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ACLA-Lovells Foreign Investment Memo Template _English Only_

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ACLA-Lovells Foreign Investment Memo Template _English Only_ Powered By Docstoc
					中华全国律师协会                                                                                                   路伟国际律师事务所
ACLA                                                                                                       Lovells


           ACLA-Lovells Foreign Investment Memo Template (English Only)
                     "OVERVIEW OF COMMON FOREIGN INVESTMENT VEHICLES AND
                 TRANSACTION STRUCTURES IN CHINA—ORIGINAL NOTE AND ADDENDUM"

(Prepared by Lovells for instructional and reference purposes only, and should not be construed as legal advice. All rights
reserved. Last updated in July 2004. All content involving interpretation of the laws of the People's Republic of China reflects
the results of consultation with EastBright Law Firm.)

This sample memo has been prepared as part of the All China Lawyers Association ("ACLA") -
Lovells Legal Skills Training Series ("Training Series"), which have covered skills ranging from
contract/memo drafting, commercial negotiation, law firm management and corporate law
department management. Since the first ACLA-Lovells Legal Skills Training Seminar in January
2003, more than 2,500 lawyers from law firms and corporate law departments all over China have
attended over 250 hours of live training programmes prepared and presented by senior lawyers
from Lovells International Law Firm and Chinese legal practitioners.

If you have any comments or suggestions regarding this sample memo, please contact the two
chief instructors of the Training Series: Robert Lewis (Foreign Expert, ACLA Education
Committee/Managing Partner, Lovells Beijing) at robert.lewis@lovells.com; or John Jiang
(Director,   ACLA-Lovells    Legal    Skills Training    Series/Partner,  EastBright)    at
john.jiang@eastbright.com.

For information on DVDs, audio PowerPoint presentations and transcripts of prior ACLA-Lovells
training seminars as well as information on future ACLA-Lovells training seminars and similar
training products (including additional bilingual standard contract templates), please contact the
ACLA Training Department by email at acla@163.com, or acla@sina.com.

A Microsoft Word version of this template is available together with the audio PowerPoint
presentation of "Seminar on Contract and Legal Memo Drafting" on a CD-ROM, published by the
All China Lawyer's Association. Please contact the ACLA Training Department by email at
acla@163.com, or acla@sina.com for details.




_____________________________________________________________________________________________________
Prepared by Lovells for instructional and reference purposes only, and should not be construed as legal advice. All rights
reserved. Last updated in July 2004. All content involving interpretation of the laws of the People's Republic of China reflects
the results of consultation with EastBright Law Firm.
此范本文书由路伟律师事务所起草,仅供教学与参考之用,不得解释为法律意见。所有权利保留。最后一次更新时间 2004 年 7
月。本文中所有涉及中国法律解释的内容均由东易律师事务所提供咨询。
中华全国律师协会                                                       2                                           路伟国际律师事务所
ACLA                                                                                                       Lovells


                                    律协-路伟涉外咨询文书范本系列简介
                     "OVERVIEW OF COMMON FOREIGN INVESTMENT VEHICLES AND
                 TRANSACTION STRUCTURES IN CHINA—ORIGINAL NOTE AND ADDENDUM"

(此范本文书由路伟律师事务所起草,仅供教学与参考之用,不得解释为法律意见。所有权利保留。最后一次更新时间 2004 年 7
月。本文中所有涉及中国法律解释的内容均由东易律师事务所提供咨询。)


本咨询文书范本系列是中华全国律师协会-路伟国际律师事务所法律技能培训项目(“培训项目”)的专
题之一。从2003年1月律协和路伟合作举办第一次法律技能培训班以来,来自全国各地的2500多名
律师和企业法律顾问参加了由路伟资深国际律师和中国律师事务所资深律师主讲的250多个课时的
培训课程。培训项目的内容涉及合同/法律咨询文书制作、商业谈判、律师事务所管理以及企业法
律部门管理等等。

如果您对本咨询文书范本有任何看法或建议,请通过电子邮件与培训项目的两位主讲律师联系:
吕立山(全国律协教育委员会外国专家/路伟律师事务所北京办事处主任) robert.lewis@lovells.com
江宪胜(律协-路伟法律技能培训项目专员/东易律师事务所合伙人) john.jiang@eastbright.com

本咨询文书范本的Microsoft Word版本载于中华全国律师协会推出的“合同及法律咨询文书制作培
训”录音-幻灯片VCD光盘。有兴趣订购者可通过电子邮件与中华全国律师协会培训部联系:
acla@163.com; acla@sina.com

如果您想了解有关律协-路伟培训项目的其他 DVD 录像光盘、VCD 录音-幻灯片光盘、授课讲稿,
或者即将推出的其他培训专题和培训资料(包括双语合同范本系列的第二期),可通过上述电子邮件
地址与中华全国律师协会培训部联系。




_____________________________________________________________________________________________________
Prepared by Lovells for instructional and reference purposes only, and should not be construed as legal advice. All rights
reserved. Last updated in July 2004. All content involving interpretation of the laws of the People's Republic of China reflects
the results of consultation with EastBright Law Firm.
此范本文书由路伟律师事务所起草,仅供教学与参考之用,不得解释为法律意见。所有权利保留。最后一次更新时间 2004 年 7
月。本文中所有涉及中国法律解释的内容均由东易律师事务所提供咨询。
中华全国律师协会                                                                                                   路伟国际律师事务所
ACLA                                                                                                       Lovells




     OVERVIEW OF COMMON FOREIGN INVESTMENT VEHICLES AND
              TRANSACTION STRUCTURES IN CHINA




                                ORIGINAL NOTE AND ADDENDUM




_____________________________________________________________________________________________________
Prepared by Lovells for instructional and reference purposes only, and should not be construed as legal advice. All rights
reserved. Last updated in July 2004. All content involving interpretation of the laws of the People's Republic of China reflects
the results of consultation with EastBright Law Firm.
此范本文书由路伟律师事务所起草,仅供教学与参考之用,不得解释为法律意见。所有权利保留。最后一次更新时间 2004 年 7
月。本文中所有涉及中国法律解释的内容均由东易律师事务所提供咨询。
中华全国律师协会                                                                                                   路伟国际律师事务所
ACLA                                                                                                       Lovells




                            OVERVIEW OF COMMON FOREIGN INVESTMENT VEHICLES
                                                             AND
                                        TRANSACTION STRUCTURES IN CHINA

1.        INVESTMENT IN CHINA

          China’s re-entry into the World Trade Organisation (“WTO”) in December 2001
          represented a fundamental shift in China’s commercial and legal environment. A new
          wave of foreign investment is now permitted as China begins to open certain industry
          segments, particularly in the services sector, that previously were closed to foreign
          participation. Whereas previously only major multi-national corporations were equipped
          to manage the complexities of investment in China, more and more small- and medium-
          sized foreign enterprises are entering China as it becomes the workshop for the world,
          increasingly in high technology areas as well as in more traditional manufactured goods.

          Operations of multinational corporations in China are becoming increasingly more
          localized, and Chinese enterprises are becoming increasingly sophisticated and
          internationalized. Certain remnants of the old centrally-planned economy have not yet
          been fully discarded, but the direction of change in China continues to be positive and the
          pace of change continues to be remarkable. Thus, while conducting business in China is
          still challenging, the market and regulatory environment continues to improve, keeping
          pace with the growing importance of China as a manufacturing centre and consumer
          market.

1.1       WTO

          In connection with its re-entry into the WTO, in addition to a schedule of tariff reductions
          China has agreed to certain market access undertakings in key service sectors, including
          telecommunications, insurance, banking, trade, distribution and logistics, etc. In the
          majority of these sectors, foreign investment and participation is to follow a schedule
          whereby initial investment caps and business scope and geographic scope limitations are
          gradually liberalized over a period of several years. Implementing regulations may
          impose additional practical restrictions, but these WTO service sector commitments do
          represent a major step forward in the overall opening of China to foreign investment.

1.2       Foreign Investment Framework

          China's WTO commitments are reflected in the Foreign Investment Guidance Catalogue
          ("Catalogue"), which lists various types of foreign investment projects under the following
          category heads: encouraged, restricted and prohibited. All foreign investment projects not
          included in the Catalogue are considered to be permitted.

