Haworth & Lexon Law Newsletter (201110)-Law Bridge-Shanghai Law Firm/Lawyer

Haworth & Lexon Law Newsletter
No.10 2011 (Total:No.117) Nov.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:

Administrative Measures for the Registration of Debt-for-Equity Swap of Companies

Provisions on the Establishment of the System for Registration and Management of People in Possession of Insider Information of Listed Companies, Circular on Issues concerning Strengthening the Insider Information Management of State-owned Shareholders of Listed Companies

The Supreme People’s Court Issued the Circular on Several Opinions concerning the Reasonable Allocation and Scientific Operation of Enforcement Power

Provisions of the Supreme People’s Court on Certain Issues Relating to the Trial of Criminal Protest Cases Lodged by People’s Procuratorates through the Adjudication Supervision Procedure

Supplementary Provisions to the Provisions (II) on the Standards for Filing Criminal Cases under the Jurisdiction of Public Security Organs for Investigation and Prosecution

Several Opinions on the Rural Collective Land Ownership Registration and Issuance of Certificate

Interim Measures for the Supervision and Management of Refinancing Business

Circular on Issuing the Pilot Program for the Collection of VAT Instead of Business Tax

Measures for the Implementation of the Pilot Change from Business Tax to Value-Added Tax in the Transportation and Certain Modern Service Industries, Circular on the Implementation of the Pilot Change from Business Tax to Value-Added Tax in the Transportation and Certain Modern Service Industries in Shanghai

Detailed Rules for the Implementation of Interim Regulations of the People’s Republic of China on Resources Tax

Detailed Rules of Shanghai Municipality for the Implementation of the Regulation on the Expropriation of Housing on State-owned Land and Compensation

Interim Measures of Fujian Province for the Administration of Equity Investment Enterprises

Legal Practices:

Allocation of the Burden of Proof and Identification of “New Product” in Disputes over Process Patent Infringements

A Preview of Cross-border Direct Investment in RMB

On Hearing the Litigation of “Take A Paid One” Dispute

Latest Laws and Regulations

Administrative Measures for the Registration of Debt-for-Equity Swap of Companies

On November 23, the State Administration for Industry & Commerce promulgated the Administrative Measures for the Registration of Debt-for-Equity Swap of Companies (hereinafter referred to as the Measures), and put them into effect on January 1, 2012.
If the debt-for-equity swap occurs in any of the following circumstances, the Measures shall apply: (1) the contractual debt arising between the creditor and the company in the operation of the company is swapped for the company equity and the creditor has performed the contractual obligations corresponding to the debt and has not violated the prohibitive provisions of laws, administrative regulations, decisions of the State Council, or the company’s Articles of Association; (2) the debt is swapped for company equity in accordance with the ruling already validated by the people’s court; (3) the debt is swapped for the company equity in accordance with the reorganization plan approved by the people’s court or the reconciliation agreement backed by the court ruling during the bankruptcy-based reorganization or reconciliation.

The sum of capital contributions made with equities swapped with debts and other non-monetary property shall not be higher than seventy percent (70%) of the registered capital of the company. Debts to be swapped for equities shall be appraised by a legally established appraisal institution, and the sum of capital contributions made with equities swapped with debts shall not be higher than the appraisal value of such debts. The debt-for-equity swap shall also be subject to capital verification by a legally established capital verification institution.

The State-owned Assets Supervision and Administration Commission of the State Council issued the Provisions on the Establishment of the System for Registration and Management of People in Possession of Insider Information of Listed Companies (hereinafter referred to as the Provisions) and the Circular on Issues concerning Strengthening the Insider Information Management of State-owned Shareholders of Listed Companies (hereinafter referred to as the Circular) respectively on October 25, 2011 and October 28, 2011.

According to the Provisions, listed companies shall establish the system for registration and management of people in possession of insider information and shall make provisions on the confidentiality management of the insider information as well as on the registration and management of people in possession of insider information before the legal disclosure of the insider information. The board of directors of the listed company shall ensure that the archives of the people in possession of the insider information are true, accurate and complete and the chairman of the board shall be the principal person in-charge. The system for registration and management of people in possession of insider information of listed companies shall specify the confidentiality obligation and liability for breach of confidentiality obligation of the people in possession of insider information, and such particulars as informing the related personnel of the foregoing matters by concluding a confidentiality agreement and a non-insider-trading notification, etc. The archives of the people in possession of insider information shall be kept for at least ten (10) years starting from the date of record (including necessary supplements and improvements) and they may be referred to by China Securities Regulatory Commission (CSRC) and its local offices as well as stock exchanges.

The Circular defines the bodies responsible for management of the insider information, i.e. the state-owned shareholders directly holding shares of listed companies, and the actual controllers of listed companies. The Circular requires both the state-owned shareholders and the actual controllers of listed companies to establish the system for management of insider information in conformity with their own management and operation characteristics and specify the special institution and personnel in charge.

After the state-owned shareholders and the actual controllers of a listed company conclude a resolution on matters relating to insider information, they shall promptly notify the listed company of this in writing in accordance with the relevant provisions and have the listed company disclose the insider information in accordance with the law; and when reporting and communicating to the competent government department and regulatory body on matters relating to insider information, the listed company shall inform them of the confidentiality obligation and put the whole thing on record for reference.

The Supreme People’s Court Issued the Circular on Several Opinions concerning the Reasonable Allocation and Scientific Operation of Enforcement Power

On October 19, 2011, the Supreme People’s Court issued the Several Opinions concerning the Reasonable Allocation and Scientific Operation of Enforcement Power (hereinafter referred to as the Opinions).

The Opinions further specify the scope of the enforcement power. The enforcement power refers to the power of the people’s court to examine such matters as objection to enforcement, reconsideration and appeal by taking various enforcement measures, including the power to conduct enforcement and the power to conduct examination. The power to conduct enforcement is rested with the executor or the judge and handling of matters concerned shall comply with the examination and approval system. And the power to conduct examination is rested with the judge and handling of matters concerned shall comply with the collegial system. During the enforcement, where it is required for enforcement measures in case of emergencies, the executor may follow the instruction of the command centre of the enforcement work to adopt immediate measures including seizure, impoundment and freezing and other property preservation and control measures, and shall complete the supplementary formalities for examination and approval within two (2) working days thereafter.

