Haworth & Lexon Law Newsletter
No.4 2013(Total:No.132) June 17, 2013
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 Laws and Regulations:

    Catalogue of Priority Industries for Foreign Investment in Central and Western China (Revised in 2013)

    Notice of the State Administration of Foreign Exchange on Printing and Distributing the Provisions on Foreign Exchange Administration over Direct Investment Made by Foreign Investors in China and the Supporting Documents

    Notice on Further Improving the Examination and Approval of Corporate Bond Issuance

    Provisions of the Supreme People¡¯s Court on Handling Requests for Judicial Assistance in the Service of Judicial Documents, Investigation and Evidence Collection in Civil and Commercial Cases According to International Conventions and Bilateral Treaties on Judicial Assistance

    Interpretations of the Supreme People¡¯s Court and the Supreme People¡¯s Procuratorate on Certain Issues Concerning the Application of Law in Criminal Cases of Endangering Food Safety

    Reply of the Supreme People¡¯s Court on Issues Concerning Application of Law in Trying Cases Involving Export Credit Insurance Contract Disputes

    Notice of the Ministry of Housing and Urban-Rural Development and the State Administration for Industry and Commerce on Printing and Issuing the Project Construction Contract (Sample Text)

    Announcement on Approval of Protection of Champagne with Geographical Indications

    Notice on Import Taxation Policy concerning Development of Hengqin

    Announcement of the State Administration of Taxation on Issues concerning the Individual Income Tax on Individual Investors Who Obtain Additional Share Capital Converted from the Original Accumulated Surplus after Acquiring the Equities of Enterprises

    Announcement of the State Administration of Taxation on the Levy of Enterprise Income Tax on Labor Services Provided within the Mainland of China by Personnel Dispatched by Non-resident Enterprises

    Announcement on Issues Concerning the Administration of Pilot Collection of Enterprise Income Tax Policies Applicable to Corporate Partners of Limited Partnership Venture Capital Enterprises in Suzhou Industrial Park

Legal Practices:

    Sale of ¡°Cartier Diamond Ring¡±¡ªDispute over Infringement upon Trademark and Unfair Competition

    Analysis on the Duty of Loyalty of Company Senior Manager

Latest Laws and Regulations

Catalogue of Priority Industries for Foreign Investment in Central and Western China (Revised in 2013)

On May 16, 2013, the National Development and Reform Commission and the Ministry of Commerce jointly promulgated the Catalogue of Priority Industries for Foreign Investment in Central and Western China (Revised in 2013) (hereinafter referred to as 2013 Revision). 2013 Revision is a revision of the Catalogue of Priority Industries for Foreign Investment in Central and Western China promulgated in December 2008.

2013 Revision lists 500 items in total, with an increase of 173 items on the basis of the original Catalogue, among which, some product processing items upon strength of specific biological and mineral resources in the Central and Western China have been added to the agriculture and mining industries; some major product items in the Central and Western China that hold certain industrial base and play a leading role in the local economic development have been added to the manufacturing industry.

In the meantime, 2013 Revision also optimizes the contents of relevant industrial items on the basis of the original Catalogue, e.g. the content of the ¡°manufacturing of automobile parts and components¡± item has been optimized as: ¡°automatic transmission with more than six gears, high-power density drive axle for commercial vehicles, servo front-lighting system, LED head lamps, lightweight materials application (high-strength steel, aluminum magnesium alloy, composite plastic, powder metallurgy, and high strength compound fiber, etc.), clutch, hydraulic shock absorber, control panel assembly and seats¡±.

Moreover, encouraged provinces involved in 2013 Revision have been added to 22 provinces (districts, municipalities). In particular, according to the Several Opinions of State Council on Promoting the Construction and Development of Hainan International Tourism Island (Guo Fa [2009] No.44), production of drinking natural mineral water, manufacturing of cruise liners, manufacturing of deepwater engineering equipment, manufacturing of golf equipment as well as development and operation of sightseeing agriculture and leisure agriculture and construction of supporting facilities thereof, which conform to the actual conditions of Hainan¡¯s development, have been added to the encouraged items.

2013 Revision finally specified that, according to the Provisions Guiding Foreign Investment Direction (State Council Order 2002 No.346), items of foreign investment that fall under the Catalogue of Priority Industries for Foreign Investment in Central and Western China shall enjoy preferential policies for encouraged foreign investment projects. After effectuation of the 2013 Revision, ongoing foreign investment projects that meet the requirements of this Catalogue may be implemented in accordance with relevant policies under this Catalogue.

Notice of the State Administration of Foreign Exchange on Printing and Distributing the Provisions on Foreign Exchange Administration over Direct Investment Made by Foreign Investors in China and the Supporting Documents

On May 10, 2013, the State Administration of Foreign Exchange promulgated the Notice on Printing and Distributing the Provisions on Foreign Exchange Administration over Direct Investment Made by Foreign Investors in China and the Supporting Documents (hereinafter referred to as the Notice). The aim of Notice is to promote and facilitate domestic direct investment by foreign investors and regulate domestic direct investment in foreign exchange administration by foreign investors. The Notice includes three documents, i.e. Provisions on Foreign Exchange Administration over Direct Investment Made by Foreign Investors in China; List of Repealed Regulations on Foreign Exchange Administration over Direct Investment in China and Operating Guidelines for Business Relating to Direct Investment in China (Omitted).

The Provisions on Foreign Exchange Administration over Direct Investment Made by Foreign Investors in China further simplified and integrated the foreign exchange registration, account opening and using, receipt and payment, foreign change settlement and sale, etc., on the basis of the policies on foreign exchange administration in foreign investment business. The Operational Guideline to Domestic Direct Investment Business promulgated at the same time further specified the operating procedures of various business, and guided and simplified the foreign exchange registration, account opening and using, receipt and payment foreign exchange settlement and sale, etc. involved in the foreign direct investment.

Notice on Further Improving the Examination and Approval of Corporate Bond Issuance

Following the Circular on Issues Concerning Further Strengthened Management of Risk Prevention for Corporate Bonds promulgated by the National Development and Reform Commission (NDRC), NDRC promulgated the Notice on Further Improving the Examination and Approval of Corporate Bond Issuance on April 19, 2012 (hereinafter referred to as the ¡°Notice¡±). The Notice manages applications for corporate bond issuance by three categories: ¡°category of examination acceleration and simplification¡±, ¡°category of strict examination¡± and ¡°category of appropriate control of scale and pace¡±.

