Haworth & Lexon Law Newsletter (201204)-Law Bridge-Shanghai Law Firm/Lawyer

Haworth & Lexon Law Newsletter
No.4 2012 (Total:No.122) June 8, 2012
Edited by Haworth & Lexon

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 News of Haworth & Lexon

Haworth & Lexon Representing Client Won an Arbitration Case in Hong Kong International Arbitration Center

Recently, Chambers Yang, Senior Attorney and Partner of Haworth & Lexon, received a final arbitration award from Hong Kong International Arbitration Center whereby the arbitration request filed by Mr. Yang on behalf of the claimant in an international trade dispute arbitration case was fully supported by the arbitration tribunal.

In 2008, a Singaporean silicon materials company concluded a sale and purchase contract with a Korean silicon materials company. The Singaporean company prepaid all the monies for the goods pursuant to the contract but the Korean company failed in performance thereof. Through negotiations, the Singaporean company agreed that the Korean company might replace with other silicon materials but the Korean company still defaulted in complete performance of the contract. The parties then reached an agreement on refund of the remaining fund prepaid by the Singaporean company while the Korean company failed to perform such refund agreement. After issuance of several letters demanding payment but without result, the Singaporean company decided to entrust Haworth & Lexon to file an application for arbitration.

Based on the agreements entered into between the two parties in the contract, Senior Attorney Chambers Yang with his team represented the client to serve a notice of arbitration application to Hong Kong International Arbitration Center in September 2010, launching the arbitration proceedings. After nearly 20 months, Hong Kong International Arbitration Center made a final arbitration award which fully supports the claims filed by the claimant.

Legal Updates Express

The Fifth Supplement to Administrative Measures for Foreign Investment in the Commercial Sector

On April 10, 2012, the Ministry of Commerce promulgated the Fifth Supplement to Administrative Measures for Foreign Investment in the Commercial Sector (hereinafter referred to as the Supplement) to make supplementary provisions on the Administrative Measures for Foreign Investment in the Commercial Sector

Pursuant to the Supplement, where a service supplier from Hong Kong or Macau opens more than 30 stores accumulatively in the Mainland to sell foods of different kinds and brands from different suppliers, such service supplier is allowed to operate in a manner of wholly-foreign invested under a pilot scheme, provided that such operation is confined within Guangdong Province

For other overseas investors who open more than 30 stores accumulatively in the Mainland, if such investors deal with foods which are of different brands and from different suppliers, the proportion of capital contribution by the overseas investors shall not exceed 49%.

Notice on Improving Administration over Record-filing Procedures of Foreign-invested Venture Capital Enterprises by the Ministry of Commerce

On May 7, 2012, the Ministry of Commerce promulgated the Notice on Improving Administration over Record-filing Procedures of Foreign-invested Venture Capital Enterprises (Shang Zi Han [2012] No. 269, hereinafter referred to as the Notice). The Notice further provides for administration over the record-filing procedures of foreign-invested venture capital enterprises.

As required by the Notice, in examining and approving the establishment of foreign-invested venture capital enterprises (hereinafter referred to as the ��Venture Capital Enterprises��), all the competent commerce departments at the provincial level shall immediately complete record-filing procedures with the Ministry of Commerce via the management system for examination and approval of foreign-invested enterprises. Venture Capital Enterprises already established shall go through the record-filing procedures as required by the Administrative Measures on Foreign-invested Venture Capital Enterprises (hereinafter referred to as ��Administrative Measures��) and the Notice on Issues related to Approval of Foreign-invested Venture Capital Enterprises and Foreign-invested Venture Capital Management Enterprises (hereinafter referred to as ��Record-filing Notice��).

The Notice further specifies that Venture Capital Enterprises included in the record-filing list may be entitled to state policies, effect changes and carry out domestic investment. With regard to Venture Capital Enterprises that are not included in the list released at the website of the Ministry of Commerce, the competent commence departments of all regions shall not handle the procedures for change in such enterprises, and shall not permit such enterprises to carry out domestic investment.

In the meantime, the Notice also provides for the record-filing of the investment acts made by the Venture Capital Enterprises. Where a Venture Capital Enterprise invests in industries encouraged or permitted by the Catalogue of Industries for Guiding Foreign Investment, the relevant competent commerce department shall handle the record-filing procedures for the enterprise invested by the Venture Capital Enterprises pursuant to Article 40 of the Administrative Measures, and shall, within five working days upon receipt of the record-filing application materials, complete the record-filing procedures based on the record-filing list released at the website of the Ministry of Commerce, and issue the record-filing review opinion form and grant approval certificate to the enterprise invested by the Venture Capital Enterprises.

Overseas investors are encouraged to establish Venture Capital Enterprises, or to increase capital to Venture Capital Enterprises, by making contribution with offshore Renminbi (hereinafter referred to as ��RMB��), and shall go through relevant procedures in accordance with the Notice of the Ministry of Commerce on Issues Concerning Cross-border Direct RMB Investment (Shang Zi Han [2011] No. 889). Venture Capital Enterprises that make RMB investment in the industries encouraged or permitted by the Catalogue of Industries for Guiding Foreign Investment shall go through the record-filing procedures by referring to Article 3 of this Notice. Those that make RMB investment in restricted industries shall go through the record-filing procedures in accordance with relevant provisions of Article 41 of the Administrative Measures.

