Transcript China’s Government & Business Decision-Making
China Law Overview
EMAE620007_Doing Business in China (WK7) jun.dai@hhp.com.cn
1.
Key Features of the Chinese Legal System
2.
Corporate Law
3.
Tax Laws
4.
Labor and Employment
5.
Intellectual Property
6.
Trading & Distribution
7.
Commercial Litigation and Arbitration
8.
Corporate Criminal Law
I. Key Features of the Chinese Legal System
Over the last 100 years “ 法” (Fa) & “ 律” (Lü) “ 灋 ” “氵” + “ 廌” + “ 去” “ 法 ” Laws (from God) Transparency, neutrality, implementation “ 律” Rules (from the Emperor, son of God) Governing, Disciplining, Binding Before 1906, all laws were made by the Emperors. From 1906 to 1930, Japanese law influenced the laws of Qing and ROC greatly. From 1930 to 1949, German law had an important impact on the laws of ROC. From 1949 to 1966, laws of the Soviet Union was dominant in the lawmaking of PRC. From 1966 to 1976, no rule of law due to the Cultural Revolution. From 1977 to present, a total reinvention of Chinese law. Note: Four jurisdictions in China, namely mainland China, Hong Kong SAR, Macau SAR and Taiwan.
I. Key Features of the Chinese Legal System
Congress & Governments, Courts and Procuratorate
National People’s Congress (NPC)
Standing Committee Assembly
Central People’s Government
President Premier of State Council Chairman of Central Military Commission Chief Judge of Supreme Court Procurator-General of Supreme Procuratorate Local People’ Congress on Provincial, City and County Levels (LPC) Governor Chief Judge of Local Court Procurator-General of Local Procuratorate
I. Key Features of the Chinese Legal System
Congress & Governments, Courts and Procuratorate
National People’s Congress (NPC)
Standing Committee Assembly
Central People’s Government
President Premier of State Council Chairman of Central Military Commission Chief Judge of Supreme Court Procurator-General of Supreme Procuratorate Local People’ Congress on Provincial, City and County Levels (LPC) Governor Chief Judge of Local Court Procurator-General of Local Procuratorate
I. Key Features of the Chinese Legal System
People’s Courts Supreme Court (in Beijing) High Courts (in capitals of provincial regions) Intermediate Courts (on city level) Basic Courts (on county or district levels) Special courts: Railway, Maritime and others. Two instances principle
I. Key Features of the Chinese Legal System
Sources of Chinese laws and Regulations Legislation by NPC & LPC Administrative Regulations by State Council Administrative Rules by Ministries Administrative Rules by Provincial Governments Judicial Interpretation by Supreme Court
II. Corporate Law
Business Vehicles Market Entry: Foreign Investment Catalogue Allowed Restricted Encouraged Forbidden
Available business vehicles for foreign investors
Representative Office Wholly Foreign Owned Enterprise (WFOE) Equity Joint Venture (EJV) Contractual Joint Venture (CJV) Partnership
II. Corporate Law
Greenfield Investments: Foreign Invested Enterprise (FIE)
Applicable Laws
PRC Company Law (promulgated in 1993, latest amendment in 2005) PRC EJV Law (promulgated in 1979, latest amendment in 2001) PRC CJV Law (promulgated in 1988, latest amendment in 2000) PRC WFOE Law (promulgated in 1986, latest amendment in 2000)
Key Issues to Note
Registered Capital & Total Investment Shareholders’ Meeting (WFOE) vs. Board of Directors (JV) Legal Representative & General Manager Branches vs. Offices
Approval from Ministry of Commerce (MOC)
Registration with State Administration for Industry and Commerce (SAIC)
II. Corporate Law
Buying a Business in China: M&A
Share Deal
Equity Purchase from the shareholder of a Chinese company Capital Increase into a Chinese company
Asset Deal
Asset Purchase + Setting up FIE + Capital Contribution in kind Setting up FIE + Capital Contribution in cash + Asset Purchase
Key Issues to Note
Due Diligence Project Acceptance Approval & Registration of Transaction Payment Cut off
III. Tax & Foreign Exchange
Tax System in China
State Tax Administration (SAT) vs. Local Tax Administration (LAT)
State Taxes
Tariff & Duties, Import & Export VAT, Consumption Tax, Vehicle Purchase Tax
Local Taxes
Business Tax, Land Appreciation Tax, Stamp Duty, Urban Construction Tax, Deed Tax, etc.
