory infringement, which shall be liable for stopping infringement and making compensations.
[Comments] First of all, Article 2 of the Copyright Law provides that “Works of Chinese citizens, legal entities or other organizations, whether published or not, shall enjoy the copyright in accordance with this Law. Any works of a foreigner or stateless person who enjoys copyright under an agreement concluded between the country to which the author belongs or in which the author permanently resides and China, or under an international treaty to which both countries are parties, shall be protected by this Law. Any works of a foreigner or stateless person published for the first time and within the territory of China shall enjoy copyright in accordance with this Law. Any works of an author from a country not having concluded an agreement with China or entered into an international treaty jointly with China or of a stateless person, which is published for the first time in a country as a member of the international treaty into which China has entered or published in a member country and non- member country at the same time, shall be protected by this Law.” Article 11 provides that “Except otherwise provided in this Law, the copyright in a piece of works shall belong to its author.” In this case, the plaintiff provided the design drawings of the disputed design and the sales records of the wallpaper which used the disputed design, which proved that U.S. Brewster was the author of the disputed design. Though U.S. Brewster was not a Chinese enterprise, China and U.S. were both the member states of Berne Convention. Therefore, the court held that U.S. Brewster was the copyright owner of the disputed design and shall be protected under the Copyright Law. Secondly, in this case, though the defendants tried to prove that he designed the drawing by itself, the evidence submitted by the defendants were obviously later than the creation time of U.S. Brewster. Therefore, the court held that it was U.S. Brewster, not the defendant, who shall be the copyright owner. Thirdly, Article 56(5) of the Copyright Law provides if “plagiarizing the works of others”, the people shall bear the civil liability for such remedies as ceasing the infringing act, eliminating the effects of the act, making a public apology or paying compensation for damages, depending on the circumstances. In this case, the products manufactured and sold by the three defendants were substantially similar to those claimed by the plaintiff, considering YU Zhaohui and the plaintiff had once been of an employment relationship, duties of YU Zhaohui during his employment period, time of registration of copyright and sales of products by Shanghai Venecia and Zhejiang Venecia, and failure by the defendants to prove they created the disputed design, therefore, the court held that the three defendants committed contributory infringement.
(Contract Method of the Author: bruceluan@hllawyers.com)
Tax Supervision on Equity Transfer of Offshore SPVs
It is commonly adopted by the investors to establish an offshore special purpose vehicle (“SPV”) for trans-border investment, transaction and IPO, due to various reasons such as tax, law or assets protection. Since the promulgation of the new Enterprise Income Tax Law in 2007, the State Administration of Taxation promulgated a series of tax regulations to strengthen the tax administration of the offshore SPVs. The regulations also relate to the tax administration on equity transfers of offshore SPVs.
Therefore, I intend to sort the relevant tax problems in equity transfers of offshore SPVs and conduct a brief analysis basing on the relevant regulations, hoping to help the investors to have a better understanding of this issue.
1. Withholding of Tax At Source on Income from Equity Transfer of Offshore SPV
Usually, the offshore SPV related share transfer transactions shall refer to the offshore SPV transfers the equity in the domestic Sino-foreign joint venture or wholly foreign-owned enterprise to the foreign investors, or the offshore SPV accepts the equity in the domestic Sino-foreign joint venture or wholly foreign-owned enterprise from the foreign investors. In these transactions, the parties and the capital transactions are all outside China and thus the Chinese tax authorities have some difficulties in handling the tax administration.
Therefore, the State Administration of Tax promulgated the Interim Measures for the Administration of Source-based Withholding of Enterprise Income Tax on Non-resident Enterprises (“Interim Measures” 1), which specifically provides that the equity transfer involved in these transactions shall be subject to source-based withholding, and also provides that the domestic target company whose shares are transferred has the obligation to provide the corresponding assistance.
