Haworth & Lexon Law Newsletter(201106)-Law Bridge-Shanghai Law Firm/Lawyer

Haworth & Lexon Law Newsletter
No.5 2011 (Total:No.112) June.15, 2011
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:

Notice of the State Administration of Foreign Exchange on Printing and Distributing the Implementation Instructions on Foreign Exchange Administration for Domestic Residents Engaging in Financing and Round-trip Investment via Overseas Special Purpose Vehicles

Notice of the General Office of the State Council on Forwarding the Opinions of the People s Bank of China, the Ministry of Supervision and Other Departments on Regulating the Administration of Commercial Prepaid Cards

Provisions of the Supreme People s Court on Several Issues Regarding Implementation of the System of Withdrawal for Adjudicatory Functionaries in Litigation Activities

Provisions of the Supreme People s Court on Several Issues Regarding Entrusted Enforcement

Administrative Measures on Medical Device Recalls (for Trial Implementation)

Announcement of the General Administration of Customs on Implementing the Catalogue for Guiding Industrial Restructuring (2011 version)

Notice of the Ministry of Finance and the State Administration of Taxation on Issues Regarding the Applicable Tax Rate and Tax Credit of the Foreign Income of High & New Tech Enterprises

Rules for Determining the Administrative Liability for Acts of Violation of Information Disclosure Laws

Interim Provisions on the Exemption of Import Tax on the Cartoon Animation Development and Production Supplies Imported by Cartoon-Animation Enterprises

Legal Practices:

A Brief Analysis on the Qualification for OEM Production in Foreign Invested Wholly-Owned Companies

Legal Issues concerning Product Comparison in Advertising Wording

Several Proposals on Establishing the Mechanism of Collective Consultation on Wages in Foreign-invested Enterprises

Latest Laws and Regulations

On May 20, 2011, the State Administration of Foreign Exchange issued the Implementation Instructions on Foreign Exchange Administration for Domestic Residents Engaging in Financing and Round-trip Investment via Overseas Special Purpose Vehicles (No. 19 [2011] of the State Administration of Foreign Exchange, hereinafter referred to as No.19 Document), further defining the administrative principles and related measures for the application of the Notice of the State Administration of Foreign Exchange on Printing and Distributing the Implementation Instructions on Foreign Exchange Administration for Domestic Residents Engaging in Financing and Round-trip Investment via Overseas Special Purpose Vehicles (No. 75 [2005] of the State Administration of Foreign Exchange, hereinafter referred to as No.75 Document), meanwhile simplifying the operation procedures in the No.75 Document. The aforementioned No.19 Document comes into force as of July, 1, 2011.

The No.19 Document is divided into 3 categories:

The 1st category is the implementation instructions for foreign exchange administration of special purpose vehicles (SPVs), including: foreign exchange registration of SPVs controlled by individual domestic residents, foreign exchange amendment registration; SPV establishment registration and the foreign exchange registration of domestic enterprises merged and acquired by the SPV; account entry approval of individual domestic residents proceeds from SPVs capital change; foreign exchange cancellation registration and supplementary registration of SPVs controlled by individual domestic residents.

The 2nd category is the implementation instructions for foreign exchange administration of all foreign-invested enterprises, including: foreign exchange registration of newly-established foreign-invested enterprises; foreign exchange registration of foreign-invested enterprises composed by domestic enterprises merged and acquired by foreign investors; foreign exchange registration amendment and cancellation of foreign-invested enterprises.

The 3rd category is the implementation instructions for foreign exchange administration of overseas direct investment by domestic institutions, including: foreign exchange registration, foreign exchange amendment registration, foreign exchange filing and cancellation registration of overseas direct investment by domestic institutions; capital decrease, share transfer, cleared funds account entry approval of overseas investment enterprises funded by domestic institutions.

The following are some points of focus in No.19 Document:

Time Requirement on Registration No.19 Document has eased the time requirement on foreign exchange registration of SPVs controlled by individual domestic residents, under which circumstance an individual domestic resident may establish overseas an SPV at first and then handle the foreign exchange registration. However, establishment before registration shall meet certain conditions, i.e. before the completion of registration, this SPV shall not conduct any substantial capital or equity alterations including overseas financing, equity change, round-trip investment, etc..

New Categories of Non-SPVs Round-trip Investment

No. 19 has also explicitly stipulated the foreign exchange registration of round-trip investment of Non-SPVs under No. 75. As per No. 19, in case individual domestic residents directly invest in domestic enterprises via overseas enterprises other than the SPVs as stipulated in No. 75, the overseas enterprises shall be treated as Non-SPVs and individual domestic residents do not need to conduct SPVs registration for the overseas enterprises. After investigating the domestic enterprises controlled by overseas enterprises, the local administration of foreign exchange shall mark them as Non-SPVs Round-trip Investment in the information system of direct investment foreign exchange administration provided that they have no violations of laws and regulations; if any act of violating laws and regulations is detected during the investigation, the local administration of foreign exchange shall transfer the investigation report to the department of foreign exchange inspection for punishment and then mark it as Non-SPVs Round-trip Investment in the information system of direct investment foreign exchange administration

Supplementary Registration

No. 19 explicitly stipulates the implementation instructions for foreign exchange supplementary registration of SPVs controlled by individual domestic residents. With regard to an individual domestic resident who has already directly or indirectly controlled an SPV before the deadline of application, provided that the SPV has already witnessed a substantial capital or equity alteration (like overseas financing, equity change, round-trip investment and so on), the domestic resident shall handle an SPV supplementary registration firmly in accordance with the principle of punishment before supplementary registration .

