Guia de Investimento Na China

8/22/2019 Guia de Investimento Na China

1/65

+1212 0

2012

CHINA

INVESTMENT GUIDE


2/65

32

Think Global,ActLocal | CHINA |

I INTRODUCTORY NOTE

II COMMERCIAL ENTITIES AND FOREIGN INVESTMENT

III -- TYPES OF ECONOMIC REPRESENTATION

IV FOREIGN TRADE POLICY

V TAXATION

VI - LABOR RELATIONS

VII INTELLECTUAL PROPERTY

VIII JUDICIAL SYSTEM

CONTENTS CHINA INVESTMENT GUIDE

06

08

77

44

70

76

96

112

120

05

07

09

45

71

77

97

113

121

05


3/65

5

Think Global,ActLocal |

BUSINESS IN CHINA LEGAL GUIDE


4/65

76


I.INTRODUCTION This Guide is o inormative nature and aims to provide potential investors with an introductoryknowledge o the legal ramework on the setting-up o a commercial presence and on how toconduct business in China.

In this context and based upon the laws and directives currently in orce in China in the mostrelevant areas, this Guide outlines in general terms the structure o the two types o commercialcompanies, the dierent alternatives on options or investments, administrative licenses andrestricted business areas, taris and trade protection instruments, tax, legal aspects oemployment relationships and types o visas or oreigners, protection o intellectual property

rights, concluding with the judicial system.This Guide is or general reerence only, and does not exhaust all relevant aspects o the legalregimes o the areas covered. This guide can not be construed as legal advice, nor can it beconsidered as a basis or claiming the existence o an attorney-client relationship. For advice andlegal assistance to carry out specic transactions interested investors should consult and retainlawyers licensed to practice in China.

For general inormation about China and its economy, readers can consult the website o theCentral Government at http://english.gov.cn/ and the website o Xinhua News Agency at http://www.chinaview.cn/index.htm in English.

http://english.gov.cn /http://w ww.chinaview.cn /index.htm


5/65

98


COMMERCIAL ENTITIES

Introduction

The most widely used type o business in China is Limited Liability Company or LLC, and publiclimited companies (Joint Stock Limited Company or JSLC). Both types are governed by theCompany Law o the Peoples Republic o China, which is revised in 2005 (the Company Law).The Company Law establishes the requirements to be met by LLCs and JSLCs in respect o theobject o the company, the share capital, the organizational structure, the transer o shares anddissolution.

(A) Limited Liability Company (LLC)

The LLC is a type o company in which shareholders are liable up to the value o the capital theysubscribed. The number o shareholders shall be no more than 50.

Company Name

The company name o an LLC must include the phrase Limited Liability Company or LimitedCompany.

Registered Capital

Minimum registered capital

The company capital o the LLC is the total amount o equity invested in the company, subscribedby all shareholders and registered with the commercial register. Except or specic cases laid downby law, the minimum company capital or incorporation o an LLC is RMB 30 000 (approx. USD 4500). The amount o the initial company ca pital subscribed and paid up by all shareholders shouldnot be lower than 20% o the registered company capital or lower than the minimum establishedby law. Shareholders must pay the remaining amount within 2 years upon the date o incorporation.For an investment company, the shareholders must make the payment o the remaining amount

within 5 years upon the date o incorporation.The shareholders may pay the capital to be invested in the company in cash or in kind, in the ormo assets o which value can be determined in ca sh or legally transerable rights, such as intellectualproperty rights, usuruct o land or other intangible assets, excluding the cases specically providedor by law or administrative provision. The value o the capital paid in kind must be established andconrmed according to the law and administrative regulations applicable to valuation, i any.

II.COMMERCIALENTITIES AND FOREIGN

INVESTMENT

200 5

50


6/65

1110


In any case, the capital invested in the company which is to be paid up by all shareholders in cashmust represent at least 30% o the registered capital o the LLC. Each shareholder must ully andduly pay the capital they subscribed in accordance with the articles o association. Each shareholdermust deposit the cash contribution in ull in the temporary account o the LLC or lega lly transer thecontribution in kind by ollowing appropriate transer process or the assets prescribed by the law.I a shareholder ails to meet this obligation, that shareholder will remain liable or payment in ullto the company and also be liable or his deault towards other shareholders who have met theirobligations on time. The law also provides that, or each capital contribution made by theshareholders, the company shall retain verication rom a legitimate capital verication institution.

Minimum capital requirements or oreign investment in special industries

As m entioned a bove, the minimum capital or an LLC is RMB 30 000 (approx. USD 4 50 0).However, Chinese law requires higher minimum capital or incorporation o an LLC in specialindustries as ollows, such as banking, investment, insurance and international transport:

Foreign-capital banks and oreign invested banks: RMB 1 billion (approx. USD 150 million)or the same value in a reely convertible equivalent currency.

Foreign invested insurance companies: RMB 200 million (approx. USD 30 million) or thesame value in a reely convertible equivalent currency.

An investment company incorporated by oreign investors: USD 30 million.

Foreign invested international reight orwarding enterprises: USD 1 million.

Total investment

In addition to the minimum capital, oreign invested companies must estimate and indicate theirtotal planned investment amount in their articles o association. The amount o the total investmentis made up o the registered capital and nancing estimated to be necessary or the oreigninvestment company to operate productively. The proportion o registered capital and the totalamount o investment o the oreign invested companies shall comply with the requirements orLLCs reerred to above.1

100

2

1Interim Provisions o the State Administration or Industry

and Commerce on the Ratio o the Registered Capital to theTotal Investment o a Sino-Foreign Equity Joint VentureEnterpriseArticle 3 The ratio o the registered capital to the totalinvestment o an EJV shall be in conormity with theollowing provisions:(1) Where the total investment o an EJV is USD3 million orless, the registered capital o the EJV shall be at least seventenths o the total investment;(2) Where the total investment o an EJV is more than USD3million and not exceeding USD10 million, the registered

capital o the EJV shall be at least one hal o the totalinvestment, provided that the registered capital shall be noless than USD2.1 million i the total investment is less thanUSD4.2 million;(3) Where the total investment o an EJV is more than USD10million and not exceeding USD30 million, the registeredcapital o the EJV shall be at least two ths o the totalinvestment, provided that the registered capital shall be noless than USD5 million i the total investment is less thanUSD12.5 million;(4) Where the total investment o an EJV is more than USD30million, the registered capital o the EJV shall be at least onethird o the total investment, provided that the registeredcapital shall be no less than USD12 million i the totalinvestment is less than USD36 million.

2

,:()(

),()

(),,,

()(),,,

(),,,


7/65

1312


Shareholders Meeting (General Meeting)

Unless otherwise provided or by law or regulations, or even by the articles o association o thecompany, the corporate body with the highest level o jurisdiction and authority in the LLC is thegeneral meeting o the shareholders made up o all shareholders assembled in a general meeting.

The rst general meeting must be convened and chaired by the shareholder with the greatestcapital investment in the company. The ordinary general meeting o the shareholders is convenedand presided over in accordance with the articles o association o the LLC and the extraordinarygeneral meeting is called and held when proposed by:

1. Shareholders holding 10% or more o the shares with voting rights, or

2. More than one thirds (1/3) o the directors, or

3. The supervisory board or, the individual supervisor alone i the company does not have asupervisory board.

Major corporate decisions shall be approved at the shareholders meeting by an absolute majority,which means such resolutions shall be approved by shareholders who representing 2/3 or more othe shares with voting rights. Examples o matters to be decided in this way are a review o thearticles o association, an increase or reduction in the co mpanys registered capital, a change in thetype o company and the merger, division or dissolution o the company.

To the extent that it is not other wise provided or in the articles o association, shareholders votingrights at the shareholders meeting are proportionate to their stake in the capital o the company.

The Board o Directors

The law requires the LLC board o directors consists a minimum number o 3 and a maximum o13. However, LLCs with ew shareholders or smaller scale may only have a single executive directorinstead o a board. This executive director may simultaneously act as the manager o the company.The term o oce o the directors o the LLC should be stipulated in the articles o association, buteach term shall be no more than 3 years. Directors have the right to stay in oce i they are re-elected or another term.

The rights and duties o the board are, among others established by law, to convene generalmeetings, to decide on the companys activities and investment plans, to prepare nancial budgets,to distribute prots and losses and increase or reduce the company capital.

