Haworth & Lexon Law Newsletter
No.6 2013(Total:No.134) Aug. 20, 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:

    Notice of the General Office of the Ministry of Commerce on Strengthening and Improving the Examination and Approval, and Administration over Foreign-invested Finance Lease Companies

    Opinions of the China Banking Regulatory Commission and the State Forestry Administration on Implementation of Forestry Right Mortgage Loans

    Notice of the People¡¯s Bank of China on Streamlining Cross-border RMB Business Processes and Fine-tuning Relevant Policies

    Emergency Notice to the People¡¯s Courts on Hearing Various False Litigation Cases

    Several Provisions of the Supreme People¡¯s Court on Disclosing Information on the Lists of Dishonest Persons Subject to Execution

    Provisions on Protecting the Personal Information of Telecommunications and Internet Users

    Announcement of the State Administration of Taxation and State Administration of Foreign Exchange on Issues Concerning Taxation Record Filing for External Payment Projects Including Service Trade

    Announcement of the State Administration of Taxation on Enterprise Income Tax Treatment of Mixed Investment Business of Enterprises

    Latest Regulations of Shanghai Municipality on Operational Private Institutions

    Announcement of Local Tax Bureau of Shanghai Municipality and Shanghai Municipal Bureau of Finance on the Matters with Respect to the Administration of Individual Income Tax on Equity Rewards in Zhangjiang National Independent Innovation Exemplary Zone

    Several Measures of Suzhou Municipality for Accelerating the Development of Small and Medium Science and Technology Enterprises

Legal Practices:

    Caution Against China¡¯s Harsh Attitude Towards Commercial Briberies

    Analysis of the Final Adjudication of the Johnson & Johnson Monopoly Case

Latest Laws and Regulations

Notice of the General Office of the Ministry of Commerce on Strengthening and Improving the Examination and Approval, and Administration over Foreign-invested Finance Lease Companies

On July 11, 2013, the General Office of the Ministry of Commerce promulgated the Notice of the General Office of the Ministry of Commerce on Strengthening and Improving the Examination and Approval, and Administration over Foreign-invested Finance Lease Companies (hereinafter referred to as the Notice), specifying the relevant issues regarding obligations of foreign-invested finance lease companies and strengthening the approval of the market entry of foreign-invested finance lease companies.

According to the Notice, local competent commerce departments shall, during the annual joint inspection of foreign-invested enterprises within their respective administrative regions, strengthen statistical compilation and follow-up inspection of the foreign-invested finance lease companies established after June 2010. Local competent commerce departments shall summarize and submit the reports on last year's business operations of the foreign-invested finance lease companies within their respective administrative regions and their respective financial reports audited by accounting firms to the MOFCOM (Department of Foreign Investment Administration) by June 30 of each year (and by August 15 of 2013).

Also, the Notice prescribes that, the list of enterprises that have submitted relevant materials as required shall be announced via MOFCOM¡¯s website. Local competent commerce departments are not allowed to process subsequent change formalities for foreign-invested finance lease companies that are not announced at MOFCOM¡¯s website.

The Notice also requires local competent commerce departments to, in examining and approving foreign-invested finance lease companies, earnestly fulfill their duties as the departments in charge of foreign investment in the leasing industry and the departments in charge of foreign investment, carry out operations by reference to the Guidelines for Examination and Approval of the Market Entry of Foreign-invested Finance Lease Companies.

As for foreign-invested finance lease companies, the Notice emphasizes that, foreign-invested finance lease companies shall not absorb deposits, disburse loans, entrust others to disburse loans and engage in other unauthorized activities. Without the approval of relevant departments, they shall not engage in inter-company lending, equity investments and other services. Besides, foreign-invested finance lease companies shall not provide direct or indirect financing in any form for local government financing platform companies that undertake government public welfare projects.

Opinions of the China Banking Regulatory Commission and the State Forestry Administration on Implementation of Forestry Right Mortgage Loans

On July 5, 2013, China Banking Regulatory Commission and State Forestry Administration promulgated the Implementing Opinions on Forestry Right Mortgage Loans (Yin Jian Fa [2013] No.32, hereinafter referred to as the Implementing Opinions), stipulating on the issues with regard to the handling of forestry right mortgage loans.

According to the Implementing Opinions, where a financial institution in the banking industry should actively carry out forestry right mortgage loan business, it is feasible that the financial institution issues loans to a borrower on the condition of a mortgage fixed over his/her or a third person¡¯s legally owned forestry right. Forestry rights that can be mortgaged include the ownership and use right of timber, economic forest, firewood forest as well as the use right of the corresponding forest land; the right to use the cutover land of timber, economic forest and firewood as well as the right to use the burned land area; other forests, forest ownership and use right and forest land use right that are permitted by the State laws and regulations to be mortgaged. Meanwhile, the forestry right mortgage loans shall be ensured to focus on the demands of the farmers for their forestry production and management, cultivation and development of forest resources, forest economic development, demand for funds for forest products processing, as well as other production and living-related funding requirements of borrowers.

In addition, the Implementing Opinions require the competent forestry administration departments at all levels to improve their supporting services, regulate and improve the forestry right mortgage registration, assessment, turnover, forestry right purchase and reservation, etc., and to cooperate with the financial institution to fulfill the forestry right mortgage loan business and other forest-related financial services.

For the application for handling the forestry right mortgage loans, the Implementing Opinions differentiate the circumstances of different forestry rights and make pertinent provisions as follows:

(1) When a borrower is applying for handling the forestry right mortgage loans, the financial institution shall request the borrower to present the forestry right certificate. The financial institution shall not accept any forest, wood or forest land, the ownership of which has not been registered in accordance with law or is not clear or is still disputed, as the property for mortgage, nor shall the financial institution accept any other property prohibited by the State laws and regulations to serve as the property for mortgage.

