Notice on the Establishment of a Security Review System regarding M&A Transactions Executed by Foreign Investors over Domestic Enterprises

Notice on the establishment of a security review system regarding merger and acquisition (“M&A”) transactions over domestic enterprises executed by foreign investors (“the Notice”) was issued by China's State Council on February 3, 2011, which will come into effect on March 5, 2011.

In order to establish a formal process for reviewing national security issues in international M&A transactions, China will launch an inter-ministry foreign investment security review committee (the “Committee”) which will be led by the State Council.

The security review will be required when the following conditions concur simultaneously:

1. Review Scope

The domestic enterprise involved in the security review shall be:

1. A military or military-related enterprise, enterprise physically surrounding a key or sensitive military infrastructure or other military-related units;
2. A key national security-related enterprise regarding agricultural products, energy and resources, infrastructure, transportation, technology industries, or equipment manufacturing.

2. M&A of a Domestic Enterprise by Foreign Investors

The M&A of a domestic enterprise by foreign investors is defined as follows:

1. Foreign investors purchase the equity of a domestic enterprise or subscribe to the capital increase of this domestic enterprise;
2. Foreign investors purchase Chinese shareholders’ equity of a foreign-invested enterprise (the “FIE”) or subscribes to the capital increase of the FIE;
3. Foreign investors set up a FIE, and use the FIE to purchase the assets of a domestic enterprise or purchase the equity of this domestic enterprise;
4. Foreign investors directly purchase the assets of a domestic enterprise and use these assets to set up a FIE.

3. Actual Control of a Domestic Enterprise

The actual control of a domestic enterprise by foreign investors means that foreign investors become the controlling shareholders or actual controllers of a domestic enterprise after the M&A transaction takes place, which includes:

1. The foreign investor, its controlling parent company or its controlled subsidiary holds more than 50% of the equity of the new enterprise after the M&A transaction;
2. Two or more foreign investors totally hold more than 50% of the equity of the new enterprise after the M&A transaction;
3. Although the foreign investor holds less than 50% of the equity of the new enterprise after the M&A transaction, the foreign investor’s voting right as the shareholder of the new enterprise will significantly influence the decisions of shareholders’ meeting or board of directors of the new enterprise;
4. The foreign investor controls the important matters of the new enterprise after the M&A transaction, including business decision-making, finance, human resource or technology, etc.

4. Review Standard

1. The impact of the transaction on national security, including the domestic production capacity, domestic service capacity and related equipment and facilities for the purposes of national security;
2. The impact of the transaction on China's economic stability;
3. The impact of the transaction on basic social order;
4. The impact of the transaction on research and development capacity of key technology regarding national security.

5. Committee

According to the Notice, the Committee mentioned above is co-chaired by the National Development and Reform Commission (“NDRC”) and the Ministry of Commerce (“MOFCOM”). Other relevant government departments will be involved in the review, depending on the industry fields involved.

The major responsibilities of the Committee include the following:

1. Analyzing the national security impact of M&A transactions;
2. Researching and coordinating major issues during the review;
3. Conducting the M&A transaction review and making a decision accordingly.

6. Procedures

1. The foreign investor shall apply to MOFCOM for the review over every M&A transaction that falls within the “Review scope”. If the transaction falls into the scope of national security review, MOFCOM will submit the application to the Committee for national security review within 5 working days.
2. The Committee shall first conduct a general review of the M&A transaction submitted by MOFCOM. The Committee shall send a notice of the application to the relevant departments within 5 working days. Relevant departments shall provide their opinions in writing within 20 working days. If the M&A transaction is deemed not to have impact on national security, the Committee will send its opinion to MOFCOM based on the opinions of the relevant departments within 5 working days.
3. If a M&A transaction is not passed after the general review, a special review shall be conducted subsequently within 5 working days after receiving the written opinions from relevant departments. The Committee shall complete the special review within 60 working days after the launch of the special review.
4. Where the M&A transaction has had or may have a material impact on national security, the Committee shall require MOFCOM, together with the relevant departments, to terminate the transaction or transfer relevant equities/assets or take other effective measures to eliminate the impact of the M&A transaction on national security.

