CHINA LAW DIGEST NEWSLETTER
Vol. 2, No.4 - March 25, 2003
TOPICS THIS ISSUE:
Foreign Investment:- Interim Regulations on Mergers & Acquisitions of Enterprises Within Chinese Territory by Foreign Investors
- Circular on Several Questions Concerning Importation of Aluminum by Foreign Invested Enterprises
Foreign Trade:- Opinion on Strengthening the Administration of Patents in Foreign Trade
- Circular on Several Questions Concerning Using RMB as the Denominated Currency in Foreign Trade by Institutions Within Chinese Territory
Tax:- Measures on Disposal of Income Tax of Enterprise Debt Reconstruction Businesses
LEHMAN, LEE & XU OPENS SHENZHEN OFFICE Lehman, Lee & Xu is pleased to announce the opening of its new office in Shenzhen, Guangdong Province. Please direct all inquiries to attorney Zdravko Jelic at | |
Interim Regulations on Mergers & Acquisitions of Enterprises Within Chinese Territory by Foreign Investors
Issuing Date: March 7, 2003
Issuing Authority: Ministry of Foreign Economic and Trade Cooperation (MOFTEC), State Tax Administration, State Administration of Industry and Commerce and State Administration of Foreign Exchange
Effective Date: April 12, 2003
Summary
The Interim Regulations fill in the blank of provisions at the national level with regards to direct mergers & acquisitions (M&A) between foreign investors and Chinese enterprises. For a long time, foreign investors have needed to make investments in China by setting up joint ventures or wholly foreign owned enterprises, which are usually called foreign invested enterprises (FIEs). Rules were issued at the provisional level at a later stage to allow foreign investors to purchase equity or assets directly from local enterprises but the lack of national laws made foreign investors unwilling to take such direct M&A steps since there were too many uncertainties..
Under the Interim Regulations, "M&A by foreign investors" refers to foreign investors' purchase of equity from non-FIE Chinese enterprises, increase of capital contribution of Chinese enterprises ("equity M&A"), purchase of assets or set up of FIEs to purchase assets from non-FIE Chinese enterprises ("asset M&A"), and restructuring of Chinese enterprises into an FIE. If a foreign investor invests in an existing FIE, it shall follow the provisions in the Several Rules on Shareholder Equity Changes of Foreign Invested Enterprises issued in 1997. M&A by investment companies established in China shall also follow the Interim Regulations.
In case of equity purchase, the Interim Regulations require the FIE to after the M&A bear all credits and liabilities of the merged Chinese enterprises; in case of asset purchase, the Interim Regulations require the Chinese enterprise that sells assets to undertake all its original credits and liabilities before the asset sale. The competent approval authorities shall approve any credit and liabilities disposal plan other than the above.
It should be noted that when applying to the competent authority for approval of the M&A, a plan on employment arrangements shall be submitted along with many other documentations for changing the Chinese enterprise into an FIE. This means that the foreign investors must make careful plans regarding the disposal of former employees of the Chinese enterprise in order to get government approval.
There are also anti-trust provisions in the Interim Regulations. Article 19 to 21 provide the requirements that need to be reported during the M&A of Chinese enterprises by foreign investors: 1) One of the foreign investors has over RMB 1.5 billion revenue in China Market in the year of the M&A; 2) the foreign investor has acquired more than 10 Chinese enterprises in related industries within one year in China; 3) the market share of one of the foreign investors reaches 20% in the China market; and 4) the M&A will result in that one of the foreign investors receive a market share of 25% on China market. MOFTEC and SAIC are also entitled to require a report from the foreign investors if the considered M&A concerns enormous market shares or may severely harm market competition and the safety of the national economy. Overseas M&As, which concern assets in China must also be reported to MOFTEC or SAIC provided that: 1) one of the foreign investors in an overseas M&A owns over 3 billion worth of RMB assets within Chinese territory; 2) one of the foreign investors in an overseas M&A has over 1.5 billion in annual revenues in the China market; 3) one foreign investor and its related companies has taken over a 20% share in the China market, and 4) the M&A will result in that one of the foreign investors acquire a market share of 25% in the China market; and 5) as the result of the M&A, one of the foreign investors may directly or indirectly hold equity of more than 15 FIEs in related industries.
Circular on Several Questions Concerning Importation of Aluminum by Foreign Invested Enterprises
Issuing Date: February 19, 2003
Issuing Authority: Ministry of Foreign Economics and Trade Cooperation (MOFTEC)
Effective Date: As of the Issuing Date.
