Local Laws
Shandong Province
Opinions to Further Accelerate the Development of the Shipbuilding Industry (Lu Zhen Fa No. [2008] 104, promulgated by the People’s Government of Shandong Province and effective as of November 26, 2008)
The Opinions to Further Accelerate the Development of the Shipbuilding Industry (“Shipbuilding Opinions”) establish that Shandong Province will accelerate construction at three of its shipbuilding industry bases (Qingdao, Yantai and Weihai). It will also develop six shipbuilding industry gathering zones (Qingdao Economic and Technological Development Zone, Jimo County, Yantai Economic and Technological Development Zone, Penglai County, Weihai Economic and Technological Development Zone, and Rongcheng County). Shandong will focus most its efforts on developing three types of ships; container ships, bulk cargo ships, and oil tankers. However, it will also work to develop high technology and high value ships, including, ro-ro passenger ships, LPG ships, LNG ships, and ocean engineering equipment.
Under the Shipbuilding Opinions Shandong is pledging to accelerate its establishment of a science and technology innovation system and enhance an enterprise’s ability to independently innovate. The Opinions establish that shipbuilding and its supporting industries will be Shandong Province’s development priority, and all relevant special funds (such as, the funds of the Provincial Technology Center for construction, special funds for structural adjustment, special funds for the development of information industry and special funds for manufacturing information engineering) will be allocated to shipbuilding. If a shipbuilding enterprise and its supporting industries are able to meet the State’s standards for high and new technology enterprises, then their income will be taxed at a 15% rate. Furthermore, enterprises with new technologies, new products, and new technological process research and development expenses will be able to take an additional 50% deduction on the income tax due if the research and development expenses are not capitalized as intangible assets. However, where these expenses are capitalized as intangible assets， 150% of the cost of the assets can be deducted from the enterprise’s income tax.
KW’s Comments: The Shipbuilding Opinions clarify how Shandong Province will emphasize, promote, and implement the “One Body with Two Swings” policy and the ocean economy development strategy.
Zhejiang Province
1.The Notice of the Zhejiang Provincial People’s Government’s General Office on Strengthening its Work on Developing and Managing Hydropower Resources No.〔2008〕79 of the General Office of the People’s Government of Zhejiang Province, November 17, 2008)
The Notice of the Zhejiang Provincial People’s Government’s General Office on Strengthening its Work on, Developing, and Managing Hydropower Resources (“Hydropower Notice”) establishes that it will continue strengthening its rational development and utilization of hydropower resources. This strengthening will focus on five specific areas:
First, they will conform their management, development, and planning of hydropower “recourses” with the development plan for the river basin. They will also coordinate with the overall urban plan, overall land utilization plan, and relevant plans for forestry, environmental protection, and tourism. They will also specify which regions are marked for focused development, which areas will be subject to having their development restricted, and which areas will have their development prohibited.
Second, the province will adhere to the principle that the state will own all hydropower assets. It will use an open bidding system for allowing utilities to pay for the power they acquire from a hydropower source, and it will standardize the system used to transfer hydropower resources. Furthermore, mechanisms to compensate the damage done to any resources destroyed by hydropower development will be increasingly developed and improved.
Third, the province will develop and implement a system to effectively manage changes to the environment due to hydropower. It will prepare an environmental evaluation report for its hydropower development projects, and it will get the environmental evaluation report approved before the project’s feasibility study report is completed.
Fourth, the province will strictly follow hydropower development project construction protocol when building a hydropower project. It will also make sure that the legal person responsibility system, the open bidding system, construction engineering supervision system, and project management system are fully implemented in hydropower construction projects.
Fifth, the province states that it will strengthen its leadership in hydropower development projects, and focus on safely producing energy from hydropower projects. Its focus on safety will adhere to the State’s territorial principle, the State’s chief executive accountability system, and the State’s “one-vote-veto” system to prevent accidents at hydropower projects.
KW’s Comments: The Hydropower Notice will allow Zhejiang province focus on rationally developing and utilizing its hydropower resources. It will help the province promote the healthy, stable and sustainable development of its hydropower resources. Furthermore, the Notice implements regulations on the procedure to build a hydropower project, which will effect how hydropower investors develop projects and work with intermediary entities on projects.
2. Reply on Whether Title Deed Taxes Should be Levied on Housing and Land When a Title Transfer is Executed (No.〔2008〕20 of the Department of Finance, Agriculture and Bureau of Taxation of the People’s Government of Zhejiang Province, November 21, 2008)
Zhejiang province’s Department of Finance replied to questions about whether taxes should be levied on housing and land when a title transfer is executed. The provincial government made this reply under the Provisional Regulations of the People’s Republic of China on Title Deed Taxes. The provincial government determined that if the land is recovered is related to the re-transfer of housing and land titles, then the housing and land will be considered outside of the title deed tax’s scope, and will not have title deed tax levied against it. Furthermore, the Reply establishes if a title execution is judicially revoked, then the party that benefited from the title transfer must return all of the gains to the other party so that both parties are in the state they were before the transfer was executed.
