China Updates- Intellectual Property & Internet

Intellectual Property

The State Administration for Industry and Commerce (SAIC) announced that the Provisions on Prohibition of Abuse of Intellectual Property, the final version of which was issued on 13th April, 2015, would come into effect on 1st August, 2015. This can be seen as the culmination of 7 years of IP reform in China, starting from the Intellectual Property Strategy Outline in 2008.

Very briefly, the Provisions strike a balance between IP protection and Anti-Monopolies Law, bringing in, for example, EC-type ‘safe harbour’ provisions (for example, a rebuttable presumption that an IPR agreement is unlikely to be anticompetitive).

This follows the issue on 1st April 2015, of a new draft of the fourth amendment of the PRC Patent Law (the “Draft Amendment”) by SIPO (the State Intellectual Property Office) for public comment. Key provisions include:

(i) Redefinition of “employee service inventions”, limiting these to only those made by an employee in execution of work assignments.

(ii) Extending industrial design protection to those for either the overall or the partialappearance of a product.

(iii) Improvements to the patent enforcement system, such as the beginnings of a disclosure system (China does not have a discovery process) where a patent holder has made best efforts to prove financial damage, introduction of punitive damages (recently imposed in the New Balance trademark case*), and the adoption of US-style safe harbour provisions for ISPs and OSPs.

*In the New Balance case, the US company sports footwear company was found not to have come to the court with clean hands and the damages against it on the appeal (which it lost) were therefore increased to punitive damages for its “bad faith”. It was not disputed that the sound translation of New Balance’s trademark had been registered and used by another company, but New Balance had opposed the mark back in 2007, but unsuccessfully, and then continued to use “its” mark in the knowledge that, as far as Chinese law was concerned, it belonged to someone else.

The legal position was very clear and the case should serve as textbook example to foreign companies of how not to approach trademark registration in China. The similar Michael Jordan case, now going to appeal in China may well have the same outcome, albeit without punitive damages.

The legal position was very clear and the case should serve as textbook example to foreign companies of how not to approach trademark registration in China. The similar Michael Jordan case, now going to appeal in China may well have the same outcome, albeit without punitive damages.

Internet

Following the rapid expansion of top level domain names (TLDs) by ICANN, the Chinese authorities have seen the need to impose greater control over domain names. In summary, a domain name can only be sold in the PRC if:

a. The registry that manages and controls the particular TLD of the domain name, has been approved and registered with the Ministry of Industry and Information Technology (MIIT); and

b. The registrar that sells and administers the domain name has been approved and registered with the MIIT.

This will mean a drastic restriction in the range of domain names that can be sold legitimately in the PRC domain name market. Most significantly, popular TLDs such as “.com”, “.net” and “.org” are not on the approved list and therefore cannot be sold in the PRC until they are approved by the MIIT.

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Primasia will post the updates of Hong Kong and China from time to time. Follow us on our Website/ Blogger/ LinkedIn and stay tunned for our updates!

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Possible Obstacles for Foreign Companies Running Businesses in China

Doing business in China could be very challenging for Foreigners. Here are some possible obstacles that foreign companies may encounter due to Chinese legal system and cultural differences.

• Different regulations imposed on foreign companies running businesses in China by different government authorities at the country and regional levels: These regulations need to be fully understood to avoid breach of laws and regulations.

• Government authorities involved with the set-up and running of foreign businesses in China work very differently from those in other countries.

• There is no single step of company incorporation and business license application. In general, it takes two to four months to obtain all the approvals/certificates/licences on one application.

• There are complex taxation systems at state and local levels.

• There are differences in the working styles of Chinese government authorities and foreign companies.

• There are different perspectives on environmental, cultural and ethical issues, among others.

Through our China WFOE (offices in Shanghai, Beijing and Guangzhou), Primasia provides one-stop China set-up and supporting services, including payroll, tax, accounting and licence renewal. If you need further assistance, please contact US. 

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Employment information in China

Employment information in China

·    Paid Annual Leave

Years served in the company	Days of annual leave
1 full year, less than 10 years	5 days
10 full years, less than 20 years	10 days
>20 years	15 days

Statutory national holidays and rest days are not included in annual leave.

·    Rest Days

The employer must ensure that its workers have at least one day off a week with a maximum of 44 working hours per week.

·    Sickness Allowance

Sick leave is required to be paid for all employees. Sick leave is paid at 60-100% of daily wages, depending on the seniority of the employee.

          ·    Severance Payment

An employee shall be given compensation based on the number of years he has worked for the employer and at the rate of one month's wage for each full year he worked and for no more than 12 years of his work.

         ·      Termination

An employee may dissolve the labour contract if he notifies the employer in writing 30 days in advance. During the probation period, an employee may dissolve the labour contract if he notifies the employer 3 days in advance.

