Vol.1, No.03

China Corporate Renewal Update

Vol. 1, No.3 - July 17, 2002

TOPICS THIS ISSUE:

• China Reforms Capital Settlements for Foreign Investment Accounts
• Sino-Canadian Joint Insurance Firm Launched
• China Reports Soaring Overseas Investment
• Possible Turnaround or Transfer Projects
  • Pharmaceutical manufacturer share transfer
  • A garment company holding its own trademark
  • High-tech enterprise share transfer
  • A Hotel seeking share transfer
  • A high-tech limited liability company in Tianjin
• Feature report: China's Tax Policy Regarding Foreign Investment
• Appendix - Excerpt from the Bankruptcy Law of the PRC

China Reforms Capital Settlements for Foreign Investment Accounts

(Jul.1, 2002)

The State Administration of Foreign Exchange (SAFE) announced, as from July 1, 2002, a new capital settlement scheme for foreign invested accounts will be implemented throughout the country. A SAFE spokesman said the new scheme should improve the foreign investment environment and facilitate the capital operation of foreign investments.

Under the current capital settlement scheme, SAFE ratifies the capital settlements of foreign investment accounts individually and banks settle the accounts according to directions from SAFE. To make it easier for enterprises, the new system will allow designated banks to check and handle settlements directly and SAFE will perform indirect supervision through its authorized banks.

The spokesman said that the reform simplifies the business procedures faced by Foreign Invested Enterprises (FIE) by lower their costs and raising capital efficiency.

Sino-Canadian Joint Insurance Firm Launched

(Jun. 13, 2002)

China Everbright Group Ltd. and Sun Life Assurance Company of Canada have established a joint life insurance company (the company). The company opened recently in Tianjin, a northeastern Chinese port city, brings the number of "local" life insurance companies in China to six.

The company named Guangda-Yongming Life Insurance Company is the first joint venture of its kind in northern China and will initially offer products and services such as fixed term insurance, life (fatal disease), accident and children's education insurance to Tianjin residents.

To date, 30 overseas banks and insurance companies have set up representative offices in Tianjin.

Established in 1871, Sun Life Assurance Company is the largest insurance company in Canada and one of the biggest insurance and assets management companies in the world. Since 1998, the company has been listed as one of the world's top 500 enterprises by Fortune magazine. The China Everbright Group Ltd., which is engaged in banking, securities, insurance and investment management, is a multinational company, whose business interests now cover China's mainland, Hong Kong, Singapore, South Africa and had assets totaling RMB 290 billion (US $34.9 billion) in 2001.

China Reports Soaring Overseas Investment

(Jun. 13, 2002)

China used overseas funds totaling US $16.92billion in the first five months of this year, up 12.38% on last year's figure, according to the latest figures released by the Ministry of Foreign Trade and Economic Cooperation (MOFTEC).

Figures released recently indicate that during the above-mentioned period, the government approved 11,612 foreign-funded companies, up 23.26% from the same period last year. The contractual foreign investment totaled US $27.86 billion, registering a 7.29% growth.

China now has 401,637 foreign-funded companies, backed by contractual foreign investment of US $773.16 billion, of which US $412.15 billion has already been provided.

Possible Turnaround or Transfer Projects

Pharmaceutical manufacturer share transfer - 100% equity available

A garment company holding its own trademark

High-tech enterprise share transfer

A Hotel seeking share transfer - 100% equity available

A high-tech limited liability company in Tianjin

Feature report:
China's Tax Policy Regarding Foreign Investment

China has implemented a low-tax policy to encourage investment by Foreign Investment Enterprises (FIE) and has implemented preferential tax policies in certain State encouraged industries and geographic regions.

There are numerous taxes effecting FIE and foreign individuals (including compatriots in Hong Kong, Macao and Taiwan) including: business income tax, personal income tax, turnover tax (value-added tax and Consumption tax), tariffs, land increment tax, resource tax, urban real estate tax, etc.

1. Income tax:

The government collects business income tax from FIE at the rate of 33%. The tax rate is reduced to 15% in special economic zones, national high-tech industrial zones and national-grade economic and technical development zones, and 24% for FIE in open coastal regions and capital cities of local provinces.

2. Turnover tax:

On January 1, 1994, China implemented a value-added tax, consumption tax and business tax on FIE's which are also applicable to domestic enterprises. The Chinese authorities also implemented a much lower rate of taxation on those FIE's involved in technology transfers.