Comments

• The scope of the key national security-related enterprises is broad, and the category related to “energy and resources” is extremely wide.
• The Notice does not clearly establish how a foreign investor can be clear about whether his/her project needs review.
• The Notice does not clearly specify the standard for evaluating impact on national economic stability and basic social order.
• The Notice does not clearly define the function of the five-day review by MOFCOM, or the difference of its review from the general review by the Committee.
• The Notice does not establish the penalties for violating the Notice.

by UBILLA & CIA

Shanghai Municipality Issues Measures for the Launching of a Pilot Foreign-Invested Equity Investment Enterprise Project in Shanghai

Implementing Measures for the Launching of a Pilot Program for Foreign-Invested Equity Investment Enterprises in Shanghai (the "Measures") were issued jointly by the Shanghai Municipal Financial Services Office, Shanghai Municipal Commission of Commerce and Shanghai Municipal Administration of Industry and Commerce on January 12th, 2011. The Measures will be effective on February 1st, 2011.

The main contents of the Measures are as follows:

1. Establishment of a Foreign-Invested Equity Investment Management Enterprise ("FEIME")

A FEIME is a foreign-invested management enterprise or a partnership mainly carrying out the following business:

1. Sponsoring the Foreign-Invested Equity Investment Enterprises;
2. Managing the investment of the Foreign-Invested Equity Investment Enterprise and providing related investment services; and
3. Giving advice on the equity investment.

The requirements of the establishment of a FEIME are as follows:

1. At least one investor who/which has the business scope relating to equity investment or equity investment management;
2. At least two senior managers with more than 5 years' experience in equity investment or equity investment management, more than 2 years' experience in a senior manager position and relevant experience in China-related equity investments or Chinese financial institutions;
3. The registered capital shall be at least USD 2 million and the contribution shall be in the form of cash.

2. Establishment of a Foreign-Invested Equity Investment Enterprise ("FEIE")

The FEIE is partnership enterprise with foreign investment primarily engaging in the following business:

1. Investing with its own capital in private equity to the extent permitted by laws, including establishing new enterprises, investing in existing enterprises, etc.; and
2. Providing management consulting services to the enterprises in which the FEIE invested.

The requirements of the establishment of a FEIE are as follows:

1. The registered capital shall be at least USD 15 million and the contribution shall be in the form of cash;
2. If the investors include the limited partners, each limited partner shall contribute at least USD 1 million.

Moreover, the FEIE shall not conduct the following activities:

1. Investments in prohibited industries;
2. Investments in public stocks and corporate bonds in the secondary market;
3. Investments in futures and other financial derivative transactions;
4. Direct or indirect investments in the real estate for non self-use;
5. Investments by using capital other than its own capital; or
6. Loans or guarantees to third parties.

3. Qualification of a Pilot Enterprise ("Pilot Enterprise")

A Pilot Enterprise is defined as a FEIME or FEIE (the "Applicant") which have the corresponding qualification to receive special treatment for matters such as currency exchange, etc. This qualification is granted by a special joint committee led by the municipal finance office ("Joint Committee").

In order to be qualified as a Pilot Enterprise, the Applicant shall meet the following requirements:

1. The proprietary assets of the Applicant shall be at least USD 500 million or assets under management of the Applicant shall be at least USD 1 billion during the past fiscal year before the application;
2. The Applicant has the good corporate governance structure and internal control system;
3. The foreign investor of the Applicant shall have at least 5 years' experience of relevant investment;
4. The Applicant hasn't been subject to any judicial or regulatory penalties during the past two years.

Qualified as a Pilot Enterprise, a FEIME is entitled to convert the foreign currency capital into RMB, as the capital contribution to the newly established equity enterprise. The contribution of the FEIME can not be more than 5% of the equity of the invested enterprises. However, this part of the foreign investment will not change the nature of the new invested enterprises.