          Establishment of foreign-invested enterprises ("FIEs") all require approval of the Ministry
          of Commerce ("MOFCOM") (the successor in powers and authorities of the former
          Ministry of Foreign Trade and Economic Cooperation), or its local counterpart, the
          provincial or municipal Commission of Foreign Trade and Economic Cooperation
          ("COFTEC"). While the process is well established, and the foreign investment vehicles in
          China are considered stable, MOFCOM and the local COFTEC do have some discretion
          in certain aspects of the FIE approval process.

          Production-oriented FIEs with a minimum 25% foreign investment are currently entitled to
          certain tax incentives (see Section 3.2 below). FIEs with at least 25% foreign investment
          also have greater access to foreign loans (including shareholder loans from the foreign
_____________________________________________________________________________________________________
Prepared by Lovells for instructional and reference purposes only, and should not be construed as legal advice. All rights
reserved. Last updated in July 2004. All content involving interpretation of the laws of the People's Republic of China reflects
the results of consultation with EastBright Law Firm.
此范本文书由路伟律师事务所起草,仅供教学与参考之用,不得解释为法律意见。所有权利保留。最后一次更新时间 2004 年 7
月。本文中所有涉及中国法律解释的内容均由东易律师事务所提供咨询。
中华全国律师协会                                                       2                                           路伟国际律师事务所
ACLA                                                                                                       Lovells


          parent) with no practical interference by Chinese foreign exchange regulatory authorities.
          Foreign investors can invest less than 25% of the equity in a Chinese-registered company,
          but such investment vehicles do not qualify as FIEs or for the favourable tax and foreign
          exchange treatment described above.

2.        COMMON INVESTMENT VEHICLES

2.1       Representative Office

          The most basic form of foreign business presence in China is the Representative Office.
          A China Representative Office provides a permanent base from which its resident
          personnel may conduct local sales and purchasing activities. As a practical matter, it is
          desirable, and in most cases necessary, to establish a formal Representative Office for a
          foreign company to do the following in China:

          •     Open an office with company signage
          •     Print company business cards showing local contact information
          •     Open bank accounts
          •     Import office equipment and supplies
          •     Import personal effects of resident company representatives, and
          •     Hire Chinese employees.

          Representative Offices are prohibited from engaging in “direct business operations” and
          violations may result in fines and the closure of the office. There is no precise definition
          of “direct business operations”. However, it is clear that the Representative Office may
          not directly enter into contracts with a view to making profits nor may it directly invest in
          the PRC with a view to making profits.

          [For more information on representative offices, please see Outline of Basic Legal and
          Practical Issues in Respect of the Establishment of a Representative Office]

2.2       Equity Joint Ventures

          The Equity Joint Venture (“EJV”) is probably the most common of the foreign investment
          vehicles in China.

          (a)       Legal Form

                    EJVs are limited liability legal person entities. The concept of limited liability now
                    appears to be both settled and respected in China and conforms substantially to
                    international custom and practice.

          (b)       Capital Contributions

                    Capital contributions to an EJV (which are referred to as the "registered capital")
                    must be made in cash, patented and unpatented technology, materials and
                    equipment and other property rights. However a recent circular released by State
                    Administration of Foreign Exchange ("SAFE") has loosened the restrictions to
                    allow foreign parties to make capital contribution in assets other than those listed
                    above, such as the proceeds of investments (released through liquidation, share
                    transferring, capital reduction etc.) from FIEs it has previously invested in. The
                    investors must share the profits and bear the losses of the EJV in proportion to
                    their respective equity contribution percentages. The ratio of debt to equity and
_____________________________________________________________________________________________________
Prepared by Lovells for instructional and reference purposes only, and should not be construed as legal advice. All rights
reserved. Last updated in July 2004. All content involving interpretation of the laws of the People's Republic of China reflects
the results of consultation with EastBright Law Firm.
此范本文书由路伟律师事务所起草,仅供教学与参考之用,不得解释为法律意见。所有权利保留。最后一次更新时间 2004 年 7
月。本文中所有涉及中国法律解释的内容均由东易律师事务所提供咨询。
中华全国律师协会                                                       3                                           路伟国际律师事务所
ACLA                                                                                                       Lovells


                    the timing of equity contributions must conform to applicable PRC legal
                    requirements.

          (c)       Management and Operation

                    An EJV functions substantially as a corporation in Western jurisdictions, with a
                    board of directors and a general management office operating under the
                    supervision and direction of the board. However, an EJV also shares many
                    characteristics of a partnership in that the directors are appointed by the parties in
                    general proportion to the investors’ respective equity shares. There is no concept
                    of a Shareholders meeting in an EJV (or any FIE) with power being concentrated
                    at the board level. Also, equity interests can be transferred only with the consent
                    of the other investors, and certain other fundamental activities require unanimous
                    Board resolutions to be validly executed.

                    [For more information on joint ventures, please see Outline of Basic Legal Issues
                    in Respect of the Establishment of Sino-Foreign Joint Ventures.]

2.3       Cooperative Joint Ventures

          (a)       Forms of Cooperative Joint Ventures (“CJVs”)

                    In the past, CJVs took one of two different forms: a “true” CJV which did not
                    involve the creation of a legal person that was separate and distinct from the
                    contracting parties; and a “legal person” CJV in which a separate business entity
                    was established and the parties’ liability was generally limited to their capital
                    contributions.

                    In the case of a “true” CJV, each party was responsible for making its own
                    contributions to the venture, paying its own taxes on profit derived from the
                    venture and bearing its own liability for risks and losses. In contrast, a “legal
                    person” CJV, the more prevalent form today, shares more of the characteristics of
                    an EJV. The "true" CJV is a rare animal in today's market as few investors are
                    willing to entertain the prospect of unlimited liability. For purposes of this overview,
                    we will discuss only the "legal person" CJV structure.

          (b)       Parties' Investments

                    The primary difference between a CJV and an EJV is that parties to a CJV,
                    instead of or in addition to contributing to the registered capital, may provide
                    “cooperative conditions” that may consist of access to or use of certain assets
                    and/or rights that cannot be or are not assigned formally to the CJV, such as
                    market access rights or undertakings to supply certain services or cooperation
                    that will promote the business prospects of the CJV. In the most common
                    scenario, the Chinese party provides such non-equity “cooperative conditions” in
                    exchange for an agreed share of the profits, while the foreign party contributes
                    most or all of the true registered capital in the form of cash or other permitted in-
                    kind contributions.

          (c)       Distribution of Profit

                    The distribution of profits from a CJV does not have to conform rigidly to the ratio
                    of the parties' capital contributions. Consequently, CJVs are considerably more
                    flexible than EJVs, permitting schemes whereby the profit-sharing of the parties is
_____________________________________________________________________________________________________
Prepared by Lovells for instructional and reference purposes only, and should not be construed as legal advice. All rights
reserved. Last updated in July 2004. All content involving interpretation of the laws of the People's Republic of China reflects
the results of consultation with EastBright Law Firm.
此范本文书由路伟律师事务所起草,仅供教学与参考之用,不得解释为法律意见。所有权利保留。最后一次更新时间 2004 年 7
月。本文中所有涉及中国法律解释的内容均由东易律师事务所提供咨询。
中华全国律师协会                                                       4                                           路伟国际律师事务所
ACLA                                                                                                       Lovells


                    not necessarily tied to the value of the contributions. Unlike EJVs, CJVs are
                    expressly permitted to distribute dividend in kind as well as cash.

          (d)       Management and Operation

                    A CJV must either have a board of directors or a joint management office. In
                    practice “legal person” CJVs typically adopt the board of directors model. The CJV
                    law also permits the management of a CJV to be delegated to a third party with
                    government approval. This arrangement has been the standard mode of
                    operation for the hotel industry but could be utilised in other industries as well,
                    although this is not so common.

          (e)       Recoupment of Investment

                    It is permitted in CJV contracts, subject to approval, to provide that the foreign
                    party may recoup its equity investment prior to the expiration of the term provided
                    that if the foreign party has already recovered its investment, all of the fixed assets
                    of the joint venture will revert to the Chinese party upon termination of the CJV. In
                    other cases, liquidation will be handled with reference to the procedures
                    applicable to EJVs.

                    [For more information on joint ventures, please see Outline of Basic Legal Issues
                    in Respect of the Establishment of Sino-Foreign Joint Ventures.]