However, No. 19 has not explicitly stipulated the standards and specific procedures for punishment other than mentioning that the investigation on the violations of laws and regulations as mentioned above shall be transferred to the department of foreign exchange inspection, and then a supplementary SPV registration shall be conducted . Therefore, the administrative department of foreign exchange shall further define the principle for punishment, the procedure and applicable standard of the supplementary registration or negotiate with other relevant departments in the process of implementing them.

Requirement on Special Declaration of all Foreign-Invested Enterprises

For all foreign-invested enterprises, the implementation instructions under No. 19 have formulated a new declaration mechanism which stipulates that foreign-invested enterprises have to declare the property of overseas investors. After No.19 has been put into effect, new foreign-invested enterprises, enterprises established by overseas investors under the merger and aquisition of domestic enterprises, alterations concerning the equity, capital, etc. of established foreign-invested enterprises, while conducting foreign exchange registration, are required to voluntarily declare the property of overseas investors of the foreign-invested enterprise.That means foreign-invested enterprises have to declare the round-trip investment of SPVs, the round-trip investment of non-SPVs and non-round-trip investment. Such declaration mechanism is beneficial to the supervision and control over the round-trip investment by the administrative department of foreign exchange and meanwhile increases the foreign exchange compliance pressure for enterprises.

The implementation instructions under No. 19 have integrated and clarified previous different registration procedures and declaration documents of administrative departments of foreign exchange in different regions, so that relevant foreign exchange registration procedures have rules to follow. However, the emphasis on foreign exchange compliance has also increased the risk of enterprises being punished on the foreign exchange. Even if the principle of openness applies to round-trip investment of SPVs , it is based on a strict foreign exchange review mechanism; if enterprises pay no attention to the explicitly stipulated supplementary registration procedures, they will more likely set themselves up for a strict punishment.

In order to regulate the administration of commercial prepaid cards, prevent financial risks and strengthen the work on combating corruption and promoting a clean government, the General Office of the State Council forwarded the Opinions on Regulating the Administration of Commercial Prepaid Cards (hereinafter referred to as the Opinions) jointly issued by the People s Bank of China, the Ministry of Supervision, the Ministry of Finance, the Ministry of Commerce and other departments on May 23, 2011.

The Opinions put forward strict requirements on the issuance and use of commercial prepaid cards from the following aspects. First, strengthen the administration of issuers of commercial prepaid cards. Without the approval of the People s Bank of China, no non-financial institution may issue multi-purpose prepaid cards; otherwise, upon discovery, the non-financial institution shall be punished for illegal payment and debt settlement. Second, establish a real-name registration system for purchase of commercial prepaid cards. Any entity or individual purchasing registered commercial prepaid cards or purchasing RMB10,000 or more unregistered commercial prepaid cards at one time shall be subject to real-name registration with the card issuer. Third, adopt a non-cash purchase system of commercial prepaid cards. Any entity which purchases RMB5,000 or more cards at one time or any individual who purchases RMB50,000 or more cards at one time shall do so through bank transfer rather than in cash; for purchase through bank transfer, a card issuer shall register the names of paying and receiving accounts, account numbers, amount, etc. of each transaction. Fourth, set quotas for the issuance of commercial prepaid cards. The par value of an unregistered commercial prepaid card shall not exceed RMB1,000 and that of a registered commercial prepaid card shall not exceed RMB5,000. Fifth, strictly manage invoices and financial affairs. Card issuers must issue invoices in strict accordance with relevant provisions. Sixth, strictly prohibit state functionaries, especially leaders from accepting any form of commercial prepaid cards in their public service activities. Whoever accepts any commercial prepaid card and fails to turn it over in a timely manner as required shall be punished as having accepted the same amount of cash. Those suspected of bribery shall be severely investigated and punished according to law. Seventh, the prepaid funds received by the issuers of multi-purpose prepaid cards and used by clients for future payments are not property of card issuers, card issuers shall not misappropriate such funds. Eighth, the registered commercial prepaid cards shall not have a term of validity, and the unregistered commercial prepaid cards shall be valid for at least 3 years.

The above-mentioned third and sixth items are mainly directed at the needs of entities purchasing commercial prepaid cards while the other 6 items are mainly directed at the needs of card issuers.

Provisions of the Supreme People s Court on Several Issues Regarding Implementation of the System of Withdrawal for Adjudicatory Officials in Litigation Activities

The Supreme People s Court issued on June 10, 2011 the Provisions on Several Issues Regarding Implementation of the System of Withdrawal for Adjudicatory Officials in Litigation Activities (hereinafter referred to as the Provisions), effective as of June 13, 2011.

The Provisions has 15 articles, mainly stipulating on voluntary withdrawal or application for withdrawal of adjudicatory officials, notification to the parties concerned and the legal representatives of the right of application for withdrawal, restrictions on the assumption of legal representative or defender for adjudicatory officials or other staff members who have left their positions in the people s court, supervision over and punishment on adjudicatory officials in breach of the stipulated code of conducts, etc..

If a party concerned or the legal representative thereof finds that a judge commits any of the following conduct in violation of the relevant provisions, the party concerned or the legal representative thereof shall have the right to apply for withdrawal of the judge: 1. the judge privately meets a party to the present case or the legal representative or defender thereof; 2. the judge recommends or introduces a legal representative or defender to a party to the present case or introduces the case to a lawyer or any other person for handling; 3. the judge extorts or accepts any property or other benefit from a party to the present case or a legal representative thereof or asks for reimbursement of expenses from a party to the present case or a legal representative thereof; 4. the judge accepts any gift from a party to the present case or a legal representative thereof or attends any activity sponsored by a party to the present case or a legal representative thereof; 5. the judge borrows money, means of transportation or communication or any other property from a party to the present case or a legal representative thereof, or extorts or accepts any benefit from a party to the present case or a legal representative thereof in the purchase of commodities, home improvement, etc.; 6. any other improper conduct which may affect the impartial trial of the present case.