Notice on Business Nature of Medical Service Institutions Established by Private Capital by the Ministry of Health

On April 13, 2012, the Ministry of Health promulgated the Notice on Business Nature of Medical Service Institutions Established by Private Capital (hereinafter referred to as the Notice).

Pursuant to the Notice, investors with private capital may apply for establishment of profit-making or non-profit medical service institutions on their own discretion according to business purposes. The provision that ��urban private clinics, joint stock medical service institutions, medical service institutions adopting a joint-stock cooperative system, and medical institutions established in the form of Sino-foreign equity or contractual joint ventures shall generally be determined as profit-making medical institutions�� as prescribed in the Implementing Opinions on Classified Management of Urban Medical Service Institutions jointly issued in 2000 by the Ministry of Health, the State Administration of Traditional Chinese Medicine, the Ministry of Finance and the State Planning Commission shall no longer be applicable. In addition, the Notice specifies on change of business nature of medical service institutions established by private capital and that relevant administrative regulations would be otherwise formulated for such change.

Provisions on Certain Issues Concerning Application of Laws in Hearing Cases Involving Civil Disputes Arising out of Monopolistic Acts

On May 8, 2012, the Supreme People��s Court promulgated the Provisions on Certain Issues Concerning Application of Laws in Hearing Cases Involving Civil Disputes Arising out of Monopolistic Acts (effective as of June 1, 2012, hereinafter referred to as the Provisions) to clarify such issues as filing of a case, case acceptance, jurisdiction, allocation of burden of proof, litigation evidence, civil liability and limitation of legal proceedings with regard to the civil dispute cases arising out of monopolistic acts.

1. Categories of Civil Dispute Cases

Article 1 of the Provisions specifies the categories of cases involving civil disputes arising out of monopolistic acts as follows: ��for purposes of these Provisions, cases involving civil disputes arising out of monopolistic acts refer to the civil lawsuits filed with the people��s courts by natural persons, legal persons or other organizations that suffer losses due to monopolistic acts or that are involved in disputes due to the violation of the contract or articles of association of industry association and etc. in Anti-monopoly Law.��

2. Methods of filing lawsuits

Pursuant to Article 2 of the Provisions, the plaintiff may either directly file a civil lawsuit with a people��s court or file a civil lawsuit with the people��s court after the decision made by the anti-monopoly enforcement authority on the monopolistic acts has come into effect. The people��s court shall accept such lawsuit filed, provided that such filing is in compliance with requirements for case acceptance.

In light of these Provisions, a plaintiff may directly file a civil lawsuit, ��decision made by the anti-monopolistic authority that the acts of concerned parties constitute monopolistic act has become legally effective�� is not a precondition for the plaintiff to file a civil lawsuit.

3. Jurisdiction of civil dispute cases arising out of monopolistic acts

Pursuant to the Provisions, intermediate people��s courts sitting at the cities where the people��s government at the level of province, autonomous regions are located and cities separately listed under the State economic plan as well as intermediate people��s courts designated by the Supreme People��s Court shall be the court of first instance to hear the civil cases of dispute arising out of monopolistic acts. Basic people��s court could, with approval from the Supreme People��s Court, serve as court of first instance to hear civil cases of dispute arising out of monopolistic acts.

4. Provisions on burden of proof

Article 7 and Article 10 of the Provisions deal with allocation of burden of proof between the plaintiff and the defendant in respect of the civil cases of dispute arising out of monopolistic acts, which specifies as follows:

(1) Where the monopolistic act falls within the scope of any type of the monopoly agreements as prescribed in Items (1) to (5) of Clause 1 of Article 13 of the Anti-monopoly Law, the defendant concerned shall bear the burden of proof to establish that the relevant agreement has no effect of excluding or restraining competition.

(2) Where the monopolistic act falls within the scope of abuse of dorminance as prescribed under Clause 1 of Article 17 of the Anti-monopoly Law, the plaintiff concerned shall bear the burden of proof to establish that the defendant is of dominance in relevant market and has abused its dominance in the market. In the event the defendant defenses on ground that its act is of justification, the defendant shall bear the burden of proof thereof.

(3) Where the monopolistic act falls within the scope of circumstance whereby act of abuse of dominance in market is made by public utility enterprises or other business operators with lawful exclusive status, the relevant people��s court may determine that the defendant is of dominance in relevant market according to specific circumstances of the market structure and competition situations, unless there is sufficient evidence to overturn such determination.

(4) A plaintiff to a case may use information publicly disclosed by the defendant��s as evidence to prove the latter��s of dominance in the market. The relevant people��s court may determine that the defendant is dominant in the relevant market if the information disclosed by the defendant so proves, unless there is sufficient evidence to overthrow the determination.

It should be highlighted that the Provisions acknowledge the efficacity of the defendant��s publicly disclosed information as evidence, stipulating that ��a plaintiff to a case may use the defendant��s publicly disclosed information as evidence to prove the latter��s market dominant position. The relevant people��s court may determine that the defendant is dominant in the relevant market if the information disclosed so proves, unless there is sufficient evidence to the contrary��.

5. Expert witness and professional investigation report

In consideration of the extraordinary nature of the civil cases of disputes arising out of monopolistic acts, the Provisions allow admission of expert witness engaged by the concerned party to explain specialized issues involved in the case.

