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

After Shanghai allowed foreign private equity and venture capital funds to incorporate in Shanghai in August 2008, Beijing recently became another pioneer in giving legal status to foreign investment funds. On December 20, 2009, Beijing Municipality released a circular entitled Interim Measures on Establishing Foreign Invested Equity Investment Fund Management Enterprises (the "Measures"). The Measures are effective as of January 1, 2010, for a trial period of three years.

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On December 7, 2009, the Ministry of Commerce and the Ministry of Science and Technology jointly announced their opinions on encouraging technology export ("opinions"). Opinions on encouraging technology export focus mainly on three areas: implementing preferential policies, closer international cooperation and improvement of the related public administration. The aim is to support enterprises in their export of well developed industrial technologies.

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By Jennifer Ding

China’s State Administration for Industry and Commerce (“SAIC”) and Ministry of Public Security issued a joint Notice on Further Administration of Registration of Foreign Companies’ Resident Representative Offices (the “Notice”) on January 4, 2010, in light of increased problems with foreign representative offices providing counterfeit registration materials and violating rules regulating their business operations in China. The Notice heightens the scrutiny over registration procedures, personnel structure, and operations of foreign representative offices, which the issuing administrations claim will enhance the enforcement of current regulations and help maintain economic and market order. There is no direct requirement in such Notice that the new restrictions established will be applied to foreign representative offices of certain professional-services firms (including law firms) and liaison offices of foreign-invested enterprises. A summary of changes outlined by the Notice is as follows:

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On November 23, 2009, China's Supreme Court launched public consultation on draft Regulations on Issues in Adjudicating Cases Involving Foreign Invested Enterprise Disputes (Part 1) (the "Guidelines"). The Guidelines provide detailed rules regarding dispute resolution for foreign investors based on the court's experience in real cases.

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The Chinese Ministry of Health (“MOH”) announced the promulgation of the Hospital Complaint Rules (for Trial Implementation) (the “Rules”) on November 26, 2009. The Rules aim to improve the management of hospital complaints and reduce medical accidents and negligence.

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On November 25, 2009, China’s State Council issued the long-awaited Administrative Measures for the Establishment of Partnership Enterprises in China by Foreign Enterprises or Individuals (the “FIP Measures”). The FIP Measures will take effect on March 1, 2010.

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Approval of the Draft Foreign-Invested Partnership ("FIP") Regulations

On August 19, 2009, China’s State Council approved, subject to further clarifying amendments, the Administrative Measures for the Establishment of Partnership Enterprises in China by Foreign Enterprises or Individuals (Draft) (the “Draft FIP Regulations”). The Drafted FIP Regulations have been returned to the Ministry of Commerce for further refinement.

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On July 6, 2009, the China State Administration for Taxation (“SAT”) issued a Notice Regarding Enhancement of Supervision and Investigation of Cross-border Related Party Transactions (the “Notice”). The Notice aims at preventing overseas companies from shifting losses to their related-parties in China against the backdrop of the financial downturn.

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In order to encourage more multinational companies to set up regional headquarters in the capital, the Beijing Municipal Government recently issued general rules and implementing regulations (the "New Rules”) to establish detailed policies on the treatment of regional headquarters. The New Rules not only lower the application requirements for regional headquarters, but also offer generous subsidies and rewards, and other preferential policies. Some highlights include the following:

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Due to the global financial crisis and economic downturn, foreign companies are faced with more challenges and risks associated with international purchase transactions with Chinese suppliers. As a result, it is suggested that foreign companies take steps to reduce costs and control risks when purchasing commodities in China.

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Since 2006, China has implemented a string of policies designed to restrict foreign investments in the real estate industry. Recent actions, such as the State Council Order No. 546 promulgated at the end of 2008, which repealed the rigorous treatment of the urban real estate tax, have curbed some of the most onerous of these restrictions; however, the Chinese real estate market remains heavily regulated. As a result, China's attitude toward foreign investment in local real estate may be best characterized as conservative.