Article 15 of the Interim Measures provides where both parties to an equity assignment transaction are non-resident enterprises and the transaction is conducted outside China, the non-resident enterprise which receives the income or its authorized agent shall file a tax return with and pay the tax to the competent tax authority of the place where the Chinese enterprise assigned its equities. The said Chinese enterprise shall assist the tax authority in collecting tax from the non-resident enterprise.
Meanwhile, Article 17 also provides where a non-resident enterprise fails to file a tax return and pay the enterprise income tax according to Article 15 of the Measures, the competent tax authority of the place where the said non-resident enterprise is required to file a tax return and pay the enterprise income tax shall order it to pay the tax within a time limit. If it fails to pay the tax within the time limit, the said competent tax authority may collect and verify the information about its other incomes within China and the payers thereof (“other payers”), and send a Notice of Tax-related Matters to these payers so as to recover the payable tax and late fee from the payments made by them.
Therefore, for the offshore SPV, if it fails to file a tax return for the income generated from the equity transfer, the tax authority may deduct the relevant payable tax and payment penalty from the amount which shall be paid to the offshore SPV by the domestic payer through verifying the income from China by the offshore SPV.
2. Ascertainment of the income from transfer of shares in an offshore SPV
On December 10, 2009, the State Administration of Taxation promulgated Notice on Strengthening the Administration of Enterprise Income Tax on Non-resident Enterprises’ Equity Transfer Income (“ File No. 698”)2, which not only provides the calculation basis for income generated from transfer of shares of the Chinese resident enterprise by a non-resident enterprise, but also covers the tax matters relevant to the indirect transfer of shares of the Chinese resident enterprise by the non-resident enterprise.
1) Determination of Equity Transfer Income
According to the File No. 698, equity transfer price shall refer to the income generated by an equity transferor from equity transfer, which may be in forms of cash, non-monetary assets, rights and interests, etc. If an invested enterprise has undistributed profits, various funds drawn after tax, etc., the amount from the stockholder’s retained earnings that is transferred along with the equity by the transferor shall not be deducted from the equity transfer price.
The equity cost price refers to the actual amount of contributions made by an equity transferor to a Chinese resident enterprise when it invests in the shares, or the actual equity transfer price paid to the original equity transferor when purchasing such equity.
The investors shall note that if an invested enterprise has undistributed profits, or various funds drawn after tax, such profit or after-tax funds shall not be deducted from the equity transfer price. In practice, if the amount of undistributed profit or various interests in the invested company is large, it shall be handled and distributed before the equity transfer transaction, for the purpose of reducing the equity transfer price.
2) Indirect Transfer of Equity of A Chinese Resident Enterprise
According to the File No. 698, when a foreign investor indirectly transfers the equity in a Chinese resident enterprise, if the actual tax burden in the country (region) where the overseas holding company being transferred is located is less than 12.5%, or the aforesaid country (region) does not impose income tax levy on its residents’ overseas income, it shall be obligated to report to the competent taxation authority where the Chinese resident enterprise whose equity is transferred is located.
Article 5 of the File No. 698 provides that the foreign investor shall, within 30 days from the day when the equity transfer contract is signed, provide the following materials to the competent taxation authority where the Chinese resident enterprise whose equity is transferred is located:
(1) The equity transfer contract or agreement;
(2) The relationships between the foreign investor and the overseas holding company being transferred in regard to funds, business operation, purchase and sale, etc.
(3) The conditions of the overseas holding company transferred by the foreign investor on production, business operation, personnel, finance, property, etc.
(4) The relationships between the overseas holding company transferred by the foreign investor and the Chinese resident enterprise on funds, business operation, purchase and sale, etc.
(5) The explanation on a reasonable business purpose for the foreign investor to establish the overseas holding company being transferred; and
(6) Other relevant materials required by the taxation authority.
In addition, File No. 698 provides where a foreign investor indirectly transfers the equity of a Chinese resident enterprise by abusing the organizational forms and other arrangements without any reasonable business purpose so as to avoid enterprise income tax duty, the competent taxation authority may, after reporting level by level to the State Administration of Taxation for examination, redefine the transaction of equity transfer according to the economic substance and deny the existence of the overseas holding company used for tax arrangement.
