China Law Update February 2008

China Law Update February 2008

In this second issue of China Law Update for the year 2008, we summarize six new laws and regulations that were issued by various branches of the Chinese government in December 2007 and will have an impact on foreign investors and foreign-invested enterprises. The first two laws build upon recent efforts by the Chinese government, particularly in the PRC Labor Contract Law that went into effect on January 1, 2008 (summarized in the September 2007 issue of China Law Update) to protect China s workers in a fast-growing economy. The Law on Labor Dispute Mediation and Arbitration (page 4) defines new rules and provisions for the mediation and arbitration of labor disputes. In addition, we look at the Regulation on Paid Annual Leaves of Employees (page 6), which defines the terms and rules governing legally mandated paid annual leaves for most employees throughout China. On December 5, 2007, the People s Bank of China and the China Banking Regulatory Commission continued efforts to clarify banking rules, jointly issuing the Supplementary Circular on Improving the Management of the Credit for Commercial Real Estate. (See page 7.) Probably of greatest interest and importance to foreign investors and foreign-invested enterprises, however, are a series of rules issued by China s State Council to fill in missing details from one of last year s most important laws, the PRC Enterprise Income Tax Law. That law, which went into effect on January 1, 2008, eliminates many (but not all) income tax advantages enjoyed by foreign-owned businesses in China. (For background, see the May 2007 issue of China Law Update.) The new laws are, in order: The Implementation Regulations for the Enterprise Income Tax Law of the People s Republic of China, provides detailed rules that were absent from that earlier law, such as those which are designed to encourage research and development, the transfer of technology, and hiring of disabled. (See page 8.) The Circular on the Implementation of the Transitional Preferential Policies Concerning Enterprise Income Tax explains how the new tax rules will work foreign-owned businesses that completed their business registration under China s old tax rules that is, how the government is dealing with the issue of grandfathering (page 14). The Circular on the Implementation of the Transitional Preferential Policies on High-Tech Enterprises Newly Established in Special Economic Zones and in Pudong New District of Shanghai (page 16) addresses the issue of tax incentives available to high-tech enterprises in five special economic zones and the Pudong New District in Shanghai. WWW.FAEGRE.COM February 2008 2

table of contents Employment and Labor 4 Law on Labor Dispute Mediation and Arbitration 6 Regulation on Paid Annual Leaves of Employees Real Estate 7 Supplementary Circular on Improving the Management of the Credit for Commercial Real Estate Taxation 8 Implementation Regulations for the Enterprise Income Tax Law of the People s Republic of China 14 Circular on the Implementation of the Transitional Preferential Policies Concerning Enterprise Income Tax 16 Circular on the Implementation of the Transitional Preferential Policies on High-Tech Enterprises Newly Established in Special Economic Zones and in Pudong New District of Shanghai 17 Faegre & Benson s Greater China Practice 18 Lawyer Contacts for the Greater China Practice WWW.FAEGRE.COM February 2008 3

Law on Labor Dispute Mediation and Arbitration Issuing Body: Standing Committee of the Tenth National People s Congress Issuing Date: December 29, 2007 Effective Date: May 1, 2008 The Chinese government has recently enacted several labor-protection laws, including the Law on Enhancing Employment, which went into effect on August 30, 2007, and the sweeping PRC Labor Contract Law, which broadly addressed virtually all employer-employee relationships in China. (We summarized the very important Labor Contract Law, which went into effect on January 1, 2008, in the September 2007 issue of China Law Update.) Following up on those rules, the Standing Committee of the Tenth National People s Congress recently passed the Law on Labor Dispute Mediation and Arbitration (the Labor Dispute Law), which is designed to protect the rights and interests of employees by providing detailed provisions for mediation and arbitration in order to resolve labor disputes. Until the Labor Dispute Law takes effect on May 1, 2008, procedures for handling labor disputes are and have been governed mainly by the Labor Law of the People s Republic of China (issued in 1994) and the Regulation on Settlement of Labor Disputes in Enterprises, which was issued in 1993 (collectively, the Old Labor Dispute Laws). With the number of labor disputes in China having increased dramatically in recent years, those old laws no longer able provide for a prompt and fair way to solve labor disputes. Whenever a labor dispute arises between an employee and an enterprise (including disputes involving confirmation of the basic labor relationship; disputes over the conclusion, implementation, modification or termination of a labor contract; disputes about an employee s dismissal or resignation; disputes involving work time, annual leave, social insurance, welfare or treatment; and disputes involving labor payments, medical expenses for work-related injuries and economic compensation), the employer and employee may negotiate to reach an agreement, or else either side may apply for mediation or arbitration. Except for certain specified disputes, either the employer or the employee can bring a lawsuit in court if it or he is unsatisfied with an arbitration award. Either party in a labor dispute may apply to various types of organizations for mediation, including the enterprise s labor dispute mediation committee, a legally established people s mediation organization, or a labor dispute mediation organization established in a township or neighborhood community. Having tried mediation, WWW.FAEGRE.COM February 2008 4