According to the Opinions, lawsuits of objection to enforcement, reconsideration and supervision as well as lawsuits of dissidence shall be placed on file by the authority in charge of case filing and then be handed over to the relevant executive and trial institution.

Lawsuit of the outsider’s objection to enforcement, lawsuit of the enforcement applicant’s objection to enforcement, lawsuit of objection to enforcement allocation plan and lawsuit of subrogated property analysis shall be heard by the judicial institution of the people’s court in accordance with the civil litigation procedures. Examination of the objection raised by the principal to assessment, auction and realization procedures is in essence an objection to the act of enforcement and shall be included in the scope of the power to conduct examination, which shall be in the charge of the enforcement authority. The Opinions specify the principle that matters concerning enforcement shall be handled by the enforcement authority, and in the meantime, the examination and determination of the property preservation and application for advance enforcement still shall be handled by the former judicial institution but shall be executed by the enforcement authority. The examination of objection, in accordance with the different natures of the objection, shall be handled respectively by the case filing institution, judicial institution and enforcement authority.

The Opinions stipulate that when the trial institution is hearing a suit for recognition of right, it shall collect some information about the ownership of the property concerned. Where the property concerned is seized, impounded or frozen by the enforcement authority, the trial of the suit shall be suspended; where the target property in the suit for recognition of right is disposed of by the enforcement authority, such suit for recognition of right shall be cancelled; where the real right of the property is recognized after the property is seized, impounded or frozen by the enforcement authority, the ruling on the suit for recognition of right or the mediation letter shall be cancelled.

Provisions of the Supreme People’s Court on Certain Issues Relating to the Trial of Criminal Protest Cases Lodged by People’s Procuratorates through the Adjudication Supervision Procedure

On October 14, 2011, the Supreme People’s Court promulgated the Provisions on Certain Issues Relating to the Trial of Criminal Protest Cases Lodged by People’s Procuratorates through the Adjudication Supervision Procedure (hereinafter referred to as the Provisions), and put them into effect on January 1, 2012.

After receiving the written protest from the people’s procuratorate, the people's court shall place the case on file within one (1) month. If, upon examination, the people’s court has no jurisdiction over the case, or the court can not successfully serve the written protest on the defendant of the original trial, or the protest is lodged on the basis of new evidence but the list of new evidence is not attached to the written protest or such evidence does not concern the facts of the original prosecution, the people’s court shall make a decision to return the case to the people’s procuratorate. If the people’s procuratorate lodges a protest again after supplementing relevant materials, the people’s court shall accept the case if, after review, it meets the conditions for acceptance. The people’s procuratorate may withdraw its protest before trial.

For a case where the facts ascertained in the original judgment or ruling are unclear or the evidence is insufficient, the people’s court accepting the protest shall, after retrial, handle the case according to the following guidelines: (1) if the facts can be ascertained during the trial, the people’s court shall, after ascertaining the facts, render a judgment according to the law; (2) if the facts cannot be ascertained during the trial, and the defendant of the original instance cannot be found guilty due to insufficient evidence, the people’s court shall pronounce the defendant of the original instance not guilty; or (3) if any new evidence is found during the trial and the time limit for ordering a retrial as prescribed by the Criminal Procedure Law has expired, the people’s court may render a ruling revoking the original judgment and return the case to the people’s court of the original instance for retrial.

If the original instance defendant against whom a protest is lodged fails to appear before the court after the written protest is served, the people’s court shall render a ruling on suspension of the trial, and shall resume the trial once the original instance defendant appears before the court. If the original instance defendant against whom a protest is lodged is deceased or becomes deceased during the trial, the people’s court shall render a ruling on termination of the trial, but for a case where the facts can be ascertained and the original instance defendant can be pronounced not guilty, the people’s court shall amend the original judgment.

Supplementary Provisions to the Provisions (II) on the Standards for Filing Criminal Cases under the Jurisdiction of Public Security Organs for Investigation and Prosecution
On November 21, 2011, the Supreme People’s Procuratorate and the Ministry of Public Security jointly promulgated the Supplementary Provisions to the Provisions (II) on the Standards for Filing Criminal Cases under the Jurisdiction of Public Security Organs for Investigation and Prosecution (hereinafter referred to as the Supplementary Provisions).

The Supplementary Provisions specify that whoever gives any property equivalent to not less than RMB 10,000 Yuan as an individual or not less than RMB 200,000 Yuan as a unit to a public servant of a foreign country or an official of an international public organization for any improper commercial benefit shall be filed for investigation and prosecution. Whoever issues not less than 100 false invoices or issues invoices at an aggregate amount of not less than RMB 400,000 Yuan shall be filed for investigation and prosecution. Whoever holds not less than 50 forged VAT invoices or forged invoices with an aggregate par value equivalent to not less than RMB 200,000 Yuan, or whoever holds not less than 100 forged invoices that may be used for gaining export tax refund by fraud and offsetting tax payment or forged invoices with an aggregate par value equivalent to not less than RMB 400,000 Yuan shall be filed for investigation and prosecution. And whoever holds not less than 200 forged invoices other than those mentioned above or forged invoices with an aggregate par value equivalent to not less than RMB 800,000 Yuan shall be filed for investigation and prosecution.

Several Opinions on the Rural Collective Land Ownership Registration and Issuance of Certificate

On November 1, 2011, the Ministry of Land and Resources, the Office of Leading Group of Rural Affairs under CCCPC, the Ministry of Finance and the Ministry of Agriculture jointly promulgated the Several Opinions on the Rural Collective Land Ownership Registration and Issuance of Certificate (hereinafter referred to as the Opinions), and put them into effect on the same day.