Therefore, the investors shall note that in regard to the indirect transfer of equity in the Chinese resident enterprise by the offshore SPV, if such transfer is determined by the State Administration of Taxation as abusing the organizational forms without any reasonable business purpose, then the equity transfer may be held as direct transfer of the equity in the Chinese resident enterprise, and thus it may request the offshore SPV to pay relevant income tax to the Chinese tax administration for the equity transfer.
3) Special Taxation Treatment
File No. 698 provides where the equity transfer income meets the conditions for special reorganization as prescribed in File No. 59 [2009] of the Ministry of Finance, the transferor of the non-resident equity may choose special taxation treatment after it has obtained approval from a provincial taxation authority.
The said special taxation treatment shall refer to the taxation treatment where the equity transaction meets the relevant conditions and does not cause any change to the withholding tax on the income from the later transfer of the same equity. According to this taxation treatment, when the share transaction happens, the income and loss are not determined immediately, and no tax payment obligation is exerted of the income withholding tax burden is not changed by the transfer, and the income and loss will be determined and the relevant income tax shall be paid when the equity transfer happens next time and the income withholding tax burden is changed by the transfer.
(Contract Method of the Author: jasonxia@hllawyers.com)
1. The Interim Measures came into force on 1 January 2009.
2. File No. 698 came into force on 1 January 2008.
Procedures and Key Points of Normal Liquidation of Foreign-invested Enterprises
As impacted by the financial crisis in 2008 and the increased human resources costs in China, since 2009, more and more foreign investors are paying attention to merger and restructure of foreign-invested enterprises in China, and some enterprises with bad performance or having no clear development direction have entered the procedures of liquidation and deregistration. However, due to the investors’ lack of knowledge about the regulations on liquidation of foreign-invested enterprises and relevant key points, some liquidation and deregistration procedures have been seriously delayed, and even a part of investors just left China without conducting the legal liquidation procedures. Therefore, I would like to give a brief introduction of normal liquidation of foreign-invested enterprise according to the relevant laws and regulations of China and based on my experience in long-term practice.
1. Regulations on Normal Liquidation of Foreign-invested Enterprise
The foreign-invested enterprises in China could be divided into three types: WFOE, Sino-foreign equity joint venture, and Sino-foreign contractual joint venture. Before 2008, the normal liquidation of these three sorts of enterprises shall be conducted according to the Procedures for Liquidation of Foreign-Funded Enterprises, which came into force on July 9, 1996; but in early 2008, these Procedures were abolished.
In the current stage, normal liquidation of foreign-invested enterprise shall be handled complying with Chapter 10 “Dissolution and Liquidation of A Company” of the Company Law of China. However, there are only eleven articles in this Chapter 10, and a lot of specific procedures and requirements of liquidation are not covered in this chapter, therefore, in most cases, the liquidation of foreign-invested enterprise is handled upon practical experience and upon specific requirements of the competent authority.
It worth to mention that, the liquidation to be discussed hereunder only refers to normal liquidation (including the liquidation decided by the investor, the liquidation upon the expiry of the operating term or upon the dissolution of the company according the requirement of its articles of association). Bankruptcy liquidation is subject to other special laws and regulations.
2. Legal Liability for Illegal Evacuation of Foreign Investors
As required by the laws, liquidation is a necessary procedure for deregistration of each enterprise. However, in past years, we can see that some foreign investors just left China without liquidating or deregistering their enterprises. I think, such illegal evacuation will result in some bad consequences, because:
1) China has strict foreign currency control systems. If there is still any fund (including profit) in this foreign-invested enterprise, it can only be transferred out of China after all the procedures of liquidation are completed.