either party may apply for arbitration if no mediation agreement is reached within 15 days after a mediation organization receives a mediation application, or if the other party fails to execute a mediation agreement within the time limit prescribed in the agreement. However, if an enterprise fails to execute a mediation agreement concerning the delayed payment of labor remuneration, medical expenses for workrelated injuries or economic compensation within the time limit prescribed in the agreement, the employee may apply to the people s court for a payment order based on the mediation agreement, and the court shall issue such an order. All employers, including foreign-invested enterprises, should be aware that the Labor Dispute Law provides for a number of important changes in the rules for resolving labor disputes: The time limit to apply for arbitration is extended from 60 days under the Old Labor Dispute Laws to one year from the date when a party knows or should have known that its rights were infringed upon. As an exception to this rule, for a dispute arising from the delayed payment of labor remuneration, an employee may apply for arbitration at any time while a labor relationship exists; but if the employment relationship is terminated, the employee must apply for arbitration within one year of the date of termination. The processing period of labor dispute arbitration is shortened to 50 days (counting from the date when an application for arbitration is submitted) for most cases and 65 days for exceptional cases, compared to 74 days and 104 days, respectively, under the Old Labor Dispute Laws. In addition, a party is entitled to bring an action in court for a dispute if an arbitration tribunal fails to render an award within the prescribed period. Only an employee, and not than an employer, may go to court to dispute an arbitration award in certain types of disputes: those which involve the recovery of labor remuneration; disputes about medical expenses for work-related injuries; disagreements about economic compensation that involve an amount not greater than a total of 12 months of the local monthly minimum wage; disputes over working hours, rest and vacations, social insurance, and other working conditions that are stipulated by state labor standards. The Labor Dispute Law makes the employer responsible for providing evidence. As a result, an arbitrator may require the employer to provide relevant evidence if an employee is not able to do so and the evidence is in the employer s control. The employer will bear the adverse consequences for not producing such evidence. A party in a labor dispute no longer needs to pay any fees when applying for arbitration. The costs of a labor dispute arbitration committee are to be paid by the relevant government authority. WWW.FAEGRE.COM February 2008 5

Most of the changes contained in the Labor Dispute Law are designed to protect the rights and interests of employees. These changes, if implemented fully and properly, are expected to provide employees a fast, affordable and fair way to solve labor disputes. Regulation on Paid Annual Leaves of Employees Issuing Body: State Council Issuing Date: December 14, 2007 Effective Date: January 1, 2008 The Labor Law of the People s Republic of China, which was issued in 1994, provided for a nationwide system of paid annual leaves, the details of which were to be determined by the State Council. In practice, however, many employees have not enjoyed such paid vacations, in part because the State Council had not previously provided detailed regulations. In December 2007, the State Council issued the Regulation on Paid Annual Leaves of Employees (Annual Leaves Regulation) in order to protect employees rights to rest and vacation. This new regulation provides the detailed terms, exceptions, required compensation and other matters related to employees paid annual leave. Every employee who has worked continuously for an employer (including, but not limited to, a government agency, organization, enterprise or individual business) for more than one year is entitled to enjoy the legally mandated paid annual leave, with payment equivalent to what the employee earns while working. The Annual Leaves Regulation stipulates minimum paid vacations as follows: at least a five-day annual leave for any employee who has served the same employer for more than one year but less than ten years; at least a ten-day vacation for those who have worked at the employer for more than ten years but less than 20; and a minimum 15-day leave for those who have been employed by the same enterprise, organization, business or agency for more than 20 years. The Annual Leaves Regulation lists five situations in which the employer is not required to give an employee that year s paid annual leave. Employees who take more than the allowed number of sick days and days off for cause, for example, are not entitled to their paid vacation. Similarly, teachers and other types of employees WWW.FAEGRE.COM February 2008 6

