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LEGAL GUIDE TO DOING BUSINESS IN CHINA
CONTENT
I. OVERVIEW ...................................1 II. FORMING A COMPANY IN CHINA ................................................................2 III. MERGERS AND ACQUISITIONS ................................................................8 IV. TAXATION ...................................12 2011.05 Address: 13th/14th F, Huamin Empire Plaza 726 West Yan An Road, 200050 Shanghai,China Tel: (8621) 52370950

I. OVERVIEW
This guide provides foreign investors an overview of the laws and regulations governing business in mainland China. After 30 years law making and reform, in 2010s, China has already promulgated a body of written statutes governing commercial affairs, including company management, employment, making contract etc. There exists an even larger body of implementing regulations and circulars issued by governmental authorities. The law in China often evolves in a piecemeal fashion, with certain regulations applicable experimentally only in certain geographic regions or with the issuance of temporary “interim” regulations that nevertheless have the force of law. The written statutes and regulations are often pitched at a relatively high level of generality, leaving significant discretion to implementing officials. Questions of law are resolved generally directly by the administrative agencies in charge of enforcing those laws, rather than by the courts.

V. EMPLOYMENT AND LABOR LAW ..............................................................14 VI. INTELLECTUAL PROPERTY ..............................................................15 VII. REAL PROPERTY ..............................................................16 VIII. EXCHANGE CONTROL ..............................................................17 IX. CONLUSION ..............................................................17

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The PRC legal system more closely resembles civil law systems than common law systems. China has no centralized mechanism for reporting decisions by administrative agencies or courts, and no concept of a common law. Even published decisions by China’s highest court, the Supreme People’s Court, are of advisory rather than precedential force in future cases, even for lower courts. Ambiguities in the written regulations are most often addressed, not by reviewing court precedents, but by directly consulting the government officials with jurisdiction over the matter. Informal guidance offered by government officials is usually reliable, but cannot generally be enforced against the officials if they change their minds. China joined the WTO in December 2001 which is an important impetus for reform of China’s business law environment. WTO brought three main categories of domestic reform: reduction of tariff rates, opening of additional sectors to foreign investment, and reforms to its legal system in areas such as intellectual property protection and foreign exchange control. By 2011, China has made significant progress in these reforms, for example, it reduced the general tariff rate from 15.3% in 2002 to 9.8% in 2008; It removed some trade barriers, including in retail, wholesale and import-export. Services, such as financial services and insurance, remain highly protected but with increasing foreign participation. China has also implemented a number of changes to the domestic legal system designed to increase transparency and enforcement of intellectual property rights.

II.
A.

FORMING A COMPANY IN CHINA
OVERVIEW

Nowadays in most statutes, foreigners are treated as natives. However, there are still some differences. This chapter will introduce the basic information for foreigners concerning forming a company in China.

B.

TYPES OF FOREIGN INVESTED ENTERPRISES

Chinese companies established with at least 25% foreign investment comprise a distinct category of PRC legal entity called foreign invested enterprises (FIEs). FIEs generally fall into one of two subcategories, wholly foreign owned enterprises (WFOEs) and joint ventures. A WFOE is a Chinese company wholly owned by foreign persons. For some sectors of businesses, WFOEs are not permitted. In these sectors, only joint ventures with at least partial Chinese investment are permitted. Although, joint ventures have some advantages, WFOE is a better vehicle if possible, because joint ventures have historically run into difficulties when the parties have differing goals, management methodologies, and plans for the business. M&A LAW FIRM 2/18

LEGAL GUIDE TO DOING BUSINESS IN CHINA
As to joint ventures, there are two basic forms: equity joint ventures (EJVs) and cooperative joint ventures (CJVs). In an equity joint venture, board representation, profit distribution, and liquidation are strictly arranged in accordance with each party’s relative equity contribution. Relatively, CJVs offer flexibility to distribute profit in proportions different from the proportions of the equity contributions. However, to avoid complication of negotiating process and alert from the authority, EJVs remain far more common investment vehicle than CJVs. The basic constitutional document of a WFOE is its articles of association. In addition to articles of association, joint venture companies also have a joint venture contract describing the basic terms of the cooperation between the parties. In practice, the articles of association and the joint venture contract for a joint venture company overlap significantly. In forming a joint venture, negotiating ancillary agreements relating to the use of technology and know-how, related party purchasing and supply, and intellectual property rights is often an important aspect of the transaction. Forming a joint venture therefore often involves agreeing to the terms of IP and trademark license agreements, purchase agreements, and supply agreements in addition to the joint venture contract itself. In general, FIEs are separate legal persons with limited liability. One exception to this rule is that it is possible to establish a “contractual” CJV without limited liability, but this is very rare.