2) According to the Notice of the General Office of the Ministry of Commerce, the General Office of the Ministry of Foreign Affairs, the General Office of the Ministry of Public Security and the General office of the Ministry of Justice on Issuing the Working Guidelines for the Chinese Interested Parties Related to the Abnormal Pullout of Foreign Investment to Conduct Transnational Investigation and Litigation, which was issued on November 19, 2008, in case of illegal pullout of foreign investment, the Chinese investors or creditors, whose interests are harmed, may bring a lawsuit to the court, and when they have won such lawsuit in China, if the losing foreign party has no property in China available for enforcement, the wining party may request the foreign court with jurisdiction to recognize and enforce the effective judgment or ruling of the Chinese court according to the relevant provisions of the Treaty on Judicial Assistance in Civil and Commercial Matters concluded by China and the corresponding country or according to the law of the place where the overseas property of the losing party is located. For a very small number of criminal suspects who have maliciously evaded payment of taxes in huge amount, the relevant competent department of the state may, after establishing a case and as the case may be, request the country where the criminal suspect fled to for extradition or transfer of criminal proceedings through the Central Authority prescribed in the treaty or through a diplomatic channel to ensure to the criminal suspect to be brought to justice. Therefore, the illegal pullout of investment will case serious legal liabilities.
3) For those investors who have or intend to have other investment projects in China, such illegal evacuation definitely will harm their further investment in China.
Therefore, I think such illegal evacuation will not only cause serious punishment, but will also affect the investor’s further investment in China, and I think that, on a long view, the investors who intend to withdraw from China should finish the liquidation and deregistration work required by the laws.
3. Procedures of Normal Liquidation of Foreign-invested Enterprise
Pursuant to the Company Law as well as the requirement of competent authority in practice, the procedures of liquidation shall include:
1) submitting application to the administration of commerce;
2) establishing the liquidation group;
3) filing the members of the liquidation group with the administration of industry and commerce;
4) notifying the creditors and making announcement on newspaper; registering and checking creditor’s rights;
5) dealing with termination of labor contracts;
6) checking the assets of the company and making audit;
7) paying up taxation, and dealing with the deregistration procedures with taxation administration and Customs;
8) making the liquidation report;
9) dealing with deregistration with the administration of industry and commerce;
10) allocating the rest properties by the investor, remitting foreign currency and deregistering the bank account;
11) dealing with the deregistration procedures of finance, organization code, statistics, foreign currency, social insurance, etc.
As each step is necessary for the whole procedures, usually it will cost about half a year to finish a legal liquidation case. However, I think if the process could be reasonably arranged (such as finish the termination of labor contract in earlier period), will promote the procedures and shorten the processing time.
4. Key Points in Liquidation
Upon my experience in the past years, I think attention needs to be paid to the following problems relating to the liquidation procedures:
1) As different from the liquidation of a domestic enterprise, the earlier dissolution or termination of an equity joint venture agreement or contractual joint venture agreement needs to be approved by the administration of commerce. Therefore, before entering the formal procedures of liquidation, the foreign-invested company must submit an application letter to the administration of commerce, which has approved the establishment of the enterprise, and when submitting the application letter, the enterprise shall also submit the resolution of the determining organization of the enterprise, the agreement on earlier termination of the JV agreement or other documents required by the laws. Especially, the government will require an allocation plan of the staff, which shall introduce the current status of the employees, and compensation plan and if there is any unsettled dispute, and in this plan, the enterprise shall undertake that it will not harm the legal interests of the staff.
2) As to the members of the liquidation group, in accordance with the regulations on limited companies, the liquidation group shall be formed by the shareholders. However, in practice, in consideration of the incontinence of foreign-invested companies, the administration of commerce allows that the liquidation group of a foreign-invested enterprise could be composed of three or more than three persons decided by the resolutions of the determining organization of the enterprise. Such three or more than three persons are not limited to directors, supervisors or general managers of the company, but can be any person chosen by the determining organization, such as lawyers or employees.