who enjoy scheduled winter and summer vacations that exceed the annual-leave requirements are not also entitled to the paid annual leave stipulated in the Annual Leaves Regulation. In lieu of all or a portion of the mandated paid annual leave, an employer can, with an employee s consent, pay the employee 300 percent of his daily wage for each day of leave not granted. If an employer either does not provide an employee with his annual paid vacation or does not pay the employee the additional remuneration described above, the employer should rectify the misconduct within a prescribed time limit by paying the employee; otherwise the employer has to pay the employee the remuneration and an additional compensation up to 600 percent of his daily wage in total. If the employer refuses to pay that amount, either the employee or relevant authorities may apply to a court for compulsory enforcement. Supplementary Circular on Improving the Management of Credit for Commercial Real Estate Issuing Body: People s Bank of China and China Banking Regulatory Commission Issuing Date: December 5, 2007 Effective Date: December 5, 2007 In September 2007, China s top banking authorities, the People s Bank of China (PBOC) and the China Banking Regulatory Commission (CBRC), jointly issued the Circular on Improving the Management of Credit for Commercial Real Estate (the Credit Management Circular) to regulate and strengthen the administration of various types of real estate loans, including loans for real estate development, individual residential housing and commercial housing. (See the November 2007 issue of China Law Update.) In the section regarding the administration of loans for individual residential housing, the Credit Management Circular requires banks to implement a variety of policies, including the imposition of different interest rates for borrowers depending on such factors as the number of similar loans the borrower has taken out and the size of the residential dwelling the borrower intends to purchase. Some important questions have been asked about these requirements that are not answered definitively in the Credit WWW.FAEGRE.COM February 2008 7

Management Circular, especially relating to the standard for establishing the number of loans. The PBOC and the CBRC issued the Supplementary Circular on Improving the Management of the Credit for Commercial Real Estate (the Supplementary Credit Management Circular) to clarify relevant issues. For purposes of applying the rules and rates contained in the Credit Management Circular, banks should count the number of residential housing loans to the borrower s immediate family, and not just loans to the individual. Accordingly, if, for example, a husband has already obtained a loan from a bank for purchasing a house, then an additional house later purchased by his wife should be deemed a second house and thus may not enjoy preferential bank loan policies aimed at those who are purchasing a first house. A family that has purchased a first residential home with a bank loan may apply for another housing loan in accordance with policies governing first-home loans so long as the average living space per resident in the family is less than the local average level. However, the borrower must provide relevant evidence to the bank. Policies concerning residential housing loans under the Credit Management Circular and the Supplementary Credit Management Circular also apply to situations where a family has purchased a home with a housing reserve fund loan and subsequently applies to a commercial bank for another loan. Commercial banks should establish internal rules and policies to implement the rules contained in the Credit Management Circular and the Supplementary Credit Management Circular. Banks should require borrowers to provide correct information concerning real estate owned, income, household size, taxes and all other relevant matters. Banks should refuse applications for loans where anyone provides false information or false certificates. WWW.FAEGRE.COM February 2008 8