·    Minimum Wage

Regulations on the Minimum Required Wage are set by each provincial government. Foreign employers are expected to pay much more than the minimum, roughly double the minimum or more.

·    Social Security Insurance

Each agency must provide the five benefits legally required, at the rates set by the local or provincial government. All foreign employees who work in China for longer than six months must be included in the social security system as well.

The legally required benefits are 1) retirement pension, 2) medical fund, 3) unemployment insurance, 4) disability insurance, 5) maternity fund.

For salaries higher than RMB 11,688, the social securities figure is 47% x RMB 11,688.

For salaries lower than RMB 11,688, the social securities figure is 47% x Actual Salary.

·    Salaries Tax

Local employees are taxed on the basis of the balance of their monthly income after deducting their social benefits contribution, a standard deduction of RMB 3,500, and then applying the progressive tax rate.

Foreign Employees:

(i) foreigners that have lived in China for less than 90 days (183 days for citizens of countries that have signed a treaty on the avoidance of double taxation with China) will have to pay Individual Income Tax.

(ii) foreigners that lived in China for more than 90 days (183 days) but less than a year: income for work in China from all sources is taxable. However, for senior executives, they are liable for their full income derived from Chinese sources from the first day in the country.

Through our China WFOE (offices in Shanghai, Beijing and Guangzhou), Primasia provides one-stop China set-up and supporting services, including payroll, tax, accounting and licence renewal. If you need further assistance, please contact US. 

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John Barclay -Email

Teresa Tam - Email 

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Primasia Corporate Services Limited

Tel: +852 2882 2088

Suite 1106-08, 11/F., Tai Yau Building, No. 181 Johnston Road, Wanchai, Hong Kong

Major Tax Categories in China for Foreign Investment Enterprises and Foreigners

Since China opened up in the late 1970s, foreign investment has played an increasingly important role in the country’s economic growth. Hundreds of thousands of foreign investment enterprises and foreign enterprises are in operation in China. A number of taxes are applicable to enterprises with foreign investment, foreign enterprises and foreigners in China in accordance with regulations set by the National People’s Congress, its Standing Committee and the State Council of China.

Chinese tax authorities have been paying more attention to international tax collection and administration. The division of taxation and tax policymaking powers between levels of authorities is still largely determined by the Central government, rather than through legislation. Under the existing taxation regime in China, there are mainly three taxation collection systems, namely state tax bureaus at various levels, local tax bureaus at various levels and Customs.

Generally, state tax bureaus have the power to levy certain taxes (e.g. enterprise income tax and value-added tax), while taxes imposed by local authorities include the individual income tax, business tax and stamp tax. Customs is mainly responsible for collecting customs duty and consumption tax. The following content briefly summarises the major tax categories for foreign investment enterprises and foreigners. For more information, please refer to “China’s Tax System” at http://www.chinatax.gov.cn/2013/n2925/n2959/c307248/content.html.

• Value-added tax

Value-added tax (VAT) is payable by enterprises and individuals who sell merchandise, who import goods or who supply services, such as processing, repair and replacement. Unlike in Western countries, VAT is not imposed on all services in China.

• Consumption tax

Consumption tax is levied on the production, processing or importation of certain specific consumable goods in China. 

• Customs duty

Customs duty is levied by the customs authority on imported and exported goods in order to raise state revenue and to protect domestic industries.

• Business tax

In China, business tax is a kind of turnover tax imposed instead of VAT on businesses other than those related to manufacturing. These businesses include most services such as communications, transportation, finance, entertainment, as well as the transfer of intangibles and immovable property.

• Enterprise income tax

In general, foreign companies are taxed on their China-source income whether they have any permanent establishment in China or not.

                    

	Taxable China-source income	Taxable foreign-source income
Resident enterprises*	V	V
Non-resident enterprises,** if income is effectively connected with their China establishment	V	V
Non-resident enterprises, if they do not have any China establishment, or if income is not effectively connected with their China establishment	V	×

Notes:* Resident enterprises: incorporated or effectively managed in China

** Non-resident enterprises: incorporated and effectively managed outside China

•  Individual income tax

Individuals who have resided in China for less than one year should pay individual income tax on their incomes derived from sources within the country. Those who have resided in China for one year or more should pay individual income tax on their income derived from sources both inside and outside China.

• Land appreciation tax

Land appreciation tax is levied on gains arising from the transfer of the right to use state-owned land and the buildings that are constructed on this type of land.

• Urban real estate tax

A tax of 1.2 percent is imposed on foreign investment enterprises and foreign national owners of real estate, or at the rate of 12 percent of rental income.