With regard to the restrictions on the assumption for adjudicatory functionaries who have left their positions in the people s court, the Provisions stipulate that no adjudicatory official or other staff member of a people s court shall serve as legal representative or defender as a lawyer within two years after leaving their office in the people s court. No adjudicatory official or other staff member of a people s court shall, after leaving their position in the people s court, serve as a legal representative or defender in a case tried by a court where they once served, unless they serve as a legal representative or defender as the guardian or close relative of the party concerned.

The Provisions further stipulate that no spouse, child or parent of an adjudicatory official or other staff member of a court shall serve as a legal representative or defender in a case tried by the court where the adjudicatory official or staff member serves.

Provisions of the Supreme People s Court on Several Issues Regarding the Court Entrusted with Enforcement

The Supreme People s Court issued on May 3, 2011 the Provisions on Several Issues Regarding the Court Entrusted with Enforcement (hereinafter referred to as the Provisions), effective as of May 16, 2011.

The Provisions provide for, first of all, the court of enforcement, if upon investigation, discovers that the party against whom enforcement is sought has no property available for enforcement within the court s jurisdiction, but within other provinces, autonomous regions and municipalities directly under the Central Government, there is property available for enforcement, the court shall entrust enforcement of the case to the people s court at the same level in the different location.

Second, the Provisions define the ownership and closing procedures of a case entrusted for enforcement. After a case is entrusted for enforcement, the entrusted court shall open an enforcement case in accordance with law; the entrusting court shall, after receiving the entrusted court s notice of case filing, perform entrustment case-closing procedures.

Third, the Provisions simplify the entrustment procedures. Previously, the entrustment procedures were very complicated: when a court entrusted another court in a different location for enforcement of a case, it had to file the case level by level to their respective higher people s courts for approval. But under Article 4 of the Provisons, in a case entrusted for enforcement, the entrusting court shall directly handle entrustment procedures with the entrusted court.

Fourth, Article 11 of the Provisions stipulate on the supervision over the case entrusted for enforcement: if the entrusted court is unable to complete enforcement of an entrusted case within 6 months, the party applying for enforcement has the right to request that the people s court at the next higher level take up enforcement or assign enforcement; the people s court at the next higher level shall place a case on file for review, and when it discovers the entrusted court failed in enforcement without any justified reason, it shall put a time limit on enforcement, rule to take up enforcement or assign enforcement.

Last but not least, with regard to enforcement in a different location, Article 12 under the Provisions stipulates that when a court of enforcement goes to a different location for case enforcement, it shall have an approval letter from the higher people s court within its jurisdiction, which shall put a strict limit on the enforcement in a different location by a court of enforcement and may be accordingly beneficial to the construction of an honest and ethical court in enforcement activities.

Administrative Measures on Medical Device Recalls (for Trial Implementation)
The Ministry of Health of the People s Republic of China issued on June 28, 2010 the Administrative Measures on Medical Device Recalls (for Trial Implementation) (hereinafter referred to as the Administrative Measures), effective as of July 1, 2011.

The Administrative Measures have 38 articles in 6 chapters and make specific provisions on matters concerning the administration of medical device recalls on related topics such as supervision and control mechanisms, grading and classification, legal obligations, etc.

First of all, the Administrative Measures have clearly defined recall and defect . For the purpose of the Administrative Measure, the term recall of medical device means the practice in which a medical device manufacturer gives the alarm on, examines, repairs, re-labels, revises or improves the manual of, upgrades the software of, replaces, recalls or destroys a certain category, type or batch of defective products which have been sold in conformity with the specified procedures, so as to eliminate the defects of such products; the term defect means all unreasonable risk of endangering human health and safety which may be caused by normal use of a medical device.

In the supervision and control mechanism of medical device recalls, Article 8 of the Administrative Measures provides for the supervision and control mechanism basically under the leadership of the drug regulatory authority of the province directly under the jurisdiction of the Central Government.

In grading and classifying recalls, Article 13 of the Administrative Measures provides for three grades of recalls in accordance with the severity of medical device defects; and meanwhile divides the medical device recalls into voluntary recall and mandatory recall and on that basis further provides for the implementation procedures for both.

In legal obligations, the Administrative Measures stipulate that if the medical device manufacturer has already taken recall measures to voluntarily eliminate or alleviate the harmful consequences, it shall have imposed a lighter punishment or reduced punishment; if the medical device manufacturer s illegal act is minor and corrected in time, with no harmful consequences having been incurred, it shall be exempted from any punishment. If the medical device is discovered to be defective and its manufacturer does not take any recall measures, then the manufacturer shall be ordered to recall its medical device and shall be imposed a fine 3 times the value of the medical devices to be recalled. If the medical device has caused serious consequences, the medical device product registration certificate of the manufacturer shall be revoked by the original certificate issuer; in the worst case, the Medical Device Manufacturer License shall be revoked. If, upon receiving the notification of mandatory recall, the medical device manufacturer refuses to recall its medical device, it shall be punished in accordance with the aforementioned criteria.