In the meantime, ��the parties to a case may apply with the relevant people��s court to entrust professional institutions or professionals with preparation of market survey or economic analysis reports on specialized issues involved in the case��, the people��s court may refer to the provisions on identification conclusions prescribed in the Civil Procedure Law and relevant judicial interpretations to review and judge the foregoing market survey or economic analysis reports.

Interim Measures for Administration on Registration of Property Rights of State-Funded Enterprises

On April 20, 2012, the Ministry of State-owned Assets Supervision and Administration Commission of the State Council issued the Interim Measures for Administration on Registration of Property Rights of State-Funded Enterprises (effective as of June 1, 2012, hereinafter referred to as the Interim Measures). The Interim Measures regulate the administration on registration of property rights of State-funded enterprises.

For purposes of the Interim Measures, registration of property rights of State-funded enterprises shall mean registration made by authority in charge of state-owned assets supervision on property rights and distribution thereof of the state-funded enterprises as such are authorized by relevant people��s government to be administered by the foregoing authority in charge of state-owned assets supervision.

1. Scope of the property rights subject to registration

Pursuant to the Interim Measures, State-funded enterprises, all domestic and overseas enterprises at all levels over which the State-funded enterprises have effective control (excluding companies with state-owned capital) and their invested enterprises (hereinafter referred to as ��Enterprises��) shall be included in the scope of enterprises subject to property rights registration. The institutions subordinate to State-funded enterprises shall be regarded as subsidiaries of the State-funded enterprises when conducting the property rights registration.

For the purposes of the preceding paragraph, having effective control shall mean that the State-funded enterprise has a total direct or indirect shareholding ratio exceeding 50% or is the largest shareholder even if such ratio does not exceed 50%, and can effectively control the acts of the enterprise through the shareholder agreement, the articles of association, the board resolution or other agreements and arrangements.

2. Exemptions from the property rights registration

As prescribed by the Interim Measures, the following equity interest held by the Enterprises is exempted from property right registration:

��1�� The equity interest of public listing companies purchased from secondary market for the purpose of profiting from price difference;

��2�� Other equity interest held for purpose of selling out in the near future (within one year).

3. Procedures of the property rights registration

��1�� Application for property rights registration before the industrial and commercial registration

Pursuant to the Interim Measures, in case of any economic acts in relation to the property rights registration by the Enterprises, application for the property rights registration of such acts shall be made within 20 working days after completion of such economic acts but prior to going through the registration with administration of industry and commerce. In the event the Enterprises are cancelled of legal person status, property right registration shall be made in a timely manner after completion of cancellation of registration with the administration of industry and commerce.

��2�� Approval on registration with the State-owned assets supervision and administration authority

The State-owned assets supervision and administration authority shall complete registration of enterprise that meets the registration requirements within 10 working days after the information for property rights registration is submitted by the State-funded enterprise.

��3�� Submission after completion of registration with administration of industry and commerce

An enterprise shall submit the business license for enterprise with legal person or the form of change in its registration with relevant administrative authority for industry and commerce to the State-owned assets supervision and administration authority within 10 working days after completing the registration formalities with the relevant administrative authority for industry and commerce.

Notice on Issues Concerning Strict Control and Regulation over Transfer of Mining Rights by Agreement by the Ministry of Land and Resources

On May 15, 2012, the Ministry of Land and Resources promulgated the Notice on Issues Concerning Strict Control and Regulation over Transfer of Mining Rights by Agreement (Guo Tu Zi Fa [2012] No. 80, hereinafter referred to as the Notice). The term of validity of the Notice is five years. The Notice is formulated with an aim to strictly control and regulate transfer of mining rights by agreement.

1. Circumstances where exploration rights and exploitation rights are permitted to be transferred by agreement

As required by the Notice, where investors of mining survey or exploitation projects have been determined and a collective review procedure by the authority in charge of examining and approving mining transfer by agreement has been conducted, the exploration rights and exploitation rights are permitted to be transferred by agreement upon on occurrence of any of the following:

��1��Development projects for key mineral resources approved by the State Council and mineral sites providing supporting resources for key construction projects approved by the state council;

��2��Development projects for mineral resources with large and medium-sized reserves approved by the people��s governments at the provincial level;

��3��Exploring projects for alternative resources for old mines (crisis mines) included in special national programs;

��4��Area adjacent to area where exploitation rights have been set but that needs to be integrated or needs utilization of original production systems to expand the scope of survey and exploitation;

��5��Area where exploration rights have been set but such area requires integration or expansion of survey due to overall survey plan, and the foregoing requires involvement of peripheral sporadic resources.

The transfer of exploration rights and exploitation rights by agreement shall be in compliance with mineral resource plan and plan for setting of mining right. If mineral resource plans and mining rights setting schemes have not been approved or submitted for record-filing, applications for transfer of exploration rights or exploitation rights by agreement may not be approved.

2. Strict control on approval of transfer by agreement

Pursuant to the Notice, the transfer of exploration rights and exploitation rights by agreement shall be examined and approved by the Ministry of Land and Resources and the competent departments of land and resources at the provincial level. With regard to the 34 kinds of major mineral varieties as listed in the appendices to the Administrative Measures for Registration of Mineral Resources Survey Blocks and the Administrative Measures for Registration of Mineral Resources Exploitation, the transfer of exploration rights and exploitation rights by agreement shall be examined and approved by the Ministry of Land and Resources. With regard to mineral varieties other than the foregoing 34 major mineral varieties, the transfer of exploration rights and exploitation rights by agreement shall be examined and approved by the competent departments of land and resources at the provincial level.