2.4       Wholly Foreign-Owned Enterprises

          (a)       Permitted Industries

                    In connection with China’s re-entry into the WTO, certain previous requirements
                    that a WFOE be a high-technology or export-oriented (with more than 50% of
                    products exported) production (but not service) enterprise have now been relaxed,
                    and WFOEs are permitted in a broader range of categories. However, where the
                    Catalogue or other PRC laws and regulations specifically refers to a joint venture
                    requirement, WFOEs may not be possible.

          (b)       Parties Involved

                    The foreign investor in a WFOE does not need to negotiate with a Chinese
                    enterprise matters such as the scope of operation, number of workers, percentage
                    of exports and changes in control or ownership of the business. A WFOE will
                    therefore be easier to establish and exit from than an EJV or CJV. In fact, in the
                    past few years, the WFOE has become the foreign investment vehicle of choice,
                    accounting now for more than half of all foreign investment in China.

          (c)       Management and Operation

                    Responsibility for the daily operations of a WFOE lies solely with its own
                    management, although financial reports must be filed regularly with the PRC tax
                    and financial authorities. However, such filings are for regulatory purposes only,
                    and PRC law prohibits interference in operation and management activities of a
                    WFOE pursuant to its approved articles of association ("AA").

          (d)       Approval and Capitalization


_____________________________________________________________________________________________________
Prepared by Lovells for instructional and reference purposes only, and should not be construed as legal advice. All rights
reserved. Last updated in July 2004. All content involving interpretation of the laws of the People's Republic of China reflects
the results of consultation with EastBright Law Firm.
此范本文书由路伟律师事务所起草,仅供教学与参考之用,不得解释为法律意见。所有权利保留。最后一次更新时间 2004 年 7
月。本文中所有涉及中国法律解释的内容均由东易律师事务所提供咨询。
中华全国律师协会                                                       5                                           路伟国际律师事务所
ACLA                                                                                                       Lovells


                    Outline of Basic Legal Issues in Respect of the Establishment of Sino-Foreign
                    Joint Ventures relating to permitted industry sectors (Section 2.1), government
                    approvals (Section 2.2) preferential treatment for FIEs (Section 2.3), scope of
                    business (Section 2.4), capitalization (Section 3.2) and term of operation and
                    operating licenses (Section 3.5) also apply generally to WFOEs.

2.5       Holding Companies

          (a)       Scope of Holding Company Operations

                   For a foreign company with many investments in China, a holding company
                   structure can provide many advantages such as centralised management,
                   employment, marketing and distribution. Upon approval by the relevant authority,
                   a holding company may also balance foreign exchange within the group and hold
                   other group companies’ interests in other Chinese investments. In recent years,
                   the scope of permitted holding company activities has been expanded to include
                   R&D, buy-sell distribution and systems integration, technical training, test
                   marketing and holding shares in companies limited by shares, in each case
                   subject to certain consents and approvals.

          (b)       Qualifications

                    To establish a holding company the regulations set out high threshold tests. The
                    registered capital of the proposed holding company must be at least US$30
                    million and must be used for new investments (i.e. you cannot use it to buy-in the
                    interest in FIEs brought under its mantle). For a wholly-foreign owned holding
                    company, the applicant foreign company must have (i) had total assets in the year
                    prior to application of not less than US$400 million, (ii) already established FIEs in
                    China with paid-up capital of more than US$10 million and (iii) secured approval
                    for at least three more projects or, alternatively established more than ten FIEs
                    each with a paid up capital of more than US$10 million.

2.6       Alternative Investment Structures

          (a)       Acquisition of Equity Share in Existing FIE

                    As an alternative to establishment of a new FIE or as part of an overall acquisition
                    transaction involving entities in China, it is possible to acquire the registered
                    capital in an existing FIE held by a domestic or foreign investor. The other
                    party(ies) to an EJV or CJV have a pre-emptive right to acquire the equity share of
                    the proposed transferor, and have absolute consent rights to any transfer
                    generally. All transfers of registered capital in any FIE additionally require
                    amendment to the AA of the FIE, unanimous approval of the FIEs board of
                    directors and approval of the local COFTEC (or in some cases, MOFCOM).
                    Consequently, the transfer of registered capital in any FIE, including a WFOE, is
                    more complex than a simple transfer of shares in an off-shore corporate entity
                    generally, and the transfer of registered capital in an EJV or CJV is even more
                    complex as it invites a possible renegotiation of the AA as a condition to the
                    transfer. Tax and other related issues in respect of the sale of an equity interest in
                    an FIE are discussed in Section 5.1 below.

          (b)       Acquisition of Off-shore Vehicle


_____________________________________________________________________________________________________
Prepared by Lovells for instructional and reference purposes only, and should not be construed as legal advice. All rights
reserved. Last updated in July 2004. All content involving interpretation of the laws of the People's Republic of China reflects
the results of consultation with EastBright Law Firm.
此范本文书由路伟律师事务所起草,仅供教学与参考之用,不得解释为法律意见。所有权利保留。最后一次更新时间 2004 年 7
月。本文中所有涉及中国法律解释的内容均由东易律师事务所提供咨询。
中华全国律师协会                                                       6                                           路伟国际律师事务所
ACLA                                                                                                       Lovells


                    Many financial or strategic investors planning to do private placement capital
                    raises in anticipation of an eventual public offering set up an off-shore special
                    purpose vehicle ("SPV") in a tax-efficient jurisdiction to be the named foreign
                    investor in the FIE. Even many multinational strategic investors not planning for a
                    potential exit from the investment may also utilize an off-shore SPV for their China
                    investments for internal management purposes. Instead of selling its interests in
                    the FIEs concerned, the foreign investor may sell its shares in the off-shore SPV
                    which holds the FIE interests in China. Consents and approvals of such sale of
                    off-shore SPV interest are not required, as PRC law is not directly applicable to
                    such transaction.

                    However, since EJVs and CJVs operate in many respects as a partnership (and
                    good partner relationships are the key to the success of any such EJV or CJV),
                    and since the new investor may wish to negotiate amendments to the AA of the
                    EJV or CJV in any event as a condition to the acquisition of the SPV shares
                    (which will require board and COFTEC approvals), it is as a practical matter
                    necessary and desirable for each new investor in the SPV to cultivate a positive
                    working relationship with, and obtain at least tacit consent of, the other investors
                    before concluding the investment.

                    Acquisition of the shares in an off-shore SPV holding all of the registered capital of
                    a WFOE, of course, is much simpler. However, given the ease with which a new
                    WFOE can be set up, the circumstances in which acquisition of the SPV's indirect
                    interest in an existing WFOE will, as a practical matter, be simpler may be limited.

          (c)       Branch Office

                    To establish a branch office of a foreign company in China, significant
                    prerequisites have to be fulfilled. Among other requirements, the applicant must
                    have had a Representative Office in China for over two (2) years and the
                    minimum working capital of the branch office must exceed US$10 million. A
                    branch office will not have legal person status and as such, as in the West, its
                    parent company will be held liable for its activities. Certain branch office
                    restrictions have recently been lifted in compliance with WTO provisions, which
                    will allow foreign companies to establish liaison offices for a local parent company.
                    However, approval of branch offices for other purposes is, at present, rarely given
                    and then only in certain industries such as banking and insurance.

          (d)       Foreign Invested Company Limited by Shares ("FICLS")

                    An FICLS essentially is a blend between an EJV and a Western stock company or
                    public company. An FICLS is governed by a board of directors which is
                    subordinate to the shareholders. For an FICLS, the board of directors must be
                    established in addition to the supervisory board consisting of representatives of
                    the shareholders and employees. Compared to EJVs, some of the advantages of
                    an FICLS include having perpetual existence and no requirement of unanimous
                    consent of “shareholders” as is required in EJVs. The foreign investor is required
                    to hold more than 25% of the total shares of the FICLS to qualify as an FIE. An
                    FICLS can be established by way of promotion with a minimum of US$30 million
                    of paid up capital. However, if the FICLS is set up by way of public share offering
                    the total investment will be substantially higher. Unlike FIEs, FICLS can, with
                    approval, be listed on a recognised PRC stock exchange, or even offer shares

_____________________________________________________________________________________________________
Prepared by Lovells for instructional and reference purposes only, and should not be construed as legal advice. All rights
reserved. Last updated in July 2004. All content involving interpretation of the laws of the People's Republic of China reflects
the results of consultation with EastBright Law Firm.
此范本文书由路伟律师事务所起草,仅供教学与参考之用,不得解释为法律意见。所有权利保留。最后一次更新时间 2004 年 7
月。本文中所有涉及中国法律解释的内容均由东易律师事务所提供咨询。
中华全国律师协会                                                       7                                           路伟国际律师事务所
ACLA                                                                                                       Lovells


                    overseas. Guidelines issued by MOFCOM indicate that promoters may be jointly
                    and severally liable to pay for the shares of an FICLS in full.