Implementation Regulations for the Enterprise Income Tax Law of the People s Republic of China Issuing Body: the State Council Issuing Date: December 6, 2007 Effective Date: January 1, 2008 In March 2007, after years of discussion and controversy, China s National People s Congress substantially revised the nation s tax policies regulating both foreign- and Chinese-owned businesses. The resulting PRC Enterprise Income Tax Law, which went into effect on January 1, 2008, and will be fully phased in over a five-year transition period, imposed a unified 25 percent tax rate on all foreign-invested and Chineseowned businesses, except for those in encouraged industries (most notably, high-tech) and for qualified small businesses. Previously, foreign-owned enterprises had enjoyed a substantially lower tax rate than domestic enterprises. (For a summary of this important law, see the May 2007 issue of China Law Update.) The Enterprise Income Tax Law (EIT Law), however, provides only a basic framework for the new tax system, leaving many details to be clarified by implementing regulations, notices and circulars. On December 6, 2007, China s State Council approved the Implementation Regulations for the Enterprise Income Tax Law of the People s Republic of China (the EIT Implementation Regulations), providing many detailed provisions concerning tax incentives, transfer pricing rules, the anti-taxavoidance rules and other important matters. We summarize below the major provisions that concern foreign investment in China. Tax Incentives High Technology Enterprises The EIT Implementation Regulations clarify the detailed conditions for qualifying as a high-tech enterprise that by law may enjoy a preferential tax rate of 15 percent. Those conditions include: independent ownership of the company s core intellectual property rights (IP rights); its products or services are included in Areas of High and New Technology Encouraged by the State, which will be issued by the State Council; its expenses for research and development (R&D) exceed a certain percentage of annual sales revenue; its income from high-tech products or services exceeds a certain percentage of total revenue; and the number of R&D personnel exceeds a certain percentage of all employees. It is expected that the detailed percentages and other additional conditions will be clarified in the near future. WWW.FAEGRE.COM February 2008 9

In order to be recognized and treated as a high-tech enterprise and enjoy the resulting benefits of the EIT Law, every enterprise, including those which previously qualified as a high-tech enterprise under the prior tax system, must pay attention to the requirements in these EIT Implementation Regulations and subsequent rules and take necessary steps to meet the requirements. Of special importance is the rule concerning the ownership of core IP rights, which reflects the Chinese government s desire to promote the development of technology in China. Until now, many foreign investors have preferred not to transfer their IP rights to subsidiaries in China due to various concerns, such as the protection of IP rights. As a result of the new requirement, investors might consider adjusting previous practices concerning IP rights. Super-Deductions for R&D and Hiring Disabled Persons The EIT Law and EIT Implementation Regulations together allow for several generous deductions to encourage investment in R&D and the employment of disabled persons: Companies may deduct 150 percent of qualified R&D expenses that are incurred for the development of new technology, products or craftsmanship. If the resulting asset is intangible, a company can amortize the expense based on 150 percent of the actual cost. Enterprises are allowed to deduct 200 percent of actual salaries paid to disabled employees. Technology Transfer Income Income of up to RMB five million within one tax year that arises from the transfer of technology by a Chinese tax resident enterprise is exempt from income tax. Income above RMB five million that is due to the transfer of technology is subject to a 50 percent tax reduction. Venture Capital Enterprises If a venture capital enterprise makes an equity investment in a private small-to medium-sized high-tech enterprise over a period of two years or more, 70 percent of the firm s investment may be deducted from the current-year taxable income upon completion of the initial two-year period. Unused deductions may be carried forward to following years. WWW.FAEGRE.COM February 2008 10

Certain Encouraged Industries: Agriculture and Public Infrastructure The EIT Implementation Regulations list a number of projects in the agricultural, forestry, animal husbandry and fishery industries that may entitle enterprises to full tax exemption. Those projects include the cultivation of vegetables, oil-bearing crops, fruits and nuts; preliminary processing of agricultural products; agricultural machinery services; and the repair of agricultural machinery. Enterprises may enjoy a 50 percent reduction of income tax from other types of agriculture, such as the cultivation of flowers, crops for tea or other beverages; the cultivation of spices; and fish farming, either in salt or fresh water. An enterprise s income from the investment in or operation of a public infrastructure project (such as harbors, wharfs, airports, railways, public transportation and electric power) is entirely exempt from income tax for the first three years. For the subsequent three years, enterprises are entitled to a 50 percent reduction in income tax. Resident Enterprises and Non-Resident Enterprises The EIT Law and EIT Implementation Regulations treat resident and nonresident enterprises differently. A non-resident enterprise must pay income tax only on income derived from China, while a resident enterprise (which refers to an enterprise established in China, or an enterprise with its place of effective management located in China) must pay tax on income generated worldwide. The EIT Implementation Regulations define the place of effective management as the location of the organization from which executives or managers substantially exercise overall management and control over production and business operations, personnel, finance and accounting, and properties. However, the regulations do not provide clear guidelines on the specific factors used to determine whether effective management is located inside China, so tax authorities may exercise discretion on a case-by-case basis. WWW.FAEGRE.COM February 2008 11