KW’s Comments: This Reply is a supplement to the Provisional Regulations of People’s Republic of China on Title Deed Taxes, and its provisions are only effective within Zhejiang Province. However, other provinces will look at how the provisions are implemented in Zhejiang, and will consider whether the Reply’s policies should be implemented elsewhere.
Guangdong Province
The Shenzhen Stock Exchange Rules on the Trade of Non-Tradable Shares by Large/Small-Scale Shareholders
The Shenzhen Stock Exchange is attempting to more efficiently regulate trading in large or small-scale non-tradable shares. On December 2, 2008, the Shenzhen Stock Exchange issued its Circular on Insuring the Strict Implementation of the Administrative Measures for Acquiring Listed Companies and Other Relevant Provisions for companies listed on the Shenzhen Stock Exchange and their shareholders. The Circular clarifies the fact that the Shenzhen Stock Exchange will use the standards established in Article 13 of the Administrative Measures for Acquiring Listed Companies to insure that the increase or decrease in the ratio of shares that a shareholder acquires or sells via the Shenzhen Stock Exchange’s centralized bidding transaction system or block trading system. Article 13 requires that investors trading via these systems report and disclose their activities, and they will not be able to trade shares in the listed companies they are trading in under these systems when Article 13 prohibits them from trading. The Circular also establishes that investors must strictly comply with all relevant regulations, and they must only trade shares in a lawful way.
KW’s Comments: The Shenzhen Stock Exchange appears to have taken positive steps toward effectively regulating the stock market. The Circular radically changes how the frequent trading of large or small non-tradable shares is governed. These changes should be looked at as the Shenzhen Stock Exchange attempting to maintain stability as it eases short term market pressure. Yet, these changes are not the long term answer, and in turn, the Stock Exchange will have to make even more changes if it wants to provide long term market stability.
Sichuan Province
1.The People’s Government of Sichuan Province’s Notice on Distributing the Several Opinions of the Provincial Science and Technology Bureau and Other Provincial Departments Opinions on Investment and Financing Policies and Implementing Services to Improve High-Technology Industrial Development (Chuan Fu Han (2008) 336 Hao, the People’s Government of Sichuan Province, December 3, 2008)
These Opinions aim to promote concentrating capital into hi-tech enterprises, and to support the overall development and prosperity of the high-tech industry. The Opinions focus on four main areas:
(i)There will be a focus on establishing a mechanism to increase venture capital investment in high-technology industries. Sichuan province will provide detailed policies to attempt to increase venture capital investment in three ways. First, the province will develop a policy on how it will provide subsidies for venture capital investment in small and medium scientific and technological enterprises. Its new policy will follow the limited involvement and priority support principles, in addition to, the government guidance principles. Sichuan will establish a subsidy fund for venture capital. It will attempt to guide international financial institutions, domestic and foreign venture capital firms, listed companies, various State or individually owned social funds, and hedge funds to try to broaden the available financing channels for developing high-technology industries. Second, Sichuan will provide finance and tax benefits to entities that provide, at least, two years worth of venture capital to State supported and encouraged unlisted small and medium high-tech enterprises, as long as, the entities providing the venture capital meet the State’s conditions for preferential finance and tax benefits. Entities that do meet the State’s standard’s for preferential treatment will be able to deduct 70% of the capital they invested in venture capital enterprises from their taxable income after they have held equity in a venture capital enterprise for at least two years. Furthermore, if the investor’s tax bill is not large enough to use the entire 70% deduct, the remainder of the deduction can be carried over to the next year’s tax bill. Moreover, this carry over is available each additional year after two years of investment until the entire 70% deduction has been used. Third, Sichuan will push venture capital toward State-owned enterprises by changing how State-owned venture capital enterprises are managed. It will also encourage State-owned venture capital enterprises to adopt the “fund to fund” mechanism in an attempt to attract domestic and overseas social funds and by establishing venture capital companies or partnership funds so that there will be diverse private and public venture capital investment options.
(ii)Another area of focus will be on encouraging financial institutions (banks, insurance companies, and security institutions) to support the development of Sichuan’s high-tech industry. The province will provide detailed policies to encourage investment in five ways. First, Sichuan will attempt to strengthen the strategic banks’ support for high-tech enterprise development. Second, it will push commercial banks to improve and strengthen the amount of credit they offer to high-tech enterprises. Third, it will encourage banks offer preferential treatment to high-tech enterprises. For example, the province would like banks to explore offer high-tech enterprises a pledge of an export rebate, a pledge of stock, a pledge of stock equity, a pledge of an insurance policy, a pledge of debenture, a pledge of a warehouse receipt, mortgages, or offering interest discounts for intellectual property pledge loans. Fourth, it will attempt to energize and marshal security institutions toward providing support for high-tech enterprises to develop.It would also like to sway security institutions with enough capital to start investing as venture capitalists, and in turn, be able to enjoy the State’s preferential policies.Fifth, Sichuan will attempt to encourage insurance companies to develop new insurance products that will be suitable to the actual needs of high-tech enterprises.