3) Regarding taxation liquidation, as it is known as the most complicated part of the whole procedures, I suggest that it should be arranged as earlier as possible. Upon the establishment of the liquidation group, it shall start the communication with the local taxation administration, make sure the materials to be submitted, and retain a professional CTA firm to make a separate taxation liquidation report. In addition, as some enterprises, which have enjoyed the " three years' free and two years' half" preferential policies, need to pay up the exempted or reduced taxes according to the Notice of the State Administration of Taxation about How to Deal with Relevant Matters after Cancellation of Several Former Tax Preferential Policies on Foreign-funded Enterprises and Foreign Enterprises (No. 23 [2008] of the State Administration of Taxation On February 27, 2008), it shall be noticed that such taxes will be required to be paid up when applying for the earlier dissolution.
4) Regarding the allocation of staff, as the government of China has strengthened the protection of employees since the promulgation of the Labor Contract Law and the occurrence of the financial crises, the investors must pay attention to this problem and solve it smoothly. According to the Labor Contract Law, the enterprise shall consult with the employees to terminate their contract as earlier as possible, and enter into a written agreement with the employees, which will be helpful for the investor to obtain the approval from the Administration of Commerce, and will reduce the legal risks of the enterprise in follow-up disposal.
In addition, some other problems, like the order of assets allocation, also need special attention during the procedure of liquidation. Due to lack of space, this article could not cover each specific problem. If you are interested in any problem, please feel free to contact me.
(Contract Method of the Author: kevincheng@hllawyers.com).
New Regulation on Foreign Enterprise Permanent Representative Organization
In the current stage, a diverse trend has been evident in the methods of foreign investment in China. In addition to various types of companies and partnerships, the foreign enterprise permanent representative organization (“rep office”) is always favored by foreign investors, due to its simple procedures of establishment, low operating costs, and no requirement for registered capital. Especially in the earlier stage of investment in China, establishment of a rep office is always the first step of the investors for entering Chinese market. However, as there is a lot of restrictions on the business scope of a rep office (such as forbiddance of direct operating activities), it is a common phenomenon that some rep offices violate these restrictions to undertake their business. In the past years, the relevant authorities have issued a series of documents to strengthen the management of rep offices.
1. Registration Management
The Notice of the State Administration for Industry and Commerce and the Ministry of Public Security on Further Strengthening the Administration of Registration of Permanent Representative Offices of Foreign Enterprises (No. 4 [2010] of the State Administration for Industry and Commerce) (the “Notice”) was issued on 4, January 2010, which strengthens the registration management of rep offices with some specific measures, such as:
1) the foreign enterprise which intends to establish a rep office in China shall have been incorporated for more than two years, and its incorporation certificate and credit certificate, which are notarized and certified by a notary office in the country or region where the said enterprise is located and the embassy or consulate of the People’s Republic of China stationed in that country or region, shall be submitted when the rep office is set up or its name is changed;
2) the effective term of the registration certificate of a rep office shall be one year;
3) a rep office usually shall have no more than four representatives (including the chief representative); and
4) the Administrations for Industry and Commerce shall conduct an on-site inspection of registration particulars of each rep office newly established, such as its address, etc., within three months after it obtains the registration certificate
However, the regulations of the Notice are relatively simple and general, and can not solve all the problems which occurs in practice, such as whether or not the credit certificate shall be notarized and certified, and if there is any limit on numbers of staff who are not representatives. A draft of the Rules on Management of Foreign Enterprise Permanent Representative Organization were released by the Legal Affairs Office of the State Council on August 29, 2008, but up to now, the formal rules still have not been promulgated. Therefore, we think the further systematic legislation on registration management of rep office is still necessary.
2. Taxation Management
The Taxation Administration also has paid a lot of attention to the management of rep offices. On February 20, 2010, the State Taxation Administration issued the Interim Measures for the Administration of Tax Collection against the Permanent Representative Offices of Foreign Enterprises (No. 18 [2010] of the State Administration of Taxation) (the “Interim Measures”), which regulated that rep offices shall declare and pay enterprise income taxes based on their actual income, and declare and pay business tax and value added tax on their taxable income. The key provisions of the Interim Measures include:
1) As required by the Interim Measures, a rep office shall, within 30 days after obtaining the registration certificate, apply for tax registration.