C.

CAPITAL STRUCTURE

The capital structure of a standard FIE is divided into two components: registered capital and total investment. Registered capital is the amount of equity contributed to the company. In general, an investor’s ownership interest in the company is determined by the proportion of the registered capital it contributes. The registered capital of a Chinese company must be fully paid up. There is no PRC equivalent to authorized but unissued equity. Investors have the option of paying up the registered capital in installments. The first installment, amounting to at least 15% of the total registered capital, must be paid within six months of the issuance of the FIE’s business license. The balance must be paid within two years. Although the registered capital may be paid in installments, an investor may claim dividends only to the extent attributable to the amount of registered capital actually contributed. Each contribution to the registered capital must be verified by a certified Chinese accountant. The accountant will issue a document called a “capital verification report” attesting to the proper contribution of the capital.

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A foreign investor may contribute to the registered capital in foreign currencies only. The law permits RMB denominated contributions only to the extent that the contributed RMB funds derive from prior investments in the PRC. The law also permits in-kind contributions, such as machinery, equipment, and intellectual property. In general, no more than 70% of the total registered capital of an FIE may be contributed in-kind. In-kind contributions must generally be valued at an appraised amount as assessed by a certified Chinese appraisal institution. As such, non-cash registered capital contributions tend to complicate efforts to specify the amount of the registered capital contribution of each party. Certain types of in-kind contributions, such as contributions of land use rights and state-owned assets, are subject to additional valuation rules and appraisal procedures. The total investment of a company is the total amount of funding available to the company from both equity and debt. That is, an FIE may borrow generally only to the extent of the difference between its total investment and registered capital. The portion of the total investment in excess of the registered capital may be raised by debt of any kind, including bank loans and shareholder loans. Chinese law imposes requirements on the ratio of the total investment to the registered capital. The ratios are as follows.

The Articles of Association of an FIE must set forth the specific amount of the total investment and registered capital. Any changes to these figures must be submitted to the PRC authorities and approved before they become effective. Accordingly, foreign investors should carefully consider from the outset the amount of capital its enterprise will require.

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D. THE APPROVAL AND REGISTRATION PROCESS

In the PRC, each foreign investment is subject to substantive government review. Different industry sectors are subject to differing levels of scrutiny. Investors should consult the Foreign Investment Industrial Guidance Catalogue (Amended 2007) (the “Catalogue”) and the Guidance on Direction of Foreign Investment Provisions to determine the degree to which foreign investment in a given sector is regulated. The Catalogue provides for four different categories of foreign investment: encouraged, permitted, restricted, and prohibited. The Catalogue expressly sets forth the encouraged, restricted, and prohibited categories. Any business not expressly listed in one of these three categories generally falls within the “permitted” category.The most important consequence of a business’s Catalogue classification is often the level of government at which an investor must seek approval for its investment. Lower levels of government (municipal and provincial authorities) generally provide more rapid review. They generally also actively seek foreign investment. Review at the central level of government in Beijing generally takes more time, and approval is more difficult to obtain. FIEs may be established only with the approval of the Chinese government. The approval process begins with a name reservation application to the relevant bureau of the State Administration for Industry and Commerce (SAIC) to check on the proposed name for the FIE. After the company name has been reserved, the applicant must obtain substantive “examination and approval” of the investment by MOFCOM. Examination and approval by MOFCOM is the key stage in the approval process. It requires submission of the full definitive documents for the proposed enterprise to the government, and may also require a “Feasibility Study” describing background on the project, along with other supporting documents. After MOFCOM’s approval, and the parties’ payment of the initial installment of registered capital, the parties may register with SAIC for issuance of a business license. An FIE is officially established upon issuance of its business license. Even after the business license is issued, there remain additional registrations to complete (including with the local SAFE, labor, customs, and tax authorities). As noted above, the level of SAIC and MOFCOM to which these applications must be made is determined by the size of the total investment and the classification of the business under the Catalogue. In some cases, the parties must also obtain certain special approvals, such as environmental approval, prior to applying to MOFCOM for examination. Environmental approval may be required for manufacturing enterprises, or for any investment project that entails a construction project.