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A recent agreement by the People's Bank of China ("PBC") has expanded a critical process for conducting business in China: currency settlement. On March 12, 2009, the PBC declared a foreign exchange payment arrangement (hereinafter referred as to the “Arrangement”) between mainland China and Hong Kong in conformity with the Memorandum of Foreign Exchange Payment Arrangement between achieved by the PBC and the Hong Kong Monetary Authority (“HKMA”). The Arrangement was executed on March 16, 2009.

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China's Ministry of Commerce (MOFCOM) has released new Rules on Overseas Investment ("New Rules"), which will make it easier for Chinese enterprises to get approval to invest overseas. The New Rules will go into effect on May 1, 2009.

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On November 19, 2008, China’s Ministries of Commerce, Foreign Affairs, Public Security and Justice jointly issued a Guideline on Cross-border Investigation and Litigation of Fugitive Foreign Investors (hereinafter referred as to the “Guideline”). 
 

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In January 2009, China's State Administration of Industry and Commerce issued the Rules on the Registration of Share Investment as Capital Contribution ("Rules"), which will go into effect on March 1, 2009.  "Share investment as contributions to capital" means the investment of a company through an investor's shares of another company.  The Rules will facilitate the share investment and improve the efficiency of its use.
 

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Recent changes to Chinese tax law has dramatic tax implications for foreign investors in the People's Republic of China.  Despite the changing tax landscape, there are still opportunities to take advantage of current tax law.

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On October 23, 2008, China and Singapore signed the China-Singapore Free Trade Agreement (CSFTA), which is the first comprehensive bilateral Free Trade Agreement between China and an Asian country. The Agreement will come into effect on January 1, 2009, once both sides have completed the necessary legislative processes. It is believed that the CSFTA, concluded after two years of negotiations, will enhance China-Singapore bilateral economic relations by further decreasing or removing barriers to trade.

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China is raising export tariff rebates for certain exports to help producers cope with smaller profit margins as a result of slacking market demand, the CNY’s appreciation and rising production costs.

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The world is facing a financial crisis, as large numbers of small and medium enterprises (SMEs) throughout Southeast Asia face bankruptcy.  More than 20% of SMEs in Vietnam are on the edge of bankruptcy, while SMEs in Korea are going bankrupt because of increasing difficulties in obtaining loans from banks that are haunted by unrecoverable bad debts (especially the SMEs located in China that were invested by Korean enterprises).  China has seen about 67,000 SMEs collapse in the first half of this year.  The past 5-10 years, a total of 1.4 million SMEs have gone bankrupt.   

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On August 1, 2008, the State Administration of Taxation (SAT) and the Ministry of Finance (MOF) announced several changes in export tax policies.  The export tax rebate for textiles and clothing was increased from 11% to 13%.  Large export companies are speculating that this increase will boost their profits.  Certain chemical products will not be included in the tax rebate increase.

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Electronic sports games ("E-sports games") have been sweeping across China as elsewhere in the world, and the sector in China is developing at a rapid and accelerating pace. More and more foreign E-sports companies are taking aim at the Chinese market.  With E-sports games gaining tremendous popularity in China, more and more foreign companies are aiming at the Chinese market.  However, upon entering China with enthusiasm, foreign enterprises are often paralyzed by Chinese regulations.

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One challenge for foreign investors in China is moving profits generated by their Foreign-Invested Enterprises (FIEs) out of China at reasonable cost.  Foreign investors commonly do so through dividends, interest, and royalties paid to them by their FIEs subject to a withholding tax of ten percent.  However, bilateral agreements on double taxation create opportunities for withholding tax savings.  An attractive way for withholding tax savings is by establishing FIEs through a Hong Kong Special Purpose Vehicle (SPV).

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Why Invest in the Chinese Bio-Industry

The Chinese Government is placing significant emphasis on developing and expanding China's biotech and pharmaceutical sectors, using a variety of tax breaks, government inducements, and other incentives. The goal is to make China the leader in global life sciences industries. This priority effort poses significant opportunities for foreign investors.

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Earlier this year, China surpassed the U.S. as having the No. 1 online Internet user base in the world.  Concurrent with that development, the China video gaming sector enjoyed explosive growth.  Today, the China video gaming sector remains extremely hot for investment.

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