2) Different from the original taxation collection method, which varies according to type of the business undertaken by each rep office, the Interim Measures have unified the collection methods, required that each rep office shall keep accounting books pursuant to the relevant laws and make taxation declaration, and have made specific regulations on declaration period, etc.
3) For those rep offices which cannot make declaration according to the actual numbers, the Interim Measures have given detailed methods on the determination of taxable amount of income by the taxation administration; and the appraised and specified rate of profit was increased from 10% to more than 15%.
4) Some original relevant regulations on tax exemption for rep offices were revoked; and in accordance with the Interim Measures, the taxation administration will check up the rep offices which have been approved for tax exemption pursuant to these original regulations. However, rep offices still can enjoy the treatments under a tax agreement pursuant to Order No. 124 [2009] of the State Administration of Taxation, but relevant formalities of declaration should be completed within the required period.
At the same time, the State Taxation Administration has also issued the Administrative Measures for the Assessment and Levy of Enterprise Income Tax on Non-resident Enterprises (No. 19 [2010] of the State Administration of Taxation) (the “Administrative Measures”). According to the Administrative Measures, tax authority may determine the profit rate of non-resident enterprises according to their different business from 15% to 50%, or even higher; but in the Interim Measures, it is only required that the appraised rate of profit of rep offices is “more than 15%”. By now there is no official explanation on whether or not the Administrative Measures will be referred to by the local taxation administrations when determining the profit rate of rep offices.
From the regulations set forth above, we can see that both the administration of industry and commerce and the administration of taxation have tighten up the management of rep offices, and we think such measures will affect the motivation of foreign investors to set up rep offices in China, and through comparison, more investors will think about changing the rep offices to foreign-invested enterprises.
(Contract Method of the Author: baileyxu@hllawyers.com,arielleli@hllawyers.com).
Other Offices of Haworth & Lexon
Summary for the Lecture Regarding Legal Issues In Relation to Industrial Parks
In the afternoon of May 21, 2010, the partner attorney of Haworth Lexon Chongqing Branch, as invited by the Education and Training Sub-bureau of Chongqing Municipal Economic and Information Commission (which is also named as the Office of Chongqing Special Industrial Park Planning and Construction Leading Team) has made a lecture for the head of the industrial parks of Chongqing City to explain and answer the legal issues concerned. The lecture focuses on the master of preferential policies, the observation of WTO rules, the prevention of dereliction of duty and malfeasance. The summary of the lecture is as follows:
Lead:
Law is the greatest human invention. All the rest give man mastery over his nature. Law give him mastery over himself.
—— (US) Edgar Bodenheimer
Question 1:
What is the legal nature of the management commission of industrial parks (development zones)?
A. The management commissions in the eyes of people:
Have part of the administrative powers, and at the same time have duties such as construing the industrial park, attracting merchants and capitals and signing lots of economic agreements;
The personnel are appointed by the government, in which, most of the staffs are public servants, with some from public institutions and other employees under the Labor Contract Law.
B. The management commissions under the law ---- Four NOTs
—— not a local government at any level;
—— not a legally accepted representative institution of local government (in controversy);
—— not a representative institution of any functional departments of local government;
—— not an organization established under the authorization of any administrative agency.
B. The management commissions in controversy
—— complaints about insufficient authority or powers;
—— blames against optional operation of powers.
Link: Regulations for the Administration of Chongqing Economic and Technological Development Zone
Article 7: The Municipal People’s Government sets up the Management Commission of Chongqing Economic and Technological Development Zone (“The Management Commission“), and hereby authorizes the Management Commission to supervise and manage the development zone on behalf of the Municipal People’s Government.