The Opinions specify the scope of rural collective land ownership registration and issuance of certificates, which is confined to the rural collective land ownership and collective land use right, etc. Documents and materials that function as basis for rural collective land ownership registration include approvals and decisions of the people’s government or other competent administrative departments, mediation decisions of the competent administration of land and resources under the people’s government at the county level, rulings, verdicts and mediation decisions effected by the people’s court, agreements legally entered into by and between the parties concerned, cadastral inventory complied through the demarcation procedures, agreements on land ownership boundaries and otherwise, and other documents as prescribed by laws and regulations, etc.

The Opinions require the governments of different regions to comply with the relevant technical regulations and standards, to make the most use of the existing achievements of the national land survey, to make a thorough investigation of each plot of land in rural areas concerning their ownership, boundary, area and purpose, etc. and form integrated cadastral findings in accordance with the uniform ancestral land encoding mode in order to provide some reference for the registration of and issuance of certificate for the rural collective land ownership. Where it is applicable, the ancestral land cadastral inventory of rural collective land ownership shall adopt the analytical method to measure the coordinates of boundaries and area of the ancestral land.

The determination of the rural collective land owner shall comply with the principle of “equality between civil subjects” and “autonomy of villagers”. The land ownership by each farmer collective shall be confirmed by differentiating three categories of owners, i.e. township, village and villagers’ group. The villagers’ group in possession of the land shall have the collective economic organization or the villagers’ group legally submit an application for registration of the land ownership and issuance of certificates. For the former collective land that has not been expropriated after the removal and reconstruction thereon, it shall be subject to statistical investigation rather than official registration or certificate issuance.

The use right of residential land plots shall be allocated to members of the farmer collective organization in accordance with the area standards prescribed by the local provincial people’s government. Members of the farmer collective organization and village or urban residents as outsiders of the farmer collective organization who already have a residential land plot and intend to occupy an inherited rural residential land plot, may have the land plot registered and obtain a land ownership certificate. Any non-rural resident (including overseas Chinese) who formerly had a residential land plot or housing in the village without any change in the title may, with an undisputed attestation produced by the local farmer collective organization, handle the land ownership registration according to the law.

Illegal residential land plots and collective land used for rural construction must be handled with the relevant laws and regulations before the registration hereof. The past records and current status of the illegal residential land plots and collective land used for rural construction shall be straightened out, and those plots of land compliant with the overall planning of land use and township planning as well as the relevant policies on land use shall be subject to the supplementary procedures for land use approval and thereafter the registration together with the issuance of certificate.

Interim Measures for the Supervision and Management of Refinancing Business

On October 26, 2011, China Securities and Regulatory Commission (CSRC) promulgated the Interim Measures for the Supervision and Management of Refinancing Business (hereinafter referred to as the Interim Measures) and put them into effect on the same day.

For the purpose of these Measures, “refinancing business” means activities that securities finance companies lend their own or legally raised funds and securities to securities companies for them to operate margin trading and short selling businesses.

As stipulated by the Interim Measures, the form of organization of a securities finance company is a limited liability company and the registered capital thereof shall not be less than RMB 6 billion Yuan and shall be paid-up capital, and the shareholders thereof shall contribute capital in currency.

A securities finance company carrying out refinancing business shall in its own name separately open a special securities account of refinancing, a guarantee securities account of refinancing and a securities delivery account of refinancing in a securities registration and settlement institution, and open a special funds account of refinancing in a commercial bank and a guarantee funds account of refinancing and a funds delivery account of refinancing in a securities registration and settlement institution separately. A securities finance company carrying out refinancing business shall get to know the basic information about the securities company, the business scope, financial status, default records, risk control capacity, etc. and shall record and keep all these matters in both written and electronic form. A securities finance company may conclude arrangements with a securities company to suspend or terminate the transaction of the refinancing securities and extend or shorten the duration of the refinancing under other special circumstances. In addition to this, the duration of a securities finance company refinancing towards a securities company shall not exceed six (6) months, starting from the date of the actual delivery of funds or securities.

A securities finance company carrying out refinancing business may collect a certain percentage of earnest money from a securities company. Such earnest money may be set off by securities, but the monetary capital shall account for not less than 15% of the due earnest money. A securities finance company shall calculate the ratio of the value of earnest money versus the debts of a securities company on a daily basis. When such ratio is below that of the maintenance margin as agreed upon, the securities finance company shall notify the securities company to make up the difference within a certain time limit until the original ratio of earnest money as agreed upon is realized.

A securities finance company carrying out refinancing business may use its personal funds and securities, funds and securities acquired via the business platform of a securities exchange, funds acquired via the business platform of a securities finance company and other legally-raised funds and securities. The securities finance company may borrow subordinated debts from shareholders or other designated investors but shall report to CSRC before doing so.

Circular on Issuing the Pilot Program for the Collection of VAT Instead of Business Tax

On November 16, 2011, the Ministry of Finance and State Administration of Taxation promulgated the Circular on Issuing the Pilot Program for the Collection of VAT Instead of Business Tax (hereinafter referred to as the Pilot Program), and put it into effect on January 1, 2012.

According to the Pilot Program, after the state of development of service industry, financial capability and tax administration conditions, etc. are taken into account, the pilot areas where the collection of VAT instead of business tax is applicable shall be those with prominent economic radiation effects and strong exemplary role in reform. The first pilot sectors shall be the transportation sector and modern service sector and other manufacturing service sectors and later include some other sectors. When conditions are ripe, some other sectors may be chosen nationwide for implementing the Pilot Program. Those pilot sectors chosen shall begin to implement the Pilot Program on January 1, 2012 and shall be subject to further improvement and expansion based on actualities.

On the basis of the current 17% standard VAT rate and 13% low VAT rate, two grades of low rates, i.e. 11% and 6%, have been covered by VAT rates. With regard to VAT on specific sectors, 17% is applicable to lease of corporeal movables, 11% is applicable to transportation and construction services, and 6% is applicable to modern services. Calculation of the tax payable by the taxpayer shall be based on the total income generated from the taxable transaction. In some sectors where payment collected or made on behalf of others abounds, the amount of payment collected or made on behalf of others may be deducted within a reasonable scope. Trade in services in importation shall be subject to the levy of VAT in the domestic link while the trade in services in exportation shall be subject to zero VAT or exempted from any tax.