Pursuant to the Notice, with respect to the exploration rights and exploitation rights for which the Ministry of Land and Resources authorizes competent departments of land and resources at the provincial level to register survey and exploration, in the event of transfer by agreement of such exploration rights and exploitation rights due to integration of mining right or enlargement of area of survey or mining, such transfer by agreement shall be approved by competent authority of land and resource at the provincial level

In addition, the competent authority of land and resources shall, prior to approving the transfer of exploration rights and exploitation rights by agreement, make public announcement of basic information, such as names of survey and exploitation projects proposed to be approved and the names of project investors and reasons for applications for transfer by agreement in the ��Public Announcement and Publicity System for Nationwide Grant and Transfer of Mining Rights�� for at least 7 working days. The approval could be rendered only when the announcement period is ended and no objection was raised during the announcement period.

3. Strict regulation on application for transfer by agreement

��1��The project investor applies for transfer by agreement

Under any of the following circumstances, project investors shall, according to the authority of examination and approval with regard to transfer by agreement, apply with the Ministry of Land and Resources or the competent departments of land and resources at the provincial level for grant by agreement:

��a��With regard to development projects for key mineral resources approved by the State Council and mineral sites providing supporting resources for key construction projects as approved by the state council, project investors or exploitation right holders shall file applications by presenting relevant approval documents;

��b��With regard to mining exploring projects for alternative resources for old mines (crisis mines) included in special national programs, exploitation right holders shall file applications by presenting project budget notices issued by the Ministry of Finance or project plan notices issued by the Ministry of Land and Resources

��2��The people��s government at the provincial level applies for transfer by agreement

For development projects of mineral resources with large and medium-sized reserves approved by the people��s governments at the provincial level which requires approval from the Ministry of Land and Resources pursuant to this Notice, the application for transfer by agreement shall be made by the people��s governments at the provincial level in writing to the Ministry of Land and Resources.

��3��The exploitation right and exploration right holders apply for transfer by agreement

With regard to area adjacent to area where exploitation rights have been set but that needs to be integrated or needs utilization of original production systems to expand the scope of survey and exploitation, if the original certificate for exploitation right is issued by the Ministry of Land and Resources, the exploitation holder shall apply with the Ministry of Land and Resource for transfer by agreement on strength of approval in writing by competent departments of land and resources at the provincial level, apart from the foregoing circumstance, the exploitation holder shall apply with the competent departments of land and resources at the provincial level for transfer of agreement.

With regard to area where exploration rights have been set but such area requires integration or expansion of survey due to overall survey plan, and the foregoing requires involvement of peripheral sporadic resources, if the expanded area is more than 25% (inclusive) of current exploring area and setting additional exploring right is not appropriate as proved by experts organized by competent departments of land and resources at the provincial level, the exploring right holder shall apply with the original authority for transfer by agreement; if the expansion area is less than 25% of the current exploring area, the exploring right holder shall apply with the original authority for expansion registration.

Provisions on Issues Concerning Change of Registered Capital or Equity Interest of Futures Companies

On May 10, 2012, China Securities Regulatory Commission promulgated the Provisions on Issues Concerning Change of Registered Capital or Equity of Futures Companies (Zheng Jian Hui Gong Gao [2012] No.11, hereinafter referred to as the Provisions). The Provisions have specified such matters as equity investment by overseas investors in futures companies.

Pursuant to the Provisions, where a legal person within the territory of China in which overseas investors have direct or indirect equity investment (by manner that is capable of influencing or controlling, such as stipulations of articles of association or agreement arrangements) intends to make equity investment in futures companies, proportion of equity interest or voting interest indirectly held by a single overseas investor in such future companies shall be less than 5%, proportion of the equity interest or voting interest shall be calculated on a pass-through basis and equity interest or voting interest held by entities with related party relationship shall be calculated as a whole.

The Provisions also provide that, an overseas investor is not bound by the aforesaid restriction in terms of proportion of equity interests or voting rights it may hold in a futures company, if the overseas investor indirectly holds equity interests or voting rights in the futures company via equity investment in a listed company, provided that controlling shareholder, shareholder holding the largest proportion of equity interest or the actual controller of the listed company is a Chinese investor; or, if the overseas investor indirectly holds the equity interests or voting rights of the futures company via equity investment in a securities company, which has obtained qualifications to engage in more than three types of business, including securities brokerage, securities trading on its own account and securities asset management.

Besides, the Provisions put forward relevant requirements on capabilities and conditions that a shareholder shall possess before investing in a futures company and obligation of the investors to perform record-filing formalities after completion of investment in the futures company, e.g. a prospective shareholder of a futures company shall have the capability to exercise its rights and perform its obligations as a shareholder and shall not be under any of the following circumstances that may affect the performance of shareholders�� rights and obligations, a prospective shareholder of a futures company shall be capable of making full payment of its capital contribution as scheduled, statutory procedures shall have been gone through before the investor becomes a shareholder of a futures company, a shareholder of a futures company shall disclose its equity structure to the extent of its ultimate equity holder and shall detail on its affiliating relationship with other shareholders of the futures company or its relationship with persons acting in concert and etc..

