UBILLA & CIA

Beijing and Shanghai Allow 72-hour Transit without Visa for Citizens from 45 Countries

Starting from January 1, 2013, foreign passengers from 45 countries/regions, with a third country visa and flight ticket, will be able to enjoy the new policy of "72-hour Transit Without Visa (TWOV)" when transiting through Beijing Capital International Airport (PEK), Shanghai Hongqiao Airport (SHA) and Shanghai Pudong International Airport (PVG). This new policy is designed to boost the tourism industry in Beijing and Shanghai.

The following is the list of the countries/regions that the "72-hour TWOV" policy is applied:

• Twenty-four European Schengen countries: Austria, Belgium, Czech Republic, Denmark, Estonia, Finland, France, Germany, Greece, Hungary, Iceland, Italy, Latvia, Lithuania, Luxembourg, Malta, Netherlands, Poland, Portugal, Slovakia, Slovenia, Spain, Sweden, and Switzerland;
• Seven other European countries: Russia, the United Kingdom, Ireland, Cyprus, Bulgaria, Romania and Ukraine;
• Six American countries: the United States, Canada, Brazil, Mexico, Argentina, and Chile;
• Two Oceania countries: Australia, and New Zealand;
• Six Asian countries: Korea, Japan, Singapore, Brunei, United Arab Emirates, and Qatar.

by UBILLA & CIA

Notice on Further Improvement and Revision of Foreign Exchange Regulatory Policies concerning Foreign Direct Investment

On November 19th, 2012, State Administration of Foreign Exchange (SAFE) issued a Notice on Further Improvement and Revision of Foreign Exchange Regulatory Policies concerning Foreign Direct Investment (hereinafter referred to as the Notice) which shall be implemented since December 17th, 2012.

By improving the foreign exchange (FX) regulatory system concerning foreign direct investment (FDI) as well as nullifying and revising some relevant administrative licensing items, the Notice was designed to deepen the FX regulatory system reform, simplify the administrative examination and approval procedures and promote the investment and trade facilitation.

Key Points

The key points of the Notice are as follows:

1. Cancellation of Some FDI-related FX Regulatory Measures
1.1. Cancellation of the approval requirements for the opening of FDI-related FX accounts, FX receipts, FX settlement, FX purchase and FX payment;
1.2. Cancellation of the approval requirements for FX transfer from within China regarding FDI-related routine transactions;
1.3. Cancellation of the approval requirements for reinvestment of legitimate income which foreign investors derived from within China;
1.4. Cancellation of confirmation requests for capital verification involved in capital reduction;
1.5. Cancellation of FX registration and confirmation requests for capital verification regarding the reinvestment in China by foreign-funded investment companies.

2. Simplification of the Current FX Regulatory Procedures
2.1. Simplification of the categories of FDI-related FX accounts;
2.2. Simplification of the regulatory procedures regarding the settlement of capital funds;
2.3. Simplification of confirmation requests for capital verification and the foreign investment and FX registration on receipt of foreign exchange for share transfers;
2.4. Simplification of required documents and shortening of processing time.

3. Further Liberalization of the Using of FDI-related Funds
3.1. Relax the limits on the number of FDI-related FX accounts and the restriction on opening FX accounts in places other than the domiciles;
3.2. Relax the restriction on FDI-related FX purchase and payment from places other than the domiciles;
3.3. Relax the restriction on the fund sources of overseas loan and the loaner qualification, allowing the domestic enterprises to grant overseas loans with domestic FX loans and the foreign-funded enterprises to grant loans to their overseas parent companies.

General Comment:

Currently, the FDI in China faces restrictions by various Chinese regulatory authorities. According to SAFE data, FDI in China has been in decline for the fifth straight month. From January to October, the investment rate fell by 3.45 percent compared to the same period in 2011, totaling about $91 billion.

The Notice is aimed at attracting more foreign investment. In brief, 35 administrative examination and approval requirements will be nullified and 14 of these requirements will be either simplified or merged under the Notice. Such significant reduction in administrative licensing items will conduce to the decline of social costs, further promote the facilitation of trade and investment and contribute to the development of the real economy.

by UBILLA & CIA

Interim Regulations on Capital Contribution by Equities in Foreign Invested Enterprises

Minister of Commerce (“MOFCOM”) released the Interim Regulations on Capital Contribution by Equities in Foreign Invested Enterprises (“FIE”) (hereinafter the “Interim”) on September 21, 2012, which came into effect on October 22, 2012.

