The year 2007 has brought many changes to China's Legal System. Here is a guideline of the recent changes and the effects that may occur in the New Year for Foreign Invested Enterprises (FIEs).

Anti-Monopoly Law

Amidst rising concerns of market domination by large companies, the anti-monopoly law promulgated on 30 August 2007 is a first attempt at regulating all kinds of monopolistic activities. It will come into effect on 1st October 2008.

Under the new law, monopolistic conduct includes collusions between companies, abuse of a dominant market position and concentrations that will eliminate or restrict competition in relevant markets. An anti-monopoly Committee will be established under the State Council to determine competition policies, issue guidelines against monopolistic conduct and coordinate enforcement efforts. The Anti-monopoly Enforcement Authority shall investigate monopolistic conduct and upon confirming the existence of monopolistic conduct may confiscate illegal gains, impose fines based on total sales volume and order other measures to punish the involved companies or to rectify the situation. If through monopolistic conducts, companies cause damage to third parties, they shall bear civil liability and thus may be used in court.

Formalities for Trademark Registration by Natural Persons

Natural persons can register trademarks in China based on the 2001 amended Trademark Law. In recent years, more and more persons have registered trademarks and then offered them to third entities for high prices. To tackle such illegal bad-faith registrations, the State Trademark Office promulgated new rules on February 6th 2007.

A self-employed merchant may apply for registration of a trademark in the name of his company or in his own name. Private partners may apply in the name of the partnership, or in the name of all partners. Other persons approved by competent authorities to operate businesses can apply in the name of operators as registered with such authorities. A natural person may only apply for registration of a trademark regarding goods and / or services which are in the business scope as registered with the competent authorities. In case of the transfer of registered trademarks, the above provisions shall apply to the transferee.

Property Rights Law

The first version was drafted in 2002, and only last year its anticipated promulgation was stopped after accusations that it would be unconstitutional. Finally passed, this marks the first time that the equal right to property of the state and private individuals is confirmed in Chinese law.

The law contains 247 articles covering numerous issues relating to the creation, transfer and ownership of real estate and movable property in the PRC, which came into effect on October 1st 2007. It confirms the equal protection of the state and private properties, "The property of the state, collective, the individual and other obliges is protected by law, and no units or individuals may infringe upon it." It consolidates property-related provisions from existing laws, including the General Principles of Civil Law, the Land Administration Law and the Security Law. It further clarifies the right to possess, utilize and profit from real estate or movable properties owned by others. It expressly allows for new financing through mortgages on future equipment, raw matierals and semi-finished products and pledging of unit funds and receivables. It announces that fixed terms of residential land use rights will be automatically renewed upon expiry. Non-residential land use rights will be subjected to other laws and regulations.

China's New Bankruptcy Law

The new law came into effect on June 1st 2007 and covers all kinds of insolvent entities including private and state owned enterprises (SOEs) and foreign investment enterprises and is clearly one of the cornerstones of China's efforts to expand its use of market forces to bring efficiency to its economy. Prior to the implementation of the new law, China did not have unified bankruptcy law covering all types of enterprises, and the bankruptcy of debtor enterprises (including SOEs) was governed by an amalgamation of laws, rules and procedures which tended to make things complicated and confusing.

The new law provides that secured creditors will have priority over the assets pledged to them by the bankrupt entity. Workers will then be ahead of all other (unsecured) creditors, stipulating that after settlement of bankruptcy expenses and debts for the common benefit fo creditors (such as debts incurred to continue operations), the bankrupt entity's unsecured assets will first be applied to settle employees' entitlements (for example, outstanding wages, medical expenses, physical disability subsidies, general pension funds, etc).

Reforms in Foreign Exchange Control

In the first half of 2006, China became the largest holder of foreign currency in the world. Growth has continued and it reached USD 1.32 trillion at the end of June 2007.

In 2006 the State Administration of Foreign Exchange (SAFE) granted 15 banks overseas investment quotas totaling USD 13.4 billion. These figures increased to USD 20.5 billion in July 2007, with 19 banks being granted USD 14.8 billion and four insurance companies being granted USD 5.2 billion. One fund management company was granted USD 500 million.

Residents
In February 2007, the annual quota for foreign currency fund conversion by a Chinese or Foreign Individual was raised from USD 20,000 to USD 50,000.

Insurance Companies
In July 2007, the CSRC, CIRC, the Bank of China and SAFE jointly issued a new rule which raised Chinese insurer's overseas investment ceiling from 5 percent of their assets to 15 percent. With this new rule in place, more than RMB 300 billion (USD 39.5 billion) is now ready to flow into the international market.

Non-financial Companies
Until 2002, Chinese companies were required to bring home all the money they made abroad and obtain government permission to make new foreign investments. However as of 2002, companies were allowed to keep 20 percent of foreign revenues which was raised further to 50 percent in 2004 and 80 percent the following year. In July 2007 China scrapped rules requiring domestic companies to convert a portion of their foreign earnings into Chinese currency. Chinese companies are now allowed to decide how to use money earned abroad.