Article 10: The works in relation to the education, culture, health, physical education, civil affairs, family planning and the like in the development zone shall be undertaken by the Administration of the People’s Government of the District where the development zone locates and its functional departments or under the administration of the Management Commission if so authorizes.
Question 2:
Where the Management Commission, by internal meetings, decides to reduce or exempt the construction fees and charges of one investment project, and such decision is agreed by the Government of the District where the development zone locates, if the investor brings a lawsuit as the promise fails, whether the lawsuit is civil or administrative?
This is a case tried by a Provincial Superior People’s Court at first instance and tried by the Supreme People’s Court at the second instance. It is held that, as the investor has not joined the internal meeting and thereafter signed the decision, the case shall not be deemed as civil dispute. As a result, the Supreme People’s Court decides to object the complaints, which deserves careful thinking.
Question 3:
Whether the limitation on the standard land price of industrial lands may be avoided by awards provided by the development zone?
It is provided by the Notice of the General Office of the State Council on Regulating the Management of Incomes from and Expenses for the Assignment of the Right to Use State-owned Land (No. 100 [2006] of the General Office of the State Council) that, no region, department or entity may exempt or reduce the incomes from land assignment, implement the “zero land price”, or even “negative land price” in the name of “investment promotion”, “old city reconstruction” or “restructuring of state-owned enterprises”, or do so in a disguised form by the way of exchanging projects with land, returning fees after collecting them or granting subsidies, etc.
However, there are some points of view that, as the notice issued by the General Office of the State Council is neither law nor administrative regulation, whether violation of such rules will lead to invalidity of a contract is still a matter for argument.
Question 4:
Whether the development zone can enter into an agreement with the investors that the taxes paid by the enterprises set up by the investor can be awarded in certain percentage by the development zone to the enterprise?
Article 3 of the Law Concerning the Administration of Tax Collection provides that no governmental organs, entities or individuals may be permitted to make without authorization, by violating laws or administrative regulations, decisions regarding the collection of tax or the cessation thereof, the reduction, exemption or refund of tax, the payment of tax dodged or overdue or decisions in conflict with other tax laws or administrative regulations.
However, there are some points of view that, the government shall have the right to grant awards to enterprises by following the precedents, which shall not be deemed as disguised tax refund.
Question 5:
When making and enforcing the preferential policies by the development zone, what measures shall be taken to avoid the violation of WTO rules?
Ref: In 2009, China had suffered more than 100 trade investigations. Now, about 71% of the global countervailing investigations are targeted at the products exported from China. The central government has ceased to provide massive export subsidies by steps, however, it is still normal for local government to provide the subsidies, including export awards, export tax preferences for foreign-invested enterprises and specific subsidies to special enterprises and industries.
Link: The WTO Agreement on Subsidies and Countervailing Measures
1.1 For the purpose of this Agreement, a subsidy shall be deemed to exist if:
(a)(1) there is a financial contribution by a government or any public body within the Territory of a Member (referred to in this Agreement as "government"), i.e. where:
a government practice involves a direct transfer of funds (e.g. grants, loans, and equity infusion), potential direct transfers of funds or liabilities (e.g. loan guarantees);
government revenue that is otherwise due is foregone or not collected (e.g. fiscal incentives such as tax credits) ;
a government provides goods or services other than general infrastructure, or purchases goods;
a government makes payments to a funding mechanism, or entrusts or directs a private body to carry out one or more of the type of functions illustrated in (i) to (iii) above which would normally be vested in the government and the practice, in no real sense, differs from practices normally followed by governments; ...
The results of one administrative investigation taken in Guangdong Province show that the circumstances that may break WTO Countervailing Agreements include:
tax preferences;
reduction or exemption of land use fees;
preference in infrastructure;
subsidies linking with the export performances;
preferential policies regarding loan interests;
subsidies for joining certain activities (like exhibits, study tours).
We think that preferential policies are necessary. However, the measures and scale of the policies shall be well managed.