The Interim was promulgated after the public comments collection in May 2011 and over one year’s research on relevant issues by MOFCOM. The Interim includes the major issues as follows:

1. Transactions for the Purpose of the Interim

Transactions that domestic or foreign investors execute for the establishment or change of a FIE (“Foreign Invested Company” ) in China by means of capital contribution of equities which they hold in a domestic company (“Equity Company” ) include:

a. Set up a new foreign invested company (“FIE”);
b. Transform a domestic company into a FIE by increasing the registered capital of the domestic company;
c. Change the equities of a FIE by increasing the registered capital of the FIE.

2. Restriction on the Equities to be Contributed

The Equity Company cannot be contributed under the following circumstances:

a. The registered capital of the Equity Company has not been fully contributed;
b. The equities to be contributed have been pledged;
c. The equities to be contributed have been legally foreclosed or frozen;
d. The equities cannot be transferred according to the articles of association or contract of the Equity Company;
e. The equities of the FIE cannot be contributed if the FIE doesn’t pass the annual inspection;
f. The equities of real estate company, foreign invested company for investment and foreign invested venture capital company cannot be transferred;
g. The share transfer has not been approved by the Chinese authorities;
h. Other circumstances.

3. Evaluation of Equities

The equities to be contributed shall be evaluated by domestic evaluation institutions. The final price of transaction and equity contribution may be negotiated by parties according to the equity evaluation report. However, the price of the actual equity contribution shall not be higher than the price of the equity evaluation concluded in the report.

4. Restriction on the Proportion of Contribution by Equities and Total Investment Amount

The total capital contribution by equities and other non-monetary properties shall not be more than 70%, which is consistent with the rule regulated in the Company Law of China (issued in 2005)

The total investment amount of Invested Company shall be calculated based on its registered capital (including contribution by equities) and following the same calculation formula in the regulations on the proportion for joint venture companies in China.

5. Application Documents for Transactions of Contribution by Equities

a. Application letter for the contribution by equities and the agreement;
b. Shareholding proof of the shareholder;
c. Business license copy of the Equity Company;
d. Approval Certificate of the Equity Company if it is a FIE and the proof of passing the annual inspection of FIE;
e. Equity evaluation report;
f. Legal opinion letter regarding item d and e above, which shall be issued by a law firm;
g. Other application documents for the establishment or change of the FIE;
h. Approval documents for the share transfer if necessary;
i. Other relevant documents.

6. Approval Authorities

MOFCOM and its provincial commercial departments shall be in charge of the approval regarding transactions of the contribution by equities.

If the approval authority is different from that of the Equity Company, when the Invested Company’s approval authority receives the application documents, it should inquire the opinions of the Equity Company’s approval authority. The Equity Company’s approval authority shall respond whether it accept the application or not within 20 days after receiving such inquiry. Any response over 20 days shall be regarded as the acceptance.

7. Registration Change of the Equity Company

After the application of the contribution by equities is approved, the Equity Company shall:

a. If the Equity Company is not a FIE, it shall apply for the change of the shareholder from the previous investor to the Invested Company according to Interim Regulations on the Investment in China by FIE (issued in 2000);
b. If the Equity Company is a FIE and it still has the foreign shareholder(s) after the equity contribution, it shall apply for the change of shareholder from the previous investor to the Invested Company with relevant authorities according to the Interim Regulations on the Investment in China by FIE and Regulations on Change of Equities of FIE (issued in 1997);
c. If the Equity Company is a FIE and it has no foreign shareholder after the equity contribution, it shall apply for cancelling or changing the Approval Certificate with relevant authorities according to Regulations on Change of Equities of FIE and Interim Regulations on the Investment in China by FIE.

