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Chinese Commercial Law Practice Q&A

What is the position of China in the Global Economy?  

Answer: China has a population of 1.38 billion, a territory almost as big as whole Europe and has enormous production and consumption potential as a developing country.  Starting from 2010, Chinese Gross Domestic Product exceled Japan, and China became the world’s second largest economy only after the United States.  In 2016, China contributed 33.2% of growth to the World economy. Furthermore, according to the Trade and Development meeting at the United Nations, during the period from 2010 to 2015, the weight of Chinese goods exported in the world increased from 10.3% to 13.7%, and importation increased from 9.1% to 10.1%.  Meanwhile, the amount of Chinese exportation in the world increased from 3.9% to 5.9%, and importation raised from 4.8% to 9.9%.  

 

What is the China New Zealand Free Trade Agreement?

Answer: The China–New Zealand Free Trade Agreement is a bilateral free trade agreement signed in April 2008. It is the first free trade agreement that China has signed with any developed country, and New Zealand's largest trade deal since the 1983 Agreement with Australia. According to the Agreement, all tariffs for Chinese exports to New Zealand will be eliminated by 2016, and 96 per cent of New Zealand exports to China will be tariff free by 2019.  Since 2008, trade between China and New Zealand grew by 15% each year.  China has been the biggest goods trade partner and the biggest export market for 3 consecutive years. In 2016, New Zealand exported to China 9.2 billion dollars’ worth of goods and 3 billion worth of services which is 4 and 3 times more than the exports New Zealand did in 2007 before the FTA.  

 

What is the Government Structure in China?

Answer: Though China has a different government system to western countries like New Zealand, its government consists of a parliament, judiciary and executive.  The National People’s Congress as the parliament, has the role of creating and amending laws by passing legislation. For example the 1999 Contract Law, 1993 Anti Unfair Competition Law, 1982 Trade Mark Law and its amendments and other intellectual property protection laws.  The Local People’s Congress under the Law of Legislation, has the power to create and amend local legislation. The Judiciary comprises the courts and arbitration committees, public security units and procuratorial authorities.  Courts and arbitration committees hear cases to resolve disputes. The Supreme Court plays a part in determining legislation as it has the power to issue Interpretations of Law.  The Public Security Unit manages the daily security administration and most criminal investigations. Procuratorial authorities partly manage criminal investigations, review and filing of public charges. The State Council and local governments at all levels manage business operations, including business registration, tax collection, environmental supervision, financial regulation, etc.

 

How different industries are distributed across China?

Answer: China commenced a reform and open policy in 1978 and joined WTO in December 2001. Step by step, China has formed a strong production capacity and a comprehensive industrial chain and is recognized as “The World factory”.  In general, the south-east coastal area has strong light industries (like plastics articles, toys) and the north-east area (Liaoning, Jilin and Heilongjiang provinces) and middle China have well developed heavy industries.  The distribution of industries are:  

Electrics and information industry has developed well in the Pearl River Delta (RRD) area (main part of Guangdong province), Yangtze River Delta (YRD) area with its centre being Shanghai city, Bohai Gulf area, West China with its centre being Sichuan and Shanxi provinces;

 Media and film industries are strong in Beijing, Shanghai and Guangzhou. They are3 super cities with each having a population of more than 14 million.  

Textile and Garment industries are mainly distributed in Zhejiang, Jiangsu, Fujian, Guang Dong and Shandong provinces,

 Household electrical appliances are (including lighting sign) in PRD, YRD, north-east area, Beijing-Tianjin area and the middle China area,

Mechanical industry in north-east, Shanxi, Hunan, Hubei provinces,

 Furniture and wood processing industries in Zhejiang, Fujian, Guangdong provinces,

Culture-education and sports articles in Zhejiang, Fujian, Guangdong and Hubei provinces.

 

What options are there to do business with China?

Answer: If you have chosen a business partner, you may deal with them directly, such as exporting directly to China or purchasing goods from a Chinese supplier. The structure of the company shareholding, profit sharing and nature of the company determines what kind of entity it will be, whether it be: a wholly-owned-foreign enterprise (hereafter refer to WOFE); a joint-venture enterprise (hereafter refer to JV); or, a cooperative enterprise with your Chinese partner (hereafter refer to CE). Or, you may purchase whole or part of shares of an existing Chinese company.   You may also set up a representative office (hereafter refer to RO) to handle sourcing, contacting and, quality control issues. Please note that the Representative Office cannot engage in direct purchase or sales activities.  