The Manager

The LLC is permitted to have a manager who can be hired or dismissed at the boards disposal. Themanager answers to the board and will be responsible or organizing the impleme ntation o annualbusiness plans and investment plans o the company, as well as or developing the internalmanagement structure and other duties imposed by law or by the board.

1 23


8/65

1514


The Supervisory Board

Among other duties prescribed by law and the articles o association, the supervisory board isresponsible or supervising the nancial aairs o the company and ensuring that the directors andsenior managers carry out their duties. The supervisory board o the LLC shall consist o at least 3members. However, smaller LLCs may have only 1 or 2 supervisors instead o a supervisory board.

The Company Law strictly prohibits any director or senior manager rom simultaneously occupyingthe position o supervisor o the company. The term o oce o a supervisor is 3 years and thesupervisor has the right to stay i re-elected or another term. The supervisory board must meet at

least once a year and any supervisor may convene extraordinary meetings. Unless otherwiseprovided by the Company Law, the supervisory boards discussion and voting procedures areestablished in the articles o association. Resolutions o the supervisory board are be approved bya simple majority o its members which means over hal o the supervisors.

Transer o Shares

In an LLC, the shares may be transerred between shareholders or to a ny third party, provided thetranser is made in accordance with the applicable law. Shareholders have a pre-emptive right toacquire the shares o other shareholders. The law gives companies a margin to decide on themethods or the transer o shares, that i special clauses are included in the articles o associationregarding transer o shares o the company, these special provisions should prevail.

Financial Reports

At the end o each nancial year, the company is required to provide a management report andaccounts to be audited by an auditing rm. The scal year in China begins on 1 January and endson 31 December. LLCs must submit the nancial report or consideration to the shareholders bythe deadline established in the articles o association.

Dissolution

An LLC may be dissolved in t he ollowing situations: 1) upon the business term provided in thearticles o association 2) upon the occurrence o any o the situations or dissolution provided orin the articles o association, 3) upon resolution o the shareholders, 4) in the event o merger ordivision o the company, 5) i the business license is cancelled, or 6) when its dissolution is orderedby the Court.

Shareholders holding 10% or more o shares with voting rights can apply to the courts ordissolution when the company is unable to operate and the continuation o business operationwould result in a huge loss to the shareholders.

1 23 4 5

6


9/65

1716


(B) Joint Stock Limited Company (JSLC)

The JSLC is a company in which the shareholders are liable in proportion to the shares to whichthey subscribe. It can be incorporated by two ways: (i) through the subscription o capital bycertain promoters, or (ii) through public subscription o shares.

(i) In the ormer case (promotion), all shares are subscribed by the promoters.

(ii) As to the latter option a JSLC with open capital the shares issued by the company aresubscribed by the promoters together with the general public, or by a particular group opeople.

To establish a JSLC in either way, the number o promoters cannot be ewer than 2 or more than200. At least hal o the promoters must be domiciled in China.

Company Name

The company name o the JSLC should include words such as Joint Stock Limited Company orJoint Stock Company to indicate the type o company.

The Company Capital

The minimum registered capital o a JSLC is RMB 5 million (about USD 0.7 million), withoutprejudice o specic conditions imposed by law or certain situations. For example, the minimumcapital o a JSLC with oreign capital is RMB 30 million (about USD 4.4 million). The capital o aJSLC is divided into shares carrying the same nominal value. The cer ticate o own ership o theshares must be issued by the JSLC to prove ownership o the shares subscribed.

I the JSLC is set up by promoters, the capital at registration should be the total capital o the sharessubscribed by the promoters at the Registry o Companies. The minimum amount o initial capitalsubscribed and paid up by all promoters should be more than 20% o the total capital and theoutstanding amount should be paid by the promoters within 2 years o the date o incorporation.In the case o an investment company, the period is ve years. Shares may not be oered to thirdparties or subscription until the set up capital has been paid.

I the JSLC is incorporated with open capital, its capital will consist o any such amount which hasactually been paid, corresponding to shares registered with the Registry o Companies.

The type o capital being invested and the percentage required or payment in kind within the totalcompany capital contribution are the same as those described above or LLCs.

12

1

2


10/65

1918


General Meeting

The General Meeting is the supreme corporate body in a JSLC and is made up o all the shareholders.The ordinary general meeting o shareholders must be held once a year. However, extraordinarygeneral meetings may be c alled with two m onths prior notice in the ollowing circumstances(among others provided or in the articles o association): i the number o directors is less than 2/3o the required number, i the companys losses exceed 1/3 o the capital, when the board odirectors or supervisory board deem it to be necessary, and by any shareholder or shareholderscumulate holding at least 10% o the shares. The shareholders present at the meeting are entitledto one vote or each share they hold in the company. However, the shares held by the companydo not have voting rights.

Resolutions o the general meeting must be approved by simple majority o the votes o theshareholders attending the meeting. However, issues o greater relevance such as changing thearticles o association, increasing or reducing the share capital, changing the company type,merger, division or dissolution o the company, must be approved by 2/3 or more o the votes oshareholders attending the meeting.

Board o Directors

The JSLC must establish a board o directors, which must be made up o at least 5 directors and nomore than 19. The term o oce and the powers held by the board are the same as those describedabove or LLCs. The board must meet twice a year and extraordinary meetings must be held whenproposed by: 1) shareholders representing 1/10 or more o the voting shares, 2) at least 1/3 o thedirectors, or 3) the supervisory board. The meeting o the board can only take place i more thanhal o the directors are present. Any de cision o the Board o Directors must be approved by morethan hal o all directors; each director shall have one vote only.

The Manager

JSLCs must have a manager who is hired and dismissed by t he directors. The term o o ce and

powers assigned to the manager are the same as those described above or LLCs.

Supervisory Board

Unlike LLCs, the supervisory board o the JSLC is made up o at least 3 members. They meetregularly once every 6 months or whenever proposed by a supervisor. The term o oce o itsmembers, unctions, discussion methods and voting procedures o the board are the same as thator the LLC, as described above.

1 23


11/65

2120


Transer o Shares

There are two types o shares in a JSLC, namely, registered/nominative stock and unregistered/bearer shares. Registered or nominative shares may be transerred by endorsement or other waysprovided or by relevant laws or administrative regulations and unregistered shares or bearer sharesare transerred by simply handing them over to the transeree. Shares issued to promoters or legalpersons must be registered shares and may only be registered in the name o those promoters orlegal persons. Chinese Company Law imposes restrictions on the term and value o shares held bypromoters, directors, supervisors and senior managers in JSLCs, on their transerring o such shares.

Annual Reports and Accounting

At the end o each nancial year, the company is required to produce a report regarding itsnancial situation prepared by a legitimate auditing rm. In China the nancial year begins on 1January and ends on 31 December. The report and accounts must be submitted to the shareholdersor consideration in the 20 days preceding the annual meeting o shareholders. I the JSLC is a listedcompany, it should make public its management report and accounts.

The documents, books, balance sheets, reports and other accounting documents must beprepared in accordance with the unied accounting rules laid down by the Accounting Law o Peoples Republic o China as revised in 1999.

Articles o Association

The articles o association contain the rules that govern the operation o the company. In both LLCsand JSLCs, the articles o association must state the company name, the object o the company, theregistered oce, the registered capital and the capital subscribed by each shareholder, thedirectors and the rights and obligations o the shareholders, among other issues.


12/65

2322


FOREIGN INVESTMENT

Introduction

The most important decision to be made by investors in China is the choice o the most suitableinvestment vehicle. Typically, the most popular orms o oreign investment in China are:

the Wholly Foreign-Owned Enterprise (WFOE) - a company ully established byoreign capital.

Joint Ventures () divided into Equity Joint Ventures (EJVs) and Contractual JointVentures (CJVs). Joint ventures are ormed on the basis o oreign and Chinese joint investments.

the Representative Oce (Rep. Oce ).

Foreign investors can also opt or more specic orms o investment such as:

Build-Operate-Transer (BOT).

Compensation Trade (CT).

Processing & Assembly (PA ).

International Leasing (IL ).

1. Leading Solutions or Investment

(A) The Wholly Foreign-Owned Enterprise (WFOE)

A WFOE is a Chinese limited liability company composed entirely o oreign capital owned by oneor more oreign investors, excluding branches set up in China by oreign enterprises and otheroreign economic organizations. China encourages the establishment o WFOEs with the capacityto export their products or that are equipped with innovative technology.