8. Registration Change of the Invested Company

After the registration change of the Equity Company, the Invested Company shall also apply for the registration change by submitting the following documents:

a. Statement of the change of equity of the Domestic Equities;
b. Business license of the Equity Company after the change of equity;
c. Capital verification report of the contribution by equities issued by qualified verification institutions;
d. New Approval Certificate of the Equity Company if it is still a FIE after the change of equity;
e. Approval of re-investment in China of the FIE issued by the provincial authorities if the Equity Company is not a FIE but its business scope involves restricted areas according to Catalogue of Industries for Guiding Foreign Investment (latest version in 2011).

9. Transactions of Contribution by Equities which Involves Chinese Listed Companies and State Owned Enterprises (“SOE”)

Transactions of contribution by equities involving Chinese listed companies shall comply with corresponding regulations regarding security supervision, security transaction, security registration and settlement, etc.

If the foreign investor is involved in the orientate offer of shares or share transfer of Chinese listed companies by using its equities held in the Equity Company as the consideration, such transaction shall also apply the Measures for the Administration of Strategic Investment in Listed Companies by Foreign Investors (issued in 2006).

10. Merger and Acquisition (“M&A”) of Domestic Enterprises by Foreign Investors and Security Review

If the transaction of contribution by equities belongs to M&A transaction, it shall apply to Regulations on M&A of Domestic Enterprises by Foreign Investors (latest version in 2009) together with the Interim.

If transactions of contribution by equities involve circumstances mentioned in the Notice on the Establishment of Security Review System for M&A of Domestic Enterprises by Foreign Investors (issued in 2011), the foreign investor shall apply for the security review with relevant authorities.

11. Equity Swap

If the foreign investor conducts the equity swap with other investors by using the Equity Company, it shall comply with rules of restrictions on equities to be contributed and equity evaluation in the Interim, as well as Regulations on Change of Equities of FIE and Regulations for M&A of Domestic Enterprises by Foreign Investors.

Comments

Before the promulgation of the Interim, Measures on Management of Registration of Contribution by Equities (issued in 2009) were applicable for the management of such matters. Notwithstanding, the Measures only stipulated rules on transactions of contribution of equities into domestic enterprises rather than transactions related to FIEs. Now the Interim brings a new mechanism for the investors especially for foreign investors to establish legal entities for the development of business or expansion of businesses in China. The way of contribution by equities will provide more alternatives and flexibility for the investment in China, and it will release the burden of cash contribution for such investment. Meanwhile, the Interim also stipulates the specific documents for the application of contribution by equities and approval authorities.

However, even though the Interim provides the possibility of contribution by equities for FIE transactions, it is still not complete. At least the following issues are not clear or regulated in the Interim:

1. Timeline of contribution by equities during the establishment or registration change of the FIE;
2. The specific contents or requirements which shall be included in the capital verification report of contribution by equities issued by qualified verification institutions;
3. The official procedure of registration with different approval authorities regarding transactions of contribution by equities;
4. The remedy if the application of transactions of contribution by equities is rejected;
5. Priority of the authority’s approval if different authorities have opposite opinions on the same application.

Rules on such issues mentioned above need further clarification or supplement. Therefore, the Interim is expected to be further improved by the issuance of the formal regulations on capital contribution by equities in FIE and other relevant legislation shall be followed by other supplementary rules.

by UBILLA & CIA

China's New Exit-Entry Administration Law

On June 30th, 2012, the National People’s Congress Standing Committee of People’s Republic of China issued the new Exit-Entry Administration Law (hereinafter referred to as the “New Law”) which is applicable to exit-entry of both Chinese nationals and foreign nationals and shall come into effect on July 1st, 2013.

Key Points

The New Law strengthens the enforcement over foreign nationals’ entry, employment and residence in China. Its key points are as follows:

• The New Law imposes harsher penalties on illegal entry, residence or employment of foreign nationals. For instance, monetary penalties will be imposed heavily on employers for illegally employing foreign nationals and the relevant income received by illegally employed foreign nationals will be confiscated.
• The New Law adds a sub-category of visa called “talent introduction” into the “ordinary visa” category in order to attract highly talented foreign individuals to work and live in China.
• The New Law draws a distinction between stay and residence. The longest duration of stay for qualified foreigners is no more than 180 days while the longest duration of residence for qualified foreigners is 5 years.
• The New Law allows foreign nationals who have outstanding contributions to China’s economic and social development or meet the existing permanent residence requirement to apply for permanent residence qualification.
• The New Law establishes an information sharing platform and increases transparency. As at present, the Ministry of Public Security, the Ministry of Foreign Affairs and other relevant departments have their respective information systems of exit-entry management.
• The New Law emphasizes the equal importance of service and management. The relevant enforcement department shall take practical measures to improve their management as well as their service.