Implementing Opinions on Encouraging and Guiding Private Capital to Invest in Railway Industry by the Ministry of Railways

On May 16, 2012, the Ministry of Railways promulgated the Implementing Opinions on Encouraging and Guiding Private Capital to Invest in Railway Industry (Tie Zheng Fa [2012] No.97, hereinafter referred to as the Implementing Opinions) with an aim to implement the Several Opinions of the State Council on Encouraging and Guiding Healthy Development of Private Investment (Guo Fa [2010] No.13), further specifying the fields, manners and relevant policies and measures of private capital investment in railways.

The Implementing Opinions encourage insurance funds to expand the scope and step up the efforts in railway investment and to explore employment of multiple financing instruments, such as project financing, leasing financing and trust plans, so as to provide investment and financing platforms for private capital to invest in railway industry and to broaden the channels and means by which private capital invests and participates in railway construction.

Pursuant to the Implementing Opinions, private capital is encouraged to invest in the construction of main railway lines, special railway lines for passenger transport, inter-city railway lines, coal transport passageways, local railway lines, feeder railway lines, railway lines for dedicated purposes, railway lines dedicated for enterprise use, ferries for railway use and their stations and facilities, and other projects. Private enterprises meeting the qualifications required by the State are permitted to participate in bidding for survey and design, construction, supervision and consultation of railway engineering projects, as well as procurement of construction materials and equipment. Private capital is encouraged to invest in the services of passenger and freight transport by railways. Private capital is encouraged to participate in innovation of technologies related to railway, invest in research and development, design, manufacturing and maintenance of new types of railway transport equipment, rail and bridge equipment, electric railway equipment and apparatuses, energy-saving and environment-friendly equipment and apparatuses, safety inspection and testing equipment and other special railway equipment and to participate in bidding for equipment procurement under equal conditions. Private capital is encouraged to participate in restructuring and reorganization of railway related enterprises that are not transport enterprises. Private capital is encouraged to invest in the ��go global�� projects of the railway industry. Private capital is encouraged to invest in railway product certification, quality inspection and testing, safety assessment, professional training, energy performance contracting and other related technical services and activities

The Implementing Opinions also put forward specific requirements with respect to improving the relevant policies and measures, strengthening the railway industry administration and government supervision, reducing and regulating the railway administrative examination and approval, strengthening disclosure of government affairs and government information, effective changing function of the Ministry of Railways, etc

Announcement on Issues Concerning Enterprise Income Tax in Further Implementing the Western Development Strategy by the State Administration of Taxation

On April 6, 2012, the State Administration of Taxation promulgated the Announcement on Issues Concerning Enterprise Income Tax in Further Implementing the Western Development Strategy (effective as of January 1, 2011, hereinafter referred to as the Announcement). The Announcement further specifies and clarifies the enterprise income tax preferential policy in connection with the western development strategy.

1. Clarification on enterprise income tax preferential policy and method of application

Pursuant to the Announcement, from January 1, 2011 to December 31, 2020, for western enterprises that take industry items specified in the Catalogue of Encouraged Industries in the Western Region as primary businesses and whose revenue derived from primary business in the current year accounts for more than 70% of its total revenue, upon application by such enterprises and examination and confirmation by competent tax authorities thereof, such enterprises may pay enterprise income tax at a reduced rate of 15%.

Furthermore, according to the Announcement, enterprises shall apply the said enterprise income tax preferential policies on their own and such application shall be examined and confirmed by the competent tax authority; enterprises which apply for the first time for the enterprise income tax preference shall submit their application with competent tax authorities for examination and confirmation in the first year. With regards to any change in the qualifications whereby the enterprise is entitled to the tax preference, such change shall be subject to administration in the manner of record-filing.

2. Specification on scope of entitlement to enterprise income tax preference.

According to the Announcement, prior to the promulgation of the Catalogue of Encouraged Industries in the Western Region, enterprises may be entitled to enterprise income tax preference at a rate of 15% in accordance with the Catalogue for Guidance on Industrial Restructuring (2005), the Catalogue for Guidance on Industrial Restructuring (2011), the Catalogue for Guidance of Foreign-invested Industries (revised in 2007) and the Catalogue of Competitive Industries in the Central and Western Regions (revised in 2008), subject to confirmation by tax authorities. After the promulgation of the Catalogue of Encouraged Industries in the Western Region, for the enterprises having conducted settlement of enterprise income tax at the rate of 15%, if such enterprises do not satisfy the entitlement for enterprise income tax preference, such enterprises shall re-file for tax at its applicable tax rate as determined by applicable tax laws.

3. To specify the relevant examination and approval requirements for the policy of ��100% exemption for two years and 50% reductions for three years�� enjoyed by relevant industrial projects

For enterprises categorized under the industries of transport, power, water conservancy, post and radio & TV that have obtained approval from relevant tax authority in accordance with the Notice of the State Administration of Taxation on Opinions Concerning Implementing Relevant Tax Policies for the Western Development (Guo Shui Fa [2002] No. 47) (hereinafter referred to as ��No. 47 Notice��), such enterprises may continue enjoying the tax preferential policy of ��100% exemption for two years and 50% reductions for three years�� of enterprise income tax till the expiration of such tax preference period. For enterprises categorized under the foregoing industries that meet the prescribed requirements for enjoying the tax preferences under the previous western development policy but had not completed approval formalities with tax authorities in accordance with Article 2 of the No. 47 Notice prior to December 31, 2010 due to having not earned revenue or having not entered profit-making years, such enterprises may, in accordance with this Announcement, enjoy the previous tax preferences after going through relevant formalities.