Announcement of the General Administration of Customs on Implementing the Catalogue for Guiding Industrial Restructuring (2011 version)
In order to coordinate with the implementation of the Catalogue for Guiding Industrial Restructuring (2011 version) issued by the National Development and Reform Commission on March 27, 2011, the General Administration of Customs issued on May 26, 2011 the Announcement on Implementing the Catalogue for Guiding Industrial Restructuring (2011 version) (hereinafter referred to as the Announcement), effective as of June 1, 2011.

The Announcement requires that as of June 1, 2011, domestic investment projects within the encouraged category in accordance with the Catalogue for Guiding Industrial Restructuring (2011 version) and equipment for personal use imported within the gross investment, except for the goods listed in the Catalogue of Imported Commodities for Domestic Investment Projects Not Exempted from Tax and the Imported Major Technical Equipments Not Exempted from Tax and Product Catalogue, they shall be exempted from any tariff in accordance with the Notice of the State Council on Adjustment of Imported Equipment Taxation Policies, No. 103 [2008] of the General Administration of Customs and other relevant regulations, and shall be imposed an importation value-added tax in accordance with the regulations.

It shall be particularly noted that, with regard to the domestic investment project that is examined, approved or filed before June 1, 2011 and is within the encouraged category under the Catalogue for Guiding Industrial Restructuring (2005 version), the import tax exemption procedures shall still be handled in accordance with relevant provisions, on the premise that the relevant project entity applies to the Customs for tax relief filing with the Letter of Confirmation on Foreign Investment Project issued by the competent department of investment before June 1, 2012; once the aforementioned application for tax relief filing is overdue, the Customs shall not accept it. With regard to the domestically funded project under construction that has not been listed in the Catalogue for Guiding Industrial Restructuring (2005 version), it may, as long as it comes under the encourged category under the Catalogue for Guiding Industrial Restructuring (2011 version), upon the issuance of the Announcement, apply to the competent department of investment for a supplementary issue of the Letter of Confirmation on Foreign Investment Project and hereafter enjoy the preferential policies on import taxation; but the tax collected on the imported equipment shall not be returned.

? Notice of the Ministry of Finance and the State Administration of Taxation on Issues Regarding the Applicable Tax Rate and Tax Credit of the Foreign Income of High & New Tech Enterprises

The Ministry of Finance and the State Administration of Taxation issued on May 31, 2011 the Notice on Issues Regarding the Applicable Tax Rate and Tax Credit of the Foreign Income of High and New Tech Enterprises (hereinafter referred to as the Notice), effective retroactively as of January 1, 2010.

The Notice stipulates that, with regard to the high & new tech enterprises applying for income tax preferential policies with targets including the total cost of research and development, total income, total sales revenue, high & new tech product (service) income, etc. related to all domestic and overseas production and operating activities, they can enjoy the preferential policies for high & new tech enterprises concerning their proceeds obtained from overseas, i.e. they may pay the enterprise income tax at a preferential tax rate of 15% for their proceeds obtained from overseas and they may calculate the total taxes to be paid both home and abroad at the preferential tax rate of 15% when calculating the limit of tax credit overseas. The high & new tech enterprises as mentioned in the Notice are those that have obtained the high & new tech enterprise certificate as accredited by the Administrative Measures for the Accreditation of High and New Technology Enterprises and are now enjoying a preferential income tax rate of 15%.

Rules for Determining the Administrative Liability for Acts of Violation of Information Disclosure Laws

China Securities Regulatory Commission announced the Rules for Determining the Administrative Liability for Acts of Violation of Information Disclosure Laws (hereinafter referred to as the Rules) on and effective as of April 29, 2011.

First, the Rules have expanded the scope of people liable for acts of violation of information disclosure laws, stipulating that the issuers, directors, supervisors and senior managers of listed companies shall truthfully perform the obligation of information disclosure, and if sponsors, securities service institutions and their staff fail to perform their due diligence or make or produce any document containing a false record, misleading statement or material omission, they will, upon the confirmation of their obligations, be imposed an administrative punishment by China Securities Regulatory Commission.

Second, the Rules clarify 4 specific acts of violation of information disclosure laws, including: the information disclosure obligor failing to impartially and promptly disclose the information in accordance with laws and requirements on information disclosure deadlines, manners, etc. as speficied in the operational rules of stock exchanges; the information disclosure obligor untruthfully recording the content disclosed in the information disclosure document; the information disclosure obligor making incomplete and inaccurate statement in the information disclosure document or through other information release channels or vehicles so as to cause or possibly cause a wrong judgment of the investor on its investment.; the information disclosure obligor failing to disclose information in accordance with the requirements on information disclosure concerning important events or material particulars so as to omit major matters in the information disclosure document.

In addition, the Rules stipulate that in case the act of the information disclosure obligor constitutes a breach of information disclosure laws, the obligor s obligations shall be determined through comprehensive review of the subjective and objective elements of the obligor s acts of violation of information disclosure laws. The objective elements include illegal disclosure of the information content, influence on the judgment of investors, consequences resulting from acts of violation of information disclosure laws, frequency of illegal information disclosure, the extent of negative social influence, etc.; the subjective elements include the subjective state of the information disclosure obligor, as to whether its act is a deliberate fraudulent act or a careless negligent act, what is the attitude of the obligor after the act of violation of information disclosure laws occurs, etc..