General Comment:

In view of the increase in population of foreigners in China in recent years, the issues of illegal employment, illegal entry and overstay have been a huge concern in China especially in major cities like Beijing and Shanghai. The stricter regulatory framework of the New Law creates harsher punishments to prevent immigration law violations in China.

However, there are still uncertainties in the New Law. It is expected that relevant implementation rules and further details would be developed and released by various competent authorities accordingly.

by UBILLA & CIA

China-Chile Investment Agreement

On September 9th, 2012, China and Chile signed the Supplementary Agreement on Investment to the Free Trade Agreement between the Government of the People’s Republic of China and the Government of the Republic of Chile (China-Chile Investment Agreement).

Key Outcomes

China-Chile Investment Agreement consists of 33 articles and 4 annexes. It covers substantive provisions on investment and treatment as well as procedural provisions on dispute settlement which are divided into the following 5 sections:

• Definitions of applicant, investment commission, both parties to the dispute, one party to the dispute, China-Chile FTA, freely usable currency, additional facility rules by the International Center for Settlement of Investment Disputes (ICSID), the ICSID Convention, investment, investor, China-Chile Supplementary Agreement on Trade in Services, arbitral tribunal, arbitration rules, etc.
• Substantive provisions involving market access for investment, national treatment, requirement of achievements, most-favored nation treatment, minimum standard of treatment, loss compensation, expropriation and compensation, transfer, subrogation, refusal to provide preferential treatment, etc.
• Procedural provisions on the rules and procedures for investor-state dispute settlement, including consultations and negotiations, submission of the applications for arbitration, consent to arbitration, limits and conditions of consent to arbitration, appointment of arbitrators, preliminary objection, applicable law, arbitration award, etc.
• Exceptions regarding national security, taxation, measures to maintain balance of payment, etc.
• Provisions related to transparency, dispute settlement, investment commission, annexes, footnotes, the relationship between China-Chile Investment Agreement and China-Chile FTA, amendment, implementation, period, termination, etc.

General Comment:

China-Chile FTA, covering mainly trade in goods and cooperation, was signed in November 2005, and entered into effect as of October 2006. Significant effects can be seen since its enforcement, bilateral trade rapidly going up. In April 2008, China and Chile signed the Supplementary Agreement on Trade in Service which implemented on August 1, 2010.

At present, Chile is China’s third largest trading partner in Latin America, while China is Chile’s largest trading partner in the world. The signing of China-Chile Investment Agreement completes the full establishment of Sino-Chilean Free Trade Area. It’s set to contribute greatly to improving the environment and expanding the areas for investment.

by UBILLA & CIA

Hong Kong and Chile Sign Free Trade Agreement

On September 7th, 2012, Hong Kong and Chile signed a bilateral Free Trade Agreement (the Agreement), marking a new milestone in the furtherance of trade and investment co-operation between the two economies. The Agreement will enter into force on a date to be mutually determined by Hong Kong and Chile after completing necessary domestic procedures.

Key Outcomes

The Agreement consists of 19 Chapters and covers a wide range of areas of mutual interest to Hong Kong and Chile. The major features and liberalization measures of the Agreement are summarized below.

• On trade in goods, for goods originating from Hong Kong, Chile will abolish import tariffs on around 88 per cent of its tariff lines, and will phase out the tariffs on an additional 10 per cent over three years.
• On trade in services, Hong Kong service providers will enjoy legal certainty in market access and national treatment for a comprehensive range of services in the Chilean market.
• On investment, Hong Kong investors will have legal certainty on national treatment in respect of their investments in specified non-services sectors in Chile. To enhance investment flows between the two economies, Hong Kong and Chile agreed to further negotiate a more comprehensive agreement on investment promotion and protection.
• The Agreement also contains provisions to promote competition, facilitate access to each other's government procurement market, enhance co-operation in customs procedures and protect the environment. Under the Agreement, Hong Kong and Chile will co-operate in the areas of sanitary and phytosanitary measures and technical barriers to trade, with the objective of reducing trade barriers and facilitating bilateral trade as far as possible.