Typically, there is only one investor behind a WFOE, but this is not always the case. Two individualsor two or more oreign legal persons that wish to invest jointly in China may, or example, set up aholding company in a country or jurisdiction they are amiliar with and then set up a WFOE andinvest in China through this controlling company (holding).

The WFOE must conduct its activities and its business under the precise category o which thecommercial license granted. In order to comply with Chinese law, it should retain ormal andindependent accountants, keep organized and independent accounting records, approve andregister its balance sheets and nancial statements and be ready any kind o supervision by theChinese regulatory and nancial authorities.

--

1


13/65

2524


There are three common types o WFOEs in China:

Manuacturing WFOEs

Consulting WFOEs

Commercial WFOEs

In China, WFOEs were originally designed to encourage manuacturing activities aimed atexporting or introducing innovative technology to China. However, ater Chinas accession to theWTO in 2001, such policies on WFOEs have changed. WFOEs are now increasingly used as a

means o investment in services such as management consulting or sotware development andtrading. In 2004, the Ministry o Commerce o Peoples Republic o China issued the Measuresor the Administration o Foreign Investment in Commercial Fields, whereby oreign investorswere allowed to establish Commercial WFOEs with 100% oreign capital, destined or wholesaleor retail sales and ranchises in China.

Some o the advantages o WFOEs:

It has all the unctionality o an independent legal entity, with the power to enter into contracts,issue invoices, hire and re employees, make payments and receive payment in RMB;

It allows ull management powers and total control by the management board;

It has the independence to implement strategies o a global dimension made by the aliatedcompanies without having to consider the involvement o Chinese shareholders;

It can convert prots earned in RMB (or, CNY) to USD i it intends to distribute them to anassociated company located outside China;

It benets rom more eective protection or its intellectual property, know-how andtechnology;

It has greater eciency in its operation, administration and uture development.

(B) The Joint VentureThe Joint Venture (JV) is anoth er popular vehicle o investment in China. This investment solutionalways combines the market knowledge, the avourable market treatment and the manuacturingcapacity o the Chinese partner, with the technology, know-how and market experience o theoreign partner.

The JV is usually ormed as a limited liability company, taking the orm o an equity joint venture ora cooperative joint venture. While the EJV is more strictly regulated and operates more closely tothe corporate model, the CJV allows its shareholders greater fexibility when setting out contractualprovisions that regulate, or example, distribution o prot, management and registered capital.

2001

2004


14/65

2726


CJVs and EJVs resemble each other and, in many respects, work in the same way. Aspects in whichthey are similar include their general management structure, the process o getting governmentalapproval and their relations with authorities to which they must submit requests or approval. Theyalso share similar contractual ormats, tax exemptions, legal status and applicable legal provisionsas well as the authorities to which they may resort to settle potential commercial disputes.

(C) Equity Joint Venture

The EJV is a partnership between a Chinese company and a oreign company in China, through

which shareholders can share the prots, risks and losses in proportion to their respective sharesin the capital o the company. The oreign investors, in general, shall contribute n o less than 25%o the total investment. Any transer o capital to the EJV by any investor requires authorizationrom the other shareholders and should be made by consensus. It should also be approved by thesupervisory authority with jurisdiction to grant approval and must ollow the procedures orchanges with the registration and administration oce. Partners o EJVs have pre-emptive rights inacquiring o other partners shares. EJVs are limited liability companies and their investors orshareholders are not personally liable or the debts which the company may incur. As a company,the EJV is able to acquire property, hire employees independently, execute works, e tc.

The investment by oreign investors and Chinese investors in an EJV can take the orm o cash,intellectual property rights, technology, real estate or other assets, such as equipment. However,only advanced technology and equipment that t Chinese needs can be treated as oreign jointventure investment. China species through regulation the proportion o the capital that must besubmitted or registration in ace o the total amount invested in the EJV. It also species theminimum registered capital when the oreign investment concerns certain industrial activitiesregarded as special, as reerred to above.

The management o the EJV is under the control o a board consists o at least 3 directors. The termo oce or directors is 4 years and may be renewed with the consent rom the investors o the jointventure. The usual period o operation or an EJV is between 10 and 30 years. 3

(D) Contractual Joint VentureThe CJV is an enterprise established by a Chinese company a nd a oreign company. Unlike the EJV,which is subject to tighter legal regulation, the CJV is based on a contract or a cooperative jointventure (partnership) that regulates issues such as the duration o the enterprise and the sharing oprots and risks, as well as the division o losses at the end o the CJV. Prots rom a CJV are dividedin accordance with the clauses o the agreements rather than simply ollowing the investmentproportion o each partner as in the EJV. Furthermore, the way in w hich prots can be shared ismore fexible.

In a CJV, Chinese companies usually provide the workorce, land and manuacturing inrastructures,whereas the oreign companies normally provide technolog y, equipment and capital.

3 The Article 100 in Regulations or Implementationo the Law o the Peoples Republic o China onChinese-Foreign Equity Joint Ventures says theduration o a joint venture shall be decided upon

through consultation among all the parties to the jointventure according to the actual conditions o the

particular lines o business and projects. The durationo a joint venture engaged in an ordinary project shall,in principle, be between 10 to 30 years. Duration orthose engaged in projects requiring large amounts oinvestment, long construction cycles and low protrates on the capital, or in projects producing highlysophisticated products or products well selling in theinternational market, with advanced technology or keytechnology oered by the oreign parties to the jointventures, may extend to 50 years. The duration o a

joint venture may be longer than 50 years, i speciallyapproved by the State Council.

2 5%

4

41986 115

:,,,,,


15/65

2928


(E) Representative Oce

Another common orm o oreign investment is through the setting up o a representative oce(Rep. Oce), which is not an independent company and is, thereore, considered as an extensiono its parent company. A Rep. Oce normally serves as a commercial link between the holdingcompany and local companies in China. It is also used to conduct market surveys and productpromotions, to establish contacts with potential consumers, to structure and organize the travel orepresentatives o the holding company to China and to conduct other not-or-prot activities. ARep. Oce is unable to engage in any activity that generates income, except in the cases wherethere are intergovernmental agreements or that purpose.

The Rep. Oce is less demanding in terms o procedure and takes less time to be established.Normally, the Rep. Oce activities are restricted and it may NOT:

engage directly in business activities aimed at making a prot;

issue invoices;

accept payments in RMB;

open Bank accounts, use letters o credit or benet rom other nancial services;

employ local labours directly (bur hire local employees through qualied human resourcesagencies).

2. Other Forms o Investment

(F) Build-Operate-Transer

Foreign investors who carry out industrial and inrastructure projects in China have the option oinvesting through a BOT. This orm o investment usually requires investors to nance, design, buildand conduct the business or a certain period o time, ater which, upon the expiry o the contract,the ownership o the project is transerred to the Chinese government.

(G) Business o Compensation

In the compensation business, essentially, the Chinese companies produce goods with the use omachinery, equipment, raw materials and technology which are provided by oreign investorsdirectly or on a credits basis. Foreign investors receive their compensation through capital obtainedrom other manuactured products, negotiated by both parties. This orm o investment involvestechnology transer, trade in raw materials and nancing by oreign investors and by the ir Chinesepartner.

--

--

Thi k Gl b l A L l | CHINA |


16/65

3130


(H) Processing & Assembly

This kind o investment is based on a processing and assembly contract to be established betweena Chinese company and a oreign company, allowing oreign investors to benet rom themanuacturing o products in China without the need to orm a company with this sole object. Thisorm o investment is very popular in Southern China.

The oreign investor usually provides the raw material, parts and components required or themanuacturing process, while the Chinese partner provides manuacturing and industry acilitiesand the workorce. The Chinese company operates under the directions o its oreign partner andthen exports the nal product to the oreign partner.

(I) International Leasing

International leasing involves the leasing o equipment to the lessee in China and, under thecontract terms, receiving the income arising rom that lease. During the period o the lease, thelessee has the right to use the equipment, while ownership o the equipment remains with thelessor. In the lease, the lessor and lessee normally agree on what will happen to the equipment atthe end o the lease agreement. The lessor can choose between taking back the equipment andselling it to the lessee or a xed price.