Last but not least, when determining the obligations of the person liable for acts of violation of information disclosure laws, the following aspects confirmed through comprehensive analysis can be taken into consideration on the relationship between the person liable for the acts of violation and the fact, nature, circumstance and social harmful consequences of the confirmed acts of violation of information disclosure laws, i.e. the role of the person liable for the acts of violation during illegal information disclosure, its awareness and attitude, its post, specific duties and conditions of duty fulfillment and its professional background. Certainly, the person concerned shall be exempted from any administrative punishment under the following circumstances: the party concerned raises an objection against the confirmed illegal information disclosure acts and the objection is filed in the board of directors, board of supervisors, company office meeting minutes, etc.; the party concerned fails to normally perform its due obligations owing to force majeure, loss of personal freedom, etc. during the period when the illegal information disclosure act is being investigated; the person not liable for major obligations of the company s illegal information disclosure timely reports to the stock exchanges and the securities regulatory authority on the acts of violation of information disclosure laws.

Interim Provisions on the Exemption of Import Tax on the Cartoon Animation Development and Production Supplies Imported by Cartoon-Animation Enterprises

The Ministry of Finance People s Republic of China, General Administration of Customs of the People s Republic of China and State Administration of Taxation issued on May 19, 2011 the Interim Provisions on the Exemption of Import Tax on the Cartoon Animation Development and Production Supplies Imported by Cartoon-Animation Enterprises (hereinafter referred to as the Interim Provisions), with the implementation time fixed tentatively between January 1, 2011 and Decemeber 31, 2015.

As per the Interim Provisions, in order to apply to the Ministry of Culture of People s Republic of China no later than the end of March each year for obtaining their import tax exemption, cartoon-animation enterprises shall be in compliance with the following criteria: (1) In line with basic accreditation standards for cartoon-animation enterprises set forth in the Notice of the Ministry of Culture of People s Republic of China, Ministry of Finance People s Republic of China and State Administration of Taxation on Printing and Issuing the Administrative Measures of the Accreditation of Cartoon-Animation Enterprises (for Trial Implementation); (2) Possessing the qualification and capability to conduct independent development and production of direct cartoon-animation products; (3) Possessing the registered capital of no less than RMB 800,000. The cartoon-animation enterprises applying for the qualification of import tax exemption by the end of March every year will be examined and verified by the Ministry of Culture of the People s Republic of China, jointly with the Ministry of Finance People s Republic of China, the General Administration of Customs and the State Administration of Taxation, and those approved will be included in the list of enterprises entitled to the preferential policy of exemption of import tax jointly announced by the four ministries and administrations.

Eligibility for the exemption shall go through joint verification by the Ministry of Culture of the People s Republic of China, jointly with the Ministry of Finance People s Republic of China, the General Administration of Customs and the State Administration of Taxation. After the verification, the four authorities aforesaid may jointly release a list of cartoon-animation enterprises granted with import tax preferences and indicate in the awarded "Certificate for Cartoon/Animation Enterprises" whether the enterprise concerned is granted with the import-tax exemption herein.

Any eligible cartoon-animation enterprise shall, based upon the Certificate for Cartoon/Animation Enterprises valid this year and the indication therein of its eligibility for the import-tax exemption, apply to the competent customs authority for conducting the formalities relevant to the exemption enjoyment. The exemption from import tariffs and value-added taxes may be applied to importation of goods within the List of Import Tax Free Cartoon Animation Development and Production Supplies Imported by Cartoon-Animation Enterprises within the period of validity this year.

It shall be noted that the accreditation of eligibility for the exemption of import tax is subject to the annual review system. Besides, any tax-free imported goods shall not be used for any mortgage, pledge, transfer or for other purposes nor be put to any disposal, without prior approval by the General Administration of Customs, otherwise the relevant enterprise shall be revoked of its eligibility for the import tax exemption.

Legal Practices

A Brief Analysis on the Qualification for OEM Production in Foreign Invested Wholly-Owned Companies

OEM (Original Equipment Manufacturer) refers to companies that make products for others to repackage and sell. Domestically funded enterprises keen on working for transnational tycoons via OEM can be found everywhere in China, and therefore OEM has become a prevailing production and management model in Chinese production fields. On one hand, more and more transnational companies are establishing their foreign invested wholly-owned companies in China; on the other hand, these investment companies are looking forward to access to the rapidly growing China market via OEM and other channels, but they become somewhat disappointed that there are restrictions for them directly engaging an enterprise in China to produce or process their products.

As per Article 22 of the Provisions on the Establishment of Investment Companies by Foreign Investors (second amendment in 2004) (Order of the Ministry of Commerce of the People s Republic of China [2004] No. 22), a foreign invested wholly-owned company that meets the prescribed conditions may file an application for designation as the regional headquarters of the transnational company (hereinafter referred to as the regional headquarters) while the foreign invested wholly-owned company that has been determined as the regional headquarters may, in light of the actual needs of its business in China, entrust another domestic enterprise to produce/process its own products or its parent company s products for sale both at home and abroad .

Meanwhile, as per Article 5 of the Supplementary Provisions on the Establishment of Investment Companies by Foreign Investors, foreign invested wholly-owned companies that comply with the requirements of Article 15 of the Order No.22 may, before the enterprises invested by them are put into production or before the new products of the enterprises invested by them are put into production, and for the purpose of developing product market, import relevant products for domestic trial sale, and may entrust other domestic enterprises to produce or process their products or its parent companies products for sale both at home and abroad . Article 15 of the Order No.22 stipulates that an established investment company runs its business in accordance with the law and has no record of violation of law, and its registered capital is contributed in time as prescribed in the articles of association, and the amount of the registered capital actually contributed by the investor is no less than USD 30 million and has been used for the purpose as prescribed in Article 8 of the Supplementary Provisions on the Establishment of Investment Companies by Foreign Investors . Article 7 hereof, however, requires that at least USD 30 million of the registered capital of a foreign invested wholly-owned company shall be used for any one of the four purposes including purchasing the stock rights of an enterprise in China as prescribed herein.