According to the Notice, the procedure of application for two categories of bonds shall be simplified. One is the bond issuance application for projects preferentially supported by the State and has high credit ratings and perfect repayment measures, and has been included in the scope of pilot credit building. The projects preferentially supported by the State at present include major restructuring or adjustment of major projects under construction or reconstruction, energy-saving and environmental governance project aimed at promoting regional coordinated development, eco-friendly public rental housing, low-rent housing, shanty town transformation, economically affordable housing, low-cost commodity housing and other government-subsided housing projects; and the focus is placed on the credit-enhancing collective bonds of micro and small-sized enterprises and collective bonds of small and medium-sized enterprises whose target tasks include preferential government-subsidized housing projects. The other is the bond which has high credit ratings, perfect repayment measures and has been included in the scope of pilot credit building, including bonds whose corporate or bond credit ratings are AAA, bonds for which guarantee companies with good credit status (guarantee companies with AA+ corporate ratings or above) provide unconditional irrevocable guarantee, mortgage or pledge guarantee with valid assets and bonds whose credit ratings are AA+ and above, etc.

According to the Notice, the following two categories of bond issuance applications shall be examined strictly to effectively prevent market risks: (1) bond issuance applications for raising funds for overcapacity, high-pollution and high-energy-consumption fields restricted by the industrial policies of the State, (2) bond issuance applications of enterprises that have low credit ratings, high asset-liability ratios and large bond balances, or conduct substandard operations, fiddle with assets and have weak repayment measures, including higher asset-liability ratio (over 65% for urban construction investment enterprises, over 75% for general production and operation enterprises) and bonds that have credit ratings below AA+, enterprises and governments in places where enterprises are located or securities brokers that provide underwriting services for enterprises have records of malfeasance or dishonesty, urban construction investment enterprises that have issued bonds for more than twice in a row and have asset-liability ratios of over 65%, bond issuance applications of enterprises that fiddle with assets, conduct substandard operations and have weak repayment measures.

In addition to the aforesaid two kinds of bonds, the Notice stipulates that, for other bonds under the category of appropriate control of scale and pace, efforts shall be made to rationally control overall issuance scale and appropriately control examination and issuance pace in accordance with the State macro-control policies and the development of the bond market.

 

Provisions of the Supreme People¡¯s Court on Handling Requests for Judicial Assistance in the Service of Judicial Documents, Investigation and Evidence Collection in Civil and Commercial Cases According to International Conventions and Bilateral Treaties on Judicial Assistance

On April 7, 2013, the Supreme People¡¯s Court promulgated the Provisions on Handling Requests for Judicial Assistance in the Service of Judicial Documents, Investigation and Evidence Collection in Civil and Commercial Cases According to International Conventions and Bilateral Treaties on Judicial Assistance (Fa Shi [2013] No.11, hereinafter referred to as the Provisions).

Pursuant to the Provisions, people¡¯s courts shall, on the principle of convenience and efficiency, make requests to foreign authorities for judicial assistance in the service of judicial documents, investigation and evidence collection in civil and commercial cases according to the Hague Convention on the Service of Documents, the Hague Convention on Evidence collection or relevant bilateral treaties on judicial assistance in civil matters. People¡¯s courts shall review the requests made by foreign authorities for service of judicial documents, investigation and evidence collection in civil and commercial cases, and refuse to provide assistance to those foreign authorities whose requests for judicial assistance fall under any of the circumstances in which a request for judicial assistance shall be rejected as specified in the Hague Convention on the Service of Documents, the Hague Convention on Evidence Collection or relevant bilateral treaties on judicial assistance in civil matters.

People¡¯s courts shall adopt the methods specified in the Civil Procedure Law and relevant judicial interpretations when assisting in the service of judicial documents, investigation and evidence collection in civil and commercial cases at the request of foreign authorities. If an applicant requests a special method specified in its letter of request to be followed, and if such method does not conflict with the law of our country and is not unable or difficult to be followed in practice, such special method shall be followed.

And the Provisions also specify that each people¡¯s court shall establish an international judicial assistance file system. Upon authorization by the Supreme People¡¯s Court, a higher people¡¯s court may directly send requests for the service of judicial documents, investigation and evidence collection in civil and commercial cases made by people¡¯s courts within its jurisdiction to foreign authorities according to the Hague Convention on the Service of Documents and the Hague Convention on Evidence collection.

Interpretations of the Supreme People¡¯s Court and the Supreme People¡¯s Procuratorate on Certain Issues Concerning the Application of Law in Criminal Cases of Endangering Food Safety

On May 2, 2013, the Supreme People¡¯s Court promulgated the Interpretations of the Supreme People¡¯s Court and the Supreme People¡¯s Procuratorate on Certain Issues concerning the Application of Law in Criminal Cases of Endangering Food Safety (Fa Shi [2013] No.12, hereinafter referred to as the Interpretations).

Production and sale of food not in compliance with the food safety standards shall be deemed as ¡°thus causing an accident of serious food poisoning or resulting in any serious disease caused by food-borne bacteria¡± as specified in Article 143 of the Criminal Law if falling under one of the following circumstances: containing invasive organism, pesticide residue, veterinary drug residue, heavy metal, pollutants and other hazardous substances to human health which seriously exceed the standard limit; falling under the scope of farm animals, fowls, livestock and aquatic animals dead from disease or for unknown reason s or without passing the inspection and quarantine, or under the scope of the meat or meat products thereof; production and sale of food are banned by explicit order of the State for disease prevention and control or other special purposes; the nutrient content in infant food for growth and development is seriously not in conformity with the food safety standards; other circumstances that may cause an accident of serious food poisoning or resulting in any serious disease caused by food-borne bacteria.

Production and sale of food not in compliance with the food safety standards shall be deemed as ¡°serious harm is done to human health¡± as specified in Article 143 of the Criminal Law if falling under one of the following circumstances: causing slight injury or above; causing mild or moderate disability; causing organ or tissue damage and thus resulting in general or severe dysfunction; causing serious food poisoning or resulting in any serious disease caused by food-borne bacteria to more than ten persons; other circumstances that may cause serious harm to human health.

