UBILLA & CIA

New Regulations on Foreign Representative Offices in China

The State Council of PRC issued the Regulations on Administration of Registration of Resident Representative Offices of Foreign Enterprises(the "New Regulations") on November 19th, 2010 and the New Regulations will take effect on March 1st, 2011.

The New Regulations make some changes mainly in the following respects:

1. The New Regulations specify the operational activities which the representative office (the “Rep Office”) can engage in:
   1. The market survey, exhibition and promotional activities in relation to the foreign enterprise’s products or services;
   2. The liaison activities in relation to the product sales, service provision, domestic sourcing and investment of the foreign enterprise.
2. The New Regulations require two new requirements for the establishment registration:
   1. The legalized certificate of the foreign enterprise’s domicile;
   2. The legalized certificate of the foreign enterprise’s business operation for more than two years;
   3. The Article of Association or organization agreement of the foreign enterprise.
3. Both the Measures on the Administration of the Rep Office (issued in 1983, the “Old Regulations”) and the Circular on Further Strengthening the Registration Administration of the Rep Office (issued in January of 2010, the “Circular”) stipulated one year’s resident period (duration) in the Registration Certificate of the Rep Office. However, the New Regulations only stipulate that the duration of the Rep Office can not exceed that of the foreign enterprise. Though the Old Regulations is abolished, the Circular which established one year’s duration and the extension of the Rep Office is still applicable. Therefore, whether one year’s duration of the Rep Office will be applied in practice needs to be further clarified by the authorities in future.

The New Regulations indicate that the administration of the Rep Office is becoming stricter than before, both in respect of the establishment and the practical operation. In other words, the cost of establishing and operating a Rep Office will be increased accordingly. Besides, during the year 2010, various regulations have also been issued in order to strengthen the supervision and management of the Rep Office. It seems to be a clear trend that the role of a Rep Office is being limited in China. Foreign investors who want to enter into China market by setting up a Rep Office or have engaged in the activities via a Rep Office in China may consider restructuring their business into other alternatives such as a Wholly Foreign-Owned Enterprises (“WFOE”).

by 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