UBILLA & CIA

Unification of the Taxation of Foreign Enterprises, Foreign Invested Enterprises and Domestic Enterprises

The State Council issued the Notice on Unifying the City Construction Tax and Educational Surcharge of the Foreign Invested Enterprises, Foreign Enterprises, Foreign Individuals and Domestic Enterprises (the "Notice") on October 18th, 2010.

According to the Notice, the city construction tax and education surcharge will be levied on foreign invested enterprises, foreign enterprises and foreign individuals from December 1, 2010.

City construction tax and education surcharge are two types of surtaxes, which are levied on the taxpayers who pay the turnover tax, such as value-added tax, consumption tax and business tax. Each type of the surtaxes shall be calculated based on the following tax rate and calculation formula:

• The rate of the city construction tax differs depending on the location of the enterprise as follows:

The calculation formula is as follows: the amount of the city construction tax = the rate of the city construction tax × the rate of the turnover tax × the business income.

• The rate of the educational surcharge is 3% of the turnover tax.

The calculation formula is as follows: the amount of the educational surcharge = the rate of the educational surcharge × the rate of the turnover tax × the business income.

The Notice aims to unify the taxation of foreign enterprises, foreign invested enterprises and domestic enterprises. However, the tax cost of doing business in China or with China will increase when these two types of surtaxes are applied. In case an enterprise in the city area should pay the business tax (the rate is 5%), the tax burden will increase [5% × (7% + 3%)], namely 0.5% of the business income. If an enterprise in the city area should pay the value-added tax or consumption tax, the tax burden will increase more, because the rate of the value-added tax or consumption tax is higher.

by UBILLA & CIA

Third Interpretation regarding the Applicable Law of Labor Dispute Cases

The 3rd Interpretation regarding the Applicable Law of Labor Dispute Cases (the “Interpretation”) was issued by the Supreme Court on 13rd September, 2010 and was effective since 14th September, 2010.

The Interpretation intends to solve some urgent and ambiguous problems that normally occur during the process of arbitration or litigation of a labor dispute.

The following are the basic principles set out by the Interpretation:

1. The courts shall accept a legal complaint filed by the employee in the following situations:

• An enterprise has not processed the social insurance payment for its employee and as a result the employee cannot enjoy the benefits of social insurance.
• An enterprise restructuring triggers the dispute.
• An employee requests his/her employer to pay additional compensation due to: the employer failure to pay the full wage or the wage for overtime work or; the employer pays wages below the minimum wage standard or; the employer fails to pay the compensation according to the laws and regulations.
• The arbitration committee of labor dispute fails to accept an employee’s complaint in time or fails to make an arbitral decision within the applicable period.

2. Relevant parties shall be identified as follows:

• In case of disputes between an employee and his/her employer who has no business license, whose business license was revoked or whose business period has expired, the employer or the investor shall be identified as the relevant party.
• In case the above-mentioned employer borrows other’s business license to do the business, if there is a dispute between the employer and its employee, the employer and the lender of the business license shall be identified as the relevant party.
• In case after examination the court finds that one party, who should be the party, has not participated the arbitration, the court shall add it as the party of the case.

3. The relationship between an enterprise and its employee who has already begun to enjoy the old-age insurance benefits or draw a pension shall be identified as the labor service relationship.

4. The relationship between the following kinds of persons and their new employers shall be identified as the labor relationship:

• The person whose position in the former company is retained with his/her salary suspended;
• The early retired person whose age has not reached the retirement age;
• The person who is laid off; or
• The person who is having a long holiday because of an operational stop of production.

5. In case an employee claims the wage for overtime working, he/she shall take the burden of proving the overtime working. However, if the employee has proof to show that his/her employer holds the proof of the fact of his/her overtime working, but the employer does not provide the proof, the employer shall bear the adverse consequence.

6. The agreement between an employee and his/her employer regarding the cancellation or termination of their labor contract shall be deemed valid as long as this agreement meets the following requirements:

• No violation of the mandatory regulations of laws and administrative rules; and
• No fraud, threat or taking advantage of other’s difficulties during the process of reaching this agreement.

