Legal Issues for Foreign Companies doing Business in China Nordic Centre, Fudan University, March 26, 2012 Qi Tong CMS, China Room 2801-2812, Plaza 66 Tower 2 Tel: 0086-(0)21-6289 6363 1266 Nanjing Road West Fax: 0086-(0)21-6289 0731 Shanghai 200040 E-mail: ada.tong@cmslegal.cn Content of Presentation Types and Establishment Requirements of Foreign Investment Enterprises (FIE) Corporate Governance Overview on Taxation Overview on Labour Law Real Estate Law Foreign Exchange Issues Intellectual Property Rights Enforcement of Claims in the PRC Copyright CMS, China Slide 2 1
Foreign Investment Enterprises (FIE) Types Establishment Procedures Copyright CMS, China Slide 3 Forms Equity Joint Venture Cooperative (or Contractual) Joint Venture Wholly Foreign-owned Enterprise (WFOE) Company Limited by Shares Holding Company Branches Copyright CMS, China Slide 4 2
Foreign Investment in General Foreign investment subject to approval of Chinese authorities Not all industries open to foreign investment Decisive: Guideline Catalogue of Foreign Investment Industries Division of industries into four categories: encouraged, permitted, restricted and prohibited Also indicates whether WFOE is permitted or Joint Venture has to be established Copyright CMS, China Slide 5 Joint Venture or WFOE Personal links, connections and relationsships with domestic enconomy and authorities are given Use of existing sales structure and distribution know how, but often not as good as expected Day to day cooperation with Chinese partner can turn out to be rather difficult Solely control over Management and operation Product quality Labour management Use and distribution of profits Adjustment into regional and global strategy without taking into account the interests of the Chinese partner Better protection of know- how, technology and patents Copyright CMS, China Slide 6 3
Legal Basis for Joint Ventures Equity Joint Ventures PRC Law on Sino-foreign Joint Equity Enterprises Regulations for the Implementation of the PRC Law on Sino-foreign Joint Equity Enterprises Cooperative Joint Ventures Law of the PRC on Sino-foreign Cooperative Enterprises Detailed Rules for the Implementation of the Law of the PRC on Sinoforeign Cooperative Enterprises Copyright CMS, China Slide 7 Equity Joint Venture Limited liability company Term: 10-30 years At least 25% of the registered capital shall be contributed by the foreign shareholder Registered capital can be contributed in cash and/or kind Board of directors has to reflect the investment proportion of the shareholders Profit, risks and losses must be shared in proportion to the equity interests of the shareholders Copyright CMS, China Slide 8 4
Cooperative Joint Venture Limited liability company or entity without legal person status More flexible than Equity Joint Venture Composition of the board of directors and the profit distribution do not have to reflect the investment ratios Chinese shareholder can contribute terms of cooperation instead of or in addition to capital contribution Recovery of investment during the business term possible Copyright CMS, China Slide 9 Establishment of a Joint Venture Pre-registration of company name Project Verification by competent Development and Reform Commission Application for establishment of Joint Venture by submitting inter alia Feasibility Study Report, Joint Venture Contract, Articles of Association etc. for approval by competent Authority of Commerce Issuance of Approval Letter and Approval Certificate Application for Business License at competent Administration for Industry and Commerce Issuance of Business License => Company is established Copyright CMS, China Slide 10 5
Legal Basis for WFOE PRC Law on Sole Foreign Investment Enterprises Detailed Rules for the Implementation of the PRC Law on Sole Foreign Investment Enterprises Copyright CMS, China Slide 11 WFOE Limited liability company Cannot be established in all industrial sectors => Guideline Catalogue of Foreign Investment Industries Originally required to utilise advanced technology and equipment or to export the majority of its products. These requirements have been cancelled after China s accession into WTO Copyright CMS, China Slide 12 6
Establishment of a WFOE Pre-registration of company name Project Verification by competent Development and Reform Commission Application for establishment of WFOE by submitting inter alia Feasibility Study Report, Articles of Association etc. for approval by competent Authority of Commerce Issuance of Approval Letter and Approval Certificate Application for Business License at competent Administration for Industry and Commerce Issuance of Business License => Company is established Copyright CMS, China Slide 13 Common Mistakes in Establishing Joint Ventures Chinese partners negotiate without having the necessary authority Attractive promises (e.g. preferential tax, favorable land use rights, fixed return of investment etc.) are not checked against Chinese law Seeking to bypass applicable restrictions Copyright CMS, China Slide 14 7