For a FEIE qualified as a Pilot Enterprise, the Measures do not provide for a quota system that permits the currency conversion of its capital between a foreign currency and RMB.

The capital contribution of the Pilot Enterprise shall be managed and supervised by the custodian bank according to the relevant regulations.

4. Comments

The implementation of the Measures will open the Chinese private equity market to foreign investors, especially the long term institutional investors. The Measures specify the substantial requirements and operational procedures of the establishment of a FEIE, FEIME and Pilot Enterprise, which will facilitate the foreign investment with respect to the private equity in China. Meanwhile, the Measures are expected to benefit foreign investors that invest in new strategic industry, high-technology area and other encouraged industries.

However, some outstanding issues are still needed to be further clarified in practice, such as currency conversion, fund repatriation, national treatment, etc. Furthermore, Shanghai Municipality indicates that it obtained US$3 billion quota for the Measures. The allocation of the quota will also be an important element of the implementation of the Measures.

by UBILLA & CIA

Tianfu Group Wins the Lawsuit against Pepsi Cola Regarding Intellectual Property Right Dispute

On December 30, 2010, Chongqing No.5 Municipal Intermediate People's Court issued a decision on the Pepsi Cola – Tianfu Cola case, establishing that Pepsi shall cease to use Tianfu group’s technology secrets and know-how (including Tianfu Cola’s component, formula and business secrets with respect to the production), return the formula, as well as all the documents with respect to Tianfu group’s technology secrets and know-how.

Brief Introduction

In 1994, Tianfu group (a Chinese beverage company with a famous brand “Tianfu Cola”) and Pepsi signed a joint venture agreement (“JV”) and set up Chongqing Pepsi-Tianfu beverage Ltd Co (“Pepsi-Tianfu”) to produce soft drinks under both the Tianfu and Pepsi brands.

According to the JV agreement, Tianfu group contributed the land, factories and production facilities valued at about USD 7,320,000 and held 40% shares of Pepsi-Tianfu. Pepsi contributed USD 10,707,000 in cash and held 60% shares of Pepsi-Tianfu.

However, the intellectual property (the formula and some manufacturing know-how) owned by Tianfu group were not included in the contribution to the JV agreement. Neither Pepsi-Tianfu nor Pepsi ever paid Tianfu group anything for using them during the existence of the JV agreement.

In 2006, Tianfu group sold its 40% shares in Pepsi-Tianfu to Pepsi and quitted from Pepsi-Tianfu because Pepsi-Tianfu had made losses for 12 years after its establishment.

On October 28, 2009, Tianfu group sued Pepsi-Tianfu for illegally occupying its technology secrets and know-how. Tianfu group requested Pepsi-Tianfu to stop using the technology secrets and know-how and return them to Tianfu group. The case was formally accepted and heard by Chongqing No.5 Municipal Intermediate People's Court.

Comments

When Pepsi-Tianfu was set up in 1994, Tianfu group didn’t contribute the technology secrets and know-how to Pepsi-Tianfu, which means that the technology secrets and know-how are still owned by Tianfu group. Meanwhile, no agreement relating to the transfer of the technology secrets and know-how from Tianfu group to Pepsi or Pepsi-Tianfu was signed. Therefore, even though Pepsi purchased the shares of Tianfu group in Pepsi-Tianfu, the technology secrets and know-how were not included in this transaction. Pepsi or Pepsi-Tianfu shall pay the compensation to Tianfu group after 2006.

However, as a general comment we may say:

1. It is advisable to expressly regulate all IP matters in the JV agreement, including some important “positive and negative facts” regarding the contribution and use of each party’s know-how, trade secrets and so forth.
2. In the implementation of a JV it is important to keep record by any means including board resolutions, of the facts related to how the JV is being implemented, and which technologies and IP rights are being used.

by 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

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