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E. CORPORATE GOVERNANCE

The highest governing body of a WFOE or EJV is its board of directors, and each party’s board representation must be strictly proportional to its registered capital contribution. For an EJV, Chinese law specifies certain corporate actions, including amendment of the articles of association, dissolution of the company, increase or decrease of the registered capital, and merger or division of the company, require unanimous board approval, providing protection to minority investors. Additionally, Chinese law specifies certain corporate actions that may only be undertaken by amending the articles of association and the joint venture contract. This requirement is also protective of minority investors, because all investors must sign off on any changes to these documents, no matter how small their relative registered capital contribution. Board meetings must be held at least once a year, or more frequently if so specified in the company’s articles of association. The attendance of over two-thirds of the board of directors is required in order to establish a quorum. The chairman of the board of directors generally also serves as the company’s legal representative— the natural person who has the power to bind the company to contracts and serves as the chief representative of the company to the government. A CJV may be governed by a joint management committee, which functions similarly to a board of directors. The PRC Company Law requires limited liability companies to have, in addition to a board of directors or joint management committee, a separate “board of supervisors.” The board of supervisors consists in representatives of the shareholders and the employees, with the employees selecting at least one-third of the total number of supervisors. The board of supervisors is intended to serve as a check on the power of the senior officers and directors. The board’s powers are largely limited to proposing changes rather than directly implementing them. The board of supervisors also has the legal authority to sue directors, supervisors, or senior officers who break the law or breach the articles of association of the company, thereby causing losses to the company. In most cases, the day-to-day operations of the FIE are under the direction of a general manager, and financial operations are under the direction of a finance manager. For joint ventures, the parties often negotiate a fairly detailed management structure as part of the FIEs establishment process. The joint venture contract typically specifies which party may appoint persons to specific senior management positions.

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F. TERM

In contrast to most Western jurisdictions, in which corporations are established for indefinite terms, FIEs have a limited term set forth in their articles of association. Depending on the degree to which an FIE’s industry is regulated in China, the authorities sometimes approve terms of as long as 50 years or longer, although the norm is for shorter periods. It is possible to renew the term of an FIE with the approval of the relevant authorities.

G.

DISTRIBUTION

FIEs may not pay out dividends to investors until all taxes have been paid and all previous years’ losses have been made up. Prior to distributing any profits, FIEs also must distribute or reserve, a. employee Bonus and Welfare Fund, which may be used by the company for employee-related expenditures, such as bonus schemes and housing allowances or subsidies; b. reserve Fund, which may be used to cover capital losses, fund expansion in production and business operations, and, subject to governmental approval, to fund increases in registered capital; c. enterprise Expansion Fund, which may be used for the expansion of an EJV’s business. A joint venture must contribute at least 10% of after-tax net profits to the reserve and enterprise expansion funds until the cumulative amount in the funds reaches 50% of registered capital. A WFOE need not maintain an enterprise expansion fund, but it must contribute at least 10% of aftertax net profits into its reserve fund until the cumulated amount in the reserve fund reaches 50% of registered capital. The extent of the employee and welfare fund allocations depend on the number of Chinese employees and provisions in the FIE’s articles of association, as approved by the authorities. SAFE approval is required for any dividend payments in foreign currency. The company must generally provide tax payment certificates, an audited financial report, a board resolution approving the distribution of profits, the foreign exchange registration certificate, and a capital verification report in order to obtain clearance for an overseas profit payment. SAFE may also request additional documents. In addition to dividends, foreign investors sometimes profit by concluding agreements to provide management services, consulting services, technology, or intellectual property licenses to their FIEs. Fees paid under these agreements may be subject to taxation at a different rate from dividends. When an FIE pays out fees under agreements with foreign parties, including with a foreign investor, the FIE may have the obligation to withhold and remit PRC taxes on behalf of the payee. M&A LAW FIRM 7/18

LEGAL GUIDE TO DOING BUSINESS IN CHINA

III. MERGERS AND ACQUISITIONS
A. OVERVIEW
The main alternative of forming a Chinese subsidiary or joint venture from scratch is to acquire assets or equity in an existing Chinese company. Foreign investors typically acquire PRC entities either to obtain a presence in the PRC market or as a pure financial investment. This part provides an overview of the regulations governing mergers and acquisitions of PRC entities by foreign investors.