3. Additional considerations on nancial institutions and investmentcompanies incorporated with oreign capital

(A) Financial institutions incorporated with oreign capital

Financial institutions incorporated with oreign capital registered in China include banks, nancialcompanies and the manuacturers and distributors o credit cards, which are nanced entirely byoreign capital or through a partnership known as a Sino-Foreign Equity Joint Venture.

A nancial institution unded with oreign capital may opt to set up a representative o ce (Rep.Oce) in China to undertake non commercial activities such as consulting, networking and market

research. Under no circumstances can the representative oce enter into an agreement with anyindividual or legal person with a view to making a prot or the nancial institution represented, orengage in any commercial and operational activities.

The incorporation o banks unded with oreign capital is dependent on compliance w ith statutoryrequirements and regulations. The minimum registered capital o the bank is RMB 1 Billion (approx.USD 0.15 Billion) or the equivalent in other reely convertible currencies and this capital must beully paid up.

Think Global Act Local | CHINA |


17/65

3332


Under the Regulation o the Peoples Republic o China on Administration o Foreign-FundedBanks, in orce since 2006, banks unded by oreign capital in China have been allowed to acceptdeposits rom the general public. Foreign nancial institutions are also subject to the Chinese Anti-Money Laundering Law, in orce since 2007. Financial institutions are required to establish internalanti-money laundering control systems including customer identication and records preservingthe details o their customers and transactions carried out. They must also have alert systems oramounts that are large or suspicious or any reason.

(B) Investment Companies nanced by oreign investors

The regulations on the establishment o investment companies by oreign investors in China arecontained in the Provisions o the Ministry o Commerce on the Establishment o InvestmentCompanies by Foreign Investors enacted in 2003, revised twice in 2004 and supplemented by theSupplementary Provisions on the Establishment o Investment Companies by Foreign Investors in2006.

An investment company established by oreign investors is a company with limited liability entirelycontrolled by oreign capital or a mixed jo int venture company, designed or direct investments. Toincorporate an investment company, the investor must previously have had at least ten companiesincorporated with oreign capital in China. The minimum share capital or this type o company isUS$ 30 million, which must be ully paid up. This kind o investment company is oten encouragedor industry, agriculture, inrastructure and energy projects.

(C) Restrictions to Foreign Investment

Investment projects in China are legally classied as encouraged, permitted, restricted andorbidden under the Provisions Guiding the Orientation o Foreign Investment. I the project doesnot t into the Foreign Investment Industrial Guidance Catalogu e (2011 Revision)5or the Catalogueo Foreign-Funded Dominant Industries o the Mid-west Region (2008 Revision), it may beclassied as permitted and thereore will not be subject to any avourable treatment or restriction.These regulations are constantly updated to refect the oreign investment policies o the country.

2006 200 7

2003200 42006

200762008

6 2011201112142012130

5 Catalogue o Industries or Guiding Foreign Investment(2011 Revision) will come into orce since Jan 30, 2012.

Think Global, Act Local | CHINA |


18/65

3534


Approval Authority - MOFCOM

The establishment o a Foreign Investment Enterprise (FIE) in China is subject to approval by theMinistry o Commerce o China (MOFCOM) or by one its departments or dierent areas,depending on the volume o the investment and the classication code o the activity. In 2009,MOFCOM issued two new circulars: Circular o the Ministry o Commerce on Further Enhancemento the Approval Scheme or Foreign Investment (Shang Zi Han No. 7 (2009) (Circular 7), in orcesince 5 March 2009 and Circular o th e Ministry o Commerce on D elegation o Approval Authorityon the Establishment o Foreign Investment Holding Companies (Shang Zi Han No. 8 (2009)(Circular 8), in orce since 6 March 2009.

Activities where oreign investment is prohibited

Foreign investment is generally prohibited in the ollowing areas o business:

State security and/or public interest activities;

Pollution to the environment, damage to natural resources or human health;

Threat to security and use o exclusive military area s;

Excessive occupation o armland adverse to the protection and development o naturalresources;

Exclusive use o Chinese resources in the production o goods.

Activities where oreign investment is restricted

Restricted oreign investment is subject to approval and special assessment. The legislation alsocontrols the orm o investment in t he case o activities restricted to EJVs and CJVs, in which theChinese partners investment and control will be greater than t hat o the oreign investor.

Activities in which oreign investment is restricted:

Exploitation o specic types o mineral resources the use o which is limited by the State;

Activities harmul to natural resources and environmental protection;

Obsolete technologies;

Industries previously prohibited which the State is gradually liberalizing.

The activities in which oreign investment is restricted are updated regularly by the State. Currently,banking, nancial activities, trust investments, exchange, insurance, construction and operation oluxury hotels and high end villas, high end oce buildings, market research, credit research andconsultancy are among the activities where oreign investment is restricted.

2009 2009720093520 098200936

7 ()

72011



19/65

3736

Activities where oreign investment is encouraged

Activities where oreign investment is encouraged are:

high and new technologies or advanced application technologies which can improve theperormance o products, increase the technologic and economic eciency o companies, orcreate new equipment and materials which are beyond the capacity o domestic production;

new technologies or agriculture, comprehensive development o agriculture, energy,transportation and the raw materials mining industry;

energy saving and raw materials and environmental protection; product improvement and development o new markets or increasing the internationalcompetitiveness o products;

Currently, oreign investment is principally encouraged in the areas o modern logistics, internationaleconomy consulting services, science, technology, environmental protection, outsourcing ornancial intermediation services, human resources services, sotware development, call center8services, data processing and the operation o sports events.

4. Setting up a company through investment o a oreign company

(A) Establishment o a Representative Oce (Rep. Oce)

Foreign companies planning to set up a Rep. Oce in China have to complete the registration withthe competent authorities. Prior approval is required or a company to operate in an area whereoreign investment is restricted. The registration request must include:

The Application Form;

Certicate o registration o oreign company;

Letter proving credit;

Appointment o legal representative; CV and identication o the legal representative;

Tenancy agreement or the Rep. O ce address.

8 In Catalogue o Industries or Guiding Foreign Investment2011 Revision, Call Center has been specied as O-shoreCall Center.

,,,,,, ,



20/65

3938

(B) Incorporation o Foreign Investment Enterprise (FIE)

The ollowing steps are required in connection with t he incorporation o an FIE:

1. Due diligence

Finding appropriate premises or the headquarters o the FIE or choosing a partner are examples otasks to be perormed in advance.

2. Pre-approval o the company name

Prior to registration, the name o the company has to be pre-approved by the commercial registero companies the local Administrative Bureau or Industry and Commerce.

3. Approval o the articles o association and contracts

These documents must be submitted or review and urther approval to either MOFCOM or to oneo its departments located in any o the dierent provinces. The approval is granted through theissue o a certicate or the FIE.

4. Business license

Within 30 days o the issue o the certicate o approval, the oreign investor must register the FIEand apply or a commercial license rom the local commercial register. The date o the commerciallicense granted to the FIE is also the date when t he company is deemed to have been incorporated,ater which it may begin its activity under t he terms o its commercial license.

5. Other ormalities

The company must take the ollowing steps within 30 days o the issue o the commercial license:

i) obtain approval to make a corporate seal rom the police department;

ii) obtain the organizational code rom the Bureau o Quality and Technical Supervision;

iii) apply or registration with the local administration or the oreign currency exchange;

iv) open a oreign currency bank account in the name o the company and t ranser the registeredcapital to that account;

v) register with the local Statistics Bureau;

vi) register with the Tax Bureau, at the local and state levels;

vii) apply or authorization to print o r purchase nancial invoices/receipts;

viii) register with the Social Security Bureau;

ix) i the company is involved in the import/export business, it must also register with CustomsAuthorities.

1

2

3

4

30

5

30

1

2

3

4

5

6

7

8

9



21/65

4140

6. Registration o oreign capital

Once issued, the Foreign Currency Exchange Registration Certicate is valid or one year andreviewed annually. I the company changes its name, address, nature o business, transers shares,increases capital or merges then, ater carrying out the statutory changes and the commercialregistration o the same, the FIE should apply or the replacement o the Foreign ExchangeRegistration Certicate.

The FIE must open a oreign currency exchange bank account with a bank which is certied toprovide such service beore the expiry o validity o the FIEs Foreign Currency ExchangeRegistration Certicate, within the deadline required by the local government.