Furthermore, the Interpretations enumerate the ¡°other serious circumstances¡±, ¡°if the consequences are especially serious¡±, ¡°cause serious damage to health¡± and ¡°cause personal death or other especially serious circumstances¡± provided in Article 143 of the Criminal Law.

Last but not least, the Interpretations also define and enumerate the applications of Article 143 of the Criminal Law to ¡°production and sale of foods that do not conform to safety standards¡±, of Article 225 to ¡°illegal operation¡±, etc.

Reply of the Supreme People¡¯s Court on Issues Concerning Application of Law in Trying Cases Involving Export Credit Insurance Contract Disputes

On May 2, 2013, the Supreme People¡¯s Court promulgated the Reply on Issues Concerning Application of Law in Trying Cases Involving Export Credit Insurance Contract Disputes (Fa Shi [2013] No.13, hereinafter referred to as the Reply).

There is no provision in the Insurance Law for the application of laws for export credit insurance contract. Considering the particularity of export credit insurance, the people¡¯s courts may try the cases of disputes over the export credit insurance contract with reference to the relevant provisions of the Insurance Law. If there are other provisions for export credit insurance contracts, such provisions shall prevail.

Notice of the Ministry of Housing and Urban-Rural Development and the State Administration for Industry and Commerce on Printing and Issuing the Project Construction Contract (Sample Text)

On April 3, 2013, the Ministry of Housing and Urban-Rural Development and the State Administration for Industry and Commerce promulgated the Notice on Printing and Issuing the Project Construction Contract (Sample Text) (Jian Shi [2013] No.56, hereinafter referred to as the Notice).

According to the Notice, the Project Construction Contract (Sample Text) shall come into force as of July 1, 2013, while the original Project Construction Contract (Sample Text) (GF-1999-0201) shall be nullified.

Announcement on Approval of Protection of Champagne with Geographical Indications

On April 11, 2013, the General Administration of Quality Supervision, Inspection and Quarantine of the People¡¯s Republic of China promulgated the Announcement on Approval of Protection of Champagne with Geographical Indications (No.51 [2013] Announcement, hereinafter referred to as the Announcement)

As expressed in the Announcement, recommended by the French Department of Agriculture, Food, Fishery, Rural Area Affairs and Land Regulation and applied by the Champagne Industry Commission of France for registration of Champagne in the People¡¯s Republic of China as a product with geographical indications, the General Administration of Quality Supervision, Inspection and Quarantine of the People¡¯s Republic of China, after organizing a expert team to conduct a technical review of the application in accordance with the Provisions on the Protection of Products with Geographical Indications, has approved of the protection on Champagne as a product with geographical indications in the People¡¯s Republic of China as of the date when such approval is granted.

The so-called ¡°Products with Geographical Indications¡± were converted from the system of ¡°Products Distinguished by Their Places of Origin¡±. As of July, 2005, As provided in the Provisions on the Protection of Products with Geographical Indications, the General Administration of Quality Supervision, Inspection and Quarantine of the People¡¯s Republic of China promulgated the Provisions on the Protection of Products with Geographical Indications, as a replacement of the former ¡°Provisions on the Protection of Products Distinguished by Their Places of Origin¡±, and the previously approved products distinguished by their places of original have all automatically converted to products with geographical indications. As provided in the Provisions on Protection of Products with Geographical Indications, a product with a geographical indication shall mean a product that originates from a particular region and is approved, through verification, to be named with a geographical name, with the quality, reputation, or other features of the product to be essentially dependent upon the natural and cultural factors of that place of origin.

Notice on Import Taxation Policy concerning Development of Hengqin

On May 20, 2013, the Ministry of Finance, the General Administration of Customs and the State Administration of Taxation promulgated the Notice on Import Taxation Policy concerning Development of Hengqin (Cai Guan Shui [2013] No.17, hereinafter referred to as the Notice). The Notice provided for the relevant import taxation policy enjoyed by Hengqin Development District.

The relevant import tax policies involved in the Notice with regard to the development of Hengqin include:

(1) Record management and tax exemption shall be implemented to the following goods entering into Hengqin from abroad and in connection with production: machines and equipments required by the productive infrastructure construction projects, and capital construction materials needed for construction of production plants and storage facilities; machines, equipment, moulds as well as parts for their maintenance and repair necessary for the operation of production enterprises; machines, equipments and other goods required by such enterprise import services as R&D design, detection and maintenance, logistics and service outsourcing within Hengqin District (hereinafter referred to as ¡°the District¡±). Please see Article 2 hereof for details about the list of goods without tax exemption in ¡°fist-line customs¡±.

(2) The following goods entering into Hengqin from abroad and in connection with production shall be bonded and recorded: raw materials, parts, components, packaging materials and consumable materials required by the enterprises within the District for processing the export products; goods imported by the enterprises within the District for circulation. Please see Article 3 hereof for details about the list of goods not bonded in ¡°fist-line customs¡±.

(3) The import entry shall be handled as per relevant regulations and taxes shall be levied in accordance with actual state of application for inspection for the goods entering into the inland from Hengqin, except for such goods as consumer goods with duty paid in ¡°first line customs¡±.

(4) Where Hengqin enterprises sell tax-exempted or bonded goods (including the goods produced from tax-exempted or bonded materials) to any individual, the corresponding import taxes shall be paid as per relevant regulations concerning the import goods.

(5) Value-Added Tax (VAT) and consumption tax at the import link shall be levied as per the regulations for the goods produced and processed by the enterprises in Hengqin and sold to the inland through ¡°second-line customs¡±. As applied by the enterprises, the customs duties will be levied as a trial for the goods sold on Chinese domestic market in accordance with corresponding import materials or actual state of application for inspection, and will be officially implemented after actual operation and continuous improvement.

Article 2 of the Notice specified the list of goods without tax exemption in ¡°First-line Customs¡±. The goods without tax exemption in ¡°first-line customs¡± include: goods that shall not be granted with tax exemption as explicitly specified by the laws, administrative regulations and relevant provisions, commodities whose import is prohibited by the State, goods imported for commercial real estate development projects, i.e., the constructive materials and equipments (for example, the elevator, air-conditioner, cement, steel, marble, luminaries and other building, decorative materials) imported for the construction of hotels and restaurants, office buildings, villas, flats, dwelling houses, commercial shopping places, entertainment and catering service venues and other commercial real estate projects, and consumer goods.