Therefore, a foreign invested wholly-owned company, after applying to the relevant authority and fulfilling the formalities for alterations pursuant to the law, may directly entrust any other enterprise in China to produce/process its own products or its parent company s products via OEM model for sale both at home and abroad, on the premise that this foreign invested wholly-owned company has been accredited as the regional headquarters of the transnational company, or it complies with Article 15 and 8 of the Order No.22.

In practice, some foreign invested wholly-owned companies often sign a purchase-and-sale contract (distribution contract) with manufacturing enterprises in substitute for the OEM model due to their inconformity with the aforementioned requirements, which, however, according to relevant laws and regulations, does pose certain legal risks to their business operation.

1. Based on the distribution contract relationship, there are certain doubts as to whether foreign invested wholly-owned companies could mark the trademarks or their names on the products for resale to indicate themselves as manufacturers and bear any liability if the product quality is not as advertised.

2. Under the contract of OEM, foreign invested wholly-owned companies may put various restrictions on manufacturing enterprises, while their regulations on manufacturing enterprises under the distribution contract may be relatively weak.

3. Some department of industry and commerce at the provincial level consider it as a business operation beyond scope that an operator ineligible for production and processing signs a contract of OEM entrusting processing with other enterprises. Although the distribution contract may sidestep the OEM model to some extent, it may still be deemed as a contract of OEM in essence and will accordingly be investigated and punished by the department of industry and commerce.

(The author s contact information: baileyxu@hllawyers.com, celinechen@hllawyers.com)

Legal Issues concerning Product Comparison in Advertising Wording

In recent years, some celebrated brand products have been frequently publicized because they were suspected of misleading propaganda in advertising and consequently investigated and punished by the government authority. Upon analysis, most products suspected of misleading propaganda are due to their usage of improper or untruthful comparative wording in advertising.

The so-called comparative wording is reflected in two aspects. One is that advertisements cite a business operator s self-assessment or honorary titles (namely, Branded Product of Highest Customer Satisfaction XX , China Best-selling Product , Consumer Preferred Brand , etc.) obtained in assessment or ranking activities organized by a third party. The other is that business operators tend to compare their own products in an advertisement with others so as to highlight the superiority of their own products, e.g. a timber floor manufacturing company claims in its advertisment that timber floors manufactured by other manufacturers are nothing but eye candies .

The Advertising Law of the People s Republic of China currently in force does not have specific provisions on comparative wording in advertisments, except for Clause 3 in Article 7, which stipulates that an advertisement should not contain words such as state level , highest level or the best , etc.. Besides, the Advertising Law does not expressly prohibit or regulate comparative advertisements for other products than specific products such as drugs and medical equipments, but merely stipulates that advertisements shall not resort to any falsehood to deceive or mislead consumers and advertisements shall not have any content that denigrates the commodities or services of other producers or operators .

With regard to the aforementioned first kind of comparative wording , the Advertising Law does not carry any specific provision on it, but relevant regulations have already expressly restricted and controlled any improper assessing and ranking statement involved in the advertising wording as well as the corresponding assessing and ranking activitity. For example, Article 2 of the Notice of the General Office of the Central Committee and the General Office of the State Council on Related Issues Concerning the Strict Control of Assessing Activities (No. 10 [1996] of the General Office of the Central Committee and the General Office of the State Council) expressly stipulates that any state or trade assessing activity for enterprises shall not be held hereafter, unless otherwise approved by the Central Committee of the Communist Party or the State Council. Any assessing activity deemed as necessary shall be strictly examined and approved by the government authority or entity concerned and further be subject to the strict examination by the State Economic and Trade Commission that will finally submit the assessing activity to the State Council for examination and approval. After that, express provisions are provided for in the Circular of Issues Concerning Inappropriate Assessing Activities for Enterprises jointly issued by the Propaganda Department of the CPC Central Committee, the State Economic and Trade Commission, the Ministry of Foreign Affairs and the Ministry of Supervision, Hong Kong and Macao Office of the State Council, the State Administration of Industry and Commerce, the State Bureau of Technical Supervision (No. 98 [1998] of the State Economic and Trade Commission) and the Circular on Enforcing Issues Concerning the Notice on the Cease of Issuing Advertisements with Inappropriate Assessment, Ranking, etc. and the Notice on the Cease of Issuing Advertisements with Inappropriate Assessment, Ranking, etc. successively issued by the General Administration for Industry and Commerce.

The aforementioned regulations and provisions have not only put strict restrictions on assessing and ranking activities for enterprises, but also provide for express and strict requirements on the statements concerning assessing and ranking activities in advertising. For example, the No.274 document expressly stipulates that: except for assessment characterized enterprise marketing information released in accordance with relevant laws and regulations and approved by the State Council, any manner concerning ranking, recommendation, accreditation, chart success, snap check, statistics, release of market investigation result, etc. is prohibited to rank or comprehensively assess an enterprise, its products or services, e.g. China Best-selling Product, First in Market Share, Market Dominant Brand, Consumer Preferred Brand , Universally Acknowledged Reputed Brand in China, xxx Recommended Products (Brand), xxx Accredited, xxx Confirmed, xxx Exhibited, xxx Assembled, xxx Designated, various Satisfaction Rate, Faithfulness Rate and enterprises with a certain product or service On the List.