Acquisition of Existing Enterprises Acquisition of Existing FIEs Legal Basis: Relevant investment laws Certain Regulations on Changes to Shareholder s Rights in Foreign Investment Enterprises (1997/05/28) General Requirements Share Transfer Agreement Resolution of Board of Directors of FIE Consent of other shareholders, if any Approval of competent Chinese authority Acquisition of Domestic Chinese Enterprises Legal Basis: Provisions on Mergers and Acquisitions of Domestic Entities by Foreign Investors (2006/09/08-2009/06/22) Detailed financial and legal due diligence is essential Recommended: Asset Deal instead of Share Deal Copyright CMS, China Slide 15 Corporate Governance of FIEs Legal basis: PRC Company Law Law on Sino-foreign Equity Joint Ventures Law on Sino-foreign Cooperative Joint Ventures Law on Sole Foreign Investment Enterprises Implementing Regulations Copyright CMS, China Slide 16 8
Highest Authority in Limited Liability Companies Generally: Shareholders Meeting; in Joint Ventures: Board of Directors Legal representative of the company: Chairman of the Board of Directors Companies with a small number of shareholders and of a small scale: Board of Directors can be replaced by Executive Director Copyright CMS, China Slide 17 Composition of Board of Directors Board of Directors can have between 3 and 13 members EJV and WFOE: according to the agreement of the shareholders on the basis of the shareholding ratios CJV: more flexible, composition need not reflect shareholding ratios. However, PRC authorities usually insist that Chinese shareholder appoints at least one director Copyright CMS, China Slide 18 9
Board of Directors Maximum term of office of a director is 3 years. Extension and reappointment permitted Appointment and resignation only becomes effective upon registration with Administration for Industry and Commerce Meetings: at least once a year Quorum for meetings: two-thirds of all directors Copyright CMS, China Slide 19 Board of Directors Powers of office are defined in PRC law and in the Articles of Association For resolutions on most issues simple majority of all directors present is sufficient Some issues require unanimous decision (EJVs and CJVs) or 2/3 majority (WFOEs): Amendment of Articles of Association Termination and dissolution of the company change or transfer of the registered capital of the company merger of the company with other economic entitites Copyright CMS, China Slide 20 10
General Manager Is in charge of the daily management of the company Can concurrently be a member of the Board of Directors Powers of office are defined in the PRC law and in the Articles of Association of the company Strictly speaking needs a power of attorney from the legal representative to represent the company Copyright CMS, China Slide 21 Supervisor Generally: Board of Supervisors consisting of 3 Supervisors In small scale companies or companies with a small number of shareholders: one or two Supervisors instead of a Board of Supervisors Responsibilities Examining the financial affairs of the company; Supervising the actions of the directors and senior managers; Calling and presiding over shareholders meetings when the Chairman of the Board of Directors does not exercise the function of calling and presiding over shareholders meetings as laid down in the PRC Company Law; Submitting proposals to the shareholders meeting; Instituting legal proceedings for compensation in a People s Court against directors or senior managers who violate any law, administrative regulation or the Articles of Association in the course of performing their duties. Copyright CMS, China Slide 22 11
Personal Liability of Directors and Managers for Company Affairs Administrative sanctions or fines in case of e.g. Illegal business activities of the company beyond the registered scope of business Concealing of facts from the registration and tax authorities extracting funds or concealing assets for the purpose of evading debts Copyright CMS, China Slide 23 Personal Liability of Directors and Managers for Company Affairs Liability for damages towards the company and, if relevant requirements are fulfilled, also criminal liability in case of e.g. Acceptance of bribes or seizure of company property embezzling of funds or lending of company funds to others using company funds to provide collateral for non-company debts engaging in business of the same type as the company revealing company secrets Copyright CMS, China Slide 24 12
Personal Liability of Directors and Managers for Company Affairs Criminal liability in case of e.g. Providing false financial and accounting reports and, thereby, causing damages to the shareholders or the public Concealing property in the process of liquidation and, thereby, impairing the interests of creditors Tax evasion of more than 10 % of the tax payable and more than RMB 10,000 Forging of VAT invoices Smuggling goods, where the amount of tax evasion exceeds RMB 50,000 Copyright CMS, China Slide 25 Overview on Taxation Value Added Tax for sales (13-17%) (6%-17% in Shanghai ) Business Tax for services: 3% - 5% Former Corporate Income Tax for FIEs National corporate income tax rate: 30% Local corporate income tax rate: 3% Special tax incentives for investments in certain areas: 15% or 24% Production enterprises with a term of at least 10 years can enjoy additional tax holidays Further tax benefits for export orientated or technologically advanced enterprises Copyright CMS, China Slide 26 13