In conclusion, the Interpretation does not cover all the problems which a rise during the procession of the labor arbitration and litigation. However, it is quite relevant and practical and it clarifies some confusion and doubts in the judicial practice.

by UBILLA & CIA

China Supreme People's Court Issued Provisions on Foreign Investment Disputes

The PRC Supreme People's Court issued the Provisions on Several Matters Concerning the Hearing of Disputes Involving Foreign-Invested Enterprises (I) (the "Provisions") on August 16, 2010, which entered into force on the same day. The Provisions provide guidance for certain disputes arising from the establishment and changes in the registration of the foreign-invested enterprise (the "FIE"). The key rules of the Provisions are addressed as follows:

1. Validity of Contracts

   The Provisions provide that contracts concluded during the course of establishment or registration changes of a FIE become effective only after being approved by the FIE approval authorities (the "FIE Approval Authority").

   The Provisions, among various matters, provide that a supplement agreement concluded by the parties concerning a FIE will not be considered as an invalid agreement, even if the same has not been approved by the FIE Approval Authorities, as long as it does not involve material or substantial change, such as changes of the registered capital, company form, business scope, business term, shareholder's contribution, etc.

2. Equity Transfer of an FIE

   The Provisions provide the following rules in order to clarify the parties' obligations during the period between the conclusion of the agreement and the approval.

   1. Transferee's Rights

      If the transferor and the FIE fail to submit the agreement for approval within a reasonable period after being requested by the transferee the latter shall have the right to request the termination of the agreement, the refund of any part of the purchase price and the compensation. The transferee can also sue the transferor and the FIE to request them to submit the agreement for approval and the compensation.

   2. Transferor's Rights

      If the transferee has not paid the consideration within a reasonable period stipulated in the agreement, the transferor has the right to terminate the agreement and request the compensation for the losses arising from the late performance of the transferee.

      If the transferee has participated in the management and business operation of the FIE and obtained the profits, but the agreement has not been approved, the transferor has the right to request transferee's withdraw from the FIE and the return of profits deducting the relevant expenses and costs.

   3. Preemptive Right

      If one of the shareholders of a FIE transfers all or part of its equity to the third party, he must obtain the unanimous consent of the other shareholders, otherwise, the other shareholders have the right to request to revoke the equity transfer agreement except under some special circumstances. However, the other shareholders must assert their preemptive rights within one year after the date they knew or should have known about such equity transfer.

3. Nominal Shareholder's Interest in the FIE

   Shareholders of a FIE may reach an agreement that one shareholder shall act on behalf of another shareholder who is an anonymous investor (a "real investor").

   The agreement between the real investor and the nominal shareholder will be valid unless it violates the relevant laws and administrative regulations and the parties shall perform their obligations. However, the Provisions provide that the real investor will not be considered as a shareholder of the FIE under some special circumstances.

   Further, the real investor's has the right to terminate the agreement and request the nominal shareholder to bear the liability of breaching the agreement if the nominal shareholder fails to perform the obligation under the agreement.

   If the agreement is held invalid, the real investor may request the nominal shareholder to return his contribution and a reasonable share of the investment proceeds, if the current value of his actual equity in the FIE is no less than the contribution. Otherwise, the real investor may request payment of an amount equivalent to the current value of his actual equity in the FIE.

4. Conclusion

   The promulgation of the Provisions has set the basic principles regarding matters concerning certain contractual disputes of FIE in China. The Provisions will improve the foreign investment law systems of China and provide guidance to the courts on such foreign investment disputes.

   However, the Provisions have only tackled part of the issues involved in disputes actually taking place regarding foreign investment. Further, certain legal concepts used by these Provisions are too broad and it is not easy to foresee how courts will decide on complex cases.

by UBILLA & CIA

Measures on the Management of Trademark Agency

State Administration of Industry and Commerce (hereinafter "SAIC") issued the Measures on the Management of Trademark Agency (the "Measures") on July 12, 2010, according to the Trademark Law and the Implementation Measures of the Trademark Law.

The promulgation of the Measures is for the purpose of improving the trademark agency system and protecting the rights of the consignor of the trademark and trademark agency.

The main contents of the Measures are as follows:

1. Authorities in Charge

   SAIC and its local branches are responsible for the supervision and management of the trademark agencies and trademark agents.