On November 16, 2011, the Ministry of Finance and State Administration of Taxation promulgated the Measures for the Implementation of the Pilot Change from Business Tax to Value-Added Tax in the Transportation and Certain Modern Service Industries (hereinafter referred to as the Measures) and the Circular on the Implementation of the Pilot Change from Business Tax to Value-Added Tax in the Transportation and Certain Modern Service Industries in Shanghai (hereinafter referred to as the Circular), and put them into effect on January 1, 2012.

According to the Measures, all entities and individuals which provide transportation services and certain modern services within the territory of the People’s Republic of China are VAT payers. In connection with their taxable services, such taxpayers shall stop paying business tax and instead pay VAT in accordance with the Measures.

A taxpayer whose annual sales volume of taxable services subject to VAT exceeds the threshold prescribed by the Ministry of Finance and State Administration of Taxation shall be deemed as a general taxpayer, and otherwise it shall be deemed as a small-scale taxpayer. Any other individual whose annual sales volume of taxable services exceeds the prescribed threshold shall not be deemed as a general taxpayer. Any non-corporate entity, or any enterprise or individually-owned business that does not provide taxable services on a recurring basis may choose to pay taxes as a small-scale taxpayer.

Taxable services shall include land, water, air and pipeline transmission, as well as services of or in connection with research, development and technology, information technology, cultural innovation, logistics supports, lease of corporeal movables, attestation and consulting.

By “providing taxable services domestically”, it means that either the provider or the receiver of taxable services is located domestically. The following circumstances shall not be deemed as “providing taxable services domestically”.

(1) An overseas entity or individual provides for any domestic entity or individual the taxable services which are entirely consumed overseas.

(2) An overseas entity or individual leases to any domestic entity or individual the corporeal movables which are entirely used overseas; or

(3) The activity falls within any other circumstances defined by the Ministry of Finance and State Administration of Taxation.

The VAT rate shall be 17% in relation to lease of corporeal movables, 11% in relation to provision of transportation services, 6% in relation to provision of modern services (other than lease of corporeal movables), and zero in relation to any other taxable services defined by the Ministry of Finance and State Administration of Taxation.

In connection with taxable services provided by general taxpayers, they may choose to apply the simple tax computation process to the specific taxable services thereof which fall within the scope stipulated by the Ministry of Finance and the State Administration of Taxation, but the choice shall remain unchanged for thirty-six (36) months once it is made. In connection with taxable services provided by small-scale taxpayers, the simple tax computation process shall apply. In connection with taxable services provided domestically by an overseas entity or individual who does not have domestic business office, the withholding agent shall compute the tax payable in accordance with the following formula: tax payable = price paid by the service receiver ÷ (1+tax rate) ×tax rate.

The sales volume of the taxable services provided by an individual which does not reach the threshold of VAT is exempted from VAT; where such sales volume reaches the threshold hereof, the VAT on it shall be levied in full. However, the threshold of VAT does not apply to individual industrial and commercial households who are deemed as general taxpayers. The thresholds of VAT are computed as:

(1) Threshold for taxes levied in periods shall be for monthly sales volume of RMB 5,000 to 20,000 Yuan (inclusive).

(2) Threshold for taxes levied in instalments shall be for daily sales volume of RMB 300 to 500 Yuan (inclusive).

According to the Circular, there are thirteen (13) categories of projects that are exempted from VAT, including personal copyright transfer, provision of taxable services by the disabled, provision of pesticide spray services by airlines, provision of technical transfer, technical development and related technical consulting and other services by pilot taxpayers, etc.

There are four categories of projects entitled to the policy of “refund immediately after payment of VAT”: (1) pilot taxpayers registered in Yangshan Free Trade Port Area providing domestic goods transport, warehousing, loading and unloading and carrying services. (2) employers offering jobs to the disabled is subject to the policy of “refund immediately after payment of VAT” with a limited quota after the actual number of the disabled is computed by the competent tax authority. Thirdly, the general taxpayers among the pilot taxpayers who provide pipeline transport services may enjoy the policy of “refunding immediately after payment of VAT” for the part in excess of 3%. Fourthly, among pilot taxpayers who are approved to carry out financing and leasing services by the People’s Bank of China, China Banking Regulatory Commission, Ministry of Commerce, the general taxpayers who provide tangible personal property financing and leasing services may enjoy the policy of “refunding immediately after payment of VAT” for the part in excess of 3%.

Detailed Rules for the Implementation of Interim Regulations of the People’s Republic of China on Resource Tax

On October 28, 2011, the Ministry of Finance promulgated the Detailed Rules for the Implementation of Interim Regulations of the People’s Republic of China on Resource Tax (hereinafter referred to as the Detailed Rules), and put them into effect on November 1, 2011.

The specific rates of applicable resource tax on taxable products shall be subject to the List of Taxable Items and Tax Rates of Resource Tax as attached to these Detailed Rules.

If the sales volume of taxable products declared by a taxpayer is obviously lower without justifications, or the sales volume is zero when there is any deemed sale of taxable products, except as otherwise provided for by the Ministry of Finance and the State Administration of Taxation, the sales volume shall be determined in the following sequence: (1) determined according to the average sales price of the same kind of products of the taxpayer during the latest period; (2)determined according to the average sales price of the same kind of products of other taxpayers during the latest period; or (3) determined according to the composite taxable value as calculated below:
composite taxable value = cost × (1 + profit-cost ratio) / (1 - tax rate)

When a taxpayer cannot provide the accurate sales volume of taxable products, the sales volume for assessment of resource tax shall be the output of taxable products or an amount calculated at a conversion rate determined by the competent tax authority.

The Detailed Rules also stipulate the time when the obligation of a taxpayer to pay resource tax arises.