Article 3 of the Notice specified the list of goods without tax exemption in ¡°First-line Customs¡±. The goods without tax exemption in ¡°first-line customs¡± include: goods that shall not be granted with tax exemption as explicitly specified by the laws, administrative regulations and relevant provisions, commodities whose import is prohibited by the State, goods imported for commercial real estate development projects, i.e., the constructive materials and equipments (for example, the elevator, air-conditioner, cement, steel, marble, luminaries and other building, decorative materials) imported for the construction of hotels and restaurants, office buildings, villas, flats, dwelling houses, commercial shopping places, entertainment and catering service venues and other commercial real estate projects; consumer goods used by individuals, companies and administrative agencies inside the District (refer to ¡°4¡± and ¡°5¡± of Article 2 for the specific scope of goods); and the goods listed in the prohibited processing and trading category and other goods irrelevant to production.

Also, the Notice is stipulated to enter into force as of the date when the relevant regulatory facilities in Hengqin are checked and accepted and launched into operation, and the list of goods will be adjusted by the Ministry of Finance in cooperation with the relevant department under the premise that the relevant policies are maintained stable.
Announcement of the State Administration of Taxation on Issues concerning the Individual Income Tax on Individual Investors Who Obtain Additional Share Capital Converted from the Original Accumulated Surplus after Acquiring the Equities of Enterprises

On May 7, 2013, the State Administration of Taxation promulgated the Announcement on Issues concerning the Individual Income Tax on Individual Investors Who Obtain Additional Share Capital Converted from the Original Accumulated Surplus after Acquiring the Equities of Enterprises (hereinafter referred to as the Announcement). This Announcement is hereby given on issues concerning individual income tax on individual investors who, after acquiring the equities of enterprises, convert the original accumulated surplus of the enterprises into share capital.

As stipulated by the Announcement, where one or more individual investors have acquired 100% equity of a target enterprise by way of equity acquisition, the accumulated surplus, such as ¡°capital reserves, surplus reserves and retained earnings¡±, recorded under the original book value of the target enterprise is not converted into share capital before equity acquisition, but is instead included in the equity transfer price during equity transaction, and the individual investor(s) have fulfilled income tax obligations.

After the equity acquisition, the enterprise converts its accumulated surplus under the original book value into the share capital of the individual investors (new shareholders, the same below), issues concerning the individual income tax thereon shall be handled according to the following circumstances:

(1) In the event that the new shareholders have acquired the equity of the enterprise at prices not lower than the prices of net assets, and the original accumulated surplus of the enterprise has been included in the equity transaction price in full, individual income tax shall not be levied on the portion of the additional share capital obtained by the new shareholders from the conversion of the accumulated surplus.

(2) Where the new shareholders have acquired the equity of the enterprise at prices lower than the prices of net assets, if, among the original accumulated surplus of the enterprise, the difference of the equity acquisition price minus the original share capital has been included in the equity transaction price, individual income tax shall not be levied on the portion of the additional share capital obtained by the new shareholders from the conversion of the accumulated surplus; if the difference whereby the equity acquisition price is lower than the original owner¡¯s equity is not included in the equity transaction price, individual income tax shall be levied on the portion of the additional share capital obtained by the new shareholders from the conversion of the accumulated surplus under the taxable item of ¡°interest, dividend and bonus income¡±.

Conversion of the original accumulated surplus into share capital after new shareholders have acquired the equity of the enterprise at prices lower than the prices of net assets shall be carried out in the following order: the portion of taxable accumulated surplus shall be converted before the portion of tax-exempted accumulated surplus.

Where a new shareholder transfers his/her equity holding in the acquired enterprise, the original asset value (i.e. value of the equity) shall be the consideration actually paid for acquiring the equity of the enterprise and relevant taxes and fees.
Announcement of the State Administration of Taxation on the Levy of Enterprise Income Tax on Labor Services Provided within the Mainland of China by Personnel Dispatched by Non-resident Enterprises

On April 19, the State Administration of Taxation promulgated the Announcement on the Levy of Enterprise Income Tax on Labor Services Provided within the Mainland of China by Personnel Dispatched by Non-resident Enterprises (State Administration of Taxation Announcement [2013] No.19, hereinafter referred to as the Announcement).

The Announcement stipulated on the levy of enterprise income tax on labor services provided within the Mainland of China by personnel dispatched by non-resident enterprises.

Where a non-resident enterprise (hereinafter collectively referred to as the ¡°Dispatching Enterprise¡±) dispatches personnel to provide labor services within the Mainland of China, if the Dispatching Enterprise assumes part or all of the responsibilities and risks of the work performed by the dispatched personnel, and regularly appraises and evaluates the work performance of the dispatched personnel, the Dispatching Enterprise shall be deemed to have set up offices or premises within the Mainland of China to provide labor services. If the Dispatching Enterprise is registered in a contracting party to the relevant Tax Treaty, and the offices or premises for the provision of labor services are relatively fixed and permanent, such offices or premises shall be deemed as constituting permanent establishments set up within the Mainland of China.

The following factors shall be taken into consideration in making the foregoing judgments: (1) The Mainland enterprise that receives the labor services (hereinafter collectively referred to as the ¡°Recipient Enterprise¡±) makes payments in the nature of management fees or service charges to the Dispatching Enterprise; (2) The payments made by the Recipient Enterprise to the Dispatching Enterprise exceeds the wages, salaries, social insurance premiums and other expenses of the dispatched personnel that are paid by the Dispatching Enterprise in advance or on behalf of others; (3) The Dispatching Enterprise has retained a certain amount from relevant payments made thereto by the Recipient Enterprise without fully disbursing the same to the dispatched personnel; (4) Individual income tax is not levied on the full amount of the wages and salaries of the dispatched personnel that are borne by the Dispatching Enterprise; and (5) The Dispatching Enterprise is entitled to determine the number, post-holding qualifications and remuneration standards of the dispatched personnel, as well as their work places within the Mainland of China.