4. Enjoyment of concurrently applicable tax preferential policies

For enterprises not only meeting requirements for the 15% preferential tax rate under the western development policies but also meeting the tax preference requirements as specified in the Enterprise Income Tax Law and its implementation regulations and relevant provisions of the State Council, such enterprises may enjoy the tax preferential policies concurrently. In the event of periodic exemption and reduction of tax, within the period where 50% reduction of tax is available, enterprise income tax may be collected at 50% of the tax payable calculated at tax rates applicable to such enterprises.

5. To specify the principles and methods of tax preferences for head offices and branches

For enterprises headquartered in areas with tax preferences under the western development policies, 15% preferential tax rate shall be applicable only to the revenues of head offices and branches of such enterprises within the area with tax preference. For enterprises headquartered outside of areas with tax preferences under the western development policies, 15% preferential tax rate shall be applicable only to the revenues of their branches established within the area with tax preference.

Notice on Enterprise Income Tax Policies on Further Encouraging Development of Software and Integrated Circuit Industries by the State Administration of Tax

On April 20, 2012, the Ministry of Finance and the State Administration of Taxation promulgated the Notice on Enterprise Income Tax Policies on Further Encouraging the Development of Software and Integrated Circuit Industries (Cai Shui [2012] No.27, hereinafter referred to as the Notice). The Notice is a document with implementing rules based on the Notice of the State Council on Enterprise Income Tax Policies on Further Encouraging the Development of Software and Integrated Circuit Industries (Guo Fa [2011] No.4, hereinafter referred to as the ��No.4 Document��) promulgated by the Ministry of Finance and the State Administration of Taxation on January 28, 2011. The Notice further clarifies and specifies the income tax issues covered by the No. 4 Document.

1. Enterprises entitled to the tax preferential policy prescribed by the Notice

Pursuant to the Notice, the following two categories of enterprises are entitled to the enterprise income tax preference in accordance with the provisions of the Notice:

��1��Integrated circuit production enterprise�� (which, as mentioned in this Notice, refers to the enterprise with legal person capacity which takes the production of single chip integrated circuit, multichip integrated circuit and hybrid integrated circuit as main business and meanwhile conforms to the following conditions: the research and development personnel account for no less than 20% of the monthly average employees in that year of the enterprise; the research and development expense accounts for no less than 5% of the total enterprise sales (business) income and the research and development expense incurred in China is no less than 60% of the total research and development expense; the sales (business) income accounts for no less than 60% of the total enterprise income amount, etc.)

��2��Newly-established integrated circuit design enterprises and software enterprises which conform to the relevant conditions in China (which, as mentioned in this Notice, refers to enterprise with legal person capacity which takes integrated circuit design and software product development as main business and is incorporated in China after 1st January, 2011 and has obtained the integrated circuit design enterprise qualification and software enterprise qualification and in the meantime conform to the quantized target: the research and development personnel account for no less than 20% of the monthly average employees in that year of the enterprise; the research and development expense accounts for no less than 6% of the total enterprise sales (business) income; for integrated circuit design enterprises, the sales (business) income derived from integrated circuit design accounts for no less than 60% of the total enterprise income amount, etc.)

2. Recognition on qualification for entitlement to the tax preference

As required by the Notice, an enterprise which conforms to the provisions of the Notice and is recognized as entitled to the tax preferential policy shall obtain the relevant qualification prior to settlement of enterprise income tax of the year when such enterprise starts to make profit or of the year immediately following the foregoing year when such enterprise starts to make profit. In the event the enterprise obtained the qualification prior to settlement of enterprise income tax of the year immediately following the foregoing year when such enterprise starts to make profit, the enterprise is entitled to periodic tax exemption and reduction preference; in the event the enterprise obtained the qualification after settlement of enterprise income tax of the year immediately following the foregoing year when such enterprise starts to make profit, the enterprise is entitled to periodic tax exemption and reduction preference as of its obtainment of relevant qualifications within the remaining part of the preference period calculated from the year the enterprise starts to make profit.

3. Tax preference policies may not be double dipped

Pursuant to the Notice, where the income tax preferential policies for eligible software enterprises and integrated circuit production or design enterprises overlap with other enterprise income tax preferential policies for these enterprises, these enterprises shall choose to enjoy the most preferential investment policy rather than concurrently enjoying all the tax preference policies.

The Notice on Prohibiting Local People��s Courts and People��s Procuratorates from Formulating Judicial Interpretation Documents (Fa Fa [2012] No.2, hereinafter referred to as the Notice) promulgated by the Supreme People��s Court and the Supreme People��s Procuratorate explicitly provides relevant matters concerning formulation of judicial interpretation documents by local people��s courts and people��s procuratorates and also sets a limit on the effectiveness of the other regulatory documents formulated thereby.