Detailed Rules of Shanghai Municipality for the Implementation of the Regulation on the Expropriation of Housing on State-owned Land and Compensation

On October 19, 2011, Shanghai Municipality promulgated the Detailed Rules for the Implementation of the Regulation on the Expropriation of Housing on State-owned Land and Compensation (hereinafter referred to as the Detailed Rules), and put them into effect on the same day.

The Detailed Rules are applicable to the expropriation of housing on state-owned land and compensation in Shanghai. The housing expropriation department may engage a housing expropriation firm to undertake the specific work on housing expropriation and compensation on a non-profit basis. The housing expropriation department then shall supervise the housing expropriation and compensation work carried out by the housing expropriation firm within the authorized scope, and shall be liable for any consequence caused by the housing expropriation firm.

The people’s government may make housing expropriation decisions under the following circumstances (where there are over 50 housing owners or public housing owners, the decisions shall be made at the executive meetings of the people’s government at the district/county level):

(1) necessary for national defense and foreign affairs;

(2) necessary for the construction of energy, transportation, water and other infrastructures as organized and implemented by the government;

(3) necessary for a public cause such as science and technology, education, culture, health, sports, environment and resource protection, disaster prevention and mitigation, protection of cultural relics, social welfare or municipal utilities as organized and implemented by the government;

(4) necessary for the construction of a social security housing project as organized and implemented by the government;

(5) necessary for the rebuilding of an old urban area where dilapidated housing concentrates and infrastructure lags behind as organized and implemented by the government;

(6) necessary for any other public interest as prescribed by a law or administrative regulation.

An owner against a housing expropriation decision made by the people’s government at the city or county level may apply for administrative reconsideration or file an administrative lawsuit according to the law.

After the scope of housing expropriation is determined, acts which lead to an improper increase of compensation fees, such as new construction, expansion or reconstruction of a housing building or a change of the use of a housing building within the scope of expropriation, shall be prohibited. For such acts in violation of the relevant provisions, no compensation shall be made.

An compensation agreement for housing expropriation shall be signed by the authority in charge of housing expropriation and the owner of the housing to be expropriated and the lessee of the public housing; the value of the housing to be expropriated shall be determined by a qualified real estate price evaluation institution in accordance with the evaluation measures for housing expropriation.

An owner may choose either monetary compensation or exchange of titles. Before a decision on housing expropriation is made, the compensation fees for expropriation shall be ready in full amount, deposited in a special purpose account and used for the designated purpose only. Any housing used for exchange of titles shall comply with the State Quality Safety Standards and the requirements for license of the housing delivery in Shanghai, and shall be free of any dispute in property right and free of any encumbrance. The Detailed Rules have specified the compensation and subsidy standards for housing expropriation. Therefore, the standards for compensating any expropriated housing owner and public housing lessee for their production or business interruption losses resulting from the housing expropriation shall be fixed at 10% of the evaluated market price of the expropriated housing.

Interim Measures of Fujian Province for the Administration of Equity Investment Enterprises

On October 17, 2011, the General Office of the People’s Government of Fujian Province forwarded the Interim Measures of Fujian Province for the Administration of Equity Investment Enterprises (hereinafter referred to as the Interim Measures) formulated by Fujian Development and Reform Commission and Fujian Administration for Industry & Commerce, and put them into effect on the same day.

The Interim Measures are applicable to venture capital investment enterprises, foreign-invested venture capital investment enterprises and their management enterprises and also applicable to other equity investment enterprises and their management enterprises registered within the administrative regions of Fujian Province. The investment field of equity investment enterprises is limited to the equities of non-listed enterprises, and the idle funds in the equity investment process shall only be deposited in banks or used for purchasing fixed income investment products such as national debts. Equity investment enterprises shall not provide any security for any enterprise other than those enterprises as investees.

According to the Interim Measures, any equity investment enterprise and management enterprise shall be registered at the administration for industry & commerce for establishment. Any foreign-invested equity investment enterprise and management enterprise, after being examined and approved by the department of foreign economic relations and trade, shall apply to the administration for industry & commerce for establishment in accordance with the relevant regulations; any foreign-invested partnership equity investment enterprise and its partnership management enterprise shall register at the administration for industry & commerce by referencing the opinions of the development and reform commission at the same level. Any equity investment enterprise registered upon the strength of the Interim Measures shall, within three (3) months after completion of the registration at the administration for industry & commerce, file to the development and reform commission for record and therefore accept record administration. Where an equity investment enterprise subjects itself to entrusted administration, the management enterprise accepting such entrustment shall apply for incidental filing formalities. The provincial department and reform commission shall grant the filing formalities to the equity investment enterprise if no objections are raised during the review.

The registered capital or the amount of contributions by all the partners of any equity investment enterprise shall be not less than RMB 30,000,000 Yuan, and the initial payment shall not be less than RMB 10,000,000 Yuan. The registered capital or the amount of contributions by all the partners of any management enterprise shall not be less than RMB 10,000,000 Yuan, and the initial payment shall not be less than RMB 5,000,000 Yuan. The management enterprise shall have at least three (3) senior management personnel with no less than two (2)-year experience in equity investment or other related business experience, and there shall be at least one (1) management personnel with no less than five (5)-year experience in equity investment or economic management experience.

The monetary assets used by any equity investment enterprises in equity investment shall be subject to the trusteeship of a commercial bank in Fujian Province, for which a trusteeship agreement between the parties concerned shall be concluded.

Legal Practices

Allocation of the Burden of Proof and Identification of “New Product” in Disputes over Process Patent Infringements

A patent of invention may be simplified as product patent and process patent. The process patent, including chemical process patent, mechanical process patent and technological process patent, etc., refers to the operational method or technical process created for producing certain products or solving certain technical problems. The allocation of the burden of proof in litigations of process patent infringements is much more complicated than those of product patent infringements, because for process patent infringements, the content of the process patent, i.e. the product directly generated from the process patent shall be taken into account of the allocation of the burden of proof. In the following parts, the author will make a brief analysis on some key points covered by the allocation of the burden of proof in disputes over process patent infringements.