B.

DUE DILIGENCE

Chinese companies often have hidden liabilities, or turn out to be less attractive after careful review, than previously believed. Careful due diligence is therefore extremely important in China. Due diligence is also difficult to accomplish. Publicly available records on many aspects of a Chinese company’s business, such as the existence of pending litigation, mortgages over assets, leases, ownership to capital production equipment, registration of intellectual property, and rights to use state-owned land, are often difficult to obtain in reliable form. Corporate records often lack key documents, even as to principal assets and contracts. Tax avoidance, fraud, and self-dealing transactions remain more common than in many other jurisdictions. Another challenge of due diligence is that Chinese companies are often reluctant to participate in the process. They are often surprised at the extent of the due diligence requests of foreign acquirers. The actual due diligence process in the PRC usually begins with a due diligence checklist. The typical topics covered include establishment and approval documents, organizational structure, material contracts, land use rights and buildings, principal assets, finance, tax, labor, social insurance, intellectual property, products liability, environmental issues, antitrust issues, legal proceedings, and fraud, corruption, and affiliate transaction. In crafting due diligence requests, careful attention should be devoted to any special substantive regulations applicable to the target’s business. For example, it is important to verify that the target’s products have received any government certifications or licenses required for those products to be sold in China. In nearly all cases, acquirers will need to request supplemental documents after the first due diligence disclosure. In almost all PRC transactions, there will be known risks that cannot be resolved through due diligence. These risks can be addressed to a limited degree through representations and warranties in the definitive agreements. In some cases, in transactions with state backing, it is sometimes possible to arrange for indemnities or waivers of enforcement for past breaches directly from local authorities. The enforceability of such indemnities, however, is at best questionable because, as a general rule, governmental bodies lack legal capacity to contract.

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C. ACQUISITION STRUCTURES

Chinese law allows for both equity and asset acquisitions. The main factors in choosing between these two structures often involve balancing between liability and tax considerations. An equity investor inherits the contractual rights and obligations of the target company, including its employment contracts with its key employees and labor force, its supply contracts, its sales contracts, and its financing agreements. An equity transaction is also more straightforward from a documentation and implementation perspective. Equity acquisitions take various forms, including direct acquisition of existing equity from the current owners or subscription to an increase in the registered capital of the company. Given the inherent uncertainties involved in acquiring a Chinese company, an asset acquisition is often safer because the investor will not acquire most types of past liabilities of the target. However, asset acquisitions are often tax disadvantaged. An equity acquisition is subject to a single layer of taxation, the tax on income from the sale of the equity. Asset acquisitions sometimes involve two taxable events: the sale of the assets by the existing PRC entity is taxable to the entity, and any subsequent distribution of the profits to the sellers may be taxable to the sellers. As such, the Chinese sellers to a transaction in many cases prefer an equity structure. Asset acquisitions are also more complicated from a contractual perspective, because Chinese contractual rights generally cannot be assigned or transferred without consent of the counterparty. As such, key employees and the labor force in general must consent to be transferred from their old employer, the seller, to the acquiring entity. These transfers may come at a cost. The counterparties to key supply and sales contracts must also agree to have the contracts transferred to the new entity. The lenders to the preexisting business may also need to consent for the asset sale to proceed.PRC law also allows for mergers, but Chinese companies can merge only with other PRC domestic companies or FIEs. As such, mergers are less frequent for foreign investors than equity or asset acquisitions. The M&A Rules in 2006 do permit, for the first time, PRC persons to exchange equity in a PRC company for equity in a foreign company. Such “share swaps” are permitted only if the foreign company is publicly traded and has a 12-month trading history, or if the foreign company is a special purpose vehicle established in anticipation of an overseas listing of a PRC subsidiary. In the latter case, the offshore listing must be approved by the CSRC and completed within 12 months of the share swap.

D.