          (e)       Acquisition of Shares in State-owned Companies (Direct Cross-Border M&A)

                   Corporate law in China generally did not contemplate direct cross-border merger
                   and acquisition ("M&A") investments until recently (below Section 2.6(f)). In
                   addition, many foreign investors have been reluctant to take on the liabilities of
                   existing state-owned enterprises ("SOEs").       Consequently most FIE deals
                   involving SOEs have taken the form of asset acquisitions, in which selected SOE
                   assets have been contributed to or acquired by a new EJV or CJV.

                   However, in a landmark deal in 2002, Chinese authorities allowed a foreign
                   investor to acquire a stake in a Chinese state-owned bank and relevant cross-
                   border M&A rules for foreign purchase of equity interest or shares in SOEs were
                   issued shortly afterwards by the State Economic and Trade Commission ("SETC")
                   (now merged into MOFCOM) and other authorities. Foreign investors may acquire
                   a minimum of 10% (10-25% to qualify as an FIE, or more than 25% to be able to
                   enjoy the preferential treatment afforded an FIE) of SOEs that do business in
                   industries that are not prohibited to foreign investors either: (i) by acquiring certain
                   state-owned equity interest or unlisted shareholdings, (ii) by becoming an
                   additional investor in an SOE through a capital increase or issuance of new
                   unlisted shares, (iii) by acquiring claims of SOE creditors by way of debt transfer,
                   or (iv) by purchasing assets of an SOE to establish a new FIE. However the multi-
                   stage approval procedures are cumbersome and lack clarity, and thus take up
                   remains low.

          (f)       M&A Conversion of Domestic Enterprises

                    Under tentative rules jointly issued in March 2003 by MOFCOM and other
                    authorities and which became effective in April 2003, a foreign investor may
                    directly acquire an equity interest in an existing domestic enterprise (share deal),
                    and if the resulting foreign ownership share is more than 25% and the investment
                    otherwise complies with the other laws, rules and regulations applicable to FIEs,
                    then the target domestic company can be converted into a new FIE. Alternatively
                    the foreign investor can also acquire assets of a domestic enterprise and inject
                    these into an existing FIE or use such assets to establish a new FIE (asset deal).
                    For the first time, these rules introduce criteria and thresholds under which a
                    merger or acquisition is subject to anti-trust reporting, hearing and review
                    procedures. Such reporting obligations also apply to offshore-only transactions
                    that give rise to competitive effects in China. There remain many ambiguities in
                    these rules which will not be resolved until new regulation is issued in this area.

                    The form of M&A discussed here, is a direct form of investment, as opposed to the
                    typical quasi-M&A investment in which the domestic company contributes or sells
                    its key assets to the new Sino-foreign joint venture but the joint venture does not
                    assume the liabilities of the Chinese company (although typically the liabilities of
                    the Chinese investor must be addressed, otherwise the Chinese party will not be
                    able to make the investment). This is still a relatively new, untested and
                    procedurally intensive investment structure (formerly only available in Beijing
                    under rules issued in 1999 by the Beijing COFTEC) which requires substantial
                    negotiation among the parties and consultations with the relevant government
                    authorities.
_____________________________________________________________________________________________________
Prepared by Lovells for instructional and reference purposes only, and should not be construed as legal advice. All rights
reserved. Last updated in July 2004. All content involving interpretation of the laws of the People's Republic of China reflects
the results of consultation with EastBright Law Firm.
此范本文书由路伟律师事务所起草,仅供教学与参考之用,不得解释为法律意见。所有权利保留。最后一次更新时间 2004 年 7
月。本文中所有涉及中国法律解释的内容均由东易律师事务所提供咨询。
中华全国律师协会                                                       8                                           路伟国际律师事务所
ACLA                                                                                                       Lovells


                    It appears that these rules, which are applicable to all domestic companies that
                    are not FIEs, are complementary to the above-mentioned M&A rules in regard to
                    SOEs (above Section 2.6(e)), although there is some overlap. The merger of
                    SETC into MOFCOM has at least partially consolidated approval jurisdiction in this
                    area. However, it remains to be seen if and how the disparate cluster of M&A
                    related rules will be consolidated in the future.

          (g)       Qualified Foreign Institutional Investor ("QFII") Scheme

                    Foreign portfolio investment in domestic PRC A shares is now possible under a
                    set of new rules made effective in December 2002. Since China's currency, the
                    Renminbi (RMB), is not convertible on the capital account (see Section 3.3
                    below), the equity of PRC listed companies is split between RMB-denominated A
                    shares and B shares (denominated in RMB but tradable in either US dollars or
                    Hong Kong dollars). A shares account for most of the value of the PRC equity
                    market, but were previously off-limits to foreign investors. The new regulations
                    permit foreign institutions from 16 jurisdictions to invest in A shares, subject to
                    some restrictions, and repatriate profits and principal without having to establish a
                    PRC business vehicle.

                    Four different types of institutions are eligible to apply for a license for QFII status:
                    fund managers with at least a five (5)-year track record and US$10 billion in
                    assets under management; insurance and securities companies with thirty (30)
                    years experience, US$$10 billion in assets under management and paid-in capital
                    of at least US$1 billion; and commercial banks ranked within the top 100 banks
                    globally in terms of assets and not less than US$10 billion in assets under
                    management. In addition to these financial qualifications the applicant must satisfy
                    other requirements such as having had no record of material regulatory sanctions
                    in the last three (3) years.

                    Under the new regulations, the minimum investment quota is US$50 million and
                    the maximum is US$800 million. Portfolios can be managed by the QFII itself, or
                    by a nominated securities house, but assets must be held via a custodian. A
                    number of foreign invested banks are qualified to provide this service. All trades
                    must be executed by a licensed PRC securities house and all settlements and
                    offshore repatriations must be effected by the QFII custodian.

                    The regulations outline a somewhat restrictive liquidation mechanism devised to
                    encourage longer term investments.

                    QFIIs who are closed-end fund managers are subject to a three (3) year lock-in
                    period, whereas the lock-in period for other QFIIs is one (1) year. Repatriations of
                    principal must be made in instalments of not more than 20% of total invested
                    principal and must be separated by a defined period of time.

3.        BUSINESS OPERATIONS

3.1       Land & Buildings

          Under Chinese law, land is either owned by the state or by collectives (mostly in rural
          areas), and individuals and enterprises are granted only fixed-term rights to use land.
          Land use rights traditionally have taken one of two principal forms: allocated land use
          rights and granted land use rights. As indicated by the names, allocated land use rights
          are in the form of a personal, non-transferable, non time-limited right to use specified land.
_____________________________________________________________________________________________________
Prepared by Lovells for instructional and reference purposes only, and should not be construed as legal advice. All rights
reserved. Last updated in July 2004. All content involving interpretation of the laws of the People's Republic of China reflects
the results of consultation with EastBright Law Firm.
此范本文书由路伟律师事务所起草,仅供教学与参考之用,不得解释为法律意见。所有权利保留。最后一次更新时间 2004 年 7
月。本文中所有涉及中国法律解释的内容均由东易律师事务所提供咨询。
中华全国律师协会                                                       9                                           路伟国际律师事务所
ACLA                                                                                                       Lovells


          On the other hand, granted or transferable land use rights may be freely alienated for the
          balance of the term of use. In most cases, any land use rights to be acquired by an FIE
          will either be in the form of granted land use rights initially or be converted into a granted
          land use rights at the time of contribution, transfer or lease. Allocated land use rights are
          seen less and less these days due to the restrictions as to what you can do with allocated
          land and they have the downside of not being realisable asset on liquidation of the FIE.
          The term for granted land use rights depends on the use. Residential property land use
          rights have a maximum term of seventy (70) years. Land use rights for industrial
          purposes have a maximum term of fifty (50) years. Commercial land use rights have a
          maximum period of use of only forty (40) years. Comprehensive or mixed use land use
          rights have a maximum term of fifty (50) years. Upon expiration of the land use rights term,
          the land together with all improvements thereon reverts to state ownership pending
          payment of a separate land use rights fee for a renewed period. Building ownership in
          China is however possible and is often a part of the Chinese party's capital contribution to
          an EJV or CJV.