A non-resident enterprise is taxed at different rates, depending on whether such an enterprise has an establishment in China (25 percent) or does not have an establishment in China (in which case it is taxed at a rate of 20 percent). Under the EIT Implementation Regulations, the term establishment covers a broader range of places than in tax treaties. To avoid the higher tax rate for a non-resident enterprise with an establishment in China, it may be advisable for a foreign enterprise to structure transactions under a treaty with a narrower definition of permanent establishment. Withholding Income Tax Under China s previous tax system, dividends paid by a foreign-invested enterprise (FIE) to foreign shareholders were exempted from withholding income tax. However, the EIT Law imposes a 20 percent withholding tax on income derived from China that is not effectively connected with an establishment in China, including dividends, interest, royalties, rentals and capital gains. Good news for foreign shareholders is that the State Council is authorized to reduce or exempt such withholding tax, and accordingly has reduced it to 10 percent. As many tax treaties provide for a lower withholding tax rate for the above income, foreign investors might want to consider restructuring ownership accordingly. Transfer Pricing Rules The EIT Implementation Regulations provide detailed provisions concerning the transfer of property, both tangible and intangible, between related parties. The regulations provide, among other things, a definition of related parties, reasonable methods that are to be used by tax authorities to adjust transfer prices, cost-sharing arrangements and documentation requirements for transactions between related parties. The definition of related parties in the EIT Implementation Regulations is the same as under the previous tax structure. The new law broadly defines related parties as enterprises, other organizations or individuals that have any of the following relationships with other enterprises: (a) relationships that involve direct or indirect control over such matters as finances, business operations, or purchases and sales; (b) both enterprises or organizations are directly or indirectly controlled by the same third party; or (c) any other relationship that involves mutual interests. In the event of a transaction between related parties that tax authorities deem to be unreasonable, for tax WWW.FAEGRE.COM February 2008 12

purposes the tax authorities can adjust the transfer price by one of several reasonable methods, including the comparable uncontrolled price method, resale price method, cost-plus method and others. When tax authorities investigate such transactions, the related parties will be required to submit contemporaneous documents, including those which show the standards, computation methods and explanation for determining prices and expenditures. Thin-Capitalization Rule In accordance with the EIT Law, if the ratio of debt to equity after a related-party transaction is excessively high, then the interest expense derived from the portion of the debt that exceeds the allowed ratio may not be deducted from taxable income. The EIT Implementation Regulations, like the EIT Law itself, however, still remain silent on the details of the permissible debt-equity ratio. The new regulations do provide definitions for debt and equity investment. As defined in the EIT Implementation Regulations, debt investment refers to loans that are obtained from a related party where the borrower is required to pay interest and return the principal. The definition includes both loans directly provided by related parties and loans indirectly provided, such as back-to-back loans (i.e., a related party provides a loan through an unrelated party) and loans that are guaranteed by a related party. Summary Though still far from comprehensive in how they flesh out the EIT Law, the new EIT Implementation Regulations provide basic guidance for understanding the EIT Law. Many questions regarding the application of the new EIT Law still remain unanswered, and will need to be clarified in future circulars and provisions. To be in compliance with the new requirements on income tax and take advantage of the new tax incentives, foreign investors and FIEs need to understand the new tax laws while continuing to watch for regulations and circulars that will surely be issued later, reviewing their existing tax and management strategies carefully, and making necessary changes. WWW.FAEGRE.COM February 2008 13