THE APPROVAL AND REGISTRATION PROCESS

The general approval and registration process for an acquisition is the same as the process described for forming a new FIE. All sales of equity in PRC companies must be approved by the authorities. When a foreign investor acquires more than 25% of the equity in a domestic enterprise, it is thereby M&A LAW FIRM 9/18

LEGAL GUIDE TO DOING BUSINESS IN CHINA converted to an FIE. For asset deals, a new entity will often need to be formed to acquire the assets. As such, the approval processes involved in acquisitions is generally the same as for forming new entities. As noted in greater detail above, the basic substantive approval required is “examination and approval” by MOFCOM. Examination and approval involves entails full review of all of the definitive agreements for the transaction, including the equity transfer agreement in an equity acquisition and the joint venture contract if the resulting entity will be a joint venture. The definitive agreements are not legally binding until approved by the authorities. After receiving MOFCOM approval, the target must within 30 days apply to SAIC for issuance of a new business license. The business license will reflect the revised equity holding of the target entity.

E.

PUBLIC COMPANY M&A AND TAKEOVERS

China has two major stock exchanges, the Shanghai and Shenzhen exchanges, for publicly traded companies. Chinese companies issue two forms of stock. B-shares are shares traded in foreign currency. Originally, Chinese persons could not trade in B-shares, but now both Chinese and foreign persons can freely trade in this type of equity. Most listed companies have not issued B-shares, and the number of B-shares (when issued) is typically small compared to the number of A-shares. As such, it is generally not possible to acquire a controlling interest in a Chinese company by acquiring B-shares. A-shares are shares subscribed for and traded in RMB, which may be freely purchased only by Chinese persons. Foreign investors may purchase equity in listed companies generally only through one of four special avenues, including the Qualified Foreign Institutional Investor (QFII) program, by strategic investment, by purchasing non-listed shares, or by asset purchase. The QFII program allows qualified and approved foreign investors to trade in A-shares. The application for QFII status must be made through a custodian bank to the CSRC and SAFE. The types of entities that may qualify for QFII status are fund management firms, insurance companies, securities firms, commercial banks, and other institutional investors (such as pension funds and sovereign wealth funds). Each QFII institution must apply for an investment quota from SAFE of at least US$50 million and not more than US$800 million. QFIIs may invest on their own accounts or as nominees for other investors.No QFII may own more than 10% in any listed company, and investments from all QFIIs combined may not exceed 20% in any listed company. As of November 2009, CSRC had approved and licensed 88 institutions as QFIIs. M&A LAW FIRM 10/18

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Many publicly listed companies in China have non-listed shares, typically shares issued in return for the contribution of state assets or state funds. These non-listed shares are not tradable on the stock exchanges. In 2005, the Chinese government began a share reform initiative to convert many of these non-tradable shares into tradable ones. As part of this effort, MOFCOM and other relevant government agencies issued a regulation in late 2005 permitting qualifying foreign investors, called “strategic investors,” to invest in companies which have completed the share reform process. A strategic investor must purchase at least 10% of the company, and may not transfer its shares for three years. The relevant regulations make it easier to qualify as a strategic investor than as a QFII. Strategic investors must have assets of at least US$100 million, or manage assets of at least US$500 million. They may not have been subjected to a material penalty by regulatory authorities in China or anywhere abroad for at least three years. The regulation also sets forth subjective criteria as to the investor’s financial soundness, governance systems, and compliance processes. A strategic investor application should be directed to MOFCOM, rather than CSRC and SAFE (which review QFII applications). As noted above, many Chinese companies have non-listed shares. Unlike A-shares, unlisted shares may currently be purchased by foreign investors. Non-listed shares purchased by foreign investors are subject to a one-year lock up period. Under Chinese law, if an investor intends to acquire 30% or more of the issued shares of a listed company, it must make a tender offer. Because most foreign investors cannot legally purchase A-shares, it will not be possible to satisfy the tender offer requirement. Within the restrictions of the general rules governing foreign investment in China, foreign investors may acquire assets from listed companies. All sales of “substantial assets” to take place within a one-year period must be approved by twothirds of the shareholders. CSRC verification of the transaction is also required if (a) the assets are valued at more than 50% of the total asset value of the listed company, (b) the net asset value of the assets exceeds 50% of the net asset value of the target, or (c) the assets accounted for more than 50% of the operating revenue for the target in the prior fiscal year. This type of transaction is rare.