General Comment:

Total merchandise trade between Hong Kong and Chile was HK$7,058 million (US$904.87 million) in 2011 while total service trade was HK$950 million (US$121.79 million) in 2010. On trade in goods, Chile ranked 29th among Hong Kong’s worldwide trading partners and fourth among those in Latin America in 2011. On trade in services, Chile ranked 32nd among Hong Kong's worldwide trading partners and fourth among those in Latin America in 2010.

The Agreement will help Hong Kong businesses tap the Chilean market, which offers potential opportunities as an emerging market in itself, as well as opportunities as a gateway to the South American region. It will also expand Hong Kong's free trade agreement network to the American region, in addition to the existing linkage with the Asia-Pacific and European regions.

As regards to Chile, with the addition of this agreement, it now has 60 FTAs with various countries and regions representing more than 90% of the world GDP, making it the most open economy in the world.

by UBILLA & CIA

Dispute between China International Economic and Trade Arbitration Commission (CIETAC) and its Shanghai and South China Sub-commissions

On August 1st, 2012, China International Economic and Trade Arbitration Commission (CIETAC) issued Announcement On the Administration of Cases Agreed to be Arbitrated by CIETAC Shanghai Sub-commission and CIETAC South China Sub-commission (hereinafter referred to as “Administrative Announcement”), suspended its authorization to the CIETAC Shanghai Sub-commission and CIETAC South China Sub-commission (renamed from the CIETAC Shenzhen Sub-commission) for accepting and administering arbitration cases.

On August 4th, 2012, the CIETAC Shanghai Sub-commission (CIETAC Shanghai) and the CIETAC South China Sub-commission (CIETAC South China) made a Joint Statement, saying that they “will overcome all the improper disturbances from CIETAC, as independent arbitration institutions and subject to the Arbitration Law, continue to accept and manage arbitration cases as agreed upon by the parties.”

By now, the relationship between CIETAC and its Shanghai and South China Sub-commissions has officially broken up.

Background

In 1954, CIETAC was set up by the China Council for the Promotion of International Trade (CCPIT) with the approval of the Administration Council of the Central People’s Government.

In 1982, the CIETAC Shenzhen Office was approved by CCPIT to be set up in Shenzhen following approval by the State Council of an application jointly submitted by CCPIT, the Ministry of Foreign Economic Relations and Trade and the Ministry of Foreign Affairs. The Shenzhen Office was renamed the Shenzhen Sub-commission in 1989 and the South China Sub-commission in 2004.

In 1988, the CIETAC Shanghai Sub-commission was approved by CCPIT to be set up in Shanghai after it obtained the approval from the State Council.

From 2009, CIETAC initiated a “reform” by amending the arbitration rules and the articles of association. CIETAC Shanghai and CIETAC South China expressed their clear objection to CIETAC on several occasions.

In 2010, the Shenzhen Municipal Government approved CIETAC South China to use the name as “Shenzhen Court of International Arbitration” (SCIA) to operate as an experimental legal institution which was highly supported by Guangdong Provincial Office of Justice.

On April 24th, 2012, CIETAC published CIETAC Arbitration Rules (2012) which had been previously reviewed and approved by the Commission Meeting of CIETAC and then approved by CCPIT.

On April 30th, 2012, CIETAC Shanghai declared in an announcement to have set up its own commission, published its own arbitration rules and adopted its own Panel of Arbitrators.

On May 1st, 2012, CIETAC issued a statement and an open letter on its official websites, reiterate that the sub-commissions are only its branch offices and declared that the commission establishment, constitution and rule formulation as well as the selection of arbitrators of CIETAC Shanghai were all null and void.

On May 2nd, 2012, CIETAC Shanghai issued a statement as a response to CIETAC, saying that CIETAC Shanghai has always been an independent arbitral institution and shall not use CIETAC Arbitration Rules (2012) which are invalid procedurally, and contain many illegal provisions that are substantively ineffective and gravely harmful.