With regard to the aforementioned second kind of comparative wording , the Standards for the Examination of Advertisements issued on June 1, 1994 by the State Administration for Industry and Commerce carries special provisions on the principle, content and manner of the comparative adveritising. Article 31 of the Standards for the Examination of Advertisements stipulates that comparative advertisements shall conform to the principle of fairness and fair competition, while Article 32 hereof stipulates that the content of a comparative advertisement shall not involve any particular product or service or adopt other manners of direct comparation. An advertisement directly comparing like products or services must have a related scientific ground and proof for itself.

Judging from the provisions in the Standards for the Examination of Advertisements, indirect comparative advertising is allowed to a certain degree, but it shall contain truthful and objective statements within a limited scope, otherwise they may constitute unfair competition. (As per Article 9 of the Anti-unfair Competition Law, business operators shall not use advertisements or other methods to make false propaganda regarding the quality, composition, function, usage, producer, time of efficacy and place of origin, etc. to mislead consumers.)

To sum up, laws and regulations currently in force allow enterprises to use comparative wording in advertisements. However, comparative wording shall be careful, truthful and objective so as to avoid any legal risk incurred by any improper or untruthful statement.

(The author s contact information: jasonxia@hllawyers.com)

Several Proposals on Establishing the Mechanism of Collective Consultation on Wages in Foreign-invested Enterprises

In recent years, the mechanism of collective consultation on wages has been one of the hot issues in labor laws and regulations. The Federation of Trade Unions and the Ministry of Labor and Social Security have issued a series of policies and measures related to the mechanism of collective consultation on wages, which demonstrates the goal and resolution of the Central Government in popularizing the mechanism of collective consultation on wages. In this connection, foreign-invested enterprises, especially world top 500 foreign-invested enterprises in China, are undoubtedly the top priority of the mechanism of collective consultation on wages.

On January 31, 2011, All China Federation of Trade Unions issued the Opinions on Promoting the Mechanism of Collective Consultation on Wages in Domestic Enterprises Funded by World Top 500 Corporations (hereinafter referred to as the Opinions). As per the Opinions, the target task of promoting the collective wage bargaining system is: any domestic enterprise funded by a world top 500 corporation shall establish the mechanism of collective consultation on wages in accordance with relevant laws and regulations in China. In 2011, 80% of domestic enterprises funded by world top 500 corporations in China shall have established the mechanism of collective consultation on wages and in 2012 that proportion shall reach 90% or more. By the end of 2013, the goal of having all domestic enterprises funded by world top 500 corporations establish the mechanism of collective consultation on wages shall be fulfilled.

In light of the aforementioned plans and goals, Mcdonald s, Wal-Mart, Carrefour and other enterprises in Shanghai have established the mechanism of collective consultation on wages under the motivation of Shanghai Generel Labor Union.

In performing routine duties, the author has also come across some foreign enterprise consulting issues related to the establishment of the mechanism of collective consultation on wages. To further the understanding of the mechanism of collective consultation on wages for foreign enterprises, the author hereby analyzes some issues of common concern for our clients by elaborating on relevant laws and regulations.

1. Legal Ground for the Mechanism of Collective Consultation on Wages

The current legal ground for the mechanism of collective consultation on wages is the Tentative Measures for Collective Consultation on Wages issued by Ministry of Labor and Social Security on November 8, 2000 and the Provisions on Collective Contracts effective as of May 1, 2004. It is reported that the Regulations on Enterprise Wages still under review will provide specific rules concerning legal liabilities of enterprises that neither comply with nor implement the mechanism of collective consultation on wages. Moreover, provisions and measures being drafted now in many regions will also be a supplementary part of the legal ground for the mechanism of collective consultation on wages. Therefore, enterprises shall pay close attention to relevant lawmaking actuality in China when studying and preparing the mechanism of collective consultation on wages.

2. Relationship between the Definition of Collective Consultation on Wages and Collective Contracts

As per the Tentative Measures for Collective Consultation on Wages, the collective consultation on wages means the acts of consultation on the basis of equality concerning the wage distribution system, wage distribution manner and wage level within the enterprise and of the conclusion of the wage agreement upon unanimity by employee representatives and enterprise representatives. The wage agreement means the special collective contract on issues in relation with wages. Where a collective contract has been concluded, the wage agreement shall serve as an attachment thereto, and have equivalent force as the collective contract. The wage standards set forth in the labor contract entered into by and between the employees and the enterprise may not be lower than the minimum standards as prescribed in the wage agreement.

3. Aspects Commonly Included in the Wage Agreement

Generally speaking, collective consultation on wages include the following aspects:

(1) term of the wage agreement; (2) wage distribution system, wage standards and wage distribution manner; (3) annual average wages and fluctuations; (4) distribution manner of bonuses, allowances, subsidies, etc.; (5) payment terms of wages; (6) procedures for alteration and rescission of the wage agreement; (7) conditions for termination of the wage agreement; (8) liabilities for breach of the wage agreement; and (9) other issues that the parties consider necessary to consult on.

4. Election of Consultation Representatives and Procedures for the Consultation

As per the Tentative Measures for Collective Consultation on Wages, the labor union shall represent the employees. With regard to enterprises without a labor union, consultation representatives shall be democratically elected by all employees and have to pass with half of the votes. Consultation representatives for the enterprise shall be the legal representative as well as other people designated by the legal representative. Both consultation parties shall respectively designate a chief representative. The chief representative for employees shall be assumed by the President of the labor union who may entrust in writing another person to act as its agent. With regard to enterprises without a labor union, the chief representative shall be elected by the consultation representatives for employees. The chief representative for the enterprise shall be assumed by the legal representative who may entrust another administrative staff as its agent. Chief representatives for both consultation parties shall take turns assuming the office of executive chairman of the consultation meeting, the main responsibility of which is organizing and coordinating the collective consultation on wages and making suggestions on settlement of disputes arising therefrom.