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F. CHOICE OF LAW AND LANGUAGE VERSIONS

Certain contracts, such as a joint venture contract for a Chinese joint venture, are required to be governed by Chinese law. Even in cases where Chinese law is not statutorily required, the authorities will often expect and require that Chinese law govern agreements to the extent that they apply or must be enforced in China. However, except for contracts statutorily required to be governed by Chinese law, it is sometimes possible to select foreign law for contracts with a significant foreign connection. Any contract that must be reviewed and approved by the Chinese authorities generally must be written in the Chinese language. For a merger or acquisition, the definitive agreements (e.g., equity transfer agreement, joint venture contract, and articles of association) all must be reviewed and approved and therefore Chinese versions of these documents must be prepared. In most cases, the parties also prepare an English version and the contracts specify that each language version of the contract is equally authentic. In the typical case, the foreign party’s attorneys prepare both the English and Chinese versions of the documents. The Chinese authorities and courts are more focused on contract execution formalities than in many other jurisdictions. Original signatures or chops of both parties—not photocopies—must be submitted to the authorities. The contracts generally specify the number of originals to be executed by the parties, which number should be sufficient for each party to retain an original and for originals to be submitted to all of the relevant authorities.

IV. TAXATION
A. OVERVIEW
All FIEs must keep financial records in compliance with PRC accounting regulations, even if they also keep records in compliance with other accounting principles. Taxes will be determined with respect to the PRC accounting methodology. China’s fiscal year is the calendar year, from January 1 to December 31.

B.

CORPORATE INCOME TAX

Under China’s new Enterprise Income Tax Law, effective January 1, 2008, both FIEs and domestic companies are subject to a corporate income tax on profits at the rate of 25%.In the past, FIEs were nominally subject to a 30% national tax and a three percent local tax. In practice, many FIEs received tax benefits reducing their tax burden below the rate paid by domestic enterprises. One of the main purposes of the new tax law was to phase out tax preferences for FIEs. New FIEs are subject to the 25% rate from the outset. Certain FIEs previously enjoying preferential tax rates will now have those preferential rates phased out over time. FIEs must pay tax on their worldwide income, but tax credits may be available under dual tax treaties for income tax paid in other countries. 12/18 M&A LAW FIRM

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C. SALES TAXES

In addition to the corporate income tax, China also imposes several forms of sales tax. Sales of services, intangible property, and real estate are subject to business tax on gross revenue. The business tax rate typically ranges from three percent to five percent, depending on the type of activity, although some entertainment business is subject to a 20% tax on gross receipts. For real property transactions, additional taxes, including a land appreciation tax, land use fees, and deed tax may apply. For sales of goods, China imposes a value added tax (VAT), generally at the rate of 17%. Some goods receive a preferential rate of 13%. Certain luxury products are subject to an additional consumption tax on top of the VAT.

D.

WITHHOLDING TAX

Dividends from investments, royalties, and rents paid to foreign entities from their China activities are subject to a 10% withholding tax. The tax applies, for example, to dividends paid by FIEs to their overseas investors. Generally, the Chinese person making payments abroad must act as a “withholding agent” for the foreign recipient, and withhold the applicable taxes on the foreign entity’s behalf prior to remitting the net proceeds to a bank account outside of China.

E.

INDIVIDUAL INCOME TAX

China has a progressive individual income tax ranging up to 45%. An FIE must generally serve as a withholding agent for its employees, and withhold and pay income tax on their behalf each month. China relies principally on withholding to collect individual income tax, and only high income individuals are generally required to file separate annual tax returns. Special tax planning options are available to expatriate employees. Certain categories of reimbursements paid to expatriate employees for their meal, home return, dependent education, language education, and housing expenses can be paid on a tax free basis when supported by adequate receipts.Special tax treatment is also available for an annual bonus. As such, careful tax planning can help alleviate the tax burden on expatriate employees.

F.

STAMP TAX

Legal documents used in China, such as contracts and licenses, may be subject to a stamp tax at varying rates.

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V.

EMPLOYMENT AND LABOR LAW

On January 1, 2008, China’s new Employment Contract Law came into force. Other principal regulations governing employment include the Regulations on the Implementation of the Employment Contract Law and the Labor Disputes Mediation and Arbitration Law. These regulations provide a variety of rules and requirements applicable to FIEs and domestic employers alike.

A.

FORMING AN EMPLOYMENT RELATIONSHIP

Representative offices lack legal person status in China and may not directly employ Chinese nationals. Instead, a representative office must contract with a labor service organization, such as Foreign Enterprises Service Co., Ltd. (FESCO), to provide PRC national employees for the office. FIEs with legal person status may directly hire employees, including Chinese natives. Special rules apply to hiring expatriate employees. In general, FIEs may hire foreigners more freely than domestic enterprises. A variety of work visas and permits are required to employ an expatriate legally in the PRC.