When a FIE purchases domestic goods as part of their investment and these goods are within the category from which Value Added Tax (VAT) on goods can be exempted, then the VAT on these goods can be claimed back.

3. Reducing-tax policy

A FIE may enjoy a business income tax free period during the first two years after it first becomes profitable and then may enjoy a 50% reduction in the rate for the next three years; for FIE's in the encouraged and supported sectors by the State in China's middle-and-western regions, after the expiration of the 5 year tax collection reduction or exemption, the government can prolong the reduction for a further another 3 years at a rate of 50% of the proscribed income tax rate. For advanced technology enterprises established with foreign funds, their income tax may be exempted for two years and collected at 50% of the rate for the next six years; if a foreign investment enterprise purchases imported goods in the range of the investment sum, and if the imported goods belong to a category of goods who are tax exempt, the FIEs' business income tax may be off-set by that amount.

4. Duty exemption on imported goods

At present, if imported goods are necessary for the establishment of an FIE or for any domestic projects encouraged and supported by the State, the tariff and import VAT can be exempted.

5. Current policies to encourage foreign investment

In our next issue, we will explain some of the details behind the regulations passed in August 1999, by the Ministry of Foreign Trade and Economic Cooperation, the State Planning Commission, the State Economic and Trade Commission, the National Ministry of Finance, the People's Bank of China, the Customs Bureau, the General State Tax Bureau, the State Exchange Authority and the State Entry and Exit Test Bureau which are hoped to further encourage foreign investment.

Appendix - Excerpt from the Bankruptcy Law of the PRC

The following are some important points in China's Bankruptcy Law:

Article 3

Enterprises for which creditors file for bankruptcy shall not be declared bankrupt under any of the following circumstances:

1. public utility enterprises and enterprises that have an important relationship to the national economy and the people's livelihood, for which the relevant government departments grant subsidies or adopt other measures to assist the repayment of debts;

2. enterprises that have obtained guarantees for the repayment of debts within six months from the date of the application for bankruptcy.

Article 17

With respect to enterprises for which the creditors apply for bankruptcy, the superior departments in charge of the enterprise that is the subject of the bankruptcy application may, within three months after the people's court has accepted the case, apply to carry out reorganization of the enterprise; the period of reorganization shall not exceed two years.

Article 21

During the period of reorganization, an enterprise in any of the following circumstances shall, upon judgment of the people's court, terminate its reorganization and declare its bankruptcy:

1. not implementing the settlement agreement;

2. continued worsening in its financial condition, for which reason the creditors' meeting has applied for the termination of reorganization; and

3. committing any of the acts listed in Article 35 of this Law and seriously harming the interests of creditors

Article 28 Bankruptcy property comprises the following property:

1. all property that the bankrupt enterprise operated and managed at the time bankruptcy was declared;

2. property obtained by the bankrupt enterprise during the period from the declaration of bankruptcy until the conclusion of the bankruptcy proceedings; and

3. other property rights that the bankrupt enterprise should exercise;

Property that already constitutes security collateral is not bankruptcy property; the portion of the value of the security collateral exceeding the amount of the debt that it secures is bankruptcy property.

Article 35 During the period from six months before the People's Court accepts the bankruptcy case until the date that bankruptcy is declared, the following actions of a bankrupt enterprise are null and void:

1. concealment, secret distributions or transfers of property without compensation;

2. sale of property at abnormally depressed prices;

3. securing with property of claims that originally were not secured by property;

4. early repayment of claims that are not yet due; and

5. abandonment of the enterprise's own claims.

With respect to bankrupt enterprises which have committed acts listed in the previous paragraphs, the liquidation team has the right to apply to the people's court to recover the property, which shall be added to the bankruptcy property.

Article 37

After the prior deduction of bankruptcy expenses from the bankruptcy property, repayment shall be made in the following order:

1. wages of staff and workers and labour insurance expense that are owed by the bankrupt enterprise;

2. taxes that are owed by the bankrupt enterprise; and

3. bankruptcy claims.

Where the bankruptcy property is insufficient to repay all the repayment needs within a single order of priority, it shall be distributed on a pro rata basis.

If you are interested in any of these potential projects, please contact the following individuals for more information:

Lehman Lee & Xu

China Lawyers, Notaries, Patent, Copyright and Trademark Agents

http://www.lehmanlaw.com

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The China Corporate Renewal Update is intended to be used for news purposes only. It should not be taken as comprehensive legal advice, and Lehman, Lee & Xu will not be held responsible for any such reliance on its contents.