3.2       Tax

          China maintains a bifurcated tax system with separate tax collection on the national and
          on the local level. The most significant of the taxes applicable to an FIE are enterprise
          income tax, business tax and value added tax ("VAT").

          (a)       Enterprise Income Tax

                    Generally FIEs and other foreign enterprises with a presence in China engaged in
                    production and business operations are subject to enterprise income tax at a rate
                    of 33% on their worldwide income. The enterprise income tax regime is expected
                    to be modified (with overall rates reduced to 24-28%). No timeline or any
                    specifics have been announced, but it is anticipated that such amendments
                    cannot be put in place until 2006 at the earliest.

                    Certain income streams of foreign enterprises without a China presence such as
                    loan interest, rental income, royalties from trademark or copyright etc. are also
                    subject to enterprise income tax on a withholding basis. The usual withholding tax
                    rate is 20% but was reduced to 10% in January 2000 for income such as interest,
                    rentals, royalties etc.

          (b)       Income Tax Incentives

                    A complex system of tax incentives at the national and local levels grant
                    exemptions, reductions and refunds to an FIE on an approval basis depending on
                    the business type, invested industry or locality of investment. Some of the most
                    significant incentives include:

                    •     FIEs engaging in production (manufacturing or software development but not
                          service-oriented FIEs) with a term of more than ten (10) years may avail
                          themselves of a two (2)-year income tax exemption and a further three (3)-
                          year 50% reduction on the income tax payable from the first profit-making
                          year.

                    •     For certified technologically advanced enterprises belonging to state-
                          encouraged production projects etc., a 50% tax reduction is available for a
                          further three (3) years after the above-mentioned five (5)-year tax holiday
                          expires.
_____________________________________________________________________________________________________
Prepared by Lovells for instructional and reference purposes only, and should not be construed as legal advice. All rights
reserved. Last updated in July 2004. All content involving interpretation of the laws of the People's Republic of China reflects
the results of consultation with EastBright Law Firm.
此范本文书由路伟律师事务所起草,仅供教学与参考之用,不得解释为法律意见。所有权利保留。最后一次更新时间 2004 年 7
月。本文中所有涉及中国法律解释的内容均由东易律师事务所提供咨询。
中华全国律师协会                                                      10                                           路伟国际律师事务所
ACLA                                                                                                       Lovells


                    •     Export-oriented FIEs may receive tax breaks in Special Economic Zones,
                          Economic and Technological Development Zones, Shanghai Pudong New
                          Area, Coastal Open Economic Zones. Also certain FIEs established in the
                          Special Economic Zones engaged in service industries may apply for certain
                          tax breaks.

                    Further incentives are available for investing in certain localities or zones, such as
                    in so-called old urban areas or in areas of Western China. Also industry-specific
                    incentives are provided, e.g. for certain basic infrastructure or high technology
                    projects.

                    These tax incentives for production-oriented FIEs are expected to be discontinued
                    when the anticipated overall modifications to the enterprise tax regime (see
                    Section 3.2(a) above) are implemented. In the past, when other major changes
                    were made to the tax regime, FIEs established prior to the effectiveness of the
                    new tax regime were "grandfathered" and continued to receive the benefit of the
                    prior more favourable tax regime. This may also be the case in connection with
                    these anticipated changes, but this still remains to be seen.

          (c)       VAT

                    FIEs and foreign enterprises that are engaged in the sale or import of goods and
                    processing, repair and replacement services in the PRC are subject to VAT, a
                    kind of turnover tax. The normal VAT rate is 17%. For the sale or import of certain
                    goods the rate is 13%. A low VAT rate of 6% may be applicable if annual sales do
                    not exceed certain thresholds. Exports of goods, except those goods specially
                    prescribed by the State Council, are exempted from VAT.

          (d)       Business tax

                    Business tax is levied on services not covered by the VAT and based on the
                    income from (i) provision of labour services, (ii) sales of immovable property and
                    (iii) assignment of intangible assets. The tax rate normally falls in the range of 3%
                    to 5%, but in certain industries such as entertainment businesses the tax rate is
                    higher (20%). Exemptions from business tax are possible under various laws and
                    regulations.

3.3       Foreign Exchange System and Profit Repatriation

         China's two-tier foreign exchange ("forex") system was abolished in 1994 and was
         consolidated into a unified, controlled, floating rate system. China's WTO accession has
         catalysed further liberalisation, for example with the recent abolition of the former foreign
         exchange balancing requirements where FIEs were required to generate the foreign
         exchange revenues needed by their business for purchasing overseas etc. However, the
         continuing macro-fiscal trends such as the 1997 Asian financial crisis have brought on an
         opposite trend of increased control over forex remittance transactions. Both relaxation and
         tightening of forex rules in accordance with the overall fiscal situation, in an attempt to
         maintain a stable RMB exchange rate, are expected to continue to be the main policy
         drivers for further modifications in the forex system going forward.

          (a)       Forex Current Account and Capital Account

                    The central concept of control over inbound or outbound forex depends on
                    whether the nature of the transaction involves the transfer of capital or ordinary
_____________________________________________________________________________________________________
Prepared by Lovells for instructional and reference purposes only, and should not be construed as legal advice. All rights
reserved. Last updated in July 2004. All content involving interpretation of the laws of the People's Republic of China reflects
the results of consultation with EastBright Law Firm.
此范本文书由路伟律师事务所起草,仅供教学与参考之用,不得解释为法律意见。所有权利保留。最后一次更新时间 2004 年 7
月。本文中所有涉及中国法律解释的内容均由东易律师事务所提供咨询。
中华全国律师协会                                                      11                                           路伟国际律师事务所
ACLA                                                                                                       Lovells


                    expenditures. If the transaction has the purpose of creating capital, i.e. equity
                    investments (into FIEs), loans, securities investments, guarantees benefiting a
                    foreign entity etc., the forex will be regarded as a so-called "capital account" item
                    with strict control over its movement in the PRC currency market. Such item has
                    to be placed in a controlled bank account and virtually all such related
                    transactions require the approval of the competent department under the State
                    Administration of Foreign Exchange ("SAFE"), which is routinely obtained without
                    difficulty in many circumstances. If the forex transaction is within the category of
                    cross-border expenditure in the ordinary course of business, e.g. payments and
                    receipts from international trade in goods and services, payment of interest on
                    forex loans (but not repayment of principal) and repatriation of dividends from an
                    FIE, (see subsection (c) below), the item is classified as a "current account" item
                    and is usually only requested to be supported by documentation checked by the
                    relevant bank, although such current account items may still be subject to
                    authentication by SAFE in certain defined cases.

          (b)       Remittance Control

                    Chinese banks remitting forex are required to confirm the authenticity of the
                    remittance and, in certain respects, the underlying transaction. For forex capital
                    account remittances requiring SAFE approval, the SAFE approval document must
                    be presented to the bank. Even for forex current account remittances not
                    requiring SAFE approval certain additional guidelines apply. For example,
                    remittances of payments for imported goods may be made only if proper customs
                    clearance documents are presented to the bank and other anti-fraud and anti-
                    money laundering requirements are satisfied. Similarly, remittances of royalties
                    under a cross-border technology license contract are subject to presentation of a
                    technology import registration certificate or an import permit for the license
                    contract.

          (c)       Profit Repatriation

                    Foreign investors may repatriate profits from an FIE without restriction subject to
                    compliance with certain procedural requirements, such as prior PRC accounting to
                    determine profits, payment of income tax and obtaining SAFE approval, which is
                    routinely granted.

                    There is no direct cap on profit repatriation. However, FIEs are required to allocate
                    a certain rate of after-tax profit, determined by the board of directors, to a reserve
                    fund and to an employee bonus and welfare fund. Joint ventures additionally have
                    to make allocations to an enterprise expansion fund. WFOEs are required to
                    allocate 10% of their after-tax profit to the reserve fund and cannot reduce this
                    rate until the fund reaches an amount equivalent to 50% of the registered capital.
                    Furthermore, profit distribution is not permitted until the WFOE has made up for
                    losses of previous years.