7. Employee Registration

Within 30 days o its ormation, the newly incorporated company must register its employees andsocial welare contributions with the local Social Security Bureau, as required by the 1999 InterimMeasures on the Management o Social Insurance Registration ( 1999)and upon doing so, it will be granted its social security registration card.

(C) Incorporation o a manuacturing company

In addition to meeting the general procedure described above, the ollowing specic steps are tobe taken or setting up a oreign capital manuacturing company in China.

1. Letter o Intent or Investment Agreement

Ater selecting the primary site in China where the investment will be located, oreign investors areadvised to sign a Letter o Intent or Investment Agreement with the local government (this documentis not legally enorceable). The Letter o Intent or Investment Agreement should address theollowing subjects:

Project description;

Amount o investment;

Project schedule;

Demarcation o land (including details such as location, size and the price o land);

Preerential treatment oered by the local government;

Support to be oered by the local government during the approval process.

301999

1



22/65

4342

2. Land use

Land properties in China are o two kinds: (a) collectively-owned land or (b) State-owned land.

(a) Public land - usually rural armland and rarely an investment option by oreign investors. I aoreign investor intends to invest in this type o land, it is advisable to rst seek appropriateproessional support.

(b) State-owned land subdivided into two subtypes: i) land allocated and ii) land granted.

i) the utilization o the allocated land is granted to the entity by the Chinese government with aparticular purpose. Allocated land cannot be reely transerred, mortgaged or sold without theapproval rom the local authority and the payment o an allocation ee. Normally, this right isnot limited in time.

ii) granted land, on the other hand, is paid or and can be used or commercial and industrialpurposes. Moreover, t he right to use this type o land usuruct can be transerred,mortgaged and leased reely.

The usuruct right o the land is acquired urther to the conclusion o a contract granting landtenure with the competent authority or land administration. For the grant o the land tenure, thecompany must pay the government a special Fee. Provided the applicable requirements are met,the government will pass the L and Use Certicate to the company. Pursuant to China land law, theusuruct is valid or a maximum xed term o 50 years or industrial projects. Once the term ex pires,the holder is granted a time span to apply or an extension o the contract against payment o a eeon land use.

3. Projec t Feasibility Report

A Project Feasibility Report should be submitted to the National Development and ReormCommission, at state or local level, to request approval. The report should touch upon subjectssuch as name, term and t arget o the project, qualication o the investor, undamental inormation

o the project, adopted technologies, the selected area, environmental assessment, sales, purchasesand consumption o raw materials, registered capital and investment capital proportion, etc. Theeasibility report is not a compulsory document and no longer has to be approved by the authorities.

4. Environmental Impact Report

The environmental impact report shall be submitted to the local government or the establishmento an industrial unit. The report usually covers matters such as types and volume o pollutioninvolved in the project, the impact on environment, pollution controlling measures and technicalfow chart. The environmental impact report must be prepared by a technical expert. Theenvironmental authority will assess the project, which can only proceed upon its written approval.

2

12

1-

2-iii

i

ii

50

3

4



23/65

4544

China has a wide range o diversied commercial agreements, some modelled by the law andChinese regulations (civil jurisdiction deriving in particular rom German and French law), andothers are essentially dened by an intense commercial practice, which at the international level,with respect or general Chinese law rules. These agreements allow the access to the hyperactiveChinese distribution market in a diversied way, as regards corporate structures, with dierentlevels o control, and as regards the implementation o the distribution company scope, with ormsthat oer considerable fexibility or the operations.

Investors should be aware o the specicities Chinese law oresees as regards some o thosecontracts, such as the ranchising agreement, as well as the typical eatures o the most-commonly

used agreements in international distribution, such as the agency, concession and other agreementso the retail and wholesale distribution when used in the Chinese market.

As we will see, some o those contracts still have an unsophisticated legal basis or at least one that isdierent rom the European and American models, in particular due to the act the Chinese marketwas closed to oreign investment with severe restrictions until the adhesion o China to the World TradeOrganization, in 2001, and in some cases (as happened with services and distribution) until later.

China liberalized the services sector to oreign investment, including the wholesale and retaildistribution, in the end o 2004, through the Administration Measures or Foreign Investment inthe Commercial Sector, o April 16, that is, three years ater the adhesion to the World TradeOrganization, excluding most o the barriers or access and operability in this market.

In act, Chinese legislation nowadays allows oreign companies and individuals to set up agents,enter into ranchise agreements and act as wholesalers and retailers through oreign investmentcompanies set up in China, including companies with only oreign capital. Except when one oreignretailer has by itsel 30 or more branches distributing pharmaceutical products, pesticides, vegetaloil, cotton, sugar, chemical ertilizers, grains and plastic lms to protect the soil or other productswith dierent trademarks rom dierent suppliers, the oreign capital proportion may not surpass49%9. Also, the tobacco and salt markets are still interdict to oreign investors in China, since theseare State monopolies.

In China, wholesaling reers to the activities o sale o goods to retailers or to industrial, commercialor institutional clients or to other wholesalers and the provision o associated services. Wholesaling

includes the sale o products, agency (exception made to auctions), the import and export ogoods and relevant accessory businesses. Conversely, retail reers to the sale o goods or consumeor use by individuals or groups and the oer o accessory services in xed places, on television,by phone, mail, internet or automatic machines. This activity includes, thereore, the retail sale oproducts, the import o sel-made products, the purchase o national products or export and otherrelevant accessory businesses.

Beyond the agreements more structural to the company and its distribution activity, China has alegal diversication o contracts and a market openness that allows the perormance o ancillaryservices such as assembling, trial and classication o lots a bulk, warehousing, marketing andpublicity, ater-sales services, etc. in an organized manner.

III.TYPES OFECONOMIC

REPRESENTATION

2001

20 04416

304910

9 Supplementary Provisions (IV) or the AdministrativeMeasures on Foreign Investment in the Commercial Sectorsays where a service supplier rom Hong Kong or Macau hasopened more than 30 stores accumulatively in the Mainlandand the commodities that it deals in include pharmaceutical

products, agricultural chemicals, agricultural lm, chemicalertilizers, vegetable oil, edible sugar, cotton, etc., and thecommodities are o dierent brands and are rom dierentsuppliers, such service supplier is allowed to operate thebusiness as a sole proprietor.

10 30, ,,,



24/65

4746

Agency general

Despite its generalized use, as reerred, based in the international experience and in the principleso civil and contract Chinese general laws, the economical representation through the agreemento agency, which is considered a wholesale commercial activity, is not specically regulated in theChinese law, in particular as regards the rights and obligations o commercial agents.

The General Principles o Civil Law rom PRC, rom January 1 1987, oresee some rules o a verygeneral character as regards agency, which have a mandatory application to agents and principals,who may not enter into contracts outside the scope thereby oreseen.

This law distinguishes three types o agents: agents with mandate, which powers derive rom theprincipal, the statutory agents, which powers are dened by law, and the agents appointed by theCourt or a certain unit or service.

This law does not oresee a denition o commercial agent or principal, the ormer is denedby remission to the aorementioned 2004 Administration Measures, in which commissionaireagents are dened as sales agents, brokers, auctions or other goods wholesalers, who sale to otherpersons or provide relevant accessory services, being remunerated or doing so according to theagency agreement.

On the other hand, the PRC Contract Law, rom March 15 1999, denes commissionaire agencycontracts as those where the agent conducts commercial activities in its own name on behal othe principal, paid by the principal the corresponding remuneration.

Furthermore, within the PRC General Principals o Civil Law reerring to agency is not distinguishedbetween agents with or without representation, depending on the authorization the agent has ornot to celebrate contracts in the name o the principal (urther to the promotion o said agreeme ntsbetween the principal and third parties), a s it happens in the European and Portuguese commercialagents regulations.

The agency agreement may be ormalized in the written orm or merely orally. The written orm isoreseen only or the cases the law states the activities addressed to the agent should be ormalizedin written. The written orm is however the orm usually chosen when there is oreign partners.

In this last case, the agency agreement should indicate clearly the name o the agent, the tasksrequired rom him, the scope and duration o the powers conerred and should be signed (orstamped) by the principal.