Question 6:
The clauses to which the investors cares most in the investment agreement, and which is the hardest part for discussion are:
land use right;
resolution for dispute and the location of the court/arbitration commission (especially for foreign investment or investment from other provinces/municipalities);
such requirements as strength of the investment, opening date and closing date of the project and the like;
legality of the preferential policies, and the associated amount or the certainty of the calculation method;
The clauses that are obviously illegal shall be:
limitation of competitors;
only the management commission, rather than local administrative agencies, has right to supervise the project;
no “sudden inspection“ is allowed.
Question 7:
If the development zone is allowed to take first-class development of the industrial land together with the investors?
Current operation mode:
Article 3 of the Interim Measures of Beijing Municipality on the Administration of First-Class Land Development ( No. 1100 [2002] of the Municipal Administration of State Land Resources and Housing) provides that: the first-class land development as used in these Measures shall refer to land expropriation, farmland conversion, removal and settlement, and city roads and the other infrastructure construction etc uniformly organized by the Municipal Land Arrangement and Reserve Center and the sub-centers upon the commission of the government in accordance with the master planning on land utilization, master urban planning, specific controlling planning and the annual plan on first-class development over certain quantity of stored state-owned land, and the land to be expropriated and converted.
Land Requisition + Demolition Compensation + Planning and Design + Administration Infrastructure + Public Supporting Facilities + Environmental Landscape Construction
There is no law for such operation and the governmental documents are relatively optional, which as a result relies on the integrity and self-discipline of the government.
Currently, there are two operation modes:
Government-directed mode: Land Reserve Institution shall be responsible for handling such formalities as financing, planning, demolition, and administration construction, and the Tendering Selection Enterprise shall be responsible for concrete management and implementation, and the management fees are low.
Enterprise-directed mode: Tendering Selection Enterprise shall implement land development, while the Development Enterprise shall be responsible for handling such formalities as financing, planning, demolition, and administration construction and the like, and for organization and implementation.
Standard procedure:
Original owner/user files the application — the Bureau of Land and Resources makes preliminary examination — Reserve Center makes the plans — The various departments (including Development and Reform Commission, Planning, Construction, Transport, Environmental Protection) commit joint examination — Invitation to tender (2% or 8%) — Handle the formalities — Implementation — Inspection and Acceptance
Main points: Qualification, Rules and Policies, Financing, and Price
The development zone may introduce the mode of first-class land development to conduct relevant construction, which, however, shall be directed by local government pursuant to relevant provisions.
Question 8:
How to prevent fraud investment or other malicious investment?
Normal tricks:
To enter into agreement with construction company or other companies to cheat their deposit by using the investment agreement or letter of intent signed with the development zone;
To establish project company by fraud investment or withdraw the investment after establishing the company, and thereby enjoy various preferential policies in the name of the shell company;
To obtain preferential land price by promising investment that is virtually high, and thereafter finance the land use right by mortgage and transfer the funds;
......
Basic skills to protect yourself:
To verify the project (in such aspects as commercial, technological, legal and so on);
To undertake credit and diligence investigation (to confirm if the company is only a small company using the name of big companies, or the investment is taken without permission);
To make an approach to the other party by inserting the contractual condition such as deposit, guarantee, supervision on the funds, no mortgagee on land use right and the like.
Question 9:
How to prevent the occurrence of such acts as dereliction of duty and malfeasance committed by the cadre of the development zone not seeking for private interests?
The areas where dereliction of duty and malfeasance easily occurs include:
Issues concerning environmental protection — chain of civil and administrative lawsuits;
Land issues — the management commission directly “sells“ the land, conduct illegal requisition, reduce or exempt the fees without permission, refuse to conduct or manipulate the tendering process, lease the land without authorization and commit other acts as provided in the Measures for Disciplinary Actions for Violations of the Land Administrative Provisions.
To provide “over-preferential“ policies;
Be cheated by malicious investors.
(Contact of the author: garyjia@hllawyers.com)