Circular on the Implementation of the Transitional Preferential Policies Concerning the Enterprise Income Tax Issuing Body: State Council Issuing Date: December 26, 2007 Effective Date: December 26, 2007 The new PRC Enterprise Income Tax Law (the EIT Law), which we summarized in the May 2007 issue of China Law Update, will, when phased in over a period of five years, cancel many of the tax incentives that were implemented by China s government in order to attract foreign investment. However, there are many details about which the EIT Law remains silent; and the Implementation Regulations for the Enterprise Income Tax Law of the People s Republic of China (the EIT Implementation Regulations; see above), which fill in many details, are likewise silent about how the new rules will deal with the issue of grandfathering the taxation of enterprises that completed their business registration under China s old tax rules, prior to March 16, 2007 (Old Enterprises). To clarify those and related issues, the State Council issued the Circular on the Implementation of the Transitional Preferential Policies Concerning Enterprise Income Tax (the Transitional Policy Notice) in late December 2007. When fully implemented, the EIT Law will impose a unified 25 percent tax rate on all foreign-invested and Chinese-owned businesses, except for those in encouraged industries (most notably, high-tech) and for certain small businesses. Previously, foreign-owned enterprises had enjoyed a substantially lower tax rate than domestic enterprises. The Transitional Policy Notice explains more fully how the new income tax rate will be phased in for the many Old Enterprises that enjoyed preferential tax rates; how tax authorities will handle promised-but-unutilized tax holidays; tax policies for Old Enterprises in China s less-developed Western Region, where the Chinese government continues to encourage investment with tax breaks; and the relationship between new tax incentives in the EIT Law and prior tax incentives. WWW.FAEGRE.COM February 2008 14

We summarize below some of the key provisions of this notice. An appendix lists the various types of enterprises that qualify for special grandfathering treatment, including a low tax rate of 15 percent for foreigninvested manufacturing enterprises in many cities; and a two-year exemption followed by a three-year tax rate reduction of 50 percent for foreign-invested manufacturing enterprises that have been operating in China for ten years or more. Starting January 1, 2008, the Chinese government will gradually phase in the new 25 percent income tax rate for Old Enterprises. For Old Enterprises that previously enjoyed a lower 15 percent preferential tax rate, the income tax rate will rise gradually, in the following manner: to 18 percent in 2008; 20 percent in 2009; 22 percent in 2010; 24 percent in 2011; and 25 percent in 2012. Old Enterprises that previously enjoy a preferential rate of 24 percent will immediately be subject to the EIT rate of 25 percent in 2008. Old Enterprises that had already qualified for and commenced a tax holiday (temporary tax reduction) before January 1, 2008, may continue to enjoy the remaining benefits of the tax holiday until its expiration. For Old Enterprises that did not commence a tax holiday before 2008 because of financial losses, the tax break will start in 2008 and can also be enjoyed until it expires. Previously existing preferential tax policies that were available to Old Enterprises established in China s Western Region will continue to apply. Accordingly, Old Enterprises may continue to enjoy a preferential income tax rate of 15 percent until its expiration in 2010. They are also entitled to enjoy tax holidays until their previously scheduled expiration. An Old Enterprise that qualifies both for grandfathering treatment and a new tax incentive under the EIT Law may choose the one that is more beneficial, if they overlap. Once that choice is made, however, it cannot be changed. WWW.FAEGRE.COM February 2008 15