(2) The financial institution shall not accept any forestry right that cannot be disposed of or realized as the property for mortgage, including the ownership and use right of the forest for conservation of water sources, forest for water and soil conservation, windbreak and sand-fixation forest, farmland and pasture protection forest, stream bank and road protection forest, etc. or the corresponding forest land use right, nor the ownership and use right of national defence forest, experimental forest, seed production stand, environmental protection forest, the wood of scenic sports and historic sites and of revolutionary commemoration sites, the forest of natural reserve areas and other forests for special purposes or the corresponding forest land use right.

(3) For those mortgage over the right of the forest for which a wood cutting license has been obtained and on which the cutting has not yet started, the financial institution shall specifically request the mortgager to submit the wood cutting license to the relevant financial institution for safekeeping and handle the record-filing procedure together with the mortgager at the competent department for forestry affairs. During the period of mortgage over the forestry right, without the written consent of the mortgagee, the mortgager shall not engage in any wood cutting.

(4) For the mortgage over the forestry right operated and managed by a rural collective economic organization in a centralized form, the financial institution shall request the mortgager to provide the resolution of consent achieved by more than two thirds of the members of such organization or by more than two thirds of all the villagers as well as a written proof of approval from the people¡¯s government of the village or town where the forestry right resides; for a forestry right mortgage handled by a forestry professional cooperatives, the financial institution shall request the mortgager to provide the resolution of consent passed by the council of such cooperatives; for a forestry right mortgage handled by a limited liability company or a joint stock company, the financial institution shall request the mortgager to provide the resolution or letter of resolution passed by the meeting of the board of shareholders, the shareholders¡¯ assembly or the meeting of the board of directors.

(5) For a mortgage over the jointly-owned forestry right, the financial institution shall request the mortgager to provide the letter of consent of another owner(s); for a mortgage over the forestry right obtained by means of contracted operation, the financial institution shall request the mortgager to provide the contract for such contracted operation; for a mortgage over the forestry right obtained by other means of contracted operation or turnover, the financial institution shall request the mortgager to provide the contract for such contracted operation or the turnover contract as well as the letter of consent from the principal on the mortgage.

Notice of the People¡¯s Bank of China on Streamlining Cross-border RMB Business Processes and Fine-tuning Relevant Policies

On July 5, 2013, the People¡¯s Bank of China promulgated the Notice on Streamlining Cross-border RMB Business Processes and Fine-tuning Relevant Policies (hereinafter referred to as the Notice), streamlining cross-border RMB business processes and fine-tuning relevant policies.

On cross-border RMB settlement business under current account, the Notice points out that, a Mainland bank may, on the basis of the three principles of ¡°know your client¡±, ¡°know your business¡± and ¡°due diligence¡±, directly handle cross-border settlement according to the business certificates submitted by an enterprise (excluding enterprises on the list of enterprises subject to prioritized regulation for RMB settlement of export trade in goods) or the Collection/Payment Instructions for Cross-border RMB Settlement.

On cross-border clearing business for the RMB accounts of bank cards, the Notice points out that, cross-border interbank clearing for transactions under the RMB account of a bank card shall be handled by a bank card clearing agency that is established in the Mainland and qualified for RMB business (hereinafter referred to as the Mainland Bank Card Clearing Agency) via an offshore RMB clearing bank or a Mainland agency bank. After the RMB account of a bank card issued by an offshore bank is used in the Mainland for consumption or RMB withdrawal in cash, the relevant Mainland acquirers shall conduct clearing with the relevant Mainland Bank Card Clearing Agency in RMB, and the latter shall conduct clearing with the offshore bank in RMB.

On offshore RMB lending by Mainland non-financial institutions, the Notice stipulates that, A Mainland non-financial institution may apply to a Mainland Bank for settlement of offshore RMB lending. A Mainland non-financial institution that has equity relationship with the offshore recipient or is ultimately controlled by the same parent company as the offshore recipient, and for which a member institution exercises the functions of the regional headquarters or investment management may adopt the RMB fund pool model to apply to a Mainland bank for settlement of offshore lending with the RMB fund pool. And on the overseas bond issue, the Notice prescribes that, a Mainland non-financial institution may apply to a Mainland bank for opening a special RMB deposit account for deposit of the funds raised from bond issuance that are remitted from overseas upon approval by the People¡¯s Bank of China.

Besides, the Notice specifies that, a Mainland non-financial institution may provide RMB guarantee for external parties in accordance with the Property Law of the People¡¯s Republic of China, the Guarantee Law of the People¡¯s Republic of China and other relevant laws. Where the Mainland non-financial institution uses RMB to perform its obligations as a guarantor of external guarantees, the relevant Mainland Bank shall process RMB settlement for the said institution after examining the authenticity of relevant transactions, and submit relevant information to the cross-border RMB receipt and payment information management system. The Mainland non-financial institution may also directly pay the funds for performance of its obligations as the guarantor with the RMB funds retained overseas.

Emergency Notice to the People¡¯s Courts on Hearing Various False Litigation Cases

On June 28, 2013, the Supreme People¡¯s Court promulgated the Emergency Notice to the People¡¯s Courts on Hearing Various False Litigation Cases under the Real Estate Regulation Policy (Fa Ming Chuan [2013] No.359, hereinafter referred to as the ¡°Notice¡±).

According to the Notice, under the real estate regulation policies such as the State¡¯s Five Measures, there emerged plenty of ¡°false divorces¡±, ¡°house purchases in borrowed names¡±, ¡°yin yang contracts (dual contracts)¡± in second-house transactions, ¡°make up debts and pay such debts by houses under contracts¡±, etc., all of which were aimed at evading tax, loan restriction and purchase registration, etc. To curb the aforesaid phenomena, the Notice requires the courts at all levels to pay special and significant attention to the false litigations that have already emerged or threatened to emerge in enforcing the State¡¯s real estate regulation policies in their jurisdictions, reinforce the investigation and elimination efforts in strict accordance with the law and ensure the implementation of the State¡¯s real estate regulation policies.