Also, according to the Announcement, if a Dispatching Enterprise dispatches personnel to provide labor services within the Mainland of China only for the purpose of exercising its shareholder¡¯s rights and safeguarding its legitimate rights and interests as a shareholder of the Recipient Enterprise, including the circumstances where the dispatched personnel provide the Dispatching Enterprise with relevant suggestions on investment in the Recipient Enterprise, or attend general meetings, meetings of the board of directors and other activities of the Recipient Enterprise on behalf of the Dispatching Enterprise, the Dispatching Enterprise shall not be considered as having set up any offices, premises or permanent establishments within the Mainland of China merely because the foregoing activities are carried out in the business premises of the Recipient Enterprise.

As required by the Announcement, a competent tax authority shall strengthen taxation administration over dispatching activities, and focus on examining the following materials related to dispatching activities as well as the economic substance and execution of dispatching arrangements, so as to determine the obligations of a non-resident enterprise to pay income tax: (1) contracts or agreements between the Dispatching Enterprise, the Recipient Enterprise and the dispatched personnel; (2) the management rules of the Dispatching Enterprise or Recipient Enterprise on the dispatched personnel, including specific provisions on the job duties, job contents, job assessment, risk assumption, etc. of the dispatched personnel; (3) information on the payments made by the Recipient Enterprise to the Dispatching Enterprise, relevant account treatment information, and materials on the filing and payment of individual income tax by the dispatched personnel; and (4) whether the Recipient Enterprise has made covert payments related to dispatching activities by offsetting transactions, waiving creditor¡¯s rights, conducting affiliated-party transactions or otherwise.
Announcement on Issues Concerning the Administration of Pilot Collection of Enterprise Income Tax Policies Applicable to Corporate Partners of Limited Partnership Venture Capital Enterprises in Suzhou Industrial Park

On May 24, the State Administration of Taxation promulgated the Announcement on Issues Concerning the Administration of Pilot Collection of Enterprise Income Tax Policies Applicable to Corporate Partners of Limited Partnership Venture Capital Enterprises in Suzhou Industrial Park (No.25 [2013] SAT Announcement, hereinafter referred to as the ¡°Announcement¡±).

As specified by the Announcement, corporate partners of limited partnership venture capital enterprises in Suzhou Industrial Park (hereinafter referred to as ¡°Corporate Partners¡±) refer to the corporate resident enterprises that effectuate accounts check of enterprise income tax in accordance with the Law of the People¡¯s Republic of China on Enterprise Income Tax and its implementation rules and regulations; and for those capital venture enterprises of limited partnership that conform to the Article 3 of the No.67 Document ([2012] Finance and Tax) (hereinafter referred to as ¡°Capital Venture Enterprises¡±), if there invest in unlisted medium and small high-tech enterprises by means of equities, their corporate partners are entitled to certain preferences in accordance with the relevant laws and regulations within 2 years (24 months) of the pilot period.

In the meantime, the Announcement requires that the corporate partner shall deduct 70% of the investment amount as the tax payable by such capital venture enterprise in accordance with Article 2 of the No.67 Document ([2012] Finance and Tax. If the corporate partner invests in several qualified capital venture enterprises in Suzhou Industrial Park and combine its deductible investment amount and tax amount due. When deduction is not sufficient in the current year, it can be transferred to the subsequent tax years for continuous deduction; and when there is remainder after the deduction, the enterprise income tax shall be calculated in accordance with the Law of the PRC on Enterprise Income Tax.

As specified by the Announcement, for capital venture enterprises whose corporate partners are eligible for preferential conditions, record-filing materials prescribed by Article 4 of the Notice of the State Administration of Taxation on Issues of Application of Income Tax Preference to Start-up Investment Enterprises (No.87 [2009] Guo Shui Fa), the Statement of Deductions of Taxable Income of Corporate Partners of Start-up Investment Enterprises with Limited Partnership and the Capital Verification Report of Start-up Investment Enterprises. After acceptance thereof, the competent tax authority of Suzhou Industrial Park will be responsible for reviewing the taxable income of the enterprise in such year, distribution ratio of corporate partners, taxable income due to corporate partners, investment amount deductible by corporate partners, etc., and after the Statement of Deductions of Taxable Income of Corporate Partners of Start-up Investment Enterprises with Limited Partnership was confirmed and sealed, a copy shall be returned to the start-up investment enterprise, two copies shall be forwarded to the corporate partners by the start-up investment enterprise (inter alia one copy shall be forwarded by the corporate partner to the local competent tax authority), and another copy shall be retained by the competent tax authority of Suzhou Industrial Park. When the corporate partners apply to the local competent tax authority for eligibility of deduction of taxable investment income, they shall submit the Statement of Deductions of Taxable Income of Corporate Partners of Start-up Investment Enterprises with Limited Partnership accepted and sealed by the tax authority and the Capital Verification Report, in addition to the record-filing materials provided in Article 4 of the No.87 Document [2009] Guo Shui Fa.

The Announcement specifies the specific effective date. Since the pilot period approved by the State Council lasts from January 1, 2012 to December 31, 2013, the commencement of the effectiveness o this Announcement shall be dated at January 1, 2012.

Legal Practices

Sale of ¡°Cartier Diamond Ring¡±¡ªDispute over Infringement upon Trademark and Unfair Competition

[Case Profile]

Case I:

One of the defendants Mkela Co. highlighted its slogans of ¡°Cartier¿î°ÙÄê¾­µä»Ê¹Ú×ê½ä (Cartier Century Classic Crown Diamond Ring)¡±, ¡°Éè¼Æ·ç¸ñÔ´×Ô°ÙÄê¾­µäCartier(¿¨µØÑÇ) (Design Style Originated from Century Classic Cartier)¡±, ¡°¿¨µØÑÇ×êʯ¶àÄêÓëÌṩ¹ú¼ÊÒ»ÏßÆ·ÅÆÖ鱦CartierµÈ×êʯÉú²úóÒ×É̺Ï×÷£¬¹²ÏíÈ«Çò¶¥¼¶¹©Ó¦Á´£¬±£Ö¤×êʯ×î´¿ÕýµÄÇй¤ÓëÓÅÖÊÆ·ÖÊ (Cartier maintains years of cooperation with diamond manufacturers and traders who provide international top-class brands such as Cartier, shares with them the global top-level supply chain and guarantee the purest cutting and premium quality of diamonds)¡±, etc. in its product information, and conducted joint sales with the other Defendant Yihaodian on the website of Yihaodian.