B.

EMPLOYMENT CONTRACTS

Chinese law requires written employment contracts. The Employment Contract Law sets forth certain terms that must be included in all labor contracts, including its term; a job description; the place where the work is to be performed; working hours, breaks, and vacations; remuneration; social security; and provisions regarding working conditions and protection against and prevention of occupational injury. Chinese law provides for three basic types of employment contracts: fixed-term contract, nonfixed term contracts, and contracts expiring upon completion of certain tasks. China has no at will employment. Termination within the employment term must be for cause, and the law specifically delineates only certain justifications that rise to the level of cause for termination. As such, the fixed term contract generally provides the greatest flexibility for the employer because it allows periodic review of the employment relationship.

C.

MINIMUM WAGE, SOCIAL INSURANCE, AND WORKING HOURS

In China, the minimum wage varies by locality. The law permits deductions from an employee’s salary only to withhold income tax or as otherwise required by law. An employer must pay its employees at least once each month.

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FIEs, like domestic employers, must participate in a required social insurance program. Such programs generally require both employer and employee contributions. Social insurance provides a retirement pension, medical insurance and unemployment insurance. Local authorities may require additional types of contributions and provide additional benefits. Foreign employees are not covered by the program. China requires that employees governed by its “standard working hours” regime work no more than eight hours per day and no more than 44 hours per week. Employees (or a labor union) may agree to an extension of these hours by up to three hours per day, not to exceed 36 hours per month. When an employer requires work beyond the standard working hours, it must pay at least one and a half times the standard wage. Work over the standard period during the weekend must receive at least double wages, and work during public holidays requires triple wages. For senior, managerial, and professional employees, it is possible to select a “flexible working hours” system, which does not require overtime pay for work beyond standard hours or during holidays.

D.

NON-COMPETE AGREEMENTS

Non-compete agreements with senior managers, senior technicians, and other employees are permitted within certain limitations. Only employees also subject to non-disclosure agreements can be asked to sign a non-compete agreement. The term of the non-compete period may not exceed two years from the date the employment relationship terminates, and separate compensation must be specified and paid to the employee in respect of the non-compete period.

E.

LABOR DISPUTES

The first step in resolving a labor dispute generally involves informal negotiations between the parties. If informal negotiations fail, the dispute must be submitted to a labor arbitration commission in the district or county where the work was to be carried out. The application to arbitrate must be filed within one year from the date the cause of action arises, and the arbitration panel has 60 days from the date of filing to issue a decision. The decision of the arbitration commission is binding, but a party may bring the dispute to the courts if dissatisfied with the arbitrator’s decision.

VI.

INTELLECTUAL PROPERTY

Intellectual property protection in China has historically been a significant problem. Pirated movies and television shows continue to be widespread, as does trademark infringement. China is now a party to the WTO Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS). Although IP protection is improving as China moves to implement its TRIPS obligations, widespread violations remain 15/18 M&A LAW FIRM

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Chinese law provides for patent, trademark, and copyright protection. The term of a patent in China is 20 years. Patents may be assigned or licensed, but only upon registration with the State Intellectual Property Office (SIPO). China is a party to a number of international conventions on patents, including the Paris Convention on the Protection of Industrial Property. A new draft patent law is currently under consideration, and may be passed in the near future. Trademarks in China are under the supervision of SAIC’s Trademark Office. Marks are registered for a renewable period of 10 years, and may be assigned or licensed provided such assignments or licenses are registered with and approved by the Trademark Office. Protection for well-known trademarks is available in China even if not registered, but the extent of the protection is greater for registered marks. China has a trademark dispute regime implemented by the Trademark Office. PRC copyright law protects creative works, including software. The National Copyright Protection Center (NCPC) oversees the copyright system. The NCPC oversees a non-mandatory registration process covering both the registration of copyrights themselves and of assignments or licenses thereof.

VII.