Meanwhile, the Notice provides that, when hearing the relevant cases, the courts shall differentiate between actual conditions and put forward tailored solutions:

1. When the person concerned specifies the governing court in the contract on debt payment by house but the house at issue is in a location different from the location of the governing court, the court shall identify the validity of the contractual jurisdiction in accordance with the provisions about exclusive jurisdiction of the Civil Procedure Law.

2. When the debit and credit relationship is only evidenced by a receipt and acknowledged by the two persons concerned, but not supported by any sums, the court shall strictly review the authenticity of the debit and credit relationship rather than simply identify such relationship as tenable.

3. When the two persons concerned file a lawsuit to the court with the debit and credit relationship as the subject matter but hold no objection against the case fact and settlement and promptly enter into a contract on ¡°debt payment by house¡±, the court shall decide whether or not to issue a letter of conciliation on the basis of the real facts verified.

4. When the two persons concerned, with the intervention of the people¡¯s court, enter into a conciliation agreement that contains such clauses as debt payment by house and jointly apply for judicial confirmation, the court shall reinforce the investigation efforts to verify the circumstance and issue a valid ruling to identify the effectiveness of the conciliation agreement after careful consideration.

5. When the two persons concerned apply for enforcement of the legal instrument on the effectiveness of the debt payment by house or the conciliation agreement, in principle the court concerned shall not issue any ruling letter on the debt payment by house or require the registration authority by notice to assist in handling the house title transfer; when the two persons concerned require to clear off their debts by house property, the court shall enforce such actions as auction.

6. The court shall investigate other cases that might involve falsified actions.

Several Provisions of the Supreme People¡¯s Court on Disclosing Information on the Lists of Dishonest Persons Subject to Execution

On July 16, 2013, the Supreme People¡¯s Court promulgated the Several Provisions on Disclosing Information on the Lists of Dishonest Persons Subject to Execution (Fa Shi [2013] No.17) (hereinafter referred to as the Several Provisions).

According to the Several Opinions, where a person subject to execution fails to perform the obligations specified in binding legal instruments despite being capable of performance, and falls under any of the following circumstances, the relevant people¡¯s court shall include such person in the list of dishonest persons subject to execution, and take credit disciplinary actions against such person in accordance with the law:

(1) Where the person subject to execution obstructs or resists execution by fabricating evidence, resorting to violence or threat, or by other means;

(2) Where the person subject to execution evades execution by fictitious litigation or arbitration, by hiding or transferring property, or by other means;

(3) Where the person subject to execution violates the property reporting system;

(4) Where the person subject to execution violates the order on restrictions on extravagant consumption;

(5) Where the person subject to execution refuses to comply with the execution settlement agreement without justification; or

(6) Where the person subject to execution otherwise refuses to perform the obligations specified in the binding legal instruments despite being capable of performance.

Meanwhile, the Several Opinions specify that, an execution applicant who is of the opinion that a person subject to execution has committed any of the dishonest acts prescribed by Article 1 herein may make an application to the relevant people¡¯s court for including such person in the list of dishonest persons subject to execution, and the people¡¯s court shall make a decision after examination. A people¡¯s court that is of the opinion that a person subject to execution has committed any of the dishonest acts prescribed by Article 1 herein may decide to include such person in the list of dishonest persons subject to execution ex officio.

With respect to dishonest persons subject to execution, the Several Opinions provide that, the people¡¯s courts at all levels shall enter the information on the lists of dishonest persons subject to execution into the Supreme People¡¯s Court¡¯s database of lists of dishonest persons subject to execution, and uniformly announce relevant information to the public via the said database.

Besides, where a dishonest person subject to execution falls under any of the following circumstances, the relevant people¡¯s court shall remove relevant information from the list of dishonest persons subject to execution:

(1) Where the person subject to execution has fulfilled all the obligations prescribed in binding legal instruments;

(2) Where the person subject to execution has reached an execution settlement agreement with the execution applicant, and has fully performed the said agreement as confirmed by the execution applicant; or

(3) Where the people¡¯s court rules to terminate the execution procedures in accordance with the law.

Provisions on Protecting the Personal Information of Telecommunications and Internet Users

On July 16, 2013, the Ministry of Industry and Information Technology promulgated the Provisions on Protecting the Personal Information of Telecommunications and Internet Users (hereinafter referred to as the Provisions), further specifying the protection of the personal information of telecommunications and Internet users.

According to the Provisions, these Provisions shall apply to the activities of collecting and using the personal information of users during the provision of telecommunications services and Internet information services within the territory of the People¡¯s Republic of China.

For the purpose of these Provisions, personal information of users shall refer to the information collected by telecommunication business operators and Internet information service providers during the provision of services that may be used for identifying the users and the timing, places, etc. of the use of services by the users either independently or in combination with other information, and shall include the name, date of birth, identity document number, address, phone number, account number, password, etc. of a user.

According to the Provisions, telecommunications business operators and Internet information service providers shall, during the provision of services, collect and use the personal information of users in a lawful and proper manner and by following the principle of necessity. Telecommunications business operators and Internet information service providers shall be responsible for the security of users¡¯ personal information as collected and used during the provision of services.

The Provisions stipulate that, without the consent of users, telecommunications business operators and Internet information service providers are not allowed to collect and use the personal information of the users. Telecommunications business operators and Internet information service providers that collect or use the personal information of users shall clearly inform the users of the following information: the purposes, methods and scope of information collection or use, the channels for the users to inquire about and correct information, the consequences of refusing to provide information, etc.

A telecommunications business operator or an Internet information service provider shall take the relevant measures to guard against the leakage, destroy, alteration or loss of users¡¯ personal information.