On June 16th, 2012, the Opening of the Shenzhen Court of International Arbitration (SCIA) was launched. CIETAC South China officially started to use the concurrent name as SCIA.

Main Issues

The disagreement between CIETAC and its Shanghai and South China Sub-commissions mainly involves the following issues:

1. Nature of CIETAC Shanghai and CIETAC South China

CIETAC emphasizes that CIETAC Shanghai and CIETAC South China are only branch offices of CIETAC. According relevant regulations and public documents, CIETAC South China is under the direct leadership of CCPIT in respect of its arbitration business and it is under the leadership of the Shenzhen Municipal Government in terms of personnel and administrative affairs; CIETAC Shanghai is under the direct leadership of CIETAC in its business and is administratively attached to the Shanghai Sub-Council of CCPIT.

CIETAC Shanghai and CIETAC South China claimed that both sub-commissions are independent arbitration institutions, which were sponsored, approved and organized by the Shanghai Municipal Government and the Shenzhen Municipal Government respectively, and are independent legal persons. Both institutions have completed their judicial registrations respectively with the Shanghai Municipal Bureau of Justice and Department of Justice of Guangdong Province according to the Arbitration Law of the People’s Republic of China (the “Arbitration Law”).

2. Application of Arbitration Rules

According to CIETAC, CIETAC Shanghai and CIETAC South China shall follow the Arbitration Rules (2012) as branch offices of CIETAC.

However, CIETAC Shanghai and CIETAC South China did not recognize or use the Arbitration Rules (2012) and articles of association from the very beginning. They claimed that the amendment to arbitration rules and articles of association made by CIETAC in 2012 violated the relevant procedures and the Arbitration Law, as well as went contrary to the generally accepted practice of international commercial arbitration. Therefore, they refused to apply the Arbitration Rules (2012).

3. CIETAC’s “Authorization” and its Nature

CIETAC suspended its authorization to CIETAC Shanghai and CIETAC South China for accepting and administering arbitration cases based on the Arbitration Rules (2012) and articles of association which provided that CIETAC and its sub-commissions form an integrated arbitration institution and that the sub-commissions conduct arbitration business under the authorization of CIETAC.

CIETAC Shanghai and CIETAC South China argued that, as duly established arbitration institutions, their respective jurisdiction comes from the agreement of the parties, rather than the “authorization” from any other institutions, not to mention the so-called “suspension of authorization”. They claimed that CIETAC violated Article 6 of the Arbitration Law which provides that “the arbitration commission shall be selected by agreement of the parties concerned”, and betrayed the basic principle of “party autonomy” in the arbitration system.

4. Acceptance and Management of Arbitration Cases

According to CIETAC’s Administrative Announcement, as from 1 August 2012, where parties have agreed to arbitrate their disputes by CIETAC Shanghai or CIETAC South China, the parties shall submit their applications for arbitration to CIETAC and the CIETAC Secretariat shall accept such arbitration applications and administer such cases. Without CIETAC’s authorization, no institutions shall have the right to accept and administer the afore-mentioned arbitration cases.

But CIETAC Shanghai and CIETAC South China believe that the so-called Administrative Announcement has no binding effect on them and the parties, and will not affect the acceptance and management of cases or the normal operation. The parties can continue to apply for arbitration with CIETAC Shanghai and CIETAC South China according to their arbitration agreements.

Both CIETAC and its Shanghai and South China Sub-commissions provided their respective contact information for communication or inquiry.

General Comments

The dispute involves not only CIETAC and its two sub-commissions but also the legitimate rights and interests of concrete cases’ parties. It has caused unnecessary confusion to and exerted negative influence on the public and the parties concerned and further damaged the goodwill of China’s arbitration institutions and brought unstable factors to the economic and social development. Neither CIETAC nor its Shanghai and South China Sub-commissions will gain. Since the disagreement will cause uncertainty in respect of the effect of the determination, the parties may choose none of them for arbitration.