New PRC Law on Corporate Income Tax: Promulgated on March 16, 2007 Effective since January 1, 2008 Unification of corporate income tax regulations for domestic Chinese companies and FIEs Unified corporate income tax rate: 25% Grandfarther clauses for production FIEs which were established before the promulgation of the new law Special tax incentives only for qualified high and new technology enterprises Copyright CMS, China Slide 27 Overview on Labour Law PRC Labour Law (1995/01/01) PRC Labour Contract Law (2008/01/01) Large number of local regulations Copyright CMS, China Slide 28 14
Recruitment FIEs have discretion on timing, conditions, methods and number of employees Joint ventures often get employees from Chinese partner Special Attention Only take over employees from Chinese partner which are actually needed Ensure that employment contracts of employees with Chinese partner are terminated in advance Copyright CMS, China Slide 29 Labour Contract Conclusion of individual labour contracts Labour authorities often provide standard contracts, can be amended by supplementary terms Probation period is possible (max. 6 months) Employees are entitled to establish a trade union Copyright CMS, China Slide 30 15
Working Hours and Holidays Standard working time: 8 hours per day and 40 hours per week Statutory holidays (e.g. New Year s Day, Chinese New Year, International Labour Day, National Day) Paid leave (generally 5 to 15 days) Maternity leave: 90 days Copyright CMS, China Slide 31 Wages and Social Security Wages must not be lower than the local minimum standard Employers are required to make contributions to the following welfare funds: Pension fund Unemployment fund Medical fund Maternity fund Accident and disability fund Housing fund The amount of the contribution is determined by local regulations Copyright CMS, China Slide 32 16
Termination of Labour Contract Reasons for termination Expiration Mutual Agreement Termination Notice Termination by Employer without prior period of notice, e.g. in probation period, if employee seriously breaches labour discipline or company rules with at least 30 days prior written notice, e.g. if employee is incompetent to perform his/her job if company is undergoing reorganization due to being in the verge of bankruptcy or due to major difficulties in its production and business operation In case of dismissal of employees: severance payment Copyright CMS, China Slide 33 Major Changes brought by the PRC Labour Contract Law Fixed term labour contract => employee can ask for a labour contract with an indefinite term if fixed term contract shall be renewed for the third time Reimbursement of training costs: only in case of full time training for a duration of at least 1 month Post-contractual non-competition obligation at the maximum 2 year and only for employees who have access to company secrets Severance payment also when fixed term contract expires and employer does not offer renewal under the same conditions Copyright CMS, China Slide 34 17
Real Estate Law Types of land Types of land use rights Copyright CMS, China Slide 35 Types of Land State-owned land Allocated land use rights Granted land use rights Collectively-owned land The type of land use right is indicated in the land use right certificate Copyright CMS, China Slide 36 18
Allocated Land Use Rights Legal Basis Urban Real Estate Administration Law (1995/01/01) Definition Land use rights which have been provided to the land user without compensation Cannot be leased, transferred or mortgaged Copyright CMS, China Slide 37 Granted Land Use Rights Legal basis Provisional Regulations concerning the Grant and Assignment of the Right to Use State Land in Urban Areas (1990/05/19) Definition Land use rights which have been provided to the land user against payment of a land grant fee Term depends on purpose of use; land for industrial use: 50 years Can be transferred, leased and mortgated Obligation to develop the land within a certain time Copyright CMS, China Slide 38 19
Collectively-owned Land Legal basis PRC Land Administration Law Use is restricted Has first to be transformed into State-owned land before it can be granted Copyright CMS, China Slide 39 Foreign Exchange Issues Use of foreign exchange in the PRC is subject to government control Basic features of foreign exchange control RMB is not freely convertible into foreign exchange Payments in foreign exchange from the PRC abroad and remittances of foreign exchange into the PRC as investments are subject to control by State Administration of Foreign Exchange (SAFE) Transactions within the PRC generally must be settled in RMB Copyright CMS, China Slide 40 20
SAFE Control Current Account Transactions Capital Account Transactions different scope and content of SAFE control Copyright CMS, China Slide 41 Conditional Convertibility Legal basis Administrative Regulations on Foreign Exchange Settlements, Sales and Payments (1996/06/20) Only for current account items Enterprises allowed to purchase and sell foreign exchange through designated banks In general no prior approval of SAFE required Copyright CMS, China Slide 42 21