As a matter of fact, the Patent Law of the PRC and the related judicial interpretations have made different provisions on the allocation of the burden of proof in litigations of process patent infringements. The Patent Law promulgated in 1984 stipulated: “when an infringement dispute arises, if the patented invention is a manufacturing process for a product, the unit or individual manufacturing the similar product shall furnish proof of its manufacturing process.” In the Patent Law amended in 1992, the foregoing stipulation was amended as “when any infringement dispute arises, if the patent for invention is a process for manufacturing a new product, any entity or individual manufacturing the identical product shall furnish proof of the process used in manufacturing its product.” (Effective on January 1, 1993) And the Patent Law amended in 2000 further specified the provision: “where any dispute over infringement of a patent right is involved in a patent for invention for the manufacturing process of a new product, any entity or individual manufacturing the identical product shall provide proof on the difference of its own process used in manufacturing its product from the patented process.” We have got enlightened on the foregoing provisions specified in different years that the Patent Law amended in 1992 made significant adjustments concerning the allocation of the burden of proof in litigations of process patent infringements and the Patent Law amended thereafter upheld the allocation of the burden of proof as defined by the former. Based on the principle that laws shall not be retroactive, the allocation of the burden of proof in litigations of process patent infringements may be determined according to the following standards. Firstly, where there is a litigation of an alleged infringement upon the patent for invention for the manufacturing process which was applied for before 1993, the burden of proof, in accordance with the Patent Law formulated in 1984, shall be uniformly reversed. Secondly, for the litigation of an alleged infringement upon the process patent which was applied for after 1993, the reverse burden of proof shall apply only when the product generated from such process patent is a new product. Of course, the reverse burden of proof as described herein is fundamentally different from the transferred burden of proof; the reverse burden of proof refers to the fact that the plaintiff may not provide full evidence to prove its allegation from the very beginning when the defendant has to provide evidence to rebut the plaintiff’s allegation, and otherwise the defendant has to be liable for any adverse effect caused by its inability to bear the burden of proof.

The critical point of determining the allocation of the burden of proof in litigations of infringements upon process patents applied for after 1993 lies in whether the product generated from such process patent is a “new” product, and the reverse burden of proof arises on only when such product is recognized as “new”. The author believes that the following points should be taken into consideration when determining whether such product is “new”.

1. The Burden of Proof in Respect of the New Product

Based on the principle of “the burden of proof lies upon him who affirms”, if the plaintiff alleges that the new product manufactured with its process patent is new, he is obliged to bear the burden of proving such allegation; if the plaintiff is unable to bear such burden of proof, then the allocation of the burden of proof which is applicable to the litigation of general process patent infringements shall apply, and the plaintiff has to prove that the process adopted by the defendant to manufacture its product has fallen under the plaintiff’s scope of patent protection.

2. The Product Manufactured with the Process Patent Must Be “Directly Obtained Product”

When determining whether a process patent is the one used for manufacturing the new product, the product directly obtained from such patented process shall be deemed as the grounds. The so-called product directly obtained from the patented process is the original product acquired by the patented process, excluding the follow-up product obtained from further processing of such original product. In the litigation of the patent infringement dispute [No.84 (2009) Min Ti Zi] between Zhang Xitian and Ouyi Company, the Supreme People’s Court specifies the foregoing principle and points out that the follow-up product obtained from further processing of the directly obtained product will not be entitled to any legal protection.

3. How to Define the “New Product”?

It is of great importance to define the word “new”. The Patent Law of the PRC and Detailed Rules for the Implementation of the Patent Law do not have any further definitions of the “new product”, and the academic circles and judicial practices have different definitions of the “new product”. In this connection, the Interpretation of the Supreme People’s Court on Several Issues concerning the Application of Law in the Trial of Patent Infringement Dispute Cases promulgated on December 28, 2009 defined the “new product” as: where a product or a technical solution for manufacturing a product is known to the public at home and abroad before the patent application date, the people’s court shall determine that such a product is not a new product as provided for in paragraph 1 of Article 61 of the Patent Law. It can be concluded from such interpretation that the essence of “new” is that the process patent is not known to domestic and overseas public before it is applied for, so in a sense the “new” mentioned here is similar with the “novelty” standard as required for the patent at the moment of patent-grant. However, the author believes that the difficulty imposed upon the burden of proof is huge since the burden of proof in respect of the new product is “negative”. Thus it is not appropriate for the court to be too strict with the patentee’s burden of proof in real practices, and the plaintiff’s burden of proof can be deemed as fulfilled as long as it points out that such technology is a new manufacturing process, or such product is entitled to the tax preferential policies enjoyed by the new product, or when such product enjoys the preferential tax policies for new products or obtains the new product certificate (such as the new drug certificate) issued by the State.

From the above, there are certain preconditions for the alleged infringer to bear the burden of proving that its product manufacturing process is different from the patented process in the dispute over the infringement upon the patent of the new product manufacturing process. Firstly, the patentee can prove that the product manufactured with the patented process is the new product and the product manufactured by the alleged infringer is identical with such new product. Secondly, the product directly manufactured with the patented process shall be taken as the basis for determining whether a process patent is the one with which the new product is manufactured. Thirdly, the so-called product directly manufactured with the patented process is the original product obtained therefrom, excluding any follow-up product obtained from processing of such original product. Only when the above preconditions are all satisfied, the reverse burden of proof is then applicable and the defendant shall be required to bear the burden of proving that the manufacturing process it adopts is different from the patented process of the plaintiff.

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

A Preview of Cross-border Direct Investments in RMB

On October 12, 2011, the Ministry of Finance promulgated the Circular on Issues concerning the Cross-border Direct Investment in RMB (hereinafter referred to as the Circular of MOFCOM), and the People’s Bank of China on the following day promulgated the Administrative Measures for the Settlement of Foreign Direct Investments in RMB (hereinafter referred to as the Measures for Settlement) with provisions on the cross-border direct investments in RMB and RMB settlement. The promulgation of the above-mentioned two regulations can be deemed as another milestone breakthrough in the globalization of RMB, following the promulgation of the Administrative Measures for the Trial RMB Settlement of Cross-border Trade in July 2009. According to the aforementioned two regulations, cross-border direct investments in RMB at present shall be carried out in accordance with the following provisions.