The court held a public trial of the case on November 28, 2012, confirming that trademark ¡°Cartier¡± and ¡°¿¨µØÑÇ¡± was literally figmentary and highly conspicuous; and besides, such trademark was highly recognizable and reputable and the two products bearing such trademark are the same, therefore, Mkela was able to attract the public attention on its products with the trade name ¡°Cartier¡± and ¡°¿¨µØÑÇ(Cartier)¡± in the product information and to mislead the public to the false impression that ¡°Cartier¡± and ¡°¿¨µØÑÇ(Cartier)¡± have become the style and design of relevant diamond rings. This reflects the circumstance described in Paragraph 5 of Article 52 of the Trademark Law, ¡°other acts that have caused any other damage to another¡¯s exclusive right to use a registered trademark¡± and has constituted an infringement upon the exclusive right of Cartier. Besides, with regard to the alleged unfair competition, the court determined: Mkela and the plaintiff Cartier were both operators of jewelries and they were thus in a competitive relationship, and therefore, Mkela¡¯s act was confusing and would probably mislead the public to the false impression that the products involved were as classic and luxurious as Cartier in respects of quality, raw materials, style, etc. or that the products involved were intended to take a free ride of Cartier¡¯s products. This was an obviously false propaganda and was against Article 9.1 of Law of the People¡¯s Republic of China against Unfair Competition: ¡°a business operator may not, by advertisement or any other means, make false or misleading publicity of their commodities as to their quality, ingredients, functions, usage, producers, duration of validity or origin¡±. Therefore, Mkela¡¯s act also constituted an unfair competition against the plaintiff Cartier. On February 20, 2013, the court finally adjudicated that Mkela should immediately stop the infringement upon the plaintiff¡¯s exclusive right to use the trademark and the act of unfair competition against the plaintiff and should make economic compensation of RMB130,978 to Cartier. Since Yihaodian reviewed the business qualification of Mkela and included the relevant provisions on non-infringement in the agreement of on-line platform cooperation signed with Mkela and did not engage in any infringement act, Yihandian was free from any legal liability in this case.

Case II:

When one defendant Yihaodian was selling the product ¡°Eckart Louis 0.2 Carat Cartier Classic Style°®¿¨Â·Ò×˹0.2¿ËÀ­¿¨µØÑǾ­µä¿îʽ¡±, it highlighted the slogans ¡°Cartier Classic Style¿¨µØÑǾ­µä¿îʽ¡± and ¡°Cartier¡± to an extent of being completely the same as ¡°¿¨µØÑÇ¡± and ¡°Cartier¡±. The other defendant Hui Xin used the words ¡°Cartier Classic Style¿¨µØÑǾ­µä¿îʽ¡± on the product package and used ¡°The Louis-series rings collected by Cartier should agree with the personalities of those who wear them and perfectly match their fingers, for the sake of creating for all happiness-struck women their dream rings (CartierËùÊÕ¼µÄLouisϵÁнäÖ¸Ó¦¸ÃºÍÅå´÷ÕßµÄÐÔ¸ñÏàÆõºÏ,²¢ÓëÊÖÖ¸ÍêÃÀ´îÅä,ÊÇΪÁËÈÃÿλÐÒ¸£µÄŮʿÄÜÃÙµÃÃÎÏëÖеĻé½ä)¡± in the product introduction, etc.

The court held an open trial of the case on November 28, 2012. The two defendants used ¡°¿¨µØÑÇ¡± and ¡°Cartier(¿¨µØÑÇ)¡± in the name, package and sales proof of the same product manufactured and sold for the purpose of attracting the public attention on their products and would probably mislead the public to the false impression that ¡°¿¨µØÑÇ¡± and ¡°Cartier(¿¨µØÑÇ)¡± have already become the general names of relevant diamond rings, which is right the circumstance described in Paragraph 5 of Article 52 of the Trademark Law: ¡°other acts that have caused any other damage to another¡¯s exclusive right to use a registered trademark¡± and thus impairs the exclusive right of Cartier¡¯s registered trademark. With regard to the unfair competition issue, ¡°The Louis series rings collected by Cartier should¡­¡­¡± , as far as the literal meaning is concerned, refers to the direct public introduction of Cartier products, and Cartier does have ¡°Louis-series¡± rings, and this description neither undermines Cartier brand nor bears direct relation with the products involved, therefore, the aforesaid act was not sufficient yet to mislead the public in respects of the quality, ingredients, functions, purposes, manufacturers, brand, etc. of the products involved, nor did it achieve the extent of false propaganda of the products involved by utilization of the well-known brand and thus misleading the relevant public. That is to say, the aforesaid act does not constitute unfair competition as prescribed in Article 9 of the Anti-unfair Competition Law. On February 20, 2013, the court finally adjudicated that the two defendants should immediately stop the infringement upon the plaintiff¡¯s exclusive right to registered trademark and should jointly make a compensation of RMB56,224 to the plaintiff.

[Lawyer¡¯s Comment]

(1) Infringement upon the exclusive right of registered trademark

In the aforesaid case, the judge ruled that the defendant¡¯s acts have constituted breach of the exclusive right of registered trademark in accordance with Paragraph 5 of Article 52 of the Trademark Law. In the process of selling and manufacturing the products, the defendants used the promotional words which were completely the same as the well-known brand, which was a deliberate free ride of the well-known brand to attract consumers in order to achieve purposes of popularizing products, improving product recognition and increasing market shares. Consequently, such free ride reduced the role of identification by the well-known brand, impaired the brand¡¯s lawful rights and interests and constituted infringement upon the exclusive right of the brand.

(2) Unfair Competition

In the aforesaid cases, the defendant filed a lawsuit against the four infringers on the ground of ¡°unfair competition¡±, but the court made different judgments. In the first case, the advertising content of Mkela could neither evidence that the design of the concerned goods came from Cartier nor that it borne any business relation with Cartier and therefore was a falsified advertisement and unfair competition. In Case II, Hui Xin¡¯s statement was not a falsified advertisement nor misled the public into the false impression that its products were closely related with Cartier; therefore, unfair competition was untenable. Apparently, the focus of identifying unfair competition does not lie in whether a ¡°misleading falsified advertisement¡± exists or not. Therefore, when a business is promoting its products, it should describe its product quality, raw materials, style, etc. in a faithful manner and should never plot to take a free ride of prestigious brands.