• Stamp duty

Stamp duty is payable on instruments created in the process of economic activity, on the documents written.

• Vehicle and vessel tax

Those who own or operate vehicles and vessels should pay a vehicle and vessel tax in China; otherwise, the user should pay the tax on behalf of the owner or the operator of a vehicle.

Foreign investors tend to assume that the tax laws in China are fairly straightforward, that as long as they provide proper documentation they can deal with such laws themselves without expert advice.  Nevertheless, there are various complex rules covering numerous aspects of the business activities of foreign investment enterprises in China, particularly when preferential policies are provided to foreign investment enterprises. Both investors and companies need to find practical ways to keep updated with the latest information on regulations and laws. In a nutshell, it is suggested not to disregard or delay seeking professional advice on Chinese tax laws; otherwise, foreign investors may face serious penalties or losses due to underpayment.

Through our China WFOE (offices in Shanghai, Beijing and Guangzhou), Primasia provides one-stop China set-up and supporting services, including payroll, tax, accounting and licence renewal. If you need further assistance, please contact US. 

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Need more information?

Please contact:

John Barclay -Email

Teresa Tam - Email 

--------------------------

Follow us on:

Website: Primasia HK / Primasia China

LinkedIn: Primasia

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Primasia Corporate Services Limited

Tel: +852 2882 2088

Suite 1106-08, 11/F., Tai Yau Building, No. 181 Johnston Road, Wanchai, Hong Kong

China Updates- Food Safety & Antitrust

Food Safety

In a move which will be welcomed by expatriates in China, not to mention most of the over one billion Chinese, the China Food and Drug Administration has issued the Measures for the Administration of Recall of Food Products. These will become effective on 1^st September, 2015. Whilst recalling dangerous food products might be seen as damage limitation rather than prevention, and as being for the future rather than today, it is at least a further step in the right direction, being the latest of several dating back to 2007 aimed at improving China’s food safety standards.

In the meantime, Primasia Corporate Services Limited has been happy to assist its French and Australian clients in particular to market their products in China to fill part of the huge gap in the market for safe food.

 Antitrust

In the latest in a series of swingeing fines levied against foreign companies, Mercedes Benz were fined RMB350m for fixing prices on luxury cars and spare parts. This follows fines against Chrysler, Audi and around 10 Japanese car companies, as well as a record US$975 million fine against Qualcomm, the US chip maker, and action against pharmaceutical companies such as Glaxo.

Chinese regulator (the NDRC) said that, in 2013 and 2014, Mercedes issued verbal pricing instructions to dealers to maintain minimum prices for its E- and S-Class sedans or face the risk of “reduced policy support”, and had issued similar instructions from as early as 2010 on the minimum pricing of some replacement parts.

In the face of accusations that foreign forms were being targeted, Chinese leaders as high as Premier Li have denied that foreign companies are being selectively aimed at in the antitrust enforcement campaign.

***
Primasia will post the updates of Hong Kong and China from time to time. Follow us on our Website/ Blogger/ LinkedIn and stay tunned for our updates!

===================================================================

Need more information?
Please contact:
John Barclay -Email
Teresa Tam - Email 
--------------------------
Follow us on:
Website: Primasia HK / Primasia China
LinkedIn: Primasia
--------------------------
Primasia Corporate Services Limited
Tel: +852 2882 2088
Suite 1106-08, 11/F., Tai Yau Building, No. 181 Johnston Road, Wanchai, Hong Kong

4 Major Types of Foreign Investment Set-up in China (2)

The previous post "4 Major Types of Foreign Investment Set-up (1)" has introduced two types of foreign investment set-up in China. Here are the other two:

• Wholly owned foreign enterprises

Wholly owned foreign enterprises (WOFEs) are those set up in China by foreign individuals or firms where the investment is 100 percent provided and operated exclusively by foreign investors (without any Chinese partners). According to Chinese law, if several foreign partners jointly invest in a company, it will also be regarded as a WOFE.

A WOFE is a legal entity and is a limited liability company. The liability of the shareholders is limited to the assets they brought to the business. Setting up a WOFE requires currency input or equipment contribution, and the registered capital must correspond to the enterprise’s business scale.

In recent years, the Chinese government has steadily increased the scope of businesses allowed to WOFEs, such as consulting, management services and trading. However, although WOFEs can engage in an increasing range of sectors, some restrictions still exist on specific industries (see the other post about the Foreign Investment Guide).

WOFEs offer an advantage in that foreign investors have complete control over major decisions, products, and costs. They also allow strategic alignment with the parent company and greater control over (hence protection of) intellectual property.

The following is a summary of the characteristics of WOFEs:

-   100  percent foreign ownership

-   100 percent management control

Limited liability: An investor’s liability is limited to its share of the WOFE’s registered capital (equity).