Additionally, the consultation parties may entrust other professionals experienced in labor and personnel laws and regulations other than the enterprise employees, such as a lawyer, to act as the consultation representative for either party. Such entrusted professionals shall not exceed a third of either party s representatives.

It shall be noted that enterprise employees participating in collective consultation on wages shall be considered as providing routine labor services, under which circumstances their wages, bonuses, subsidies, allowances and insurance benefits remain unchanged. Moreover, the lawful rights and interests of employees as consultation representatives are protected by the Tentative Measures for Collective Consultation on Wages. Enterprises shall neither discriminate against the employees as consultation representatives nor illegally dissolve or amend their labor contracts. In addition, as per Article 28 of the Provisions on Collective Contracts, in case an employee as the consultation representative has its labor contract expired during its performance of related functions and obligations, the term of the contract shall be automatically extended until the achievement of its functions and obligations. The employer shall not terminate the contract with the employee unless:

(1) the employee has severely breached the labor discipline or rules and regulations lawfully made by the employer; or (2) the employee has committed a gross neglect of duty, or been engaged in malpractice and consequently has caused great damage to the employer s interests; or (3) the employee has been prosecuted for its criminal liability.

The employer shall not transfer the employee to another position without any justified reason when the employee performs its functions and obligations as a consultation representative.

5. Procedures for Collective Consultation on Wages

I. Proposal for Collective Consultation on Wages

Both the employees and the enterprise may raise a request for collective consultation on wages. The requestor shall send a letter of intent on consultation to the other party to determine the time, place and content concerned. The other party shall send a reply in writing to the requestor within twenty (20) days after receiving the letter and conduct collective consultation on wages with the requestor. Both parties are obliged to provide true information and materials related to collective consultation on wages within five (5) days before the consultation begins.

II. Conclusion of the Wage Agreement by the Employee Representative Assembly or the Workers Congress

Draft of the Wage Agreement shall be submitted to the employee representative assembly or the workers congress for discussion. As both consultation parties reach consensus on the wage, the administration department of the enterprise shall formulate a formal Wage Agreement which shall become effective after signed and sealed by the chief representatives for both parties.

As per Article 36 of the Provisions on Collective Contracts, when the employee representative assembly or all the employees discuss the draft of collective contracts or that of a special collective contract, at least two thirds of the members of the employee representative assembly or of all the employees shall be present. The draft of collective contracts or that of the special collective contract shall not be adopted unless it is agreed upon by at least half of the members of the employee representative assembly or of all the employees.

III Review by the Administrative Department of Labor and Social Security (the essential condition for the entry-into-force of the Wage Agreement)

Within seven (7) days after the conclusion of the Wage Agreement, the enterprise shall submit it in triplicate with written explanations to the administrative department of labor and social security for review. Within fifteen (15) days after receiving the Wage Agreement, the administrative department of labor and social security shall review the qualifications of both parties representatives, the terms and clauses of the Wage Agreement, the procedures for conclusion, etc.. If the administrative department of labor and social security raises no objection after the review, it shall promptly send the Opinion on the Review of the Wage Agreement to both parties, and the Wage Agreement shall immediately come into effect. If the administrative department of labor and social security holds any opinion on amendment of the Wage Agreement, it shall notify both parties of the opinions on amendment in the Opinion on the Review of the Wage Agreement. The two parties shall accordingly discuss the opinion on amendment, amend the Wage Agreement and resubmit the amended one to the administrative department of labor and social security.

Fifteen (15) days later after the Wage Agreement was submited to the administrative department of labor and social security, if the two parties do not receive the Opinion on the Review of the Wage Agreement, they shall put the Wage Agreement right into effect as it is deemed to have been approved by the administrative department of labor and social security.

IV Announcement of the Wage Agreement

The two parties shall publicize within five (5) days the Wage Agreement already in force to all staff of either party in an appropriate form.

V Renewal of the Wage Agreement

Generally speaking, the collective consultation on wages shall be conducted once a year. Both the employee and the enterprise may produce a letter of intent on consultation to each other within 60 days before the expiration of the original Wage Agreement, after which they may conduct the next round of collective consultation to properly deal with the transition from the original Wage Agreement to a renewed one.

6. Settlement of the Dispute in Collective Consultation on Wages

As per Article 49 of the Provisions on Collective Contracts, in case both parties fail to settle the dispute arising in the course of a collective consultation, either party or both parties may file an application in writing to the administrative department of labor and social security for mediation and settlement. Where no application is filed, the administrative department of labor and social security may directly mediate and settle the dispute, if it deems necessary. The administrative department of labor and social security shall organize people of the labor union of the same level and the business organization to jointly mediate and settle the dispute arising in the collective consultation.

We propose to enterprises that when performing collective wage bargaining special attention shall be paid to the subject, procedures and various deadlines as prescribed in the aforementioned provisions, so as to be exempted from any legal liability arising from the breach of statutory requirements. Meanwhile, it is necessary for enterprises, especially large foreign-invested enterprises, when or before performing the mechanism of collective consultation on wages, to establish the employee representative assembly system in order to ensure the successful establishment of the mechanism of collective consultation on wages or conclusion of other collective contracts while avoiding any unnecessary costs.

(The author s information: stevenzhou@hllawyers.com)