Shared Taxes
VAT (75:25), Enterprise Income Tax (60:40), Individual Income Tax (60:40), Natural Resource Tax, Stamp Duty on Securities Total tax revenue in 2012: RMB 11,721,000,000,000 (USD 1,890 bn.) 12.8% growth over year. (1) VAT: RMB 2,642 bn. (3) Import VAT & Tariff: RMB 1,480 bn. (2) EIT: RMB 1,965 bn.
(4) BT: RMB 1,575 bn. (5) Consumption Tax: RMB 787 bn.
(6) IIT: RMB 582 bn.
III. Tax & Foreign Exchange
Major Taxes Value Added Tax (VAT) 17% on value-added: deductible (input & output)
Business Tax (BT)
5% on revenue: not deductible
Enterprise Income Tax (EIT)
25% on profit
Individual Income Tax (IIT)
(1) Salary income: 3%~45% (3) Copyright income: 14% (5) Others: 20% (2) Individual trader: 5%~35% (4) One-time Labor income: 20%~40% For expatriates’ salary income, RMB 5,200 is deductible. Allowances for schooling, relocation, laundry, meal and transportation are tax exempted if it is done on a reimbursement basis. For Chinese citizens, only RMB 3,500 is deductible from 1 Sept. 2011.
III. Tax & Foreign Exchange
Case Study: How much are you taxed before pocketing your dividend
A WFOE in Consulting Industry. It has a registered capital of USD 200K (RMB 1.2 million). In 2012, its total revenue was RMB 5 million and its before-tax profit was RMB 1.5 million. It is owned by a Japanese company. How much will the Japanese investor receive as dividend from the WFOE?
III. Tax & Foreign Exchange
Tax Incentives Small-sized or Thin-margin companies: 20% Hi-tech companies: 15% Agricultural, Forestry, Fisheries and Livestock companies: 12.5% or 0% Infrastructure investment companies: 3 years exempted, 3 years 12.5% Environmental protection companies: 3 years exempted, 3 years 12.5% FIE in Central and Western provinces: 3 years 15%
Key issues to Note:
Fiscal Rebates for VAT and BT Fiscal Rebates for IIT
III. Tax & Foreign Exchange
SAFE Enough? SAFE: State Administration for Foreign Exchange
Foreign Exchange Control
Current Account vs. Capital Account Current Accounts: Import, Export, Service Trading (Royalty, Software, Licensing, etc.), Individual Forex, Dividend Repatriation… Capital Accounts: Foreign Investments, Foreign Debts, Securities Investments
A WOFE Sample:
A German LLC invests USD 1 million to set up a WFOE in Shanghai…
IV. Labor & Employment
Labor Contract Labor Contract Law 2008: German influenced, Pro-Labor Written Labor Contract: A “Must” for any Employer Termed Contract vs. Open-ended Contract
Must-Have Clauses:
Term, Job Description, Location, Working Hours, Leave Remuneration, Social Insurance, Labor Protection
Termination
By Employee: 30-day notice or immediate termination By Employer: immediate termination, 30-day notice, justified down-sizing Not allowed to terminate: Occupational Disease Sufferer, Female Employee during Maternity Leave, Employee with 15 years employment and 5 years to retirement.
IV. Labor & Employment
Labor Contract
Probationary Period
30 days: term contract of up to 1 year 60 days: term contract of up to 3 years 180 days: term contract of 3 years or longer, or open-ended contract
Compensation to Employee
Severance: one month salary for one year Double Cap: 12-months, 3 times of local average monthly salary
Confidentiality
Non-competition
Secondment
IV. Labor & Employment
Remuneration & Social Insurance
Working Hours & Remuneration
Working Hours: 8 hours/day, 40 hours/week OT: up to 3 hours/day and 36 hours/month, extra pay (50%~200%) or paid leave in lieu Salary: minimum monthly wage RMB 1,280 (social insurance excluded)
Social Insurance Employer Employee
Pension Medical Insurance Unemployment Insurance On-duty Injury Insurance Maternity Insurance Public Housing Fund 22% 12% 2% 0.5% 0.5% 7% 8% 2% 1% 7%
IV. Labor & Employment
Leaves and Holidays Public Holidays: 11 days (1) New Year: 1 day (3) Ching Ming Festival: 1 day (5) Dragon Boat Festival: 1 day (7) National Day: 3 days (2) Chinese New Year: 3 days (4) Labor day: 1 day (6) Mid-Autumn Festival: 1 day
Leaves
Annual Leave: 5 days (up to 10 yrs), 10 days (up to 20 yrs) & 15 days (above 20 yrs) Marriage Leave: 3 days Maternity Leave: 90 days + 30 days + 15 days Sick Leave (1) On-duty Injury (2) Off-duty illness or Injury (3) Medical Treatment Period
IV. Labor & Employment
Labor Disputes Labor Dispute Mediation: Not Compulsory Labor Dispute Arbitration: Compulsory Single-Tier Structure & Strong Influence from Union and Labor Authority No Tribunal Charges One Year Limitation, Two Months to Close A Case Only Binding if claim is less than 12-months minimum wage, or is about OT, working hours, social insurance Labor Dispute Litigation: Initiated within 15 days from arbitration award rendered. No Court Charges Follow Civil Procedural Law Two Instances
IV. Labor & Employment
Case Study A WFOE hired a GM in January 2007. His first contract expired in December 2009 and the current contract will expire in December 2013. In 2012, the GM received a monthly salary of RMB 50K plus a three-month performance bonus. The WFOE dismissed the GM in May 2012 as his performance declined dramatically. Is the WFOE obligated to compensate the GM? If so, how much?