Manufacturing JVs and WOFEs are subject to a Chinese value-added tax (VAT) of 13-17 percent and a corporate income tax of 25 percent (since the 2008 reforms). Business service JVs and WFOEs are subject to Chinese business tax (normally 5 percent, except for some businesses such as bars, karaoke, etc.). Business tax is, however, planned to be eliminated as part of the VAT tax reform.  

• Representative offices

The representative office (RO) is an office set up in China by a foreign investor (including foreign companies and economic organizations).  Compared to other foreign entities in China (JVs and WFOEs), applying for an RO business licence is quite simple and easy, except in some special industries such as banking, insurance, security and investment.  Most RO applications do not need any Central government approval and are directly submitted to the local Administration of Industry and Commerce.

Please note that the Chinese government is now discouraging ROs in favour of WOFEs.

However, an RO is not a legal entity.  An RO (like its Hong Kong namesake) can only carry out liaison and coordination work, market research and promotion for its parent company. An RO is not allowed to conduct other business activities such as signing contracts in its own name and invoicing, to name a few.

An RO is subject to business tax, normally approximately 10 percent to 12 percent of its total expenses (i.e. deemed profit), including office rental, staff salary, travelling and other office expenses.

The following is a summary of the characteristics of an RO:

-    Not a legal entity

-    Conducts research and promotion

-    No invoicing

Through our China WFOE (offices in Shanghai, Beijing and Guangzhou), Primasia provides one-stop China set-up and supporting services, including payroll, tax, accounting and licence renewal. If you need further assistance, please contact US. 

===================================================================

Need more information?

Please contact:

John Barclay -Email

Teresa Tam - Email 

--------------------------

Follow us on:

Website: Primasia HK / Primasia China

LinkedIn: Primasia

--------------------------

Primasia Corporate Services Limited

Tel: +852 2882 2088

Suite 1106-08, 11/F., Tai Yau Building, No. 181 Johnston Road, Wanchai, Hong Kong

4 Major Types of Foreign Investment Set-up in China (1)

Before deciding how to establish a business in China, foreign investors must be aware of and define their long-term and medium-term objectives. There are various corporate set-up options available, such as equity joint ventures, cooperative joint ventures, wholly foreign-owned enterprises and representative offices.  Each form has its own legal requirements, benefits and advantages.  Below is a brief description of each one:

• Equity joint venture (EJV) enterprises

These are enterprises established in China as a result of joint investment with foreign individuals, firms and/or Chinese economic organizations, based on the principle of equality and mutual benefit, and subject to approval by the Chinese government.

An EJV takes the form of a limited liability company with the status of a Chinese legal entity. It requires joint contributions of both parties in investment, operation, share of profits, risk and losses, in strict proportion to the amount of investment contributed by the respective parties. In general, the level of investment offered by the foreign investor should be at least 25 percent. Investment can be in the form of cash, real estate, industrial property, equipment and technology, but these types of investment need to count as different shares in the investment.

•  Contractual joint venture enterprises (CJV - also known as cooperative joint ventures)

As for the EJV, CJVs are established in China as a result of joint investment or cooperation with foreign individuals, firms and/or Chinese economic organizations, based on the principle of equity and mutual benefit, and subject to approval by the Chinese government.

However, a CJV has more flexibility in terms of contractual freedom and structure; that is, profits and losses are distributed between the Chinese party and the foreign investor in accordance with specific contractual provisions, as opposed to their respective equity interests in the C JV.

Capital contributions to both EJV and CJV can be in cash or in kind, such as buildings, machinery, materials, and know-how. For a CJV, the parties can decide how the value of their contributions should be determined, whereas for an EJV, this evaluation process normally needs an independent third party to assess the “market price” of the contributions.

A CJV project usually involves the foreign partner providing most or all of the funds and technology as well as key machinery, whilst the Chinese partner contributes land, facilities, natural resources and perhaps a limited amount of funding.  However, China’s economic environment has changed. Land has become a rare resource and Chinese companies are not short of money; therefore nowadays forming a CJV has become far less popular. 

(To be continued...)

Through our China WFOE (offices in Shanghai, Beijing and Guangzhou), Primasia provides one-stop China set-up and supporting services, including payroll, tax, accounting and licence renewal. If you need further assistance, please contact US. 

===============================================================

Need more information?

Please contact:

John Barclay -Email

Teresa Tam - Email 

--------------------------

Follow us on:

Website: Primasia HK / Primasia China

LinkedIn: Primasia

--------------------------

Primasia Corporate Services Limited

Tel: +852 2882 2088

Suite 1106-08, 11/F., Tai Yau Building, No. 181 Johnston Road, Wanchai, Hong Kong