MAALOUF LAW FIRM, LLC www.maalouf.us Spring 2006 INTERNATIONAL TRADE WITH CHINA - RECENT DEVELOPMENTS I. Administration of Foreign Exchange enterprise, the share/equity structure of the for Domestic Residents Engaging in overseas SPC, and the overseas financing Financing and Inbound Investment Via arrangements. Where a domestic resident Overseas Special Purpose Companies contributes assets or share/equity rights of a domestic enterprise in an SPC, or The State Administration of Foreign engages in financing abroad after Exchange promulgated its “Notice on contributing assets or share/equity rights in Relevant Issues Concerning Foreign an SPC, the resident must complete the Exchange Administration for Domestic procedures for modification of the foreign Residents to Engage in Financing and exchange registration of overseas Inbound Investment via Overseas Special investments. Purpose Companies” on October 21, 2005, which became effective from November 1, After an SPC secures overseas financing, 2005. the domestic resident should transfer the funds into China in accordance with the Pursuant to the Notice, the term "Return letter of commercial plans or the Investment" refers to all direct investment prospectus. Where a SPC uses the funds activities carried out within China by a raised overseas for return investment or domestic resident via an overseas special provides a domestic enterprise with a purpose company (an "SPC"). More shareholder’s loans or other debt funds, specifically, Return Investment is defined the relevant domestic enterprise must as an overseas enterprise directly complete the applicable foreign exchange established or indirectly controlled by a administration procedures in accordance domestic resident legal person or domestic with the presently applicable laws and resident natural person for the purpose of regulations for administration of foreign engaging in financing abroad with the debts and foreign exchange. enterprise assets or interests held inside China. A domestic resident must submit a Provided that the necessary foreign number of documents to the local foreign exchange procedures for the domestic exchange office to apply for foreign resident and the domestic exchange registration of overseas enterprise have been completed, the investments. The documents include a profits, dividends, liquidation expenses, written application stating in detail the stock right assignment expenses, capital basic information of the domestic decrease expenses etc of the domestic MAALOUF LAW FIRM, LLC enterprise can be remitted to the SPC. investment. The re-investment shall not Where a SPC affects a major capital enjoy the preferential tax treatment on modification event such as a capital return of the tax provided by Article 80 of increase or decrease, stock right Rules for the Implementation of the assignment or exchange, merger or Income Tax Law of the People’s Republic division, investment with long-term stock of China for Enterprises with Foreign rights or credits, provision of guaranty to a Investment. foreign party, etc., and is not involved in return investment, the domestic resident However, the Notice does provides for an shall, within 30 days of the major event, exception to this rule. If a foreign investor apply to the foreign exchange office to consigns the shares from (i) a foreign complete the procedure for modification or investment which is directly or indirectly archival filing of the foreign exchange owned by him or the whole share is owned registration of the overseas investments. by one person; or (ii) if the consignment is Where, before the Notice came into force, made at a cost price of the shares, then if a domestic resident had established the foreign investor re-invests with the or controlled an overseas SPC and has profit allotted before the consignment of already implemented a return investment shares, he may enjoy the preferential project, but has not yet completed the return of tax treatment as provided by foreign exchange registration of overseas relevant provisions. investments, it must complete the registration with the local foreign exchange office by March 31, 2006. III. Letter of Credit Disputes – Recent Regulations of the Supreme People’s II. Notice of the Ministry of Court of China. Administration of Tax on Relevant Issues of the Return of Enterprise On November 14, 2005, the Supreme Income Tax. People’s Court of China (“SPC”) promulgated the “Regulations of the The Ministry of Administration of Tax Supreme People’s Court on Relevant promulgated “Notice of the Ministry of Issues on Trying Cases of Letter of Credit Administration of Tax on Relevant Issues Disputes”, (“LC Regulations”) which of the Return of Enterprise Income Tax” came into force on January 1, 2006. on November 17, 2005, which became According to this new ruling, the SPC will effectively immediately. now try cases involving letters of credit disputes in accordance with Uniform This Notice has no retroactive effect on Customs and Practice for Documentary cases where the taxpayer enjoyed earlier Credits (“UCPDC”). preferential tax treatment. The Notice states specifically that in the event a This new regulation significantly amends foreign investor acquires shares of an the authority entrusted to banks by enterprise by means of consignment, then allowing them to examine letters of credit subsequent to said consignment of shares, independently, and consequently decide on the foreign investors shall re-invest in whether to accept discrepancies under the China all profits gained from any such LC, regardless of whether the LC has been MAALOUF LAW FIRM, LLC