                    There is currently no additional PRC tax levied on distributions of profits to a
                    foreign investor in an FIE.




_____________________________________________________________________________________________________
Prepared by Lovells for instructional and reference purposes only, and should not be construed as legal advice. All rights
reserved. Last updated in July 2004. All content involving interpretation of the laws of the People's Republic of China reflects
the results of consultation with EastBright Law Firm.
此范本文书由路伟律师事务所起草,仅供教学与参考之用,不得解释为法律意见。所有权利保留。最后一次更新时间 2004 年 7
月。本文中所有涉及中国法律解释的内容均由东易律师事务所提供咨询。
中华全国律师协会                                                      12                                           路伟国际律师事务所
ACLA                                                                                                       Lovells


4.        COMMON TRANSACTIONS IN CHINA

4.1       Technology Transfer

          (a)       Introduction

                    China's foreign investment policy has traditionally placed a strong emphasis on
                    the transfer of technology to Chinese enterprises. Consequently, technology
                    licensing has played and continues to play a major role in foreign investment
                    projects in China. Applicable laws, regulations and administrative practices have
                    also imposed some significant restrictions on the terms on which such technology
                    can be licensed into China.

          (b)       Applicable Regulations

                    Prior technology transfer rules and regulations imposed certain onerous limitations
                    on the contents of technology transfer contracts and required centralised
                    government approvals. This approval/registration regime has been further
                    streamlined post-WTO to the effect that many of the previously more onerous
                    existing provisions and practices have been eliminated or further relaxed.

          (c)       Prior Technology License Terms

                    Under the prior technology licensing rules, without approval, a technology transfer
                    contract was void. It was also not permitted to include any of the following
                    restrictions or requirements:

                    (i)       requiring the licensee to purchase related raw materials, parts,
                              components or equipment from the licensor at prices exceeding
                              international market prices;

                    (ii)      restricting the export of products produced by the licensee utilising the
                              imported technology; and

                    (iii)     prohibiting the licensee from continuing to use the technology after
                              expiration of the term of the contract (typically, not more than ten (10)
                              years).

                    In practice, MOFCOM also imposed a cap on the royalty payable under a
                    technology license contract. The general practice was to limit such royalties to not
                    more than 5% of the licensee’s net sales, although additional royalties could
                    sometimes be obtained for separate famous trademark licenses.

                    On a more positive note, MOFCOM practice was less intrusive on items (i) and (ii)
                    above, so parties had more flexibility in practice to control inputs and sales
                    territories without interference by MOFCOM. On the other hand, MOFCOM
                    routinely imposed its separate judgment on a myriad of commercial terms in a
                    technology license contract, thereby requiring essentially a separate negotiation
                    with MOFCOM on many matters not clearly restricted by the applicable legislation.

          (d)       New Technology License Terms

                    Fortunately, China agreed as part of its WTO market access undertakings to
                    eliminate such intrusive approval practices as well as the license term limitations.
                    Unfortunately, under the new PRC Technology Import-Export Management
_____________________________________________________________________________________________________
Prepared by Lovells for instructional and reference purposes only, and should not be construed as legal advice. All rights
reserved. Last updated in July 2004. All content involving interpretation of the laws of the People's Republic of China reflects
the results of consultation with EastBright Law Firm.
此范本文书由路伟律师事务所起草,仅供教学与参考之用,不得解释为法律意见。所有权利保留。最后一次更新时间 2004 年 7
月。本文中所有涉及中国法律解释的内容均由东易律师事务所提供咨询。
中华全国律师协会                                                      13                                           路伟国际律师事务所
ACLA                                                                                                       Lovells


                    Regulations issued December 10, 2001 ("New Technology Regulations"), there
                    is still some room for interference by MOFCOM personnel.

                    The New Technology Regulations provide for classification of technology as
                    prohibited, restricted and permitted for import-export purposes. Prohibited
                    technology cannot be imported or exported; restricted technology can be imported
                    or exported only with approval and the issue of a license; and permitted
                    technology can be imported or exported without approval, but registration is
                    required. Since registration is necessary to support remittance of royalty
                    payments under the license, it is important to determine how local COFTEC
                    officials in the relevant local jurisdiction implement the New Technology
                    Regulations as a practical matter.

                    The New Technology Regulations do contain an important improvement over the
                    prior technology licensing regime in respect of the term of the license. Under the
                    New Technology Regulations, the term is no longer strictly limited to ten (10)
                    years and at the expiration of the license term the licensee no longer has the
                    automatic right to continue to use the licensed technology on a royalty-free basis.
                    This will permit evergreen license arrangements covering continuously updated
                    technology within the scope of the license and will avoid the need to license only a
                    current "snapshot" of the existing technology with all improvements thereto being
                    licensed under separate contracts subject to separate rolling ten (10)-year license
                    terms.

                    Under the New Technology Regulations, as under the prior licensing regime, the
                    technology import license contract is required to include basic warranties
                    regarding the rights of the licensee to the subject technology and the
                    completeness and ability of the technology to achieve the stated objectives, as
                    well as relatively standard IP indemnity provisions.

                    In addition, the technology license import contract is not to include any of the
                    following provisions (which represents some improvement in some, but not all
                    areas):

                    (i)       improper tie-in arrangements, including requiring the purchase by the
                              licensee of "unnecessary" technology, raw materials, products, equipment
                              or services;

                    (ii)      requiring the licensee to pay royalties or assume other obligations in
                              respect of expired or invalid patents;

                    (iii)     limiting the licensee's ability to make improvements or use such
                              improvements (and the intellectual property rights to such improvements
                              made by the licensee are to vest in the licensee);

                    (iv)      restricting the licensee's right to obtain other similar or competing
                              technology;

                    (v)       "unreasonably" restricting the source of the licensee's raw materials,
                              components, products or equipment;

                    (vi)      "unreasonably" restricting the licensee's production volumes, product
                              types or sales prices; or

_____________________________________________________________________________________________________
Prepared by Lovells for instructional and reference purposes only, and should not be construed as legal advice. All rights
reserved. Last updated in July 2004. All content involving interpretation of the laws of the People's Republic of China reflects
the results of consultation with EastBright Law Firm.
此范本文书由路伟律师事务所起草,仅供教学与参考之用,不得解释为法律意见。所有权利保留。最后一次更新时间 2004 年 7
月。本文中所有涉及中国法律解释的内容均由东易律师事务所提供咨询。
中华全国律师协会                                                      14                                           路伟国际律师事务所
ACLA                                                                                                       Lovells


                    (vii)     "unreasonably" limiting the export sales                         channels       of    products
                              manufactured using the licensed technology.

                    It remains to be seen how the above items will be implemented in practice by the
                    relevant local COFTEC officials.         Given the use of the qualifying terms
                    "unnecessary" and "unreasonably" in items (i), (v), (vi) and (vii) above, these
                    elements should be flexible enough that the current standard practice of deferring
                    to the commercial agreement of the parties will be continued. However, the
                    absence of qualifying terms in clauses (ii) and (iii) creates some uncertainty as to
                    the position that will be taken as a practical matter by local COFTEC officials if the
                    parties agree to terms inconsistent with these requirements. It is also possible
                    that local COFTEC will be more intrusive in the approval context and less intrusive
                    in the registration context, but this remains to be seen.

                    [For an example of a cross-border license agreement incorporating relevant terms
                    addressing the above issues and other local practice matters in China, please see
                    the template Technology Licensing Contract.]

4.2       Distributors and Value-Added Resellers

          (a)       "Buy Local" Trend

                    As discussed, the procedures for conversion of RMB, purchase and remittance of
                    foreign exchange can be cumbersome. This is particularly true for cross-border
                    service contracts. Consequently, many China-based customers, including FIEs,
                    prefer to “buy local” whenever possible in order to pay for goods and services in
                    RMB. In addition, with the continuing crack-down on smuggling, some purchasers
                    of imported goods have also opted to “buy local” to avoid direct participation in the
                    import process. Because of the time and expense required to set up an FIE to
                    supply the goods or services on a domestic sale basis, many foreign companies
                    have instead opted to appoint domestic distributors or sub-contractors.

          (b)       Trading and Distribution Requirements

                    The selection of a local distributor in China requires a 2-step analysis of import
                    rights and distribution rights. Both import-export trading rights and wholesale and
                    retail distribution rights have been tightly controlled in China.

