China Law Update : China Business Law Lawyers & Attorneys : Sheppard Mullin Law Firm : Direct Investment, Dispute Resolution, Intellectual Property, Antitrust, Venture Capital

On April 20, 2010, China’s Supreme People’s Court published its first Intellectual Property Protection by Chinese Courts in 2009 White Paper (“White Paper”). The White Paper provides a review of Intellectual Property Rights (“IPR”) enforcement in China in 2009.

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On March 22, 2010, the Ministry of Commerce, State Administration of Taxation, General Admission of Customs and the Ministry of Finance jointly issued a circular (Shangzifa [2010] No. 93, "Circular 93") to clarify procedures for the examination and approval of tax exemptions and refunds for purchase of equipment in China made by foreign-invested R&D centers.

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China’s State Council has recently released the amended Regulations for the Implementation of the Audit Law of the People's Republic of China (hereafter, the “New Audit Regulation”) applicable starting May 1, 2010. Compared with the amended Audit Law of the People's Republic of China (hereafter, the “New Audit Law”), the New Audit Regulation sets forth the power of auditing authorities more specifically.

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78 Centrally administered State-owned enterprises ordered to withdraw from real estate development.

Soon after the NPC (the National People’s Congress) and CPPCC (the Chinese People's Political Consultative Conference) sessions, during which the top authorities expressed concerns over housing prices and possible intentions to control the property bubble, Beijing's land prices reached record highs, and the biggies shareholders of the winners in the recent three biggest land auctions were all state-owned firms.

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China's National People's Congress Amends the Copyright Law

On February 26, 2010, the National People's Congress passed the second amendment to the Copyright Law. Only two articles of the Copyright Law have been amended, and the changes will take effect on April 1, 2010.

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On February 20, 2010, the State Administration of Tax (the “SAT”) issued “Measures on the Administration of Approval and Collection of Non-resident Enterprise Income Tax” (the “Measures”). Non-resident corporations, defined in Article 3, Paragraph 2 of the Enterprise Income Tax Law of China, are governed by the Measures regarding enterprise income tax (EIT) issues. The EIT of representative offices of foreign enterprises is covered by Circular 18 [2010] issued by SAT on the same day. The Measures went into effect of the date of issuance.

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Mergers

A merger involves two or more enterprises forming a single legal entity (either existing or new) through combining their assets and liabilities. In China, the two methods through which a merger can be transacted are the absorption of an existing company or the creation of a new entity. Though the former resembles an acquisition, different tax rules apply if the transaction is recognized as a merger.

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The M&A rules recognize a deal as either an ordinary reorganization or a special reorganization, and different tax treatments apply accordingly. In terms of acquisitions, the major difference in tax treatment between ordinary and special reorganizations is the tax basis used for calculating the gain/loss from the transaction and the time point at which this gain/loss is recognized. Furthermore, according to Article 7 of the M&A rules, an acquisition between a domestic Chinese enterprise and a foreign enterprise (which in this case includes those domiciled in Hong Kong, Macao, and Taiwan) must meet one of the additional conditions below in order to qualify as a special reorganization[1]:

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China’s new tax law went into effect in January of 2008. This development has had important effects on tax structures used by foreign investors doing mergers and acquisitions in China. It has influenced the strategies firms employ in pursuing “enterprise reorganization” projects involving domestic Chinese enterprises, including mergers, share acquisitions, and asset acquisitions among other transaction types. In April of 2009, China’s Ministry of Finance and State Administration of Taxation ("SAT") issued Caishui [2009] No. 59 (the "M&A Rules"). Some of the most significant aspects of these new rules are described below.

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