Announcement of the State Administration of Taxation and State Administration of Foreign Exchange on Issues Concerning Taxation Record Filing for External Payment Projects Including Service Trade

On July 9, 2013, the State Administration of Taxation and State Administration of Foreign Exchange promulgated the Announcement on Issues Concerning Taxation Record Filing for External Payment Projects Including Service Trade (hereinafter referred to as the Announcement), with respect to the relevant issues concerning the taxation record filing for external payment projects including service trade:

Domestic entities and individuals shall, when making a single external payment above USD50,000 (excluding the equivalent of USD50,000, similarly hereinafter) of the following foreign exchange funds (with an exception of the circumstances prescribed in Article 3 hereunder), register with the local competent State taxation authorities (local State taxation authorities at the same level where the competent tax authorities are of local taxation only) for taxation record filing:

1. Service trade proceeds obtained by foreign entities and individuals from within the territory of China, including earnings from transportation, tourism, communications, construction and installation and contracted labor services, insurance services, financial services, computer and information services, use and license of proprietary rights, sports and culture and entertainment services, other commercial services, governmental services, etc.;

2. Earnings and current transfers receivable such as domestic employment compensations of foreign individuals, dividends, bonuses, profits, direct debt interests, guarantee fees and donations of a non-capital transfer nature, compensations, taxes, incidental income received by foreign entities or individuals from within the territory of China;

3. Financing lease rent, immovable property transfer income, equity transfer income received by foreign entities or individuals from within the territory of China and other lawful income of foreign investors.

Where foreign investors re-invest a single amount above USD50,000 in the territory of China with the legitimate income from domestic direct investment, taxation record filing shall be performed pursuant to this Provision.

When the competent tax authority finds that taxes for the outside payment project are not paid as agreed, it shall notify the taxpayer or the tax disburser in writing of the declaration or the original deduction obligations. In the event of tax recovery, the competent tax authority may impose penalties in accordance with the relevant tax laws and regulations.

Also, the Announcement confirms that, where any domestic institution or individual makes a foreign payment of the foreign exchange capital under the following items, no Record-filing List needs to be handled and submitted: (1) expenses incurred outside China by domestic enterprises on business trip, conferences, commodity fairs, etc; (2) office expenses incurred outside China by domestic enterprises, project payment advanced by domestic enterprises for contracting the projects outside China; (3) expenses incurred outside China by domestic enterprises in connection with import and export commission, insurance cost, and compensation and other fees and sums set forth in the Announcement.

Announcement of the State Administration of Taxation on Enterprise Income Tax Treatment of Mixed Investment Business of Enterprises

On July 15, 2013, the State Administration of Taxation promulgated the Announcement on Enterprise Income Tax Treatment of Mixed Investment Business of Enterprises (SAT Announcement [2013] No.41, hereinafter referred to as the Announcement), with respect to the enterprise income tax treatment of the mixed investment business of enterprises:

1. The mixed investment business of an enterprise shall refer to the investment business possessing the dual characteristics of both equity and debt investments. The mixed investment business of an enterprise that satisfies all of the following conditions shall be subject to enterprise income tax treatment pursuant to this Announcement:

(1) Where the invested enterprise, after accepting the investment, needs to pay interest on a regular basis according to the interest rate agreed upon in the investment contract or agreement (or to make regular payments of the minimum interest, fixed profits or fixed dividends, the same below);

(2) Where there is a clear investment period or there are specific investment conditions, and where the invested enterprise needs to redeem the investment or repay the principal upon expiration of the investment period or after the specific investment conditions are satisfied;

(3) Where the investing enterprise does not have ownership over the net assets of the invested enterprise;

(4) Where the investing enterprise does not have the right of voting and the right of being elected; and

(5) Where the investing enterprise does not participate in the daily production and operations of the invested enterprise.

2. The mixed investment business of an enterprise that satisfies all of the conditions prescribed by Article 1 herein shall be subject to enterprise income tax treatment pursuant to the following provisions:

(1) As regards the interest paid by the invested enterprise, the investing enterprise shall recognize the realization of income on the date when the interest becomes payable by the invested enterprise and include the interest income in the taxable income of the current period; the invested enterprise shall recognize interest expenditure on the date when the interest becomes payable, and perform pre-tax deduction pursuant to the Tax Law and Article 1 of the Announcement of the State Administration of Taxation on Several Issues Concerning Enterprise Income Tax (2011 No. 34); and

(2) As regards the investment redeemed by the invested enterprise, both parties to the investment shall, upon redemption, recognize the difference between the redemption price and the investment cost as the profits or losses of debt restructuring and include the said difference in their respective taxable income of the current period.

This Announcement shall come into force on September 1, 2013. No further taxation adjustment shall be made to mixed investment business that occurred prior to the effective date hereof and that has been subject to taxation treatment.

Latest Regulations of Shanghai Municipality on Operational Private Institutions

On June 16 and June 20, 2013, Shanghai Municipal Administration for Industry and Commerce, Shanghai Municipal Education Commission and Shanghai Municipal Human Resources and Social Security Bureau successively promulgated the Interim Measures for Registration of Operational Private Training Institutions in Shanghai (hereinafter the Interim Measures for Registration), Interim Measures for Management of Operational Private Training Institutions in Shanghai (hereinafter the Interim Measures for Management), etc., specifying the registration and routine management of operational private training institutions in Shanghai.

The Interim Measures for Registration have specified and confirmed the requirements and conditions for the registration and establishment of operational private training institutions.

First of all, the Interim Measures for Registration have defined the scope of ¡°operational private training institutions¡±, i.e. domestically-funded incorporated enterprises (excluding operational private early education service institutions) that are registered by the administration for industry and commerce after the opinions of the administrative authority of education or human resources and social security bureau are solicited and that are approved to engage in operational training activities; those that provide profit-based culture and education related and occupational skill related training services to the public. At the same time, such institutions shall not engage in any degree-based education project. Other companies shall not engage in operational training activities in the name of providing educational counselling or educational household services, etc.

Meanwhile, the Interim Measures for Management also specify the procedure for examination and approval of the registration of operational training institutions: it is the administration for industry and commerce that shall handle the registration and the administrative authority of education or human resources and social security bureau that shall provide opinions after review.