This general law also does not oresee the written notication with a xed minimum term previousnotice to denounce or termination o the contract by the parties; a damage compensation right orthe payment o commissions ater the termination o the contract is not oreseen; the comp ensationor client brought is not oreseen and any non contractual rights o the agent ater the terminationo the agreement neither.

198711

2004

1999315

;



25/65

4948

Transer o the contractual position o the agent

According to the General Principles o Civil Law on agency, the agent shall obtain the authorizationo the principal beore transerring the powers hold under the agency contract umbrella to thirdparties. I the authorization is not previously obtained, the principal shall be inormed soon, aterthe transer o powers, but the agent is liable in case the principal does not accept the transer.Exception is made, however, in the cases the transer o the agents contractual position is donein emergency circumstances in the interest o the principal (similar to the theory o the urgentnecessity received in certain situations by Portuguese law).

Breach o the agreementThe parties may claim the breach o the agreement by the counterpart, but the General Principleso Civil Law does not oresee any consequence or that case. The PRC Contract Law shall applythe damaged party should be compensated or the damages, although subject to the generalobligation to mitigate them i there is the possibility to do so.

Liability o the agent and the principal

According to General Principles o Civil Law, the liability o the agent and o the principal veriesin the ollowing cases and terms:

The principal is liable by the acts o the agent in case it accepts the act o the agent donewithout authorization or beyond the powers assigned in the agency agreement, the sameveriying ater the end o the agreement;

In case the Principal is aware o the execution by the agent o an act within the scope o theagency agreement, not reacting against that act, the act is considered consented;

In case the agent does not comply with the duties oreseen in the agency causing damages tothe Principal, the agent is considered liable or those damages;

In case o an agreement between the agent and third parties that creates damages to thePrincipal, the agent and the third party will be jointly responsible or those damages;

In case the agent carries on an illegal activity and the Principal has knowledge o the actwithout reacting against the illegal act, both agent and Principal are jointly liable.

Applicable law and orum

Regardless o the agreement between the parties on the choice o law regulating the agreementand the choice o orum or the situations o confict, as regards agency contracts executed inChina, the Chinese law is applicable, prevailing also the Chinese jurisdiction to solve conficts.

- ;

-

-



26/65

5150

Termination o the agreement

The termination o the agency agreement occurs in the end o the term when oreseen (xed term,the contract expires) or when the activities oreseen in the contract are completed. Furthermore,the agency agreement ends, according to Chinese Civil Law, in case the Principal denounces theagreement or in case the agent declines the task entrusted to him; or in case the agent dies; or incase the agent loses civil capacity or in case the Principal or the agent preclude being legal persons.

This light regulation o agency by General Principles o Civil Law o Peoples Republic o China,which does not consider many problems the European regulation pays attention, is relativelycompensated only by the rules o the Chinese Contracts Law in the chapter related with commission

and mediation as it used to be the case in Portuguese law, through the use o analogy, beorethe Agency Law existed -, and more important through the regulation o the commission agency,sometimes also translated as Brokerage agreement.

According to this Law, it is still specied that the expenses the agent incurred during the executiono the agency agreement should be paid by him except the parties oresee it otherwise.

The law oresees a care duty as regards the goods in the possession o the agent and entrusted to himwithin the scope o the agency agreement. The agent may decide upon goods with deect, consumableand deteriorating goods in its power, with the consent o the Principal, unless unable to communicatewith the Principal, case in which the agent should decide about those goods reasonably.

In the case o sales o goods below the price or purchase o goods above the price established bythe principal, the agent must get consent o the principal, without which the transaction only bindsto the latter i the agent bridges the price dierence. In the case o sales o goods above the price orpurchase o goods at a price bellow the one established by the principal, the agents remunerationcan increase in accordance with the contract. In the case o lack o agreement in this regard or inthe case the contract proves to be unclear regarding the same subject, the monetary advantagewill be reversed in avour o the principal, unless customs and traditions o the business are various.

In the case special instructions about the price have been given by the principal to the agent, thelatter is not allowed to buy or sell in opposition to such instructions.

In the case o purchase or sell o goods at the price established by the market, the agent can stillact within the unctions o a buyer or seller, unless the principal expresses opposition, and hencebe entitled or remuneration.

The principal is obliged to accept the goods bought by the agent according to the agency contract.Once he denies doing so, unjustiably, the agent can consign those goods to deposit and even sellthem, in specic cases.

In the case o concluding a contract between the agent and a third party, the agent assumes therights and obligations o such contract. I the third party does not ulll the obligations stated inthe contract and hence resulting in damages to the principal, the agent is responsible or suchdamages, unless another agreement has been established between the parties.



27/65

5352

Remuneration o the agent

The agent is remunerated by the principal once all or part o the tasks, which he was entrusted to,is concluded. In the case o deault on payment by the principal, the agent has the right to withholdthe principals goods in his possession, unless another agreement has been established betweenboth parties.

In order to complement the rules stated by the commission agency, the tout court commissionrules are applied whereby, as an example, the agent should communicate to the principal thebusiness progress in accordance with the conditions established between the parties, and mostimportantly, the nal results once the conduct is concluded.

With some repercussion in the denition o the agency contract according to Chinese law canbe also the mediation contract, according to which the agent communicates to the principal achance to conclude a business or acts as an intermediary or the contract conclusion, receiving orsuch job a remuneration, similar gure (but very distant rom it), thereore, to the agency withoutrepresentation in the European standards, i. e. the situation where the agent only promotes theconclusion o businesses being these celebrated only between the principal and third parties.

Conclusion

This regulation diversity should be taken into account while ormatting the Agency Contracts tobe executed in Chinese territory, either relative to the contracts based on ab initio destined or thismarket, or those that may adapt rom the templates used by international enterprises. The act thatcertain common eatures are not specically regulated by the Chinese Law in accordance withthose usually ound in the United State and Europe, including Portugal it will leave more roomor negotiation to both parties, as long as the applicable Chinese rules o broader patterns in theconguration o these contracts are considered.

Franchising

The Franchise Contract is widely used in China, noticeable simply by visiting any big or medium-size Chinese city, where the great majority o International Trademarks are already present with

considerable vigour, i.e. multiple representatives.

Specic characteristics o the Chinese Market in transition (including yet some cultural actors)related to the protection o Intellectual Property Rights (IPR) and Quality Control, aect sometrademarks, even though they apply the ranchise model in great extent on the ormation o theirbusinesses, by emptying later the contracts o ranchising nature, seeking to acquire part or tota lityo the shares rom the ranchisee, thus achieving higher prots and protecting their businessreputation.



28/65

5554

As China rapidly beco mes a rst-line country in the International Market, meanwhile solvingissues o Legal Predictability and Law Enorcement, these deence measures should be graduallyabandoned by oreign companies, in order to allow the Franchise Model to arise powerully in thismarket with all its advantages, as it happens in the other International Markets.

By the end o 2004, China created applicable rules to all Franchises operating in the Chineseterritory Administrative Measures or Businesses through Commercial Franchising, 30thDecember. In 2007, a regulation o upper legislative level came to widely replace these Measures.Successully, today, the Regulation o Management o Commercial Franchising (6th February 2007),the Administrative Regulation o Registration o Commercial Franchising and the AdministrativeRegulation o Inormation Access in Commercial Franchising (both became eective on 1st May

2007), constitute the Great Franchising Legislation in China.

With these rules, China changed rom a country o closed borders in terms o oreign investment,to a country that seeks to attract and receive great International Trademarks, well-establishedbusinesses in the global market, specially those successul models which they can learn rom,hence catching the same pace in respect o the countrys prior isolation.

Commercial Franchising is considered a commercial activity whereby the Franchiser, through theexecution o contracts, authorizes the Franchisee to use its own Operational Resources such asbrands, logo, patents and know-how, while the Franchisee uses the Franchisers Business Formator the contracts and pays this latter, the remuneration o the ranchise.

y transcribing the Chinese Civil and Contractual Law into the Chinese Franchising Law, both partiesare obliged to conduct the Pre-Trading Business Phase and the ormation o contracts, and theiractivity based on the ollowing principles: Freedom, Justice, Honesty and Good Faith.

The application o the Franchising Regulation is supervised by the State, nationally and locally.Moreover, any person can present testimonies on violation o L egal Regulations to these authorities.