accepted or rejected. The LC Regulations 2005, which came into effect on March 1, also deal specifically with the issue of 2006. fraud in letter of credit transactions. It enumerates four separate types of fraud in A venture capital investment enterprise LC transactions, and specifies that, in may take the form of a limited liability these types of cases, all entities which company, a company limited by shares or have an interest in the letter of credit, other form of legal enterprise. The venture including the issuing bank, will now have capital investment enterprise may also the right to apply to the courts for specify its term of existence, which shall injunctions on payment instructions. not be shorter than seven years. The Additionally, such entities, so long as they venture capital investment enterprise shall meet certain enumerated conditions, may report to the relevant supervisory apply for injunctions prior to the authorities at all important events during commencement of any such action. the investment operation, such as the amendment of the articles of association The SPC now has the authority to and other important legal documents, terminate or suspend payment based upon increasing or decreasing its capital, the applications in most circumstances division and merger, the change of senior when the issuing banks, the confirming officials or investment management banks and the negotiating banks have all agency, and its liquidation and made bona fide payment. According to the termination. new ruling, the SPC shall make a decision within 48 hours after the receipt of the A venture capital investment enterprise application, and any suspension order shall established in the form of a company may take immediate effect. appoint another venture capital investment enterprise or venture capital management The LC Regulations also deal with consulting enterprise to manage its liabilities of the guarantors. Specifically, investment business. The amount invested the guarantors shall not be exempt from by a venture capital investment enterprise their liabilities solely by reason that the into a single enterprise shall not exceed 20 issuing bank has accepted the discrepancy percent of the total assets of the venture without prior approval. However, if the capital investment enterprise. Furthermore, issuing banks amend the letter of credit it may only invest in unlisted enterprises. without the approval of the guarantors, the guarantors shall only be liable within the However, if an unlisted enterprise scope of the previous guarantee. subsequently lists on a stock exchange, the venture capital investment enterprise need not immediately dispose of its interest in IV. Venture Capital Investment that enterprise. A venture capital Enterprises investment enterprise must not engage in banking operations (the making of loans) The National Development and Reform or in real estate transactions except for its Commission passed the Interim Measures own use. The Provisions Concerning the for the Administration of Venture Capital Administration of Foreign-funded Venture Investment Enterprises on November 15, Capital Investment Enterprises also MAALOUF LAW FIRM, LLC applies to foreign-funded venture capital The bank may contract some electronic investment enterprises. A legally payment businesses out to lawful established foreign-funded venture capital professional service suppliers, however, the obligations of the bank to its customer investment enterprise is entitled to the and the corresponding duties shall not be benefit of the preferential policies under transferred as a result of the outsourcing. the Measures if its investment operations The disposal of information on RMB are in line with the relevant Measures. electronic payment businesses and the settlement of funds incurred within the territory of China must be completed V. Electronic Payment within the territory of China. The People's Bank of China promulgated its Guidelines for Electronic Payment on October 26, 2005, which apply to the The Maalouf Law Firm represents U.S. electronic payment business of domestic companies engaging in business in China, banking financial institutions. Electronic as well as Chinese entities doing business payments are classified into on-line in the U.S. payments, telephone payments, mobile payments, sales terminal transactions, We counsel clients on a variety of matters ATM transactions and other electronic including corporate entity structure, tax payments. treaties, joint venture and partnership agreements, and government regulatory When conducting an electronic payment matters. transaction, the client needs to open a bank account in the relevant bank. The opening If you have any questions or would like and use of the account should comply with assistance regarding the matters the Measures on Administration of discussed in this memorandum, please Renminbi Bank Balance Accounts and the contact the following: Regulation on Administration of Domestic Foreign Exchange Accounts. John J. Maalouf, Esq. or For an individual client, the amount per Cindy Liu, Esq. transaction shall not exceed RMB 1,000 MAALOUF LAW FIRM, LLC and the daily aggregate amount shall not 500 FIFTH AVENUE – 14TH FL. exceed RMB 5,000. The limit can be NEW YORK, NEW YORK 10110 exempted through a digital certificate, Tel: 212.789.8717 electronic signature and other security Fax: 212.789.8718 certification methods. The bank must firstname.lastname@example.org insure the security of the processing system of electronic payments and keep www.maalouf.us the authentication data like passwords and secret keys secure.