Circular on the Implementation of the Transitional Preferential Policies on High-Tech Enterprises Newly Established in Special Economic Zones and in Pudong New District of Shanghai Issuing Body: State Council Issuing Date: December 26, 2007 Effective Date: January 1, 2008 While the stated goal of the PRC Enterprise Income Tax Law, which went into effect on January 1, 2008, and will be fully phased in over a five-year transition period (see China Law Update, May 2007), is to impose a unified 25 percent tax rate on all foreign-invested and Chinese-owned businesses in China, the new law retains some tax preferences for businesses in encouraged industries (most notably, high-tech). The Circular on the Implementation of the Transitional Preferential Policies on High-Tech Enterprises Newly Established in Special Economic Zones and in Pudong New District of Shanghai addresses the issue of tax incentives available to high-tech enterprises in five special economic zones (Shenzhen, Zhuhai, Shantou, Xiamen and Hainan) as well as the Pudong New District in Shanghai. The criteria for qualifying as a high-tech enterprise under this notice are the same as those stipulated by the Implementation Regulations for the Enterprise Income Tax Law of the People s Republic of China (the EIT Implementation Regulations; see above). The company must, for example, independently own its core intellectual property rights, and its products or services must be included in the forthcoming Areas of High and New Technology Encouraged by the State. Relevant government authorities must also approve a company s designation as a high-tech enterprise (High-Tech Enterprise). For income derived within the five special economic zones and the Pudong New District, High-Tech Enterprises are entitled to a full tax exemption for the first two years in business and a 50 percent reduction from the statutory rate of 25 percent for the following three years. Those tax breaks commence from the year in which the High-Tech Enterprise earns its first income. A High-Tech Enterprise that maintains operations both inside and outside the specific economic zones must calculate its income and expenses separately, or it will not be allowed to enjoy the tax holiday. If an enterprise fails to pass the re-assessment on its qualification as a High-Tech Enterprise, it may not take advantage of the tax break beginning in the year when it fails that re-assessment. In addition, such an enterprise will not be allowed to resume enjoying the tax break even if it again qualifies later as a High-Tech Enterprise. WWW.FAEGRE.COM February 2008 16

Faegre & Benson s Greater China Practice Faegre & Benson l l p has extensive experience advising U.S., European and Asian clients on entering the China business environment, as well as on investment, trade and commercial matters throughout the Greater China region. From our offices in Shanghai and Minneapolis, lawyers in our China practice regularly provide international structuring, documentation and negotiation assistance for transactions both inbound to and outbound from Mainland China, Taiwan and Hong Kong. The core of our team includes highly experienced legal professionals who have studied and practiced in both the U.S. and in China. In addition, we collaborate with an extensive informal network of local law firms, which possess expertise vital in an often ambiguous regulatory environment, where local custom and practice can vary. Lawyers in our China practice represent clients ranging from privately held emerging companies to Fortune 50 multinationals in connection with their cross-border business dealings involving China. Our experience includes work in the industrial manufacturing, consumer products, telecommunications, hospitality, financial services, software, automotive, engineering, chemical products, pharmaceuticals, infrastructure, restaurant, and construction industries. WWW.FAEGRE.COM February 2008 17

Lawyer Contacts for the Greater China Practice John V. Grobowski Phone: +86 21 6279 8988 Email: jgrobowski@faegre.com John is co-chair of the firm s Greater China practice and is firm s managing partner of the Shanghai office. With more than 20 years of experience in the China business environment, John focuses his practice on advising multinational corporations in the establishment, acquisition and operation of manufacturing companies and service providers throughout China. John is a recognized authority on business law in China. He has served on PRC government advisory panels on competition law legislation and venture capital law reforms. He is also a frequent speaker and writer on numerous subjects related to doing business in China. George D. Martin Phone: 612 766 7055 Email: gmartin@faegre.com George is co-chair of the firm s Greater China practice, and is a partner in the firm s Minneapolis office. He has extensive experience in both China and Central Europe, advising U.S. and European multinational companies on investment and operational matters including international joint ventures, mergers and acquisitions, and franchising; establishment of wholly foreign owned enterprises, including assembly and processing facilities in free trade zones; licensing and technology transfer arrangements, including trade secret protection; commercial contracting for overseas operations; investment restructuring and review; Foreign Corrupt Practices Act compliance; and government relations, negotiations, and approvals. Yiqiang (Lee) Li Phone: +86 21 6279 8988 Email: yli@faegre.com Lee is a partner in the corporate practice in Shanghai office and provides a full range of legal services in connection with foreign investment and commercial matters in China. He is also licensed to practice law in the United States. Lee s practice is focused on the telecommunications, automotive, manufacturing, architectural, hospitality, insurance and finance industries, as well as restructuring and bankruptcy matters. 2008 Faegre & Benson llp. All rights reserved. WWW.FAEGRE.COM February 2008 18