2. The Scope of the Consignation

   If the consignor may consign the trademark application matters to the trademark agency, the trademark agent who works in the trademark agency will be permitted to provide the following trademark services:

   1. The registration application, change, extension, assignment, challenge, revocation, review, complaint to the infringement of the trademark, etc.;
   2. Trademark consulting;
   3. Other relevant trademark matters.
3. Stamping on the Trademark Application Form

   The trademark agency shall stamp on the trademark application form and the trademark agent shall also sign on the trademark application form.

4. Prohibition in Respect of Consignation of the Trademark Cases

   One trademark agency is not permitted to undertake the representation of both parties in one trademark case.

5. Prohibition in Respect of the Trademark Agent

   One trademark agent is not permitted to serve in two or more trademark agencies at the same time.

6. Obligations of the Trademark Agent

   The trademark agent shall keep the commercial secrets of the consignor. The trademark agent can not disclose any trademark details to any third party without the consignor's permission.

   The trademark agent shall reject the consignation from the consignor if the trademark agent explicitly knows that the consignation is malicious, fraudulent or violating the law.

7. Conclusion

   The Measures set forth the rules to regulate the trademark agency activities and the trademark agency regulatory system. The trademark applicant will benefit from this regulation. Nevertheless, the Measures only include the basic rules with respect to the trademark agency and they are expected to be improved by more specific practical measures.

by UBILLA & CIA

China's Ministry of Commence Broadens the Approval Authorization of Foreign Investment

Ministry of Commence of PRC issued the Notice on the Transfer of Approval Authorization of Foreign Investment (hereinafter the "Notice") on June 10, 2010.

State Council of PRC issued several Opinions on Further Improving the Task of Utilizing Foreign Investment (the "Opinions") on April 6th, 2010. The promulgation of the Notice is considered to be the implementation measures of the Opinions.

The main contents of the Notices are as follows:

1. The establishment and registration change of the following foreign invested enterprises shall be approved and managed by the commercial departments of the provincial governments, municipalities at the deputy provincial level (Harbin, Changchun, Shenyang, Jinan, Nanjing, Hangzhou, Guangzhou, Wuhan, Chengdu, Xi'an) and national economy and technology development zones:
   1. The enterprises that undertake a business which belongs to the encouraged and permitted categories in the Foreign Investment Industrial Guidance Catalogue and which total investment amount is less than USD 300,000,000;
   2. The enterprises that undertake a business which belongs to the restricted categories in the Foreign Investment Industrial Guidance Catalogue and which total investment amount is less than USD 50,000,000.
      (Hereinafter USD 300,000,000 and USD 50,000,000 are referred as the "Limited Amount" respectively.)
2. The projects in which the amount of the increased capital is less than the Limited Amount shall be approved and managed by the local authorities.
3. The establishment and registration change of the foreign invested enterprises, which undertake a business that belongs to the encouraged categories and which total investment amount is more than the Limited Amount, shall be approved and managed by local authorities.
4. The establishment and registration change of the following foreign invested enterprises shall be approved and managed by the local authorities:
   1. The foreign owned investing enterprises which registered capital is less than USD 300,000,000;
   2. The foreign owned venture capital enterprises and the foreign owned venture capital management enterprises which total investment amount is less than USD 300,000,000.
5. The establishment and registration change of the foreign owned service enterprises shall be approved and managed by the local authorities, unless the laws and regulations regulated that the projects shall be approved and managed by Ministry of Commence of PRC. The establishment and registration change of the foreign owned financial service and telecom enterprises shall be approved and managed according to the relevant laws and regulations.
6. The approval authorization of registration change which was previously held by Ministry of Commence, Foreign Trade Department and Departments of State Council shall be transferred to the local authorities.
7. Conclusion

   The Notice is the first regulation which has been issued in order to follow up the Opinions and improve the foreign investment environment and promote the foreign investment supporting system. The main contents of the Notice specify the foreign investment policies in the Opinions and set forth practical measures.

   However, the Notice only stipulated the procedural rules with respect to the foreign investment approval matters. Therefore, more corresponding regulations and new measures are expected in order to supplement the Notice.

by UBILLA & CIA

China's State Council Issues New Policies to Boost Foreign Investment in China

Several Opinions on Further Improving the Work of Utilizing Foreign Investment (the "Opinions") were issued by the State Council of China (the "State Council") on April 6th, 2010.