In addition, the Interim Measures for Management provide the specific requirements for establishment of an operational private training institution in its appendix Requirements for Registration of Operational Private Training Institutions: (1) the institution shall have legal representative who is familiar with teaching affairs and management; (2) the institution shall have full-time and part-time teachers and management personnel that match the training category, level and scale; (3) the institution shall have appropriate funds and sources of capital for routine operation and management. According to the Regulations of Shanghai Municipality on Promotion of Lifelong Education, the institution shall have a special deposit account for tuition fee and miscellaneous to guarantee that all the tuition and miscellaneous collected are mainly used for education and teaching activities; (4) the institution shall have appropriate business domicile (i.e. teaching location) and teaching equipment; (5) the institution shall have the management system for running such institution and teaching activities.

The Interim Measures for Management, promulgated along with the Interim Measures for Registration, have specified and regulated the routine business activities and operations of operational private education training institutions.

The Interim Measures for Management have clarified the different roles and responsibilities of the administrative authority of education, the human resources and social security bureau and the administration for industry and commerce in the operation and management of operational private education authorities.

Besides, the Interim Measures for Management stipulate the relevant matters regarding the responsible persons for running an operational private training institution, the utilization of tuition and miscellaneous, enrolment advertisements and lifelong education, etc.
Announcement of Local Tax Bureau of Shanghai Municipality and Shanghai Municipal Bureau of Finance on the Matters with Respect to the Administration of Individual Income Tax on Equity Rewards in Zhangjiang National Independent Innovation Exemplary Zone

In February 2013, the Ministry of Finance and the State Administration of Taxation promulgated the Notice on the Pilot Policies with Respect to the Individual Income Tax on Equity Rewards in the National Independent Innovation Model Zone Established in Zhongguancun Science and Technology Park (Cai Shui [2010] No.83, hereinafter referred to as the Notice).

As prescribed by the Notice, with a view to supporting the construction of such self-innovation pilot areas as Zhong Guan Cun Science and Technology Park, Donghu Hi-tech Development Zone and Zhangjiang Hi-tech Development Zone, and of Hefei-Wuhu-Bengbu Self-innovation Comprehensive Experimental Site, upon approval of the State Council, with regard to the rewards granted in equity forms such as shares or capital contribution ratios to the relevant technological talents of a venture enterprise engaged in technological innovation in the pilot areas for the transformation of technological achievements by such enterprise, if the technological personnel of the enterprise has difficulty in making an one-off tax payment, he/she may pay the individual income tax by instalments within a period of at most five years upon the examination of the authority in charge of taxation. Meanwhile, the equity rewards granted to the technological talents shall be subject to the payment of individual income tax in accordance with the currently effective policies in that regard. The taxable value of the equity rewards shall refer to the fair market value prevailing at the time when such equities are obtained.

According to the Notice, from January 1, 2012 to December 31, 2014, the technological talents approved by the relevant government authority of enjoying the equity rewards shall be entitled to pay their individual income tax by instalments.

Accordingly, in July 2013, the Local Tax Bureau of Shanghai Municipality and Shanghai Municipal Bureau of Finance promulgated the Announcement on the Matters with Respect to the Administration of Individual Income Tax on Equity Rewards in Zhangjiang National Independent Innovation Exemplary Zone (hereinafter referred to as the Announcement). According to the Announcement, all the enterprises that satisfy the conditions prescribed in Caishui No.15 (2003) Document (the list of enterprises shall be provide by the Administration Committee of Zhangjiang Hi-tech Industrial Development Zone) shall handle the record-filing procedure for individual income tax payment in instalments with pertinent materials at the competent tax authority within 30 days after the equity change registration is fulfilled. The period of instalments shall start from the month following the date when the individual equity registration is handled. Each calendar year shall be deemed as an instalment and instalments shall be paid within 5 years, no later than the 60th month.

Meanwhile, as specified by the Announcement, if the taxpayers entitled to equity rewards need to transfer such equities (including gifted and transferred equities arising therefrom, same below), such taxpayers shall pay off such unpaid taxes in a lump sum within 30 days after the equity transfer. If the taxpayers have not transferred the total equities and the income of such transfer is not sufficient to cover the taxable amounts, the balance can still be subject to payment by instalments after the original plan is adjusted appropriately.
Several Measures of Suzhou Municipality for Accelerating the Development of Small and Medium Science and Technology Enterprises

On July 11, 2013, Suzhou Municipal People¡¯s Government promulgated the Several Measures of Suzhou Municipality for Accelerating the Development of Small and Medium Science and Technology Enterprises, which include:

Introduce and cultivate scientific and technological talents. Priority is given to declaration of various talent plans by small and medium science and technology enterprises. For those selected into the ¡°Gusu Innovation and Entrepreneurship Pioneer Plan¡±, a scientific research grant of RMB1,000,000 to RMB4,000,000 as well as a residential allowance of RMB500,000 to RMB2,500,000 shall be given; and for those flexibly introduced overseas high-level talents who have been selected into the ¡°Seagull Plan¡±, a maximum grant of RMB500,000 shall be given. For those small and medium scientific and technological leading enterprises which are at the stage of expansion, a maximum grant of RMB1,000,000 shall be given in a sustainable manner. Considering the requirements of small and medium science and technology enterprises for talents, a talent introduction session will be held in Qinghua University, Peking University and other prestigious universities in China and a grant of RMB100,000 and RMB50,000 shall be given separately to the graduates with a doctor¡¯s degree and those with a master¡¯s degree who have come to work in Suzhou and have been selected into the ¡°Talent Plan for Gusu Major Industries Desirous of Talents¡±.

Promote technological innovations. Establish a RMB1,500 innovation fund for small and medium science and technology enterprises and support the research and development of new technologies, new processes and new products by small and medium science and technology enterprises. Strengthen the industry-university-research cooperation. More than 80% of the special fund for municipal scientific and technological deliverables conversion shall be used for the transfer and conversion of the scientific and technological deliverables of universities and scientific research institutes.