Summary
The Circular sets requirements on the issuance of Automatic Import Permits for foreign invested enterprises (FIEs) in non-aluminum industries. Provided an FIE conducts consecutive production and maintains a normal business, and the production and processing do not use alumina as the major raw materials, a single Automatic Import Permit allows the FIE to import no more than 1,000 tons of aluminum. The imported aluminum can only be used by the FIE in its production, and cannot be entrusted to other enterprises for processing or transferred to other enterprises.
When applying for the Automatic Import Permit, a FIE shall present to the local MOFTEC certain documents including the Approval Certificate of the FIE, business license, contract and articles of association, investment verification report, operation merits (financial statements, audited report of the previous year and past importation records), and the production ability (such as annual consumption, production schedule and demand of raw materials).
Opinion on Strengthening the Administration of Patents in Foreign Trade
Issuing Date: January 24, 2003
Issuing Authority: Ministry of Foreign Economic and Trade Cooperation (MOFTEC) and State Intellectual Property Office
Effective Date: 30 days after the issuance.
Summary
The Patent Administration mentioned in the Opinion refers to the administration of patent related issues that arise with regards to goods, services and technology import and export. Patent related issues include patent research, confirmation on the legal status of patents, patent infringement watch, patent licensing, transfer of patent rights (including patent application rights), and execution and implementation of patent transfer/licensing contracts.
The purpose of the Opinion is to enhance IP protection in the foreign trade business so as to follow the commitments that China has made with the WTO accession. According to the Opinion, domestic foreign trade operators shall require foreign exporters to present evidence on the legitimacy of their patent rights when importing goods or technology equipment. In import/commission processing contracts, it can be explicitly put in as follows: Should the importer of a good or the consignee of a commission processing contract be charged with patent infringement by a third party as the result of carrying out the contract, the foreign exporter or consignor shall be liable for such infringement.
When the exported goods involve new technologies or new inventions, foreign trade operators shall conduct patent searches in the exporting countries in order to protect the exported goods from any potential patent infringement in the exporting countries. If necessary, the foreign trade operators shall file a patent application in the exporting country in advance.
Circular on Several Questions Concerning Using RMB as the Denominated Currency in Foreign Trade by Institutions Within Chinese Territory
Issuing Date: March 3, 2003
Issuing Authority: State Foreign Exchange Administration (SAFE)
Effective Date: As of the issuing date.
Summary
Previously Chinese companies have been required to use foreign currency as the denominated currency in foreign trade contracts. To further promote foreign trade business, the Circular lifts the ban by ruling that RMB can be used as the contract denominated currency when executing import or export contracts. When the contract is denominated in RMB receiving foreign currency payments or making payments in RMB, as the case may be, shall be settled according to the bank's quoted foreign currency on the date of payment.
Measures on Disposal of Income Tax of Enterprise Debt Reconstruction Businesses
Issuing Date: January 23, 2003
Issuing Authority: State Tax Administration (STA)
Effective Date: March 1, 2003
Summary
"Debt reconstruction" refers to any changes in conditions of the debts between creditors and debtors, which include repayment in cash which is below the debts' taxable cost, repayment of debts in non-cash assets, conversion of debts into capital contribution and other changes such as extension on maturity.
Under the Measures, not withstanding the way of the debt is restructured, the creditors and debtors shall calculate the taxable income or any losses of the reconstruction based on the Fair Value of the restructured assets. Fair Value is the fair trading value between independent enterprises. The Measures provided detailed rules on how to decide taxable income in each circumstance.
China Lawyers, Notaries, Patent, Copyright and Trademark Agents
http://www.lehmanlaw.com
Beijing Office | Shanghai Office |
6th floor, Dongwai Diplomatic Office Building
23 Dongzhimenwai Dajie
Beijing 100600 China
Tel.: (86)(10) 8532-1919
Fax: (86)(10) 8532-1999
Email: mail@lehmanlaw.com | Suite 1310, Kerry Centre
No. 1515, West Nanjing Road
Shanghai 200040 China
Tel: (86)(21) 6288-2698
Fax:(86)(21) 6288-2699
Email: shanghai@lehmanlaw.com |
The China Law Digest News 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.
Unsubscribe
Please click here: chinalawdigest@lehmanlaw.com?subject=Remove%20China%20Law%20Digest%20%21*ADDITIONAL_FIELD1*%21