The promulgation of the Opinions aim at improving the quality and standard of use of foreign investment, streamlining the foreign investment regulatory system and encouraging the further development of foreign investment in China.

The Opinions will most likely influence the enactment of new laws and regulations in the following months.

The Opinions mainly include the following contents:

1. To optimize the use of foreign investment:
   1. The Catalogue of the Guidance of Foreign Investment Industries (the "Catalogue") will be amended, in order to encourage foreign investment in high-end manufacturing, new high-tech industry, modern services industry, new energy and energy saving environmental protection industry.
   2. The qualified projects under the "encouraged" category will benefit from discounted land prices at 70% of the statutory minimum price according to the "Standard of the minimum price of land for industrial use".
   3. The foreign investment towards the high-tech companies will be encouraged continuously and the identification of the High-tech companies will be improved.
   4. Multinational companies will be encouraged to establish regional headquarters, R&D centers, procurement centers, finance management centers and accounting centers, and other functional institutes in China.

      Facilities necessary for R&D of qualified foreign R&D centers shall be exempted from custom duties and value-added tax as well as consumption tax at the time of importation before December 31st, 2010.

2. To guide the foreign investment to central and western regions:
   1. Labor-intensive projects category will be increased in “The Catalogue of the Advantage Industries of Foreign Investment in Central and Western Regions”. Foreign investors will be encouraged to invest labor-intensive industries which shall meet the requirement of environment protection in central and western regions.
   2. Preferential tax policies shall be offered to the qualified foreign and local companies in these regions.
   3. The government departments, including Administration of Industry and Commence, tax, foreign exchange, social security and other relevant authorities, will perfect the administration services, in order to facilitate the administrative procedures for the companies.

      Foreign banks will be encouraged to establish branches or representative offices and operate their business in the central west regions.

3. To promote the Diversification of forms of foreign investment:
   1. Foreign investors are encouraged to reform and merge with local companies by means of equity participation or M&A.

      The listed companies in A stock market are encouraged to introduce foreign strategic investors.

   2. Foreign investors are encouraged to establish venture capital companies and private equity funds in China, and better exit regimes will be implemented.
   3. Qualified foreign invested companies are supported to list in the domestic stock market, issue corporate bonds and middle-term negotiable instruments in China.

      The scope of offshore companies which could issue RMB bonds in China will be expanded.

4. To intensify the reform of foreign investment management system:
   1. Projects which total investment is less than US$300 million under the “permitted” or “encouraged” categories will be approved by the local government, except the projects which shall be approved by State Council according to “The Catalogue of Invested Projects Approved by the Government” (Previously, this threshold was US$100 million).

      The establishment of foreign investment companies which provide services (except financial and telecom services) will be approved by the local governments.

   2. The approval contents and procedures of foreign invested companies will be simplified, and the approval duration limit shall also be shortened.
5. Conclusion

   The Opinions reflect that China will significantly improve its foreign investment environment and perfect the foreign investment supporting system. The main changes set forth in the Opinions are considered as policy goals rather than specific measures. Series of corresponding regulation amendments and new practical measures will be implemented to follow up the promulgation of the Opinion. Therefore, the Opinion will surely lead to a new trend of reforms in China’s foreign investment regulatory system.

   Multinational companies and potential foreign investors will benefit from the effect of the Opinion and they should pay attention to the following changes with respect to the foreign investment in China.

by UBILLA & CIA

Representative Offices: China Strengthens the Registration Management of Foreign Companies' Representative Offices

The Notice on Further Administration of Registration of Foreign Companies' Resident Representative Offices (the "Notice") was issued by China's State Administration for Industry and Commerce ("SAIC") and the Ministry of Public Security jointly on 4th January, 2010.

The Notice has stipulated new requirements to reinforce the registration management of foreign companies’ representative offices in China as follows:

1. The Existence Period of the Foreign Parent Companies

   In order to set up a new representative office or change the name of an existing representative office, the foreign parent company shall submit a certificate of incorporation which indicates that the parent company has been in existence for at least two years.

2. Notarized Credibility Certificate

   A credibility certificate, issued by the financial institution which has the business relationship with the foreign parent company, shall be notarized by the relevant authority of the government which has the jurisdiction of the parent company’s incorporation and then certified by the relevant Chinese embassy or consulate, and be submitted to the authorities for registration.