Accelerate the development of enterprises. In accordance with the different industries, size and development stages of those small and medium science and technology enterprises, a highly oriented gradient development plan will be carried out. The ¡°Eyas Plan¡± will be put into practice and 1,000 early stage small and medium science and technology enterprises will be supported by means of the angel fund and the entrepreneurship fund, etc.; the ¡°Gazelle Plan¡± will be effectuated: i.e. the municipality will arrange a special fund of RMB200,000,000 and will utilize project subsidies, technological renovation, investment and financing, etc. to support and strengthen small and medium science and technology enterprises. For the small and medium science and technology enterprises that are at the stage of expansion, priority shall be given to the land used for industrialized projects of advanced technology, great growth and high added value and attention shall also be paid to capital, electricity, energies, talents, labour, transport capacities, etc. Every year 100 small and medium science and technology enterprises of great growth shall be selected as major linking service enterprises and incorporated into the group of Innovation Leading Enterprises of Suzhou Municipality, and those that satisfy the relevant conditions will be accredited as innovation pioneers and thus entitled to the supporting preferences for innovation pioneers.

Encourage the development of angel investment. Establish the mother fund for angel investment and encourage the social capital to jointly establish the fund for angel investment. The share participation ratio of the mother fund shall be no less than 30%. The investment in the early stage scientific and technological enterprise shall be no less than 70% and the investment in the grand market scope of Suzhou Municipality shall be no less than 70%. Every year the municipality shall arrange for special fund to grant a maximum 10% risk allowance (combine the national, provincial and municipal levels all in one) to the investment institutions in accordance with their investment amount in our municipality; for the loss that occurs to the angel investment project, the municipal government may grant a maximum 20% risk allowance to the investment institution, along with a maximum compensation of RMB2,000,000.

Legal Practices

Caution Against China¡¯s Harsh Attitude Towards Commercial Briberies

Not long ago, GlaxoSmithKline (hereinafter ¡°GSK¡±), a world-famous pharmaceutical firm, was suspected of committing commercial bribery and was thus trapped in worsening situations. Under the supervision by the PRC Ministry of Public Security, the public security organs of Changsha (Hunan Province), Shanghai, Zhengzhou (Henan Province), etc., successively reported this case and worked on investigations thereon. In the wake of those investigations, criminal coercive measures were initiated against the four executives performing duties in the sales, human resources, marketing and legal affairs departments of GSK and dozens of sales personnel of GSK.

Case Profile

According to media release, GSK and several executives of GSK were suspected of committing commercial briberies, as reflected in the following events:

(1) GSK directly offered bribes to doctors and government officials: during business activities, GSK¡¯s sales force would obtain a certain sum of ¡°reserves¡± funds and use such funds to maintain the sound relationship between GSK and those doctors and government officials, including purchasing valuable gifts for these recipients, paying for various activities and directly returning to doctors a percentage of the drug sales revenues in the form of rebate.

(2) GSK engaged in cash-outs via the travel agency: due to the internal control policies of GSK, reimbursements of some overly large amounts could not pass GSK¡¯s internal review, GSK¡¯s executives had to reimburse such amounts through engaging the travel agency to hold kinds of business-related activities for the purpose of getting funds, under which circumstance, GSK¡¯s executives, after getting the funds for those business-related activities, provided doctors with some of such funds in the name of travel funds, lecture fees, etc.

(3) GSK¡¯s executives accepted bribes: the travel agency, for the purpose of undertaking more business from GSK, turned their illegal gains into cash, ¡°sexual bribe¡±, etc. to buy off the executives of GSK.

As a matter of fact, we are not surprised to learn the aforesaid means of briberies adopted by GSK and the travel agency, since such means do exist in such industries as medicine, education, tendering and bidding, etc.

The Ever-improving Legal System of China against Commercial Briberies

¡°Commercial bribery¡± is a kind of bribery, generally referring to a kind of unfair competition act, i.e. directly or indirectly offering or receiving cash, tangibles and other benefits, in the name of rebate, promotion fee, advertising fee, reimbursements, overseas travel, etc.

Since commercial bribery negatively affects the environment for fair market competitions and at the same time impairs the integrity of commercial entities, government authorities and government officials, the legal system of our country against commercial briberies focuses on striking commercial briberies from the administrative and the criminal perspective respectively: the former is targeting illegal commercial briberies and the latter is targeting more serious commercial briberies suspected of criminal offences.

1. Illegal acts that constitute commercial briberies

Illegal commercial briberies refer to those depicted in Article 8 of the PRC Anti-unfair Competition Law. Although this kind of acts is not serious enough to constitute a criminal crime, administrative penalties can still be imposed thereon due to its impairment on fair market competition.

According to the PRC Anti-unfair Competition Law, a business operator, who resorts to bribery by offering monies or goods or by any other means to sell or purchase commodities and if the case constitutes a crime, shall be investigated for criminal responsibilities according to law; if the case does not constitute a crime, the supervision and inspection department may impose a fine of not less than 10,000 Yuan but not more than 200,000 Yuan in light of the circumstances and confiscate the illegal earnings, if any. In real practices, a majority of commercial briberies are ended up with administrative penalties: e.g. Su-Ning Electronics collected payments in the name of ¡°sponsorship fee¡±, ¡°promotion fee¡±, etc. and consequently was penalized by Hangzhou Municipal Administrative for Industry and Commerce; Zhangjiang Jiashan Pharmaceutical Company accepted rebate in the purchase of drugs from Shandong Dong-E E-Jiao Co., Ltd. and was consequently penalized by Jiaxing Municipal Administration for Industry and Commerce, to name just a few.

2. Illegal Commercial Briberies

In some circumstances where a commercial bribery is serious, it might constitute a criminal offense. Article 163 and Article 164 of the Criminal Law of China have provided for commercial briberies that constitute criminal offenses. To better curb and punish commercial briberies that constitute criminal offenses, the Supreme People¡¯s Court and the Supreme People¡¯s Procuratorate promulgated in 2008 the Opinions on Certain Issues Concerning the Application of Law in Handling Criminal Cases of Commercial Bribery, stipulating on how to identify a commercial bribery that constitutes criminal offense.