(3) Joint Infringement

With regard to the issue of joint infringement, it is reflected by the above case that what the court emphasized was whether the other party performed the reasonable duty of care and participated in the relevant infringement. In Case I, the second defendant was a network service provider which only furnished the network transaction platform but not actually participated in manufacturing and selling of the infringing products; besides, the second defendant also went through the qualification review prior to the execution of the contract with the first defendant and performed the duty of care. However, in Case II, the first defendant acted as seller to the second defendant and was aware of the product information provided by the second defendant and the first defendant was fully capable of identifying the infringement by the second defendant¡¯s information upon the plaintiff¡¯s trademark, therefore, the first defendant was at fault and was thus determined to have been engaged in a joint infringement.

(The author¡¯s contact information: baileyxu@hllawyers.com, wincylu@hllawyers.com)

 

Analysis on the Duty of Loyalty of Company Senior Manager

Recently the author acted for a labor dispute case between a foreign entity and its former senior manager. In the case, a Chinese man of a foreign nationality, Mr. Pan started to work for the entity A (WFOE) in 2009 as CEO of Asia-Pacific Region. Not long after Mr. Pan began his work at A, he established an Entity B in Hong Kong and again invested in another Entity C in Shanghai in the name of Entity B. At C, Mr. Pan acted as CEO and Legal Representative, and the business scope of C was almost the same as that of A, which includes import & export and wholesale of daily necessities and cosmetics. Mr. took advantage of his position and developed C into an exclusive distributor of a certain product of A, and again he sold such product to C at an extremely low price. In 2013, A discovered the aforesaid circumstances in internal audit and therefore terminated its labor contract with Mr. Pan on the ground that Mr. Pan committed a serious breach of labor disciplines. Objecting to this termination, Mr. Pan applied for labor arbitration, claiming recovery of its labor relation with A; and A filed a counterclaim that Mr. Pan should compensate A for all the losses caused to A due to his breach of the duty of loyalty. During the labor arbitration, the major ground of defense for Mr. Pan is: Mr. D, Legal Representative of A¡¯s investor, knew about his establishment and operation of C and also approved his developing C into an exclusive distributor of A.

The case is typical as it reflects a senior manager¡¯s breach of the duty of loyalty, and such act is also a breach of the competition restriction obligation and non self-trading obligation on the part of corporate senior manager. Regarding the above, the author will elaborate as follows on how corporate senior manager shall perform his/her duty of obligation and what kind of legal liabilities shall be borne by him/her for breach of the duty of loyalty, pursuant to the PRC Company Law.

I. Theoretical Basis for the Company Senior Manager¡¯s Duty of Loyalty

First of all, in some sense, directors, supervisors and senior managers are senior officers of a company. Theoretically, engagement by the company or the company¡¯s shareholders of such directors, supervisors and senior managers to provide certain services for the corporate operation, supervision and management is a special kind of civil entrustment relationship. After accepting the engagement, those directors, supervisors and senior managers shall be obligated to provide premium services for the company in the principle of good faith and shall not practice fraud or cheat so as to infringe the company¡¯s legitimate rights and interests.

Article 148 of the PRC Company Law also provides that the directors, supervisors and senior managers of a company shall abide by laws, administrative regulations and the company¡¯s articles of association. They shall be faithful and diligent to the company. Meanwhile, Article 148 thereof also specifies in details the acts that directors and senior managers shall keep away from in normal course of business.

II. Scope of Company Senior Managers under the Duty of Obligation

Pursuant to the PRC Company Law, directors, supervisors and senior managers shall perform the duty of loyalty. However, since supervisors do not participate in routine operation of the company, therefore, the subjects in breach of the duty of loyalty in Article 149 thereof exclude supervisors, and Shanghai No.2 Intermediate People¡¯s Court also elaborated this point of view in the case of Shanghai Jingren Glass Machine Co., Ltd. suing Mr. Yao (Case Number: [2009] Hu Er Zhong Min San (Shang) Zhong Zi No.510).

Also, with regard to the scope of senior managers, the PRC Company Law provides, senior manages shall be defined as the general manager, deputy general manager, financial director of the company, board secretary of the listed company and other staff specified by the Articles of Association. It is worth noticing that, in judicial practices, industrial and commercial registration is not an essential element for senior managers, and many courts determine in trial of cases that even a staff is not registered as the company¡¯s senior but his/her duties and functions conform to the essential condition for being a senior manager and he/she has exercised the duties and functions for managing a company, he/she shall be determined as a senior manager.

III. Types of Company Senior Manager¡¯s Breach of the Duty of Loyalty

In judicial practices, common breaches of the duty of loyalty include as follows:

(1) Self-trading

Clause 4 of Article 149 of the PRC Company Law provides: directors and senior managers shall not conclude contracts or make deals with the company in violation of the company¡¯s articles of association or without the consent of the shareholders¡¯ meeting or the general meeting. Pay attention to the following two points in respect of this provision:

1) Self-trading not only refers to trading by a director or senior manager with the company he/she serves in the name of himself/herself, but also refers to trading by an entity in his/her director control with the company he/she serves. For example, if the general manager of A invested in a trading company B in his wife¡¯s or father¡¯s name and developed B into a distributor of A through arrangements by such general manager, such act should be deemed as a self-trading act since there was an indirect interest relationship between the general manager and B (although the general manager did not directly trade with the company in his own name).

2) Before the actualization of a self-trading act, if a director or senior manager has already performed the duty of disclosure and obtained the board¡¯s approval, then such self-trading act will not be prohibited. However, we need to pay attention to Article 149 of the PRC Company Law, it is not provided therein that a shareholder in an interest relationship with a director or senior manager conducting self-trading act should dodge. If a shareholder holding an interest relationship with a director or senior manager conducting self-trading act also participates in the approval procedure, then even if such director¡¯s or senior manager¡¯s self-trading act is disclosed and subsequently gets approved by the board of directors, there is also a possibility of such act prejudicing the rights and interests of shareholders without an interest relationship with the self-trading director or senior manager. Under the above circumstance, the company may also consider remedying the insufficiency of statutory systems with its own rules and regulations, i.e. the articles of association explicitly prohibit all self-trading acts or the system for all the shareholders in a relationship of interests not dodging from the voting in the disclosure of self-trading acts.