(iii)The third area of focus will be on supporting Sichuan’s high-tech enterprises ability to raise capital. The province will provide detailed policies to help high-tech enterprises increase ability to raise capital in four ways. First, Sichuan will support high-tech enterprises that have sustained profit capabilities, outstanding primary businesses, operate legally, and have good growth forecasts by pushing for the enterprises to be listed on the “main board,” the board for small and medium sized enterprises, or developing growth enterprise market. Also the province will consider working with these kinds of enterprises so that they might be able to be listed on the national stock transfer agent system. Second, it will push small and medium sized scientific and technological enterprises to issue small and medium sized enterprise collective bonds. Third, the province will establish a system for high-tech enterprises to get mutual security and joint security loans. Fourth, Sichuan will strengthen start-up and growth period support for high-tech enterprises by pushing banks to offer discounts on loans for technologically innovative projects that meet State standards, and by encouraging private investors and venture capitalists to provide support their support to high-tech enterprises.
(iv)The final area of focus will be on optimizing the high-tech industry’s financial investment environment. The province will provide detailed policies to improve the high-tech industry’s financial investment environment in three ways. First, it will foster the high-tech enterprise equity transactions market. Second, Sichuan will establish science and technology financial service centers. Third, it will apply to allow high-tech enterprises receive a preferential 15% income tax rate, and it will focus its efforts on getting the State’s preferential tax policies in place for small enterprises with meager profits.
KW’s Comments: The Opinions show that Sichuan is eager to promote the development of high-tech enterprises within the province. The policies attempt to be a catalyst for increased high-tech venture capital, financial support, and systems for raising capital within the province, however, how effective these policies will be remains uncertain, and they need to be watched to insure they adequately promote the development that Sichuan would like.
2. The Sichuan People’s Government’s Opinions on How Tourism Can Recover and Expand (Chuan Fu Fa [2008] 44 Hao, the People’s Government of Sichuan Province, 14 December 2008)
These Opinions were promulgated to help tourism recover and expand within Sichuan province. They will focus on helping tourism grow in three areas:
(i)The first area Sichuan will focus on is strengthening its push for the State to increase its efforts to promote tourism in the province. Sichuan will create a detailed policy on helping enterprises that have significant development potential, characteristics advantages, and are currently being reconstructed loans with interest rate discount or partial interest rate discount.
(ii)Second area of focus will be on providing tax benefits and credit for tourist enterprises. The province will create seven detailed policies to improve tax rates and credit for tourism enterprises. First, Sichuan will reduce or exempt tourist enterprises from taxes and fees. Second, it will attempt to get more credit to develop and construct major tourism sites. Third, it will attempt to create competitive and characteristic travel routes to Sichuan province. Fourth it will push to develop rural tourism in the province. Fifth, it will help tourism enterprises temporarily maintain their credit ratings and extend the period tourism enterprises have to pay back loans if they were damaged in the earthquake. Sixth, Sichuan will encourage security institutions to secure tourism enterprise’s bank loans so that tourism enterprises will be able to develop more attractions and construct new projects. Seventh, the province will assist tourism enterprises restructuring so that they might be able to sell stock on an open stock exchange or issuing bonds on domestic and foreign capital markets. It will also support tourism companies that are already listed on stock exchanges, publicly listed enterprises may refinance and become green channel qualified enterprises. Green channel enterprises have access to expedited financing because they promote environmentally sound development.
(iii) The third area of focus will be on influencing State policies and optimize the opportunities for tourism development. The province will create two detailed policies to make tourism development as efficient as possible. First, it will try to help tourism enterprises in counties (municipalities and districts) affected by the earthquake by supporting the development of new tourism projects that will help increase depressed land prices in the earthquake affected region. A developer will need to file a report with the Sichuan provincial government if the price of the land to be used is lower than when it was originally assessed for development. Second, it will loosen the registered capital restrictions for companies registered as group tourism enterprises. If a parent company is registered with at least 10,000,000 RMB in registered capital, controls three companies that have at least 20,000,000 RMB in consolidated registered capital, and it has followed the procedure to be registered as a “group company”, then the parent company will be allowed to register. With this designation the parent company will be able to contribute to the registered capital of any newly established tourism enterprises. However, the amount of registered capital a tourism enterprise needs will be subject to industry requirements. A privately-owned tourism enterprise that has less than 500,000 RMB in registered capital can have its registered capital injected over a two years period.
KW’s Comments: These Opinions are focused on promoting the recovery and expansion of tourism in Sichuan province. These policies focus on trying to get interest rate discounts for tourism enterprises, preferential tax treatment, additional credit and financing, decreasing land use costs, and lowering the cost of registering as a tourism enterprise. However, how effective these policies will be at increasing Sichuan’s tourism is uncertain, and the implementation of these policies needs to be observed.
Foreign Exchange and Tax Law
Circular on Several Issues Regarding the Submission of Taxation Certification for External Payments in the Service Industry
The State Administration of Foreign Exchange (“SAFE”) and State Administration of Taxation (“SAT”) jointly promulgated the Circular on Several Issues Regarding the Submission of Taxation Certification for External Payments in the Service Industry (“Circular”) on November 25, 2008, and it was implemented on January 1, 2009.
The Circular stipulates that domestic institutions and individuals should submit a Taxation Certification on External Payments for Service Trade, Income, Current Account