Pursuant to the Notice, issues concerning law application in trials by people��s courts shall be interpreted by the Supreme People��s Court; and issues concerning law application in procuratorial affairs by people��s procuratorates shall be interpreted by the Supreme People��s Procuratorate. From the date of issuance of this Notice, local people��s courts and people��s procuratorates shall not formulate judicial interpretation documents that are universally applicable within their respective jurisdiction and involve law application, such as ��guiding opinions�� and ��regulations��, and shall not quote other normative documents formulated in legal instruments.

Local people��s courts and people��s procuratorates shall on their own clean up judicial interpretation documents already formulated by them. Clean-up work shall be completed prior to the end of March 2012, and clean-up results shall be reported by higher people��s courts and provincial people��s procuratorates to the Supreme People��s Court and the Supreme People��s Procuratorate respectively.

As emphasized by the Notice, where local people��s courts and people��s procuratorates consider it necessary to formulate judicial interpretations when summarizing trial and procuratorial work experiences, they shall, in accordance with the Regulations of the Supreme People��s Court on Judicial Interpretations (Fa Fa [2007] No. 12) and the Regulations of the Supreme People��s Procuratorate on Judicial Interpretations (Gao Jian Fa Yan Zi [2006] No. 4), via higher people��s courts and provincial people��s procuratorates, make proposals on formulating judicial interpretations or make requests for instructions on issues concerning law application to the Supreme People��s Court and the Supreme People��s Procuratorate.

Legal Practices

Recognition on Liabilities Arising from Issuance of Bills of Lading by Freight Forwarding Companies

In December 2010, A Company signed with a middleman a goods sale and purchase contract based on FOB price to sell the goods to the final purchaser in UK. B Company was a freight forwarding company which issued bills of lading in its own name to A Company. In late April, 2011, A Company delivered the goods to B Company for shipment thereof to UK. In May, 2011, the final purchaser in UK became bankrupt and the agency company for B Company at the designation port detained the goods shipped by A Company to UK on the ground that the final purchaser defaulted in the payment of freight and even claimed freight that is several times as much as the market price against A Company. On May 13, 2011, A Company requested change of the bills of lading and designation of a new consignee against B Company, but B Company refused to change the bills of lading on the ground that the agency company at the designation port did not consent to that. The two parties conducted several consultations but failed without exception. Therefore, A Company filed a suit with the court, claiming return of all the goods under the bills of lading in question or compensation equivalent to the goods value by B Company against losses.

[Court Judgment]

The court of first instance determined: 1) A Company and B Company established a seaborne goods transport contract relationship where B Company was the carrier who should be liable for the legal consequences arising from the act of the agency company at the designation port; 2) A Company held a full set of original bills of lading and was entitled to take delivery of the goods involved in this case, hence B Company should be legally liable for impairment of the rights of A Company due to its refusal to change the bills of lading; 3) as the carrier, B Company did not declare lien over the goods when the agency company at the designation port detained the goods, and the detainment of all the goods exceeded the reasonable limit set forth by the legal provisions; what��s more, the agency company at the designation port claimed freight that is several times as much as the market price, so the lien of the goods made by B Company was apparently inappropriate. In the court hearing, A Company was willing to provide warranty equivalent to the value of the goods with regard to the freight issue, so B Company should unconditionally return the goods to A Company; 4) whether A Company could take delivery of the goods or not actually depended on the agency company at the designation port, and B Company, as the carrier, should be liable for the shipped goods which became out of control.

Based on the above reasons, the court of first instance ruled that B Company should return the goods to A Company within the prescribed time limit, in case of failure to return the goods, B Company should compensate A Company for the losses in the value of the goods. B Company disagreed with such a judgment and lodged an appeal.

The court of last resort determined that the focus of this case lied in that: 1) whether there was a seaborne goods transport contract relationship between A Company and B Company; 2) whether B Company should be liable for the legal consequence arising from the act of the agency company at the designation port; 3) whether A Company has the right to claim return of the goods.

With regard to the above focus, the court of last resort confirmed the judgment of the court of first instance, determining that there was a seaborne goods transport contract relationship between A Company and B Company. A Company was the consignor and B Company was carrier as prescribed under Article 42 of the Maritime Law of the People��s Republic of China. A Company and B Company did establish a seaborne goods transport contract relationship with each other. Furthermore, B Company should be liable for the legal consequences arising from the act of the agency company at the designation port. In this case, B Company, as the carrier, was obligated to deliver the goods at the designation port upon strength of the bills of lading and its obligation for the goods should last until the delivery of the goods to the consignee holding the original bills of lading. The agency company at the designation port was only an agent for B Company, hence B Company should be liable for the legal consequences arising from the act of the agency company. In addition, as the consignor, A Company is entitled to claim return of the goods. Therefore, the court of last resort upheld the judgement of the court of first instance and rejected the appeal lodged by B Company.