REAL PROPERTY

Under Chinese law, all land in urban areas is inalienably owned by the State. However, 1988 amendments to the Chinese constitution permit the State to grant the right to use land, for a limited time, to private persons. The term of such grants depends on the use of the land. Currently, land use rights are granted for 70 years for residential purposes, 50 years for industrial and mixed uses, and 40 years for commercial use. Within the term of the land use grant, the holder of the rights has many of the same basic rights that are afforded to fee simple owners in common law jurisdictions. The holder of the land use rights can sell, lease, mortgage or otherwise dispose of the property in accordance with law. The rights holder can also generally exclude other private persons from entering or using the property. Property transactions must be registered with the appropriate authorities to be effective. The practice of granting land use rights to private persons in China is about 20 years old at this point, so there is some history and a track record with respect to private holding of land use rights. However, because the terms of the grants last for 40, 50, and 70 years, they have not yet started to expire and it is still too early to say with certainty what happens to land use rights upon expiration of the term of the grant. With respect to residential property, the law says that the land use rights “automatically” renew. It does not state whether such “automatic” renewal will be free. For other types of land use rights, the holder of the rights must generally apply a year prior to their expiration for renewal and pay a fee. The law does not yet specify a fee. M&A LAW FIRM 16/18

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FIEs are generally permitted to hold land use and building rights for use in their businesses. For example, a manufacturing FIE may generally acquire land on which to build a factory. However, foreign real estate investment for its own sake, in the form of new development or acquisitions for the purposes of leasing to other persons or future sales, is very highly regulated in the PRC.

VIII.

FOREIGN EXCHANGE CONTROL

The bureau of foreign exchange is State Administration of Foreign Exchange (SAFE). FIEs must open both RMB and foreign currency bank accounts in the locality where established. After an FIE is established, it must apply to SAFE for a “foreign exchange registration certificate” and permission to open a foreign currency account. FIEs are required to segregate their capital accounts from their current accounts. Foreign exchange can be released from the capital account only upon SAFE approval. SAFE oversees capital account distributions to police the capitalization requirements and other rules; FIEs that are not in compliance with PRC regulations may be blocked from accessing their capital accounts. Foreign exchange payments from the foreign exchange current account do not require SAFE approval, but there are still administrative procedures that must be followed for any such payment. During the first year of an FIE’s establishment, the FIE may keep up to US$200,000 in its foreign exchange current account. In future years, an FIE may maintain between 50% and 80% of its foreign exchange receipts in the current account, depending on how much foreign exchange was spent in the previous year. Also, China allows FIEs and enterprises issuing shares offshore to remit their profits, dividends and bonuses out of the country. Such remittances do not require the prior approval of SAFE. The enterprises, by presenting the necessary documents, can make the remittance direct through the bank, which will report details of the remittance to the local foreign exchange administration.

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IX.

CONLUSION

As the economy grows, business opportunities still boom in China. Recent regulatory changes may make it easier for foreigners to invest in China through onshore RMB funds, or as strategic investors. However, China’s unique legal environment is not perfect as should be. To get more local information and understand the environment continue to be of importance for foreign investors who wish to do business successfully in the PRC.

Contact M&A Law Firm•Shanghai Office Add: 13/F, 726 West Yan An Rd., Shanghai,P.R. China Zip: 200050 Tel: (8621) 52370950 Fax: (8621) 52370960 E-mail: info@huiyelaw.com M&A Law Firm•Beijing Office Add: Room 1403, Jingguang Centre Office Building, Hujialou, Beijing, P.R. China Zip: 100020 Tel: 0086-10-6597 3099 Fax: 0086-10-6597 3098 E-mail: bjoffice@huiyelaw.com M&A Law Firm•Nanjing Office Add: 1901, 8/F,Jiaye International Build,158 Lushan Road,Nanjing,P.R. China Zip: 210019 Tel: 0086-25-83287788 Fax: 0086-25-83287799 E-mail: njoffice@huiyelaw.com M&A LAW FIRM M&A Law Firm•Chengdu Office Add: 21/F,Guodong Business Centre,52 Jindun Road,Chengdu,P.R. China Zip: 610041 Tel: 0086-28-86980969 Fax: 0086-28-86980969 E-mail: cdoffice@huiyelaw.com M&A Law Firm•Lanzhou Office Add: 8/F, Qianchang Building, 374 Jiuquan Road., Lanzhou, P.R. China Zip: 730030 Tel: 0086-931-8467881 Fax: 0086-931-8468951 E-mail: lzoffice@huiyelaw.com M&A Law Firm•Atlanta Office Add:1210 Warsaw Road, Suite 200, Roswell, GA 30076,U.S.A Tel:(770) 481-0609 Fax:(770) 481-0597 E-mail: atoffice@huiyelaw.com

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