The Criminal Law provides for ten crimes related to commercial briberies such as: (1) crime of accepting bribes by non-State functionary (Article 163 of the Criminal Law); (2) crime of offering bribes to non-State functionary (Article 164 of the Criminal Law); (3) crime of accepting bribes (Article 385 of the Criminal Law); (4) crime of accepting bribes by organizations (Article 387 of the Criminal Law); (5) crime of offering bribes (Article 389 of the Criminal Law); (6) crime of offering bribes to organizations (Article 391 of the Criminal Law); (7) crime of introducing bribes (Article 392 of the Criminal Law); (8) crime of offering bribes by organizations (Article 393 of the Criminal Law); (9) crime of using influence to accept bribes (Amendment to the Criminal Law (7) ); (10) crime of offering bribes to foreign civil servants or officials of international organizations (Amendment to the Criminal Law (7)).

It is worth noticing that, the threshold for prosecution against commercial briberies is not high. For example, the threshold for prosecution against a commercial bribery committed by a government official is RMB5,000 and that in the case of a non-government official is RMB10,000. In other words, in light of the current living standards, unwitting acceptance and giving of gifts will probably lead to a prosecution against the ¡°gift¡± provider and recipient for conducting a commercial bribery.

Careful Operation, Caution against ¡°Legal Prohibition¡±

As a way of doing business, gift-giving is somewhat indispensable. However, in order not to contravene the legal prohibition on commercial briberies, the only approach to avoiding delinquencies is to fully understand the legal system of China against commercial briberies and to carefully do business.

1. Distinction between ¡°rebate¡±, ¡°discount¡± and ¡°commission¡± from the perspective of law

According to Article 5 of the Interim Provisions on Prohibition of Commercial Bribery (hereinafter the Provisions), for the purposes of these Provisions, rebate shall mean a certain proportion of the price of the commodities secretly refunded off the book, in cash or physical items or by other means, to the other party¡¯s organization or individual by a business operator when selling the commodities. The goal of paying illegal rebate is to exclude fair competition and the act of ¡°accepting a rebate¡± is typical of commercial briberies. In that regard, we can refer to the case of GSK, in which the doctors accepted rebates.

For the purposes of these Provisions, ¡°discount¡±, i.e. the profits cut in the purchase or sale of commodities, shall mean the preferential price that a business operator offers to the other party when selling commodities in an explicit way and by way of truthfully recording (the discount) in the account books. Therefore, ¡°discount¡±, as a legal promotional approach, is not a bribe.

For the purposes of these Provisions, ¡°commission¡± shall mean the labor remuneration that a business operator pays to the middleman that is legally qualified for operation and that provides the business operator with services in market transactions. Lawful ¡°commission¡± is supported by the law, whereas the commission of a proportion in violation of the legal provisions or commercial practices or the commission whose grant or acceptance fails to be entered into the financial account faithfully is likely to be deemed as illegal ¡°commission¡± and thus constitute commercial bribe.

2. Distinction between bribe and gift

Gift-giving is an act of a business operator incidentally providing certain cash and articles to its counterpart for free during business transactions. According to Article 8 of the Interim Provisions, no business operator may, in commodity transactions, present cash or items to the other party¡¯s organization or individual, except for presenting small advertising gifts according to business practices. Bribery and gift-giving shall be differentiated in specific criminal cases of commercial briberies. According to the Opinions of the Supreme People¡¯s Court and the Supreme People¡¯s Procuratorate on Certain Issues Concerning the Application of Law in Handling Criminal Cases of Commercial Bribery, the following factors shall be mainly taken into consideration to make overall analysis and comprehensive judgment: (1) the source of money or property transaction, such as whether the two parties are relatives or friends, the communication, circumstances and degree in history; (2) the value of the money or property transacted; (3) the cause, time and manner of money or property transaction, whether the person offering money or property has brought forward official request towards the recipient or not; (4) whether the recipient secures benefits for the provider by taking advantage of his position or not. Therefore, under most circumstances, additional gift is an appropriate business act and, in particular, the additional gift directly given to consumers by business operators will not be suspected of a commercial bribe. However, if a gift is of a fairly high value so as to affect normal business transactions and generate illegal gains, then such gift is a commercial bribe.

3. An accurate understanding of the scope of ¡°properties¡± in commercial briberies

Pursuant to current judicial practices, ¡°properties¡± in commercial briberies include not only monies and in-kinds, but also interests of property that can be counted with monies, such as providing a ¡°benefit¡± recipient with house renovation, membership card containing monies for consumption, token card (coupon), travel expenses, etc.

Whether a ¡°sexual bribery¡± constitutes a crime or not, the Criminal Law of PRC does not have any express provision in that regard. On the basis of the principle that ¡°a crime cannot be established if there is any express statutory provision in that regard¡±, there is not any legal base for criminal penalties against pure ¡°sexual bribery¡±. However, whereas a ¡°sexual bribery¡± might cost some ¡°properties¡±, the act of committing ¡°sexual bribery¡± still might be held legally accountable.

4. Accurate understanding of ¡°seeking illegal gains¡± through offering bribes

An essential for constituting a crime of bribery is the purpose of such bribery, i.e. ¡°seeking illegal gains¡±. However, ¡°seeking illegal gains¡± refers to the circumstance that the person who offers bribes requests the recipient to provide assistance or convenience in a manner that breaches the laws, regulations, policies or industrial codes. Any act such as giving and receiving gifts out of courtesy, but not for the purpose of seeking illegal gains, is not likely to constitute a crime of commercial bribery.

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

 

Analysis of the Final Adjudication of the Johnson & Johnson Monopoly Case

Recently, Shanghai Municipal Higher People¡¯s Court repealed the first-instance judgement of the monopoly dispute between Beijing Rainbow Medical Equipment Technology & Trading Co. Ltd. (¡°Rainbow¡±) and Johnson & Johnson (Shanghai) Medical Equipment Co. Ltd. and Johnson & Johnson (China) Medical Equipment Co. Ltd. (¡°Johnson & Johnson¡±), affirmed that the Resale Price Maintenance Agreement between the parties concerned should constitute a monopolistic agreement, and thereby ordered Johnson & Johnson to pay Rainbow a compensation of RMB530,000. Since the promulgation of the PRC Anti-Monopoly Law, this is the first adjudication of a monopoly-related civil dispute, a milestone in the anti-monopoly practices. In retrospect, we believe we need to focus on such points as follows:

I. When identifying whether the Resale Price Maintenance Agreement constitutes a monopolistic agreement, we need to consider whether such Agreement serves elimination and restriction of competitions.