Example: Payment for Imports Principle: buyer has to submit documentation stating the legitimacy of the underlying transaction Scope of documents depends on payment structure and nature of the underlying transaction Control by transacting bank is in principle limited to authenticity of documentation Copyright CMS, China Slide 43 Remittance of Profits of FIEs Current account transaction Current Regulation: Circular on Relevant Questions Regarding Remittance of Profit, Stock Dividends and Bonus Dividends by Banks Designated for Handling Foreign Exchange (1998/09/22) Requirement to present certain documents to the bank Tax payment certificate and tax payment application form Auditing report on annual profits Resolution of the board of directors Foreign exchange registration certificate of the FIE Registered capital verification report Copyright CMS, China Slide 44 22
Intellectual Property Rights Two Aspects preventive repressive comprehensive use of the registration of intellectual property rights available under the law taking suitable measures to enforce existing rights Copyright CMS, China Slide 45 Legal Basis for Protection of Intellectual Property Rights PRC Trademark Law and its Implementing Regulations PRC Patent Law and its Implementing Regulations PRC Law against Unfair Competition Madrid Agreement concerning the International Registration of Trademarks PRC Regulations on Customs Protection of Intellectual Property: Intellectual Property Rights can be registered with the PRC Customs General PRC Copyright Law Copyright CMS, China Slide 46 23
Types of Intellectual Property Rights Trademarks Invention Patents (Validity 20 years) A new technical solution relating to a product, a process or improvement thereof Design patents (Validity 10 years) New design of the shape, pattern, color, or their combination, of a product, which creates an aesthetic feeling and is fit for industrial application Utility models (Validity 10 years) New technical solution relating to the shape, the structure, or combination of a product which is fit for practical use Copyrights Copyright CMS, China Slide 47 Registration of Trademarks under the PRC Trademark Law For goods or services Word marks, figurative trademarks or combination marks A trade mark must not be identical with or similar to the trademark of another person Competent authority is the Trademark Office in Beijing Applications by foreign companies only through a trademark agent Period of validity is 10 years, extension is possible Copyright CMS, China Slide 48 24
Extension of an International Trademark to the PRC Since 1989, PRC is a member of the Madrid Agreement concerning the International Registration of Trademarks International trademarks which have been extended into the PRC are protected by the PRC Trademark Law Copyright CMS, China Slide 49 Remedies against Infringement of a Trademark Administrative enforcement Judicial enforcement Institution of criminal sanctions: require a particularly serious offence. In practice, this requirement is seldom met Copyright CMS, China Slide 50 25
Judicial vs Administrative Enforcement Time consuming Plaintiff has to submit comprehensive evidence Fixed procedural rules Higher publicity Costly Local protectionism Quick, flexible, reaction in time Authority can make their own investigations Shock effect Little or no publicity Less expensive Local protectionism Copyright CMS, China Slide 51 Enforcement of Claims in the PRC Enforcement of claims (esp. payment claims) constitutes a major concern in the PRC Dispute Resolution Conciliation or settlement Arbitration Litigation Copyright CMS, China Slide 52 26
Arbitration Two possibilities Domestic arbitral tribunals International arbitration tribunals (in foreign-related disputes) Requires a written arbitration agreement Arbitration generally more recommendable than litigation before Chinese courts Litigation before foreign courts not recommendable since often enforceability cannot be guaranteed due to lack of reciprocity; exception: Chinese defendant has assets abroad Copyright CMS, China Slide 53 Litigation Jurisdiction is divided by level and by territory Basic People s Courts Intermediate People s Courts Higher People s Courts Supreme People s Court Level determined by the amount in dispute The territory is determined by the locality of the defendant or the place of performance of the contract Chinese courts have the power to grant orders of property preservation to freeze a party s assets Enforcement of court judgements only by courts => special application has to be filed with the court of first instance Copyright CMS, China Slide 54 27
Enforcement of Arbitration Awards Awards of domestic arbitral tribunals can be enforced in the same way as final judgments of Chinese courts PRC is a member of the New York Convention on the Recognition and Enforcement of Arbitration Awards Awards issued by arbitral tribunals located in other member States can be enforced in the PRC For enforcement, an application has to be filed with the competent Chinese court Copyright CMS, China Slide 55 28