I. Legality of the Sources of Overseas RMB

The Circular of MOFCOM allows all foreign investors (including Hong Kong, Macao and Taiwan investors) to conduct cross-border direct investments in China with legally obtained overseas RMB and foreign investors have to prove the legality of the sources of overseas RMB when applying to the Ministry of Commerce for approval. Such legal sources of overseas RMB include:

(1) RMB funds obtained by foreign investors from cross-border trade RMB settlement.

(2) RMB profits and RMB funds obtained from share transfer, capital reduction, liquidation and advance recovery of investment, which are legally obtained by foreign investors from within China and remitted out of China.

(3) RMB funds legally obtained by foreign investors from outside China, including but not limited to RMB funds obtained by such means as an overseas issuance of RMB-denominated bonds or stocks.

It shall be highlighted that foreign investors conducting direct investments with the foreign RMB profits obtained from the foreign-invested enterprise in China which are not yet remitted outward and RMB obtained from share transfer, capital reduction, liquidation and advance recovery of investment shall not reference the relevant provisions on direct investments in overseas RMB.

II. The provisions on the administration of foreign investment are applicable to cross-border direct investments in RMB

Cross-border direct investments in RMB have saved the procedures for foreign exchange settlement required for foreign exchange investments, but cross-border direct investments in RMB in essence fall under the scope of foreign investments. Therefore, cross-border direct investment in RMB and reinvestment of the foreign-funded enterprise as investee shall meet the requirements of relevant laws and regulations on foreign investment and other relevant provisions, and comply with the national industrial policies on foreign investment and relevant provisions on the security review of mergers and acquisitions by foreign investors and the anti-monopoly examination. The RMB funds remitted inward through cross-border direct investments in RMB, except for participating in the private placement of shares of a domestic listed company or the transfer of shares of a domestic listed company under an agreement, shall not be made directly or indirectly in negotiable securities and financial derivatives, nor be used for making entrusted loans, within China.

III. Examination and Approval Institution and Authority

The Circular of the Ministry of Commerce specifies the procedures for examining and approving cross-border direct investments in RMB. To simplify the procedures, cross- border direct investments in RMB generally are subject to the examination and approval by the local competent commerce department. However, where a cross-border direct investment in RMB falls under any of the following circumstances, it shall be submitted to the Ministry of Commerce for examination by the provincial commerce department.

(1) Investment of RMB funds of 300 million Yuan or more;

(2) Investment in an industry such as financing guarantee, financing leasing, microfinance or auction;

(3) Investment in a foreign-funded investment company, a foreign-funded venture capital enterprise or a foreign-funded equity investment enterprise;

(4) Investment in an industry under the macroeconomic control of the State, such as cement, iron and steel, electrolytic aluminum and shipbuilding.

It is not difficult to understand, for an experimental provision, the Ministry of Commerce was indeed cautious about the system of the examination and approval authority. At present, the standards set by central authorities for examining and approving cross-border direct investments in RMB are still lower than the standards for examining and approving cross-border foreign exchange investments.

It should be noted that, in accordance with the relevant regulations of the State Council, foreign-invested partnership enterprises do not need to subject themselves to the examination and approval of the commerce department. Therefore, an investor seeking to set up a domestic partnership enterprise with overseas RMB does not need to subject itself to the approval of the commerce department.

IV. Settlement of cross-border direct investments in RMB

Any foreign-invested enterprise receiving cross-border direct investments shall register in the people’s bank of the locality and open a RMB settlement account. The RMB registered capital remitted inward and RMB contributions subscribed by overseas investors shall be subject to the principle “special purpose for special account”; in other words, such capital and contributions shall be deposited in a special savings account for RMB capital and any receipt and payment in cash shall not be handled through such account. The RMB loans and foreign currency loans borrowed by foreign-invested enterprises from their overseas shareholders, associated enterprises inside the group and overseas financial institutions shall be computed with the total amount of both as a whole. Foreign-invested enterprises shall apply to open a general savings RMB account for the special purpose of depositing RMB funds borrowed from overseas.

To sum up, the two regulations on cross-border direct investments in RMB by the Ministry of Finance and the People’s Bank of China have in general provided clearer guidelines for foreign investors to conduct cross-border direct investments in RMB. Cross-border direct investments in RMB save the complicated procedures for foreign-invested enterprises to convert the foreign currency into RMB for sake of capital funds and minimize the adverse tax impacts brought by exchange gains or losses, and in the meantime provide more effective ways for the RMB held by foreign investors to be utilized. In the days to come, we believe, cross-border direct investments in RMB will gain great momentum, which is a significant advance in RMB’s steps towards globalization.

(The author’s contact information:chambers@hllawyers.com, rickylv@hllawyers.com)

On Hearing the Litigation of “Take A Paid One” Dispute

In recent years, courts in business areas are accepting an awful lot of cases of “take a paid one” disputes. In 2010, the People’s Court in Jing’an District was reported to have accepted cases of “take a paid one” disputes twice the number of the previous year, and among these cases where nearly 90% plaintiffs were anti-counterfeit professionals, 98% were ended up with meditation and out-of-court settlement. (A08 Edition, Shanghai Legal Newspaper, March 11, 2011)

The so-called case of “take a paid one” dispute refers to the plaintiff holding the merchant liable for compensations, i.e. claiming for “take a paid one”, by reason that the Chinese and/or English mark on the merchant’s product is not true to the fact, etc. The dispute between the plaintiff and the merchant highlights two aspects. Firstly, did the plaintiff purchase the defect product even if it was fully aware of the defect? In other words, the merchant shall prove that the plaintiff (buyer) “knowingly” purchased the defect product. Secondly, did the act of the merchant selling the defect product constitute a fraud?

It is difficult to prove the fact of “knowingly purchase the faked product”.