                    Under long-standing pre-WTO policy in China, most domestic Chinese companies
                    do not have direct import rights and so must purchase imported goods through a
                    licensed trading company under a 3-party contract. FIEs, on the other hand, have
                    import-export rights but these rights are primarily with respect to the purchase of
                    components for their own use and the sale of their own products.

                    Controls over trading (import-export) rights have now been gradually relaxed over
                    a post-WTO phase-in period. Instead of a handful of monolithic state corporations
                    there are now several thousand domestic companies to choose from. All FIEs,
                    which currently enjoy import rights, were granted export rights for third-party
                    products sourced in China, commencing at the end of 2003. All domestic
                    enterprises will be granted full direct import and export rights by the end of 2004.
                    So the prior trading restrictions will soon be eliminated completely.

                    However, trading rights are not the same as distribution rights. A party may
                    import goods for its own use but not be licensed to distribute such imported
_____________________________________________________________________________________________________
Prepared by Lovells for instructional and reference purposes only, and should not be construed as legal advice. All rights
reserved. Last updated in July 2004. All content involving interpretation of the laws of the People's Republic of China reflects
the results of consultation with EastBright Law Firm.
此范本文书由路伟律师事务所起草,仅供教学与参考之用,不得解释为法律意见。所有权利保留。最后一次更新时间 2004 年 7
月。本文中所有涉及中国法律解释的内容均由东易律师事务所提供咨询。
中华全国律师协会                                                      15                                           路伟国际律师事务所
ACLA                                                                                                       Lovells


                    products in China. Pre-WTO not all domestic companies and only a handful of trial
                    trading FIEs were granted the right to distribute third party products on a buy-sell
                    basis.

                    Moreover, prior to WTO, foreign investment in distribution enterprises was limited
                    to the handful of trial trading FIEs. This will change as a result of China's WTO
                    market-access commitments, which provided that minority foreign-owned joint
                    ventures were permitted to engage in distribution services starting from the end of
                    2002, majority foreign-owned distribution joint ventures were so permitted starting
                    at the end of 2003, and distribution WFOEs will be so permitted by the end of
                    2004.

                    [For an example of a cross-border distribution agreement for use in China, please
                    see the template Distribution Contract.]

          (c)       Value-Added Resellers

                    If a manufacturing FIE does not obtain distribution rights, a separate distribution
                    FIE may be set up. However, as an alternative a manufacturing FIE may be
                    engaged as value-added reseller since the resulting product may be considered to
                    have been “made” by the FIE. The PRC government has yet to establish or
                    enforce clear guidelines as to minimum value-added input criteria. For domestic
                    companies it will still be necessary to confirm that the proposed distribution activity
                    falls within its approved business scope as stated in its business license, although
                    a domestic company with relevant manufacturing rights or a systems integration
                    scope of business can also be engaged as a value-added reseller as described
                    above.

          (d)       Security of Payment

                    Another critical aspect in selecting a distributor will be security of payment. The
                    common practice is to require the distributor (or import-export company, as the
                    case may be) to open a letter of credit drawable upon presentation of shipment
                    documents. However, not all qualified distributors will have the financial capability
                    to open a letter of credit. Even when they do, in some cases they may still insist
                    on cross-border payment terms that match the domestic payment terms received
                    from the local purchaser. This is an important issue that should be managed
                    carefully.

5.        EXIT STRATEGIES

5.1       Sale of Equity Interest

          The most efficient way to exit from an investment in a China FIE is to transfer the equity
          interest to an existing partner or a third party. As noted above, transfer of the direct equity
          interest in an FIE requires partner consents and waivers of pre-emptive rights (not
          applicable in the case of a WFOE), unanimous FIE board approvals and local COFTEC
          (or MOFCOM) approvals. Sale of an indirect interest in an FIE via sale of shares in an
          off-shore SPV can be simpler but, as discussed above, will still require tacit approval and
          collation of remaining partners as a practical matter.

          Gains on the sale of equity interests in an FIE are taxable under PRC law at a rate of
          20%, or at a rate of 10% pursuant to certain double taxation treaties entered into between
          China's and foreign governments. If the equity interest of a foreign investor is purchased
_____________________________________________________________________________________________________
Prepared by Lovells for instructional and reference purposes only, and should not be construed as legal advice. All rights
reserved. Last updated in July 2004. All content involving interpretation of the laws of the People's Republic of China reflects
the results of consultation with EastBright Law Firm.
此范本文书由路伟律师事务所起草,仅供教学与参考之用,不得解释为法律意见。所有权利保留。最后一次更新时间 2004 年 7
月。本文中所有涉及中国法律解释的内容均由东易律师事务所提供咨询。
中华全国律师协会                                                      16                                           路伟国际律师事务所
ACLA                                                                                                       Lovells


          by a domestic party, including an existing Chinese partner, then the Chinese purchaser
          will be required to withhold such tax from the purchase price remitted and present other
          COFTEC and SAFE approval documents to the remitting bank to support the forex
          remittance.

          If the purchase of a foreign investor's equity interest by a domestic party results in the
          level of foreign equity interests being reduced below 25% of the total equity, then the FIE
          will no longer be entitled to preferential tax and forex treatment. If, as a result of such
          transfer, no foreign investment remains, then the FIE will have to be converted into and
          reregistered as a purely domestic company. In some local jurisdictions in China, the FIE
          must be liquidated and the assets acquired by the surviving domestic party, but in other
          localities, the transfer and remittance of the purchase price can be approved and
          completed as a first step and the conversion can take place post-exit.

5.2       Termination and Liquidation

          Events permitting termination of an FIE are generally left to the negotiation of the parties
          and are set out in the FIE's AA (and, in the case of an EJV and CJV, the joint venture
          contract). However, termination of an FIE also typically requires an unanimous FIE board
          resolution (some exceptions apply), so termination of an EJV and CJV still requires
          consensus action as a practical matter (the parties can be put under obligation to cause
          their appointed directors to approve such a resolution in agreed circumstances, but
          parties can instruct their directors to breach such obligations, delaying the process).
          Typical termination events include: breach of joint venture contract or ancillary contract,
          insolvency of a party or of the joint venture company, regulatory changes by PRC
          government authorities or force majeure with adverse effect on the joint venture's
          business, inability to access forex jeopardizing operations, operating losses exceeding
          defined ceilings etc.

          Termination is followed by liquidation and dissolution of the FIE. Under the FIE
          Liquidation Procedures liquidation can be standard or special. In the standard liquidation,
          the board of directors unanimously appoints a liquidation committee which follows the
          procedures in the FIE Liquidation Procedures and in the FIE's constitutional documents
          (joint venture contract and/or AA). A creditor's meeting is not required. Special liquidation
          usually applies in situations where the board members of the FIE, typically a joint venture,
          disagree on dissolution and thus liquidation can only be triggered by an application to the
          original approval authority. In case of such a special liquidation, the procedures are taken
          out of the hands of the joint venture parties. The approval authority will appoint a
          liquidation committee which exercises the powers of the board of directors and reports
          directly to the approval authority. Also a creditor's meeting will be required. After
          liquidation is complete, the FIE is to complete dissolution by filing a liquidation report,
          approved by the board of directors, with the approval authority. Within ten (10) days of
          filing the liquidation report the liquidation committee has to complete FIE de-registration
          procedures with the tax and customs authorities, and within a further ten (10) days, with
          the Administration for Industry and Commerce. Finally a public announcement of de-
          registration has to be made in a national and local newspaper.

          Termination, liquidation and dissolution can be very time consuming and expensive, and
          may not realise the best value for investors. Accordingly many FIE investors prefer to
          negotiate a buy-out by one of the parties in order to avoid having to go down that
          particular road.


_____________________________________________________________________________________________________
Prepared by Lovells for instructional and reference purposes only, and should not be construed as legal advice. All rights
reserved. Last updated in July 2004. All content involving interpretation of the laws of the People's Republic of China reflects
the results of consultation with EastBright Law Firm.
此范本文书由路伟律师事务所起草,仅供教学与参考之用,不得解释为法律意见。所有权利保留。最后一次更新时间 2004 年 7
月。本文中所有涉及中国法律解释的内容均由东易律师事务所提供咨询。
中华全国律师协会                                                      17                                           路伟国际律师事务所
ACLA                                                                                                       Lovells


          [For sample termination and liquidation procedural clauses, please see the relevant
          clauses of the template Joint Venture Contract.]