Requirements o the Franchiser

The Franchiser must possess a well-developed Business Format and the capacity to serve continuousoperational capacity, as well as technical support, proessional training and other services to the

Franchisee.

On the other hand, the Franchisee must already hold two units or stores, which are directlymanaged and in operation or over a year. The Law does not speciy i those stores have to be inChinese territory, however, stores and units established in oreign countries have gained acceptanceespecially in big cities.

20042007200726 0751

;

21



29/65

5756

Registration

Within 15 days ater the conclusion o the Initial Franchising Contract, the Franchiser must presentthemselves or registration at the responsible Local Governmental Entity, by submitting theollowing documents:

Duplicate copy o Business Licence or Business Registration Certicate (Certicate oIncorporation);

Copy o Franchise Contract;

Operation Manuals o Franchising;

Marketing Plan;

Written statement and evidence materials supporting the compliance by the Franchiser withthe above-mentioned requirements established by the Chinese Law;

Other documents required by the relevant Local Governmental Entity;

In the case products and services oered by the Franchising are subject to Law approval, theFranchiser must also present the relevant documents or the eect.

I all these documents are presented, within 10 days, the Registration Entity must register theFranchising and announce it to the Franchiser. I the documents are incomplete, the authority canrequire the presentation o supplementary documents or materials within 7 days.

The State Authorities publish the list o Registered Franchisors on their internet domain.

Commerce department shall record and update the list o licenses posted on the governmentwebsite.

Franchise Contract

A Franchise Contract should be written and indicative o the Franchiser and Franchisees essentialinormation; content and length o Franchise; type, value and payment methods o the Franchising

remuneration; specic contents and assistance or Operation Manual, Technical Support,Proessional Training and other services; quality, standards and guarantee o products or servicesoered by the Franchise; promotion and advertisement o products or services; agreements onthe protection o Consumers Rights and Interests; and the division o Indemnity Responsibilities inrespect o Franchising activities. Furthermore, the Contract must determine the Guiding Principles/Rules which embrace the ollowing situations: contractual changes, rescission and cessation oFranchise Contract; responsibility o both parties or the breach o Contract; dispute/litigationsolving methods; and other issues considered relevant by both parties.

The Contract must be given to the Franchisee 30 days prior to the signing day.

15

()()

()

()

()

()

()

107

30



30/65

5958

Trial period

The Franchisor and the Franchisee should state in the Franchise Contract that within a certainperiod ater the conclusion o the Contract, the Franchisee can unilaterally terminate the Contract.

Operation period

The Franchise Contract should have a minimum length o 3 years, unless the Franchisee consentsto another operation period.

Technical SupportThe Franchiser must provide the Franchise Operation Manual to the Franchisee and supplyoperational assistance, technical support and continuous proessional training, as well as otherservices among the agreed contents and methods

Conguration in accordance with the Chinese Product and Services Law

Products and services provided by the Franchise must comply with the Chinese Law, as well as tothe Regulations and other Rules issued by the State.

Franchise Remuneration

In case the Franchiser requires the payment o remuneration beore the conclusion o the FranchiseContract by the Franchisee, or that eect, it should be written and explained to the Franchisee thereasons and conditions o payment and reund.

Promotion and advertising

The payment o promotion and advertisement taxes is collected by the Franchiser rom theFranchisee. Inormation regarding the use o this und must be stated previously on the FranchiseContract by the Franchiser.

Moreover, promotion and advertising conducted by the Franchiser must not be misleading ordeceptive. The Franchiser must not publicize the Franchisees prot/income.

Transer o Contractual Position

The Franchisee must not transer the Franchise to a third party without the consent given by theFranchiser. In addition, it is established by law that the Franchisee must not divulge or allow the useo the Franchisers business/trading secrets by any other parties.

3



31/65

6160

Annual Report

In the rst trimester o each year, the Franchiser must communicate to the responsible CommercialEntities, the situation o their Franchising Contract (the one signed in the previous year).

Access to Franchisers Inormation

The procedure o access to the Franchisers inormation is quite strict in China, and in general,much stricter than the European rameworks.

As mentione d above, besides the Franchise Contract, 30 days beore closing the contract, the

Franchiser should provide the ollowing inormation to the Franchisee:

The ranchisors name, domicile, legal representative, registered capital, business scope; andbasic characteristics o the Franchise;

Background inormation on the registration o trademarks, logo, patents, know-how, andbusiness model;

Franchise Taxes: type, amount, method o payment speciying the necessity o making adeposit and the respective conditions and methods or its reund;

Price and Conditions to provide products, services or equipment to the Franchisee;

Specic contents, methods and plans regarding the deployment o continuous assistance,technical support, proessional training and other services provided to the Franchisee;

Specic measures regarding assistance and supervision o the Franchisees operationalactivities;

Investment Budget in the Franchising Business;

Report on the existent Franchisees in the Chinese territory number, geographic distributionand evaluation o operational state;

A summary o the Financial Reports audited by an Accounting Company and the summary o

the Auditors report regarding the past 2 years; Franchise-related litigation and arbitration processes in the past 5 years;

Major illegal business records perormed by the Franchiser and its legal representative;

Any other inormation required by the Local Commercial Authority.

The inormation provided to the Franchisee by the Franchiser must be true, complete and current,and the same should be promptly inormed about any noticeable alterations. The ailure to do so,gives the ranchisee the right (as serious as) to rescind the Contract.

30

( )

2

5



32/65

6362

Liability and Legal Sanction

Unauthorized operation

As mentioned above, i the Franchiser, upon the moment o registration, does not hold at least twoFranchises or over one year and directly operated by them, and it is still in the ranchising business,can be sued by the Commercial Authorities to remedy the violation, conscation o illegal prots subject to penalty o 10.000 and 50.000 Euros ne. The Authorities publicize this act.

No registration

In the absence o registration, the authorities must establish a deadline or its completion andmay also impose a ne between 1000 and 5000 Euros. I the Franchiser does not complete theregistration at the stated deadline, the operator may be applied a penalty in a value betwe en 5000and 10000 Euros, with public disclosure o this act.

Irregular payment o Franchise Taxes and lack o Annual Communication to the Authorities

There are two situations which may demand correction and application o a ne, lower than 1000Euros, established by the State Authorities prepayment o Franchise taxes does not obey theabove-mentioned document; lack o annual communication to the State Authorities.

However, in circumstances o serious violations, the Authorities may apply a penalty between1000 and 5000 Euros, and hence publicize this act.

Fraudulent, deceptive or abusive promotion and advertisement

The raudulent, deceptive or abusive promotion and advertisement, in the terms previouslymentioned, can equally result in a demand by the Authorities payment o high nes and publicdisclosure o the case and, in this subject, even the suspension o the ranchising activities, withoutprejudice to its rightul prosecution and other repercussions stated in the Advertising Laws.

Once again, the Chinese Legislatures severe action was motivated by unruly practices o seriousconsequences that occurred with the absence o the relevant law on this matter and appeared onChinese Courts during the early implementation o the new legislation, which sought to disciplinethese cases.

In addition, nes and penalties are oreseen in the cases o lack o anticipated access to theFranchise Contract by the Franchisee or in the case o incomplete or alse disclosure o relevantacts on this matter, infuencing the Franchisees contract decision.

211050

1050

15510

115

3101030



33/65

6564

With great severity and equally motivated by cases appeared in Chinese Business practice, pyramidsales systems under the designation o ranchising are also punished, as well as other raudulentactions o serious nancial or patrimonial repercussions, in which specic legislation alreadyapplies.

Similarly, cases o Management corruption are punished with criminal gravity.

Intellectual Property Rights ( IPR)

It remains to say, very briefy, that on this matter China applies - with certain exceptions - the ruleo property according to the rst registration, so it matters that the Franchiser rst registers its

trademarks, patents and careully ensure the protection o its remaining IP Rights.

It is o interest, or instance, in a particular way, to register the Chinese version o the Trademarksdesignation and logos, as we will veriy in a later stage.

Sector Association

The Chinese Association o Commercial Chains and Franchising is the sector association, which issupervised by the Chinese State, almost governmental, due to its responsibility or the discipline,development and emission o Franchise Conduct Policies.

Market Features

The oreign Franchiser that intends to carry through investment operations in China must devote aspecial attention to understand the market, the Chinese consumer and culture. With eect, manyInternational Trademarks had to customize their products, sales techniques and the designationsassociated to their Trademarks and Company, to the market and the Chinese consumer, in order toturn their business amiliar and appellative to the Chinese Market.