We need to analyse the final adjudication in regard to the constitution of a monopolistic agreement from two aspects. Firstly, in terms of definition, it is expressly pointed out in the final adjudication that, ¡°Article 13 of the Anti-Monopoly Law on the dentition of a monopolistic agreement is applicable to Article 14 thereof on a vertical monopolistic agreement.¡± In other words, a vertical monopolistic agreement should also be conditioned to the elimination and restriction of competitions.

Secondly, from the pertinent judicial interpretations of the Supreme People¡¯s Court, for a horizontal agreement with relatively strong anti-competition effect to become a monopolistic agreement, it should also be conditioned to the elimination and restriction of competitions. Accordingly, a vertical monopolistic agreement with lesser anti-competition effect should more be conditioned to the elimination and restriction of competitions.

II. When identifying whether the Resale Price Maintenance Agreement serves the elimination and restriction of competitions, we need to consider four aspects as follows:

1. Is there sufficient competitions in the relevant market?

According to the final adjudication, the insufficiency of competitions in the relevant market should be the first and foremost condition for identifying whether the Resale Price Maintenance Agreement constitutes a monopolistic agreement. Only when the relevant market lacks sufficient competitions will the effect of the suspected monopolistic agreement on competitions be evaluated. The adjudication first identifies the relevant market as the market of medical suturing products in the Mainland of China and assumes that, such market lacks the impetus for price competition among purchasers, sets higher requirements for access, subjects product users to higher dependency on the specific brand, and the defendant in such market has maintained a stable pricing capacity on the suturing products in the past 15 years, therefore, the court is in a position to conclude that the market of medical suturing products in the Mainland of China lacks sufficient competitions.

2. Does it have a great presence in the relevant market?

According to the final adjudication, the fact that companies which limit the lowest resale price hold relatively strong position in the relevant market and can influence market competitions should be considered an essential condition for the Resale Price Maintenance Agreement to become a monopolistic agreement. In this case, the defendant Johnson & Johnson has great advantages in its market share, pricing capacity, brand recognition and control over distributors and holds a significant position in the market where competitions are inherently insufficient.

It is worth noticing that, the final adjudication has not identified whether Johnson & Johnson dominates the relevant market or not. In other words, from the perspective of the court, a certain company¡¯s dominance in a certain market does not constitute the essential condition for the establishment of a monopolistic agreement.

3. What motivates Johnson to enforce the lowest resale price?

The final adjudication considers the motivation behind limiting the lowest resale price as a key factor for assessing the success of such action. As stated, there is solid evidence that Johnson & Johnson¡¯s execution of the Resale Price Maintenance Agreement has been motivated by its strategy aimed at evading price competition and maintaining its price mechanism.

4. Effect of the lowest resale price on competitions

According to the final adjudication, the action of limiting the lowest resale price might either promote competitions or restrict competitions. On one hand, the market, to some extent, can heal itself so that some factors restricting competitions will soon be rectified by the market itself; on the other hand, some factors restricting competitions will be neutralized by some other factors promoting competitions. Therefore, only when the Resale Price Maintenance Agreement gives rise to some competition-restrictive effects that are insurmountable and unable to be neutralized will it be identified as a monopolistic agreement.

In this case, from the effect of the Resale Price Maintenance Agreement on in-brand distributor competition and inter-brand market competition, the court decides that, the defendant has taken advantage of its relative strong market position to maintain a stable high price by limiting the resale price, leading to a weakening of competitions in other brands and the relevant market and thus impairing the consumers¡¯ interests¡ªthis, obviously, has restricted competitions.

Besides, the court points out that, no sufficient evidence has been provided in the court trial to prove that the Resale Price Maintenance Agreement serves any obvious promotion of competitions.

III. Burden of Proof

This case also involves an issue as to whether the reversion of burden of proof can be applied by analogy. Article 7 of the Provisions of the Supreme People¡¯s Court on Trial of Monopoly Disputes stipulates that, the defendant shall bear the burden of proof for the non-existence of competition elimination and restriction of such alleged monopolistic acts as provided from paragraph 1 to paragraph 5 of Clause 1 of Article 13 of the Anti-monopoly Law, but such Article 7 does not mention which party shall bear the burden of proof for the vertical monopolistic agreement stipulated in Article 14 of the Anti-monopoly Law.

According to the final adjudication, ¡°only when the relevant laws, regulations or judicial interpretations have such explicit provisions will the reversion of the burden of proof be applicable in civil lawsuits.¡±Therefore, this case still follows the principle of ¡°the advocate undertakes the burden of proof¡±, subjecting the plaintiff Rainbow to the burden of proof for the effect of Johnson & Johnson¡¯s Resale Price Maintenance Agreement on elimination and restriction of competitions.

However, it also mentions that, whereas the plaintiff has fulfilled its preliminary burden of proof but the defendant has failed to proactively provide counter-proof on the related market concentration, Johnson & Johnson¡¯s market share, the effect of the Resale Price Maintenance Agreement on competitions, etc. for this case, it is quite difficult for the defendant¡¯s claims to be supported by the court.

Conclusion:

Recently, National Development and Reform Commission initiated a series of investigations in the sectors of Chinese liquors and dairies, demonstrating its harsh attitude towards the vertical monopolistic agreement. Seemingly as an echo, the final adjudication of Shanghai Higher People¡¯s Court on this case has exerted significant influence on the real practices of the PRC Anti-monopoly Law. It is hereby suggested that all companies should bring this case to their attention when signing any distribution agreement and should exercise due diligence to deal with such terms as the resale price maintenance.

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