V. Intellectual Property Rights
Trademarks
SAIC China Trademark Office
Individual, Legal Entity or Organization may apply for registered trademark
First Application Prevails
Famous Trademarks
Application and Registration
Application Preliminary Examination Publication 3 Month Waiting Period Disagreement & Review & Administrative Litigation Against CTO 10 Years Protection from Application Date, Renewable
V. Intellectual Property Rights
Patents
State Intellectual Property Office
Invention (20 yrs), Utility Model (10 yrs), Design (10 yrs)
First Application Prevails
Novelty, Creativity & Applicability
Application & Patent Granting Invention
Application Preliminary Examination Publication in 18 Months Substantial Examination in 36 months Granting Patent from Publication Date Disagreement & Review & Litigation
Utility Model & Design
Application Preliminary Examination Granting Patent upon Publication / / Disagreement & Review & Litigation
V. Intellectual Property Rights
Copyright NCA (National Copyright Administration) Authorship vs. Copyright Holder Protection Period: 50 yrs (or life time + 50 yrs) Licensing & Transfer Software Know-how Trade Secrets
V. Intellectual Property Rights
Infringement & Remedies
Administrative Approach
SAIC Customs Others
Civil Litigation Approach
Evidence Damage Limited Compensation
Others
V. Intellectual Property Rights
Case Study A UK tea trading company registered its trademark in the UK and China. It sources tea in China and distributes in the EU. However, it found a Chinese tea producer supplied tea to an Irish company and the packaging and trademark are almost the same as that of the UK company. The UK company litigated against the Irish company in a UK court. The Irish company admitted that its Chinese supplier shipped Euro 200K worth of tea. Now, what can the UK company do against the Chinese tea-producer?
VI. Trading & Distribution
Import & Export
Export from China
Sourcing Office vs. Trading Company VAT Rebate & Other Incentives
Export to China
Trading Company vs. Distributor / Agent Customs Clearance
Special Zones
Free Trades Zones Export Processing Zones Bonded Logistic Zones
Special Economic Zones
VI. Trading & Distribution
Distribution
Foreign Invested Commercial Enterprise
Import & Export Wholesale & Retailing Restricted Sectors
Franchising & Flag-Ship Stores
Distributorship / Dealership vs. Agents
Supermarkets
Department Stores
VII. Commercial Litigation and Arbitration
Commercial Litigation
To Sue or Not to Sue
Before Filing Claims
Jurisdiction & Forum Evidence and Burden of Proof
Being A Good Defendant vs. Good to Be A Defendant
First Instance & Second Instance
Period of Evidence Deposition Bill of Claims & Defense Cross-examination on Evidence Mediation, Ruling, Judgments
Enforcement
Time Lines
VIII. Corporate Criminal Law
Fraud: Up to Life Sentence
Contractual Fraud Financial Fraud Fraud in Bidding & Tendering
Bribery: Up to 15 Years in Jail
Illegal Commission Unlawful Advantage Entertainment & others.
White-collar Crimes
Encroachment on Trade Secrets Illegal Possession of Corporate Assets Theft Others Related to Occupations (Capital Market, Auditing , etc.)
VIII. Corporate Criminal Law
Forex related crimes: up to life sentence
Illegal Procurement of Forex Evasion of Foreign Exchange Control
Tax related crimes: up to death sentence
Tax Evasion Fictional VAT Invoicing
Tariff related crimes: up to death sentence
Smuggling
Others