For instance, even though it is not mandatory, it will prove very convenient that the company trademarksare translated and customized in a way to suggest their meaning in English, to have identical phoneticsand to be appellative to the local market. For example, realizing with great success, Carreour and

Starbucks translated their trademarks respectively as Jia Le Fu (the whole amily happy) and XingBa Ke, Xing meaning star and being Ba Ke similar to the Bucks in English.

,bucks



34/65

6766

Contracts o Distribution

Beyond Franchising, a oreign company that has been constituted as a oreign capital companyin China can also choose to distribute or sell directly its products or services in this market as awholesaler or retailer.

In the wholesale market, as we have already seen, it includes the commissionaire agent and thecounters, being able to choose one or several wholesale distributors or contact directly the localretailers. In this case, the company initially concludes a Distribution Contract with the wholesale(s)distributor(s), through which it rebuilds the controlled and supervised network o several retaildistributors or enters into several Distribution Contracts directly with retailers.

The parties are ree to ormat the Distribution Contracts with great breadth, taking o nly into accountthat under the Chinese Competition Law, vertical agreements on xing resale prices and abuse odominant position through sales reusals, tying, and sale at unreasonably high or discriminatoryprices are prohibited.

Moreover, Chinese Law does not oresee any restrictions on the matter o selective distribution, nor isthe distributors compensation, ater a contract termination, an implemented practice in this market.

Department stores

In the case o units or counters in department stores (like El Corte Ingls), the company mustrequest the leasehold spaces o the store and divide prots with the same. Normally, a JointOperating Agreement with varying length (usually rom hal to three years) will be celebratedbetween the two companies, through which the company decides the prices to be charged in thestore and provides its products, decides or headhunts the recruitment o its sta, leaving the shopresponsible or the administration o the space, uniorm decoration, collection o the sales revenue,issuance o receipts, provision o post-sale support services as complaints management o deectiveproducts, and or the guards and security patrols, and cleaning services.

Usually there is no discrimination between the dierent departments that work under the sameconditions, although there may be exceptional negotiation aspects especially i the products orservices in question have major repercussions in the Chinese market.

Calculation o commissions and service ees

Each department store has implemented their commissions own calculation method, usuallythrough the retention o a xed percentage regarding the realized sales by the Trademark (about20-30%), or a pre-determined monthly minimum commission, which unctions as a guaranteeand under which is added ater a lower percentage o monthly sales, or even the choice betweena percentage o monthly sales or a predetermined monthly income, whichever represents thehighest amount (especially in the case o large suraces).

Moreover, Companies ound in department stores pay the latter a fat monthly ee or servicesprovided by the shop or a percentage o their sales to the same.

,

EI Corte Ing les

20%-30%



35/65

6968

Unilateral Termination o the Contract

Another standard practice is the situation whe n departments with lower perormance duringa time period (not exceeding 6 months), the shop can unilaterally drop the contract with thatcompany and reorganize the departments with ull control o the store.

Regarding the retail market, the oreign company must ensure that this activity is provided in itsCorporate Purpose as dened in its Business License, which can also be done through an extendedsubsequent change in the social subject o that company. For such purpose, the oreign companymust deliver to the responsible authority the original contract concerning the leased space or thecerticate o ownership o it, i the intention is to purchase the store.

Normally the opening o new stores goes through the establishment o a Branch and its registrationin that stores address, and thus the Mother Company must require an authorization rom the localresponsible Authorities.

The rented or purchased spaces destined or retail must have been specically oreseen orcommercial purposes. The parties have broad reedom to rest in the conormation o negotiatingleases or purchase and sale o the property, subject nevertheless to the ollowing models alreadysuccessul with the authorities. Indeed, these contracts must rst be presented in the Chinese landregister (i the landlord didnt make that contact already) beore approving the ormation o a newcompany or a branch.

Sales via the Internet

In practice, since the law requires and permits, it has been proved hard to obtain rom theAuthorities the approval o including retail sales via Internet as part o the Corporate Purpose oRetail Companies. However, some licenced retailers still practice this activity without complyingwith this requisition, but at their own risk, they are subject to terminate this activity at any moment.

What occurs sometimes is that companies have their own Internet domain or non-commercialpurposes, using that act or registration with the Authorities responsible or Telecommunications,which normally do not check the Companys Corporate Purpose.



36/65

7170

IV.FOREIGN TRADEPOLICY

(A) Tari Measures

Import taris

China import taris are calculated based upon the Harmonization System o Classication Codes(HS-Code) and the rates vary according to the type, composition and nal destination o theseproducts. Similarly to other jurisdictions, China provides a avourable tari or imports romcountries with whom it has a convention or an agreement and/or with WTO members.

Partial repayment o Export Taxes

The partial reund o taxes on exports envisages the competitiveness o exports, the increase in thequality o export goods and consists o the recovery o part o the amount already paid as taxes onproduction and circulation o goods, whenever such goods are or export.

The China Government has repeatedly extended the percentage o reund o taxes on exportso various products, mainly or textiles and clothing, iron, nonerrous metals, petrochemicals,inormation technology and energy. The present value o tax deduction can be easily ound onthe website o the State Administration o Taxation (http://202.108.90.130/n8136506/index.html).

(B) Non-tari measures

(i) Classication o imports

Imported goods are subject to dierent requirements and are divided into the ollowing categories:

prohibited goods - weapons, poisons and chemicals o toxic nature;

restricted circulation goods - the ones that require an import license or are subject to limitationby quota;

ree circulation goods - class that comprises the great majority o imports.

More detailed inormation about c ategories o goods, their restraints and relevant policies involvingeach type may be obtained in the English language web site o the Ministry o Commerce o China:

http://english.mocom.gov.cn.

(ii) Import License

The Chinese government has recently implemented a system o import license that allowsa more stringent control on certain imported goods o restricted circulation. For example, on1st April 2007, the Chinese government waived import licenses on 338 dierent categories oproducts. With the new licensing system o import ation, Chinese importers may request anautomatic import license .

WTO

http: //2 02.10 8.9 0.130 /n8136506/index.html

http://english.mofcom.gov.cn

200741338



37/65

7372

Import licenses are granted by the Chinese Ministry o Commerce and the General Administrationo Customs. The latest list o catalogues o goods subject to automatic import license in 2011 isincluded in the Announcement No. 106 (2010) o the Ministry o Commerce and the GeneralAdministration o Customs.

(iii) Import quotas

Import quotas are used as a orm o protection o the local producers o goods in the domesticmarket economy. Since Chinas adherence to the WTO in 2001, it has been cancelling its importquotas or various types o products.

Import quotas are regulated and determined by the National Commission on Reorm andDevelopment and by the Ministry o Commerce.

(iv) Anti-dumping and Anti-subsidy

(A) Regulations

China currently adopts extensive regulations that deal with the anti-dumping mea sures, providingand addressing possible breaches. Some examples o regulations are: the Anti-dumping Regulationo the PRC (revised in 2004), the Provisions on Anti-dumping cases concerning Exported Products(2006), the Provisions on the Antidumping Investigation o Industry Injury (2003), the InterimRules on the Access to Non-Condential Inormation in Anti-dumping Investigations (2002), theInterim Rules on Price Commitments in Antidumping Investigations (2002), etc.

The Tari and Classication Committee o State Council and the Ministry o Commerce are thebodies responsible or setting the anti-dumping and anti-subsidy regulations and directives.

(B) Measures to protect anti-dumping and anti-subsidy

As anti-dumping measures that may be imposed in China, there are (i) provisional anti-dumpingmeasures (deposits in guarantee, letters o guarantee, etc.), (ii) obligations (they may take the ormo guarantee given by the exporter on price changes or on ceasing any imports at prices deemed

below market price, or even guarantees about the elimination or limitation o granted subsidies).The Ministry o Commerce shall have the nal decision on the acceptability o such guaranteesand/or anti-dumping measures (required when a dumping or subsidy situation is ruled by nal andirrevocable decision, as harmul to the domestic market - the responsible entities or the paymento taris will be the importers o the dumping products a nd/ or the subsidized products).

Guia de Investimento Na China

Documents

Transcript of Guia de Investimento Na China