 

Is there any restriction when you invest in China?

Answer: Yes. China is a developing country. To realize a step by step reform and opening, the Chinese government published the “Catalogue for the Guidance of Foreign Investment Industries” in 1995 and since then it has been amended 6 times with the last amendment in 2015.  In February 2017, the Chinese government completed a new addition which less restricts foreign investment from 93 items to 62 items and the latest 2017 amendment shall be published very soon.  The Catelogue outlines 3 types of foreign investment. These include: encouraged type ( encouraged industries for foreign investment such as food, agriculture, wood processing, etc.); restricted type (with the condition of majority or certain minimum percentage shares held by  a Chinese shareholder, like rare mining production, power supply, banking etc.); forbidden type (no foreign investment is allowed, like postal service, weapon production etc.). The industries not mentioned in the Catelogue are all allowed for foreign investments.  

 

What is the tax burden for different types of businesses in China?

Answer: If you are considering setting up a business in China, you should consider tax burdens. A RO's tax is based on the expense it incurs in business operations that is remitted by its parent company. Considering all other additional items, the comprehensive tax rate of ROs is based on aforesaid expenses is around 12-15%. For JVs, WOFEs, CEs and the company that has been purchased, the main tax items are Value-added Tax, Business Tax, Consumption Tax and Income Tax. Value-added Tax is a circulation tax that shall be collected when a service is provided or goods are sold. The bearer of Value-added Tax is the seller who can offset its tax amount payable by input VAT tax when it make purchases. According to experienced accounting personnel’s analysis, the comprehensive tax burden rate of Value-added Tax is around 3% based on sales revenue. Business tax normally applies to the turnover of service provided or the turnover of sales of immovable properties, or of intangible assets, at a fixed rate varying from 3-5%. Income tax is collected based on total net profit and rate of 25% applies to most of Chinese companies. For detailed tax advice you should consult an accounting firm.  

 

What documentation is needed to establish a Chinese company?

Answer:  Oversea companies or individuals are all qualified as a shareholder to set up a new company in China. You need to provide your business license or other legitimacy documentation to prove your company as an investor exists legally. Or you put yourself as an individual shareholder, you need to provide your passport. Please note that your passport and business license need attestation by a Chinese Embassy or Consulate where you or your company is located. Documentations or information needed are: credibility letter issued by a bank (shows the balance is adequate for the new Chinese company’s registered capital), office leasing agreement (prove that you have lawful business operation location) and new company and investor’s other information (name, director, supervisor, general manager, legal representative, etc.)

 

What Customs Service issues in China does a New Zealand Exporter to China need to know?

Answer: New Zealand and China has a Free Trade Agreement.  New Zealand exporters need to know:

Data integrity is the key to successful interaction at the Chinese border and this will save a lot of time for Custom Clearance in China (China Customs has agreed to release New Zealand origin goods within 48 hours of arrival in normal circumstances). Any non-conformance may result in delay or even denial of FTA tariff preference.

Contact your local Chamber of Commerce to discuss Certificates of Origin. Certificates of origin must be in the required format and are only available from organisations that have been designated by the New Zealand Customs Service as certifying bodies for the FTA.  

Another suggestion is to ask your importer or agent in China to confirm if origin documents are required for CIQ purposes, as some Chinese ports have different requirements for different products, such as wine. If origin documents are required for CIQ purposes, one option is to present a non-preferential Certificate of Origin, which can also be obtained from authorised bodies.

 

What are the key issues when doing business with a Chinese business partner?

Answer: It is key to choose a good business partner when you are buying from or selling to China.  We have seen many cases where companies chose a Chinese company who was dishonest, or had a poor production capacity, or was in a poor financial situation. The company often engaged with the Chinese company because they did not exercise careful consideration. For example, they were attracted by a cheap price and then had a lot of problems regarding quality of goods, or timing of deliveries, or could not receive payment for delivery.  Therefore, they had to engage with lawyers to assist in sending a legal notice, negotiate damages, and even had to file a lawsuit with Court which meant that they then had to wait for the judgement and enforcement.  It not only wasted significant time and money, but also broke their promises to their customers.  So it is very important to choose the right Chinese business partner and therefore a Due Diligence investigation into your proposed business partner is indispensable.

 

How to verify your Chinese business partner?