Franchise Law

Since the first regulations on Business Franchising were passed by the Ministry of Domestic Trade in 1997, many of the biggest international franchisors have entered China, and domestic franchising has increase dramatically. In the new regulations, the State Council provides some new limitations and requirements. The regulations became effective as of May 1st 2007.

A business franchise is defined as one that licenses operation resources such as registered trademarks, trade names, patents or know-how to other business operators. A franchisor shall have a proven operational mode and the capacity to provide franchisees with directions, technical support and training on a continuous basis. A franchisor shall have at least two directly operated outlets with at least one year of operation for each. Within 15 days, a franchisor shall record its franchising contract. Under the contract, the franchisee shall have the right to terminate the contract after a certain period.

Please refer to our May Newsletter for further details.

Enterprise Income Tax Law

After many years, China finally integrates its separate tax regimes for Chinese- and foreign invested enterprises into one. This marks a complete overhaul of the tax system, with marked changes especially for many foreign invested enterprises.

The standard tax rate for resident enterprise is set at 25% regardless of industry and location. Preferential tax rates for qualified small and low-profit companies (20%) and high or new technology enterprises (15%) will be available. Tax incentives will be provided to encouraged industries, including environmental protection and conservation, venture capital and advanced technologies.

The new tax regime will be applied as of 1st January 2008. Companies enjoying existing holidays may be given a transition period of maximum five years. Companies established after March 16th 2007 will fall under the new regime immediately. Detailed implementation regulations and explanatory circulars to be issued soon.

Please refer to our March Newsletter for further details.

Value-Added Tax Refunds

China offers a rebate of up to 17 percent on the Value Added Tax (VAT) paid on certain products, if such products are exported. The amount of available rebates is gradually being scaled back, with the most recent adjustments on 19th June 2007 being particularly extensive. This will increase the manufacturing / export price of these products.

VAT tax rebates are cancelled for 553 items (listed by their PRC tariff numbers) including leather, particular chemical products, fertilizers, minerals and mineral-based products, metal carbide and activated carbon products, simple-processed non-ferrous metals, and certain non-motorized vessels.

VAT tax rebates have been reduced for 2268 items, including leather suitcases (11 percent) and other leather products (5 percent); clothing, shoes, hats, umbrellas (5 percent); plastics, rubber and related products (5 percent); certain stones, ceramics, glasses, pearls, jewels, precious metals and related products (5 percent); certain iron and steel products (5 percent), various types of machinery (9 or 11 percent), home furnishings (9 or 11 percent), watches, toys and other sundry products (11 percent).

The new tax rebate levels were effective for goods exported after July 1st 2007, excluding products to be exported under contracts signed before July 1st 2007 and recorded with the relevant tax bureau.

Please refer to our July Newsletter for further details.

Restrictions placed on Processing Trade

China announced a new policy in July 2007 to curb the growth of processing trade in labor-intensive sectors, including the manufacturing of plastic raw materials and products, weaving yarn, cloth and furniture. Processing trade is the import of all raw materials, parts, components accessories and packaging materials from abroad as bonded materials, then re-exporting the finished products after processing or assembly by enterprises within the mainland. Entities carrying out processing trade with imports or exports categorized as restricted items must pay an import deposit upon the registration of the customs logbook. The import deposit will be refunded, together with interest, on verification of the customs logbook.

Manufacturers of items on the lists of restricted items will face great financial pressure in order to finance the import deposit. In general, the more the amount registered in the customs logbook, the more the amount of the import deposit will be. The longer the period covered by the customs logbook, the longer import deposit will be held by the Customs. In addition to the import deposit, the VAT refund rates of most of these items were reduced from July 1st 2007, meaning a significant increase of cost on related exports from China.

The new policy targets high polluting and energy consuming industries in China's developed eastern regions.

Labor Law

In theory, the new labor law, which be implemented on January 1st 2008, should go far in improving the situation. Under the law, employer-employee contracts are mandatory and employers are encouraged to grant long-term contracts, which ensure that they can only be fired with good cause. Additionally, any employee who fulfilled consecutive short-term contracts, which typically last no longer than a year, will also be entitled to a long-term contract that ensures job security. The law also mandates severance pay of at least one month per year of employment.

Trade unions are also given greater room to organize under the new law. Moreover, if government officials charged with oversight of the new regulations fall in their duties, they now are exposed to the possibility of a civil suit.

While the new law is an important step in improving labor conditions in China, it does contain loopholes. For instance, a new penalty against employers who fire workers without good cause before their contracts expire merely doubles the employees' severance pay, however this can encourage employers to lay off workers early in their contracts, when they are not entitled to significant severance packages. The larger issue will of course be enforceability.

Please refer to our November Newsletter for further details.

Conclusion

The year 2007 has brought further laws, such as the third phase to the Closer Economic Partnership Arrangement (CEPA) between Hong Kong and China as well as the Double Taxation Arrangement. The year 2008 will be an interesting year to see how well these laws will be enforced and what additional laws will be implemented that could effect Foreign Invested Enterprises in China

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All information in this report is verified to the best of our ability and is assumed to be correct at time of release; however, Klako Group does not accept responsibility for any losses arising from reliance on the information provided within.