(2) Seize business opportunities that should have belonged to the company

Clause 5 of Article 149 of the PRC Company Law provides: without the consent of the shareholders¡¯ meeting or the general meeting, directors and senior managers shall not seek, for the benefit of his/her own or others, any business opportunity that belongs to the company by taking advantage of his/her powers, and operate for his/her own or for others any business that is of the same type with that of the company that he/she serves.

Since in routine operation and management of business, the directors and senior managers of a company cannot avoid various business opportunities related to the company, and these business opportunities will create practical and expectant potential interests to the company and inure to the long-term development of the company. If the directors or senior managers steal these business opportunities which should have been included in the company¡¯s property and forward them to their self-owned or third-party-owned company, this will definitely impair the interests of the company and the company shareholders.

Like self-trading, if the directors and senior managers have performed the obligation of disclosure and have obtained the approval prior to utilization of the company¡¯s business opportunities, the utilization will not be prohibited.

(3) Competition Restriction

Pursuant to Clause 5 of Article 149 of the PRC Company Law, without the consent of the shareholders¡¯ meeting or the general meeting, neither directors nor senior managers shall seek, for the benefit of his/her own or others, any business opportunity that belongs to the company by taking advantage of his/her powers, or operate for his/her own or for others any business that is of the same type with that of the company that he/she serves. For understanding of the competition restriction obligation depicted here, it is worth noticing that: this competition restriction obligation is somewhat different from the competition restriction obligation provided in the Labor Contract Law, in that: (a) The applicable subjects are different. The competition restriction obligation provided in the Labor Contract Law is applicable to the all the employees with access to the trade secrets of the company they serve, which is broader in terms of scope than the competition restriction obligation borne by senior managers provided in the Company Law. (b) The purposes are different. The purpose of the competition restriction obligation provided in the Labor Contract Law is to protect the company¡¯s trade secrets from being infringed; while that of the competition restriction obligation provided in the Company Law is to procure the performance of the duty of loyalty by the company¡¯s directors and senior managers, avoid horizontal competition and prevent impairment of the company¡¯s rights and interests. (c) The terms are different. The term of the competition restriction obligation provided in the Labor Contract Law is effective as of the termination of labor relations and lasts at most two years after termination of labor relations; while that of the competition restriction obligation provided in the Company Law is effective within the period when the company¡¯s directors and senior managers are still in service. (d) The conditions for entry-into-force are different. The competition restriction obligation provided in the Labor Contract Law shall be established by means of agreement, while the competition restriction obligation provided in the Company Law is statutory, and must be performed by the company directors and senior managers. (e) Economic compensations. If a company requires its employees to perform the competition restriction obligation after exit, the company shall pay these employees certain economic compensations, or otherwise these employees shall have the right to refuse to perform such obligation; however, the competition restriction obligation provided in the Company Law is not conditioned to economic compensations.

(4) Other acts as breach of the duty of loyalty

According to the Company Law of the PRC, in addition to the aforesaid three acts, there are some other acts deemed as breach of the duty of loyalty: misappropriating the funds of the company; opening an account in his/her own name or the name of any other individual to deposit the funds of the company; without the consent of the shareholders¡¯ meeting, the general meeting or the board of directors, loaning the funds of the company to others or using the company¡¯s property to provide guarantee for others in violation of the company¡¯s articles of association; accepting, and keeping in his/her possession, commissions for the transactions between others and the company; disclosing the company¡¯s secrets without authorization. Since we cannot include every aspect of the duty of obligation, paragraph 8 of Article 149 of the Company Law is a miscellaneous provision, i.e. none of the directors or senior managers shall engage in any other act that breaches the duty of loyalty to the company.

IV. Liability of a senior manager for breach of his/her duty of loyalty to the company

If the company director or senior manager breaches his/her duty of loyalty, the consequent liabilities to be borne by him/her include as follows:

(1) Benefits obtained from breach of the duty of loyalty shall belong to the company, i.e. exercise of the so-called disgorgement of profits in judicial practices. Pursuant to Clause 2 of Article 149 of the PRC Company Law, the income gained by the director or senior manager from any of the acts in breach of the duty of loyalty shall belong to the company. It is worth noticing that the income here refers to the income obtained by the senior manager in breach of the duty of loyalty rather than the income obtained from transaction between a third person and the company.

(2) If a senior manager causes any losses to the company due to breach of the duty of obligation, the senior manager shall be liable for compensation. Pursuant to Article 150 of the PRC Company Law, where any director, supervisor or senior manager of a company violates laws, administrative regulations or the company¡¯s articles of association during the performance of duties, he/she shall be liable for compensation if any loss is caused to the company.

(3) The company may request for confirmation of the contract relating to illegal transaction as null and void. From the perspective of protecting the bona fide third person, the Company Law does not specify that all the transactions in breach of the duty of loyalty are null and void. But theoretically, for private transactions conducted by directors and senior managers in breach of the relevant regulations, the company may claim that the contracts relating to such transactions shall be deemed as malicious collusion that impairs the company¡¯s interests, therefore, such transactions shall be deemed null and void. The case of ¡°Xi Hai Hotel Senior Manager Conducting Private Transaction without Approval by the Board of Directors¡± once tried by Jiangsu Wuxi Intermediate People¡¯s Court was ended with the adjudication that the consultancy management contract signed between Xi Hai Hotel and Zi Xun Company was null and void.

Looking back on the labor dispute between Mr. Pan and Company A initially described in this article, the focus of this case is obvious, i.e. if the act of Mr. Pan was recognized by Mr. D, Legal Representative of Company A¡¯s Investor, then his act did not constitute the act of ¡°competition restriction¡± and ¡°self-trading¡± regulated by the Company Law, therefore, Company A¡¯s dismissal of Mr. Pan would become groundless and unjustified; however, if Mr. Pan¡¯s act was not recognized by Mr. D, Legal Representative of Company A¡¯s Investor, Mr. Pan should compensate Company A for any and all economic losses incurred thereby.

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