Answer:  You company may have had preliminary contact and communication, and hope to have further cooperation. To verify its reliability of this potential business partner, key issues is to commence a prudent Due Diligence investigation.  We have 3 ways to implement a Due Diligence investigation: The first is registration information investigation. We search the company’s registration information including shareholders, registered capital, address, business scope, etc, through Chinese Governmental websites.  We search judicial authority’s website and judgements database for the company’s involvement of any lawsuits, pending enforcements.  We search intellectual property websites for information of trademark, patent, copyright, of the potential business partner.  We also search property information, through real property (like land) or chattel authorities.  The second is on-site investigation. Through our associated law firm in China, we arrange Chinese lawyers to visit the company on site.  We investigate thoroughly the company’s qualification, production capacity and management, by factory tour, management member interview, verifying papers (business license, entity code certificate, tax certificate, production license, 3 C certificate and CE certificate, articles of association, company chop card, staff contract, and equity incentive papers). The third one is to obtain detective report who is cooperating with us, to have a report of this potential business partner with overall information including financial figures.

 

How to sign a Non-Disclosure-Agreement (NDA) with a Chinese company?

Answer:  Many companies from common law countries such as New Zealand companies usually sign a Non-Disclosure-Agreement (NDA) to protect their trade secrets, before they enter into formal negotiation with his potential business partners. However, sometimes the NDA does not protect New Zealand companies in China. Why? There are several reasons. Firstly, sometimes the New Zealand company states a New Zealand jurisdiction in their agreement because they thought it was the best protection for them. But because of Judicial Sovereignty, a judgement issued by a New Zealand Court is not enforceable in China. That is to say, even if the New Zealand judgement orders the Chinese company to make a payment of 10 million NZ dollars to the New Zealand Company, the judgement still cannot be implemented in China and the New Zealand Company has to file another litigation suit in China.  This is extremely costly for the New Zealand Company, not only in terms of money but also time.  Secondly, if the NDA does not include an appendix specifying the trade secrets then a Chinese Court cannot find an infringement and determination of damage. Thirdly, if the most advantageous country’s law application is not stipulated in the application of law clause, this will result in a low damage determination.  Chinese law allows parties in international trade to stipulate an applicable law that is substantially linked to the issue in their agreement, while the jurisdiction remains a Court in China. Fourthly, implementation of the agreement may lack routine supervision.  Many overseas companies believe that the Agreement shall be observed since the Chinese company signed it. However, many Chinese companies will secretly use your trade secrets by changing company (for example, the brother in law opens a new company). Thus a routine close monitoring and market supervision are important measures to prevent the fraud.  

 

What types of intellectual property are protected by Intellectual property laws in China?

Answer:  China amended its legislation and has taken the responsibility of intellectual property protection, after having joined the World Trade Organization and signed the “Agreement on Trade-Related Aspects of Intellectual Property Right“(TRIPS).  Under the current Chinese intellectual law framework, intellectual property rights that can be protected in China are as following: Trademark right, patent right,  copy right and its neighbouring right, trade secret right, layout-designs of integrated circuits right, new varieties of plants and part of anti-unfair-competition right related to intellectual property.  Please note that, even you have an oversea country’s registration on your intellectual property, you may not be protected by Chinese law.  Therefore the best and quickest way is to apply Chinese intellectual property registration.

 

How to protect your intellectual property before you enter into China market?

Answer:  There is an old saying in China that food and fodder should go ahead of troops and horses which applies to overseas companies who wish to enter into Chinese market. Their intellectual properties are food and fodder.  In the past, we saw many of these types of cases of patent pre-emption by Chinese business partners, or wrongly usage of a prior registered Chinese trademark, or being unable to handle massive infringement and counterfeiting.  An intellectual property protection strategy must be established before you enter China market and the strategy includes: First, investigation. Take trademark as sample, you may engage us to help you to search the trademark you are using to make sure there is no p.

rior registered same or similar trademark; Second, registration.  Before you enter into Chinese market, you’d better to register your intellectual property with Chinese authority so as to prevent infringing other’s right or being infringed. Furthermore, you need to consider a preventive registration for future development.  Third, agreement. You need to have a comprehensively protective agreement that restrict your Chinese business partner from infringing your intellectual property.  Forth is monitor. You need to prepare a protective monitoring programme after you enter into Chinese market, to make sure that you may control and fight against any infringement in China during your operation. 

To obtain more detailed information, please contact Dong at wd@rowlandwoodslegal.org and we will endeavour to reply to your email as soon as possible. 


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