Take the first aspect for instance, despite the high frequency of “take a paid one” disputes, the same nature of such cases, the same reason for “take a paid one” claims, the same attorney for the parties involved and the same content of pleadings, it is still a tough task for the merchant to provide sufficient evidence to prove that the anti-counterfeit professional (buyer) has knowingly purchased the defect product, thus the merchant’s defence can hardly get any support from the court. In the case of the purchase contract dispute between Barbie (Shanghai) Commercial Co., Ltd. and Yang Xiaoguang [No.548 (2010) Hu Yi Zhong Min Yi (Min) Zhong Zi], the court found that, despite the fact that the pleading was drafted by an outsider Yan X X who appealed many times before to the court with similar causes and details of like cases, the identity of Yang Xiaoguang as a consumer could not simply be denied accordingly. Also in the case of the purchase contract dispute between Liu X X and X X (Shanghai) Commercial Co., Ltd., the court of second instance found that, the number of lawsuits instituted by Liu X X actually bore no direct relation to the case right in dispute, and the former lawsuits could neither sufficiently justify the denial of the identity of Liu X X as a consumer nor justify the disclaimer of the merchant for its fraudulent act in selling the product.

The key as to whether the merchant’s act constitutes fraud lies in whether the merchant is “intentional” or not.

Since it is quite difficult to affirm the first aspect, the grounds for the merchant’s disclaimer in the “take a paid one” dispute then lies in the second aspect.

Article 49 of the Law on the Protection of Consumer Rights and Interests stipulates that business operators engaged in fraudulent acts in supplying commodities or services shall be liable for “take a paid one” as compensations to the victims. However, there is not any definition of the “fraudulent act” under the Law on the Protection of Consumer Rights and Interests or Article 113 of the Contract Law. The definition of “fraudulent act” given by Article 68 of the Opinions of the Supreme People’s Court on Several Issues concerning the Implementation of the General Principles of the Civil Law of the People’s Republic of China (For Trial Implementation) is “in case any party purposely conveys any false information to the other party, or purposely disguises any fact so as to induce the other party into making any false declaration of will, such act shall be determined as a fraudulent act”. Therefore, we may conclude that “purposely” is an indispensable essential element of “fraudulent act”. However, before we can rest ourselves assured, we have to answer the question implied in the second aspect, i.e. is the definition of “fraudulent act” under the Civil Law still applicable to the “fraudulent act” under the Law on the Protection of Consumer Rights and Interests? In other words, is the essential element of “fraudulent act” still “purposely”? Indeed, this is a dispute-stirring problem that bothers judicial practices.

In the two cases of “take a paid one” disputes where Yan Jiaming sued Xujiahui Pacific Department Store Co., Ltd., and Yan Jiaming sued Hualian Shinkong Place (Beijing) Co., Ltd., Shanghai No. 1 Intermediate People’s Court and People’s Court in Chaoyang District, Beijing both found that, as the direct seller against consumers, the merchant who failed to perform the corresponding obligation of the for-sale goods examination so as to cause the inconsistency between the marked condition and the real condition of such goods, shall be deemed to have constituted fraudulent act. In the above two rulings, the courts respectively in Shanghai and Beijing both found that the fraudulent act shall be deemed to have been constituted once the merchant faulted to sell defect products to consumers, regardless of whether it was intentional or not. However, when the People’s Court of Xuzhou City was hearing the case of “Zhang Zhiqiang suing SUNING Appliance in Xuzhou City for the latter’s infringement upon consumer rights and interests” [Issue 10 (2006) of the Supreme People’s Court Gazette], the Court cited Article 49 of the Law on the Protection of Consumer Rights and Interests to define the fraudulent act in accordance with the General Principles of the Civil Law, i.e. fraudulent act must be based on “intentional(ly)” in order to be affirmed. Not long ago, the author acted as an attorney for another case of “take a paid one” dispute heard by the People’s Court in Chaoyang District, Beijing, and learned that the Court also took “intentional(ly)” as the grounds for the constitution of fraudulent act.

As known, the Law on the Protection of Consumer Rights and Interests is a special law while General Principles of the Civil Law is a common law which usually supersedes the special law in respect of a certain legal concept definition provided that the special law does not have a definition of such concept. This is the fundamental legal principle which shall not be disobeyed simply on ground that the Law on the Protection of Consumer Rights and Interests have special protective provisions for consumers. Otherwise, in legal practices, general provisions of the common law might be ignored even if some legal concepts hereunder do not have any specific definitions under the special law. In this connection, Professor Liang Huixing, a well-known civil law scholar in China, shows his explicit support.

Where “intentional(ly)” is deemed as an essential element of fraudulent act under the Law on the Protection of Consumer Rights and Interests, the focus will be shifted to the second aspect as to who shall bear the burden of proving the “intentional(ly)” of the merchant.

In real practices, when a court decides on whether the merchant’s fraud is based on “intentional(ly)”, it often turns to the mode of reverse burden of proof, i.e. the merchant is required to prove that it does not have any “intention” of fraud in its fault as proved by consumers. Take the ruling of Shanghai Pudong New Area People’s Court [No.27888 (2010) Pu Min Yi (Min) Chu Zi] for example, the defendant was exempted from the “take a paid one” compensation as it sufficiently proved that it neither “intentionally” concealed the real conditions of the product nor “intentionally” told consumers false information about the product.

From the author’s experiences, in the case of “production place wrongly marked” dispute, if the seller is to prove that it does not harbor any “intention” to deceive consumers, it shall do this by clarifying the reason for having wrongly marked the production place and explaining the real conditions of the product with the production place wrongly marked (are products with wrong marks coexisting with those with right marks in the market at present?). Besides, the merchant shall demonstrate that it has already performed the reasonable duty of care for the products with production place wrongly marked, etc.

Anyway, the merchant shall be cautious about the “take a paid one” compensation claim and demonstrate to the court that it never conducts such act as “intentionally” providing false information to consumers and “knowingly” concealing product defects, in order to minimize the possibility of the plaintiff’s claim for “take a paid one” compensation being supported by the court.