The current Arbitration Law entered into force in 1995. Nowhere in the Arbitration Law ever provides the legal status and arbitration authority of the sub-commissions. In order to specify the assets, personnel, finance and arbitration business of the sub-commissions, relevant amendment could be made to the Arbitration Law.

by UBILLA & CIA

VAT Reform in China Extended to 11 Provinces/Cities

On July 25th, 2012, the State Council of China held its standing meeting and approved to extend the Value Added Tax (“VAT”) reform.

From August 1st to December 31st, 2012, the transformation from Business Tax (“BT”) to VAT in transportation industries and certain modern service industries will be launched in 8 provinces and 2 cities as follows: Beijing, Tianjin, Jiangsu, Zhejiang, Anhui, Fujian, Hubei, Guangdong, Xiamen and Shenzhen. Therefore, there will be 11 pilot areas at the end of this year, including Shanghai in which the VAT reform was first launched on January 1st, 2012.

Besides the further extension of pilot areas, the State Council also noted that VAT reform in selected industries will be promoted nationwide in the next year.

This approval is part of China's long-term effort to rebalance the economy from one that relies heavily on manufacturing and exports to one dependent on domestic consumption. The detailed implementation rules for VAT reform in the 10 new pilot areas will be issued by local tax authorities.

by UBILLA & CIA

A Special Zone in the Special Economic Zone: China Officially Approved the Policies for Developing and Opening Qianhai Zone

On June 27th, 2012, the State Council of the People's Republic of China (“PRC”) issued a written Reply concerning the Policies for Developing and Opening the Shenzhen-Hong Kong Modern Service Sector Cooperation Zone in Qianhai, Shenzhen (hereinafter referred to as the “Reply”). The policies provided in the Reply are more special than those that apply to Shenzhen Special Economic Zone (“SEZ”).

The Reply approved 22 advance and trial policies in the following six fields:

1. Finance

• 1.1. Allow Qianhai to explore the expansion of offshore RMB fund flow-back channels, with the support of Hong Kong RMB offshore business development, and establish an innovative experimental zone for cross-border RMB business.
• 1.2. Support the granting of RMB loans for offshore projects by banking institutions established in Qianhai. Under the framework of Mainland-Hong Kong Closer Economic Partnership Arrangement ("CEPA"), conducting studies on the granting of RMB loans by Hong Kong-based banking institutions for enterprises and projects established in Qianhai.
• 1.3. Support qualified enterprises and financial institutions registered in Qianhai to issue RMB bonds in Hong Kong within the quotas approved by the State Council to support the development of Qianhai.
• 1.4. Support the establishment of the fund of equity investment funds in Qianhai.
• 1.5. Support the innovative development of foreign-invested equity investment funds and actively explore new modes of foreign exchange settlement of capital funds, investment and fund management.
• 1.6. Allow Qianhai financial market to open the door wider to Hong Kong.
• 1.7. Support the establishment of innovative financial institutions in Qianhai.
• 1.8. Support the establishment of international or national management headquarters or business operation headquarters by Hong Kong and other onshore and offshore financial institutions.

2. Taxation

• 2.1. Qualified enterprises will be entitled to a reduced enterprise income tax (“EIT”) rate of 15 percent based on the relevant catalogs to be formulated by competent authorities.
• 2.2. Qualified foreign talent who works in Qianhai can enjoy subsidy concerning Individual Income Tax ("IIT") and this subsidy is not subject to IIT.
• 2.3. Qualified modern logistics enterprises registered in Qianhai can enjoy the preferential Policy on Business Tax ("BT").

3. Law Practice

• 3.1. Explore the establishment of branches of Hong Kong arbitration institutions in Qianhai.
• 3.2. Strengthen the cooperation between law firms in Mainland and those in Hong Kong, explore the forms of their joint-operation and implement all the open measures to Hong Kong under CEPA.

4. Talent

• 4.1. Innovate management mechanism and develop relevant measures and policies to provide facilities for all kinds of talent who works in Qianhai
• 4.2. Include Qianhai into the trial areas in Guangdong regarding the mutual recognition on professional qualification.
• 4.3. Allow professionals who obtained Hong Kong practicing qualifications to provide services to Qianhai enterprises and residents in Qianhai.
• 4.4. Allow Hong Kong professionals who obtained the qualification as Chinese Certified Public Accountant ("CPA") to be the partners of Mainland CPA firms in Qianhai.