[Case Analysis]

The author supposes that the key issue of this case is how to determine the liabilities of the freight forwarding agency for issuing the bills of lading in its own name. In this case, the court of first instance and the court of last resort both believed that there was a seaborne goods transport contract relationship between A Company and B Company. Regardless of the actual relationship between B Company and the agency company at the destination port, B Company shall bear the liability as the carrier insofar as the bills of lading are issued in its own name. Article 4.1 of the Provisions of the Supreme People��s Court on Certain Issues Concerning the Trial of Cases of Disputes over Marine Freight Forwarding effective as of May 1, 2012 explicitly provides that where a freight forwarder signs and issues bills of lading, sea waybills or other transport documents in its own name during handling marine freight forwarding transactions, the client claims that such freight forwarder shall bear the carrier��s responsibilities, and the people��s court concerned shall support such claim of the clients. Accordingly, it could be concluded that the currently effective laws of the PRC safeguard the legitimate rights of the carrier and the holder of the bills of lading.

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

The Predicament of the QFLP System

In late April 2012, the National Development and Reform Commission served Shanghai Development and Reform Commission the Letter of Reply of the General Office of the National Development and Reform Commission to the Relevant Questions Regarding Foreign-Invested Equity Investment Enterprises (hereinafter referred to as the Letter of Reply) with regard to the questions regarding whether the Blackstone RMB Fund as one of the QFLP pilots in Shanghai is subject to the Catalogue of Industries for Guiding Foreign Investment, stating:��pursuant to the Provisions on Guiding Foreign Investment Direction and Measures for Administration on Establishment of Partnership Enterprises in the Territory of China by Foreign Enterprises or Individuals and other relevant provisions, for such equity investment enterprises in form of limited partnership with foreign-funded general partners and domestically funded limited partners, such as Shanghai Blackstone Equity Investment Partnership (Limited Partnership) shall be subject to administration of foreign investment policies and regulations and the projects invested by such equity investment enterprises shall be governed by the Catalogue of Industries for Guiding Foreign Investment.��

Such Letter of Reply issued by the National Development and Reform Commission, for the time being, put an end to the inferences and speculations regarding the entitlement of QFLP investment to ��National Treatment��, and thus bewildered the public with respect to the future of the ��QFLP System�� which actually has been groping its way forward from the very beginning.

��QFLP�� is Qualified Foreign Limited Partner, i.e. a foreign investor, after going through the eligibility examination and the regulatory procedures of the foreign exchange, converts the overseas capital into RMB fund to be used in the investment in the domestic PE and VC. As of January 2011, the governments of Shanghai, Beijing, Tianjin and Chongqing have successively published their respective ��QFLP Policy��. As a matter of fact, the original intention of all the above governments to publish their respective ��QFLP Policy�� is to respond to the Notice on Relevant Operating Issues Concerning Improvement of the Administration of Payment and Settlement of Investment Capital in Foreign Currency of Foreign-funded Enterprises by the State Administration of Foreign Exchange (Hui Zong Fa [2008] No.142, hereinafter referred to as the No.142 Document). Pursuant to the No.142 Document, the RMB capital from the settlement of investment capital in foreign currency of a foreign-funded enterprise shall be used within the business scope as approved by the examination and approval authorities, and shall not be used for domestic equity investment, unless otherwise provided.

The provision of No.142 Document means that the settlement of foreign currency for foreign equity investment shall be conducted on a project-by- project basis and reported to the administration of foreign exchange for record on a case-by-case basis. The main focus of the ��QFLP System�� is that it permits pilot institutes to directly convert the overseas capital into RMB capital in order to conduct equity investment. Judging from the ��QFLP Policy�� respectively disclosed by the above four local governments, except Beijing, the governments of Shanghai, Tianjin and Chongqing all permit the approved foreign-invested equity investment management enterprises under the pilot program to use foreign capital to invest in the equity investment enterprises sponsored and established by themselves with an amount of no more than 5% of the total capital raised or actually contributed, and such investment shall not affect the original nature of the equity investment enterprises receiving such investment.

Given the ��QFLP Policy�� of the above local governments each permits the approved foreign-invested equity investment management enterprises to conduct equity investment with their foreign capital and such investment does not affect the original nature of the equity investment enterprises receiving the investment, a conclusion is likely to be made that where a foreign-funded GP uses the foreign exchange quota available under QFLP policy to contribute capital to the fund in accordance with the relevant provisions and all the sources of the remaining capital are RMB, the original nature of such equity investment fund is still RMB fund and, if the nature of the fund remains unchanged, such equity investment fund is entitled to the national treatment for RMB fund with respect to investment industry and process and thus the laws with respect to restriction on foreign investment industries and fields could be circumvented and the investment cost could then be reduced.

However, an official confirmation has never been made over the above inference, and the Letter of Reply issued by the National Development and Reform Commission this time further specifies that such funds are subject to the Catalogue of Industries for Guiding Foreign Investment and shall be governed by the Provisions on Guiding Foreign Investment Direction and Measures for Administration on Establishment of Partnership Enterprises in the Territory of China by Foreign Enterprises or Individuals.

Furthermore, judging from the current ��QFLP Policy�� published by the above local governments, the regulations on examination and approval of the investment projects of the pilot institutes have not yet been significantly simplified or relaxed, and the investment directions of the same have been hold in restraint and guiding arrangements thereof have also been made. From the perspective of the government, the main purpose of ��QFLP Policy�� is to introduce and take in the advanced management and operation experience of overseas equity investment enterprises and their management body but not to change or circumvent the current foreign investment system of our nation.

Under such background as above, the appeal of the ��QFLP System�� has further declined. We suppose the ��QFLP System�� still has a long way to go in order to break through the current predicament and to correctly position itself.

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