6.        CONCLUSION

          This overview is intended to provide only a summary of certain aspects of common
          investment vehicles and transaction structures in the People's Republic of China. The
          information contained in this publication should not be relied on as legal advice or
          regarded as a substitute for detailed advice in individual cases.

                                                                - end -




_____________________________________________________________________________________________________
Prepared by Lovells for instructional and reference purposes only, and should not be construed as legal advice. All rights
reserved. Last updated in July 2004. All content involving interpretation of the laws of the People's Republic of China reflects
the results of consultation with EastBright Law Firm.
此范本文书由路伟律师事务所起草,仅供教学与参考之用,不得解释为法律意见。所有权利保留。最后一次更新时间 2004 年 7
月。本文中所有涉及中国法律解释的内容均由东易律师事务所提供咨询。
中华全国律师协会                                                      18                                           路伟国际律师事务所
ACLA                                                                                                       Lovells


                                                       ADDENDUM
                                                      OCTOBER 2004


1.        INTRODUCTION

          The National Development and Reform Commission ("NDRC") promulgated the Interim
          Foreign Investment Project Ratification Administrative Procedures with effect from 9
          October 2004 (the "Project Ratification Procedures"). These provide the detailed
          implementing rules for the State Council Decision on the Reform of the Investment
          System issued on 25 July 2004.

2.        NEW RATIFICATION THRESHOLDS FOR FOREIGN INVESTMENT PROJECTS

          The Project Ratification Procedures provide that based on the Catalogue, foreign
          investment projects with a total investment (or increases in capital to existing projects) will
          be dealt with as set out below:

          (a)       projects with a total investment of US$100 million or more in the "encouraged" or
                    "permitted" categories, or US$50 million or more in the "restricted" category, must
                    be reported to NDRC for ratification: applications for projects in the "encouraged"
                    or "permitted" categories, where the total investment amount is US$500 million or
                    above, or in the "restricted" category where the total investment is US$100 million
                    or above, will, after the NDRC has examined and verified the application, be
                    submitted to the State Council for final verification.

          (b)       "encouraged" or "permitted" category projects, where the total investment is
                    below US$100 million and "restricted" category projects, where the total
                    investment is below US$50 million must be ratified by the local NDRC; of these,
                    "restricted" category projects must be ratified by provincial-level NDRC, and this
                    ratification right cannot be delegated down to lower level bodies.

          The Project Ratification Procedures also set out the contents of the project application to
          be submitted to NDRC. This resembles the information typically contained in a
          Memorandum of Understanding ("MOU"), such as scale of project, place and main types
          of construction, requirements in terms of land, water and energy, total investment
          amount, registered capital, respective equity interests of the parties and types of
          contributions, financing methods, need to import equipment, an environmental impact
          assessment, number of people employed, products produced and main technology
          deployed.

3.        DOCUMENTARY REQUIREMENTS FOR NDRC RATIFICATION

          The Project Ratification Procedures also list the documents to be attached to the
          application for project ratification, namely:

          •     Business licences / registration certificates and audited accounts for both parties;

          •     LOI / MOU, resolution of Board of Directors for approving increases in capital or
                merger or acquisition;

          •     Bank finance letter of intent;



_____________________________________________________________________________________________________
Prepared by Lovells for instructional and reference purposes only, and should not be construed as legal advice. All rights
reserved. Last updated in July 2004. All content involving interpretation of the laws of the People's Republic of China reflects
the results of consultation with EastBright Law Firm.
此范本文书由路伟律师事务所起草,仅供教学与参考之用,不得解释为法律意见。所有权利保留。最后一次更新时间 2004 年 7
月。本文中所有涉及中国法律解释的内容均由东易律师事务所提供咨询。
中华全国律师协会                                                      19                                           路伟国际律师事务所
ACLA                                                                                                       Lovells


          •     Provincial or national level Environmental Protection Authorities opinion on the
                environmental impact;

          •     Provincial level planning departments site selection opinion;

          •     Provincial level or national level Land Resources Authorities project land use pre-
                approval opinion; and

          •     Where State owned assets or land use rights are being contributed as capital
                contributions, the confirmation letter from the relevant departments.

4.        TIMING

          Perhaps the most significant aspect of the Project Ratification Procedures is that they pin
          NDRC down to a specific timetable in terms of ratification, in line with the principles
          elaborated in the PRC Administrative Licensing Law:

          (a)       Where a foreign investment project is required to be verified by national level
                    NDRC or the State Council, the application is submitted to local NDRC for initial
                    verification and examination before being forwarded to the national level NDRC.

          (b)       Where national level NDRC needs to seek opinions from industry regulators from
                    departments under the State Council, these departments must provide a written
                    opinion to NDRC within 7 working days.

          (c)       NDRC must instruct consultants within 5 working days of accepting an application
                    to carry out assessment and proof of key issues, and to report back to NDRC
                    within the stipulated time frame.

          (d)       NDRC must either complete its ratification of the project application within 20
                    working days of acceptance of such application, or hand over its verification
                    opinion to the State Council within the same period, but if the verification cannot
                    be completed within that period, a 10 working day extension may be granted with
                    the approval of the responsible person at NDRC and the applicant must be told of
                    the reason for the extension. This time limit does not include the time taken by the
                    consultants.

          (e)       If the application is rejected, the NDRC must issue a written decision and notify
                    the applicant giving the reasons and notifying the applicant of its rights to apply
                    for an administrative review or bring administrative proceedings.

          This establishes a basic 30 day window for NDRC to ratify or reject a foreign investment
          project, which is a great improvement on the previous open-ended timing for approval,
          and means foreign investors can now plan their business establishment in China based
          on a pre-determined statutory timetable.

5.        CRITERIA FOR APPROVAL

          In a move towards greater transparency, the Project Ratification Procedures set out the
          criteria on which NDRC is to judge whether to grant ratification. These range from the
          very concrete (conformity with the Catalogue, Chinese laws and regulations) to the very
          broad-brush and abstract (conformity with public interest and the national people's
          livelihood and medium to long term social development). Interestingly, conformity with


_____________________________________________________________________________________________________
Prepared by Lovells for instructional and reference purposes only, and should not be construed as legal advice. All rights
reserved. Last updated in July 2004. All content involving interpretation of the laws of the People's Republic of China reflects
the results of consultation with EastBright Law Firm.
此范本文书由路伟律师事务所起草,仅供教学与参考之用,不得解释为法律意见。所有权利保留。最后一次更新时间 2004 年 7
月。本文中所有涉及中国法律解释的内容均由东易律师事务所提供咨询。
中华全国律师协会                                                      20                                           路伟国际律师事务所
ACLA                                                                                                       Lovells


          State anti-monopoly regulations is a specific ratification criterion, presumably a reference
          to the forthcoming PRC Anti-Monopoly Law.

6.        STATUS OF THE VERIFICATION

          The NDRC verification document forms the basis for the applicant to carry out procedures
          to obtain land use rights, establish (or change the particulars of) the FIE, import
          equipment and for the application of tax policies (amongst others). The verification
          document will have a validity period, during which all the relevant procedures should be
          completed. If not, an extension must be obtained. Departments such as the State
          Administration of Industry and Commerce, Customs, Tax Bureau, and State
          Administration of Foreign Exchange are instructed not to carry out "relevant procedures"
          for projects where verification has not been obtained.

          The verification can be rescinded where the project applicant provides fake documents or
          breaks up the project into smaller pieces to get below an approval threshold.

7.        Changes to Projects Requiring Re-ratification

          Certain major changes to projects require a project to be re-ratified under the Project
          Ratification Procedures, including:

          •    change of construction location

          •    change of shareholder/equity interests proportions

          •    change of 20% or more in total investment amount as compared to that previously
               ratified

          The procedure for re-ratification follows the main application procedures.



                                                                - end -




_____________________________________________________________________________________________________
Prepared by Lovells for instructional and reference purposes only, and should not be construed as legal advice. All rights
reserved. Last updated in July 2004. All content involving interpretation of the laws of the People's Republic of China reflects
the results of consultation with EastBright Law Firm.
此范本文书由路伟律师事务所起草,仅供教学与参考之用,不得解释为法律意见。所有权利保留。最后一次更新时间 2004 年 7
月。本文中所有涉及中国法律解释的内容均由东易律师事务所提供咨询。

				
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