5. Education and Health Care

• 5.1. Allow Hong Kong service providers to establish international schools in the form of Wholly Owned Foreign Enterprise ("WOFE") in Qianhai after obtain the relevant approval.
• 5.2. Allow Hong Kong service providers are to establish hospitals in the form of WOFE in Qianhai.

6. Telecommunications

• 6.1. Allow Hong Kong and Macao telecommunications service providers to establish joint ventures in Qianhai Zone with Mainland telecommunications service providers under CEPA.
• 6.2. Encourage the Innovation in telecommunications management modes and allow local telecommunications service providers to explore preferential charge schemes based on the practical situation in Qianhai.
• 6.3. Allow the establishment of a special international communication channel in order to meet the demand of Qianhai enterprises.

General Comment:

The Reply officially approved the Qianhai Zone with the aim of making it serve as an experimental business zone for better interaction between Mainland China and Hong Kong in the financial, logistics, and IT services sectors. Therefore, the preferential treatment to Hong Kong is very clear. Besides, financial liberalization is the center piece of the Reply, including the promotion of RMB as an international currency.

However, the detailed regulations and rules for the implementation of the Reply are yet to be developed by different competent authorities. Currently, there are no schedules regarding the issuance of these detailed regulations and rules. Therefore, what kind of influence will the policies in the Reply have, especially on RMB Internationalization, is still an open question.

by UBILLA & CIA

New Measures on Administration of the Credit Guarantee Funds for Small and Medium-sized Enterprises

On May 25th, 2012, the Ministry of Finance (“MOF”) and the Ministry of Industry and Information Technology (“MIIT”) of the People's Republic of China (“PRC”) jointly issued the Measures on Administration of Funds for Credit Guarantee of Small and Medium-sized Enterprises (hereinafter referred to as the “New Measures”) which shall enter into force as of the date of its promulgation. The Interim Measures on Administration of Funds for Credit Guarantee of Small and Medium-sized Enterprises (hereinafter referred to as the “Interim Measures”) that were issued in 2010 shall be simultaneously annulled.

By comparison with the Interim Measures, the key points of the New Measures are as follows:

1. A New Category of Enterprises

There were only two categories of Small and Medium-sized Enterprises (“SMEs”) in the Interim Measures, one of which is the category of small enterprises and the other is the category of medium sized enterprises. In the New Measures, a new category of “micro enterprises” is included.

2. Scope of Application

Funds for Credit Guarantee of SMES should be exclusively granted to credit guarantee agencies and credit re-guarantee agencies which serve SMEs in order to enhance their professional qualification, further develop their guarantee business and improve the financing environment for SMEs, especially micro enterprises, with preferential treatment to China’s central and western regions.

3. Methods and Limits of Funding

The methods of funding are as follows:

a. Service Subsidy
The limits of financial support under this method of funding vary according to the types of services the agencies provided:

b. Premium Subsidy
If the rate of credit guarantee fee charged by one agency is lower than 50% of the benchmark lending rate for the same period announced by the People’s Bank of China, without any increase in other standards for fees, the agency can apply for financial support of which the rate should be no more than the difference between the 50% of the above-mentioned lending rate and the actual rate the agency charges.

c. Capital Injection
The agencies, which meet the requirements as set in the New Measures, can apply for financial support in the form of capital injection in particular cases. This form of financial support should be no more than 30% of the increased capital.

d. Others
There are some other ways to support the agencies that provide the guarantee or re-guarantee services to SMEs.

According to the New Measures, the qualified guarantee or re-guarantee agencies can apply for more than one method of funding. However, the total funds for the credit guarantee received by one guarantee agency in one year should not exceed 20 million RMB and such funds received by one re-guarantee agency in one year should not exceed 30 million RMB (except in the form of capital injection).

General Comment:

The New Measures clarified certain issues relevant for the management and utilization of credit guarantee funds for SMEs and provided preferential treatment to micro-enterprises and SMEs in China’s central and western regions. The New Measures also show the Chinese government’s determination to create a better financing environment for SMEs.

by UBILLA & CIA