3. Limitations on the Number of Representatives

   The number of the representatives appointed by the foreign parent companies (including the chief representative) shall be not more than four. In case an existing representative office has more than four representatives, the representative office is not allowed to appoint new representatives and can only reduce the number of representatives.

In conclusion, the Notice indicates that the threshold with respect to the establishment and changes of foreign companies’ representative offices is heightened. However, these restrictions do not apply to the branches of foreign invested enterprises or the representative offices of professional-services firms such as law firms. It is expected that the SAIC will amend the existing Administration Measures on the representative offices (which were promulgated in 1983) later this year. More specific details and requirements included in the Notice will likely be added into the new regulation. Foreign companies shall keep an close eye on its issuance.

by UBILLA & CIA

PRC Renewable Energy Law (Amendment of 2009)

The amendment of the PRC Renewable Energy Law (the “Amendment”) has been adopted on December 26th, 2009, and shall come into effect as of April 1st, 2010.

Compared to the PRC Renewable Energy Law of 2006, the Amendment has included some new provisions to promote the utilization of electricity generated from renewable sources.

Mandatory Connection Policy

Probably the most significant principle of the Renewable Energy Law when it was originally passed was the introduction of the “Mandatory Connection” policy, which required grid companies to connect and purchase all renewable energy generated that could be injected into the grid. After few years of experience it has been clear that not all grid companies were complying with their obligations to purchase all renewable power and connect it to the grid. This was caused by various factors, including technical infrastructure weaknesses that impeded the reception of all that renewable energy by the grid companies.

Part of the amendments are aimed at addressing this “bottleneck problem” by creating a legal framework that requires grid companies to invest in expanding and strengthening their facilities.

Also the amendments have increased the responsibilities of the grid companies by now requiring them to meet a new type of target- a proportion of renewable power generated relative to overall power generation (Art. 14, paragraph 1).

In contrast with the previous targets, the new target created by the amendments places responsibility directly on grid companies to purchase a fixed share of their power generation from renewable energy sources, and these grid-level targets will be enforced through penalties for non-compliance (Art. 29).

On the other hand, the amendments also decrease the grid companies’ obligations by adding a limitation to the scope of the grid companies’ obligations under the Mandatory Connection Policy.  The original law required grid companies to purchase all renewable energy regardless of its “quality,” but the amended law now limits grid companies’ responsibility to only those renewable energy generators that meet certain technical requirements for connection (Art. 14, paragraph 2).

Renewable Energy Development Fund

Another important addition to the law is how grid companies are compensated when purchasing renewable energy instead of cheaper, dirtier forms of energy, such as coal.

Since renewable power is generally more expensive than conventional fossil fuels, China has instituted feed-in tariffs for a variety of renewable energy technologies to compensate grid companies for the additional cost of purchasing renewable energy.

According to the Amendment, instead of the grid companies’ collecting the surcharge directly from the end-user, the end-user shall pay the surcharge into a Renewable Energy Development Fund. Once the surcharges have been pooled, the grid company will then seek compensation from the fund for the additional cost of purchasing the renewable energy, including the costs associated with integration. This large fund will allow the government to use this amount of money not only to compensate grid companies, but also to invest in various renewable energy development projects, including R&D (Art. 24).

The Amendment strengthens the penalty to the companies which break the rules. Electric grid companies, natural gas & heat pipeline companies, and gas-selling enterprises which fail to purchase or accommodate renewable sources of power or fuel are liable for compensation. The energy department of the State Council or provincial level governments shall order them to correct the situation within a stipulated period of time. If they refuse to correct the situation, a fine of up to double the amount of actual amount of the economic loss shall be imposed against them.

The Amendment has reflected the Chinese government’s determination of developing and utilizing the renewable energy sources in order to decrease the carbon emission and air pollution. China has 9% of primary energy consumption come from renewable energy sources at present and China will aim to have 15% of primary energy consumption by 2020 come from renewable energy sources. It also aims to reduce the carbon intensity, or the amount of carbon consumed when producing per unit of GDP, of between 40 and 45 percent by 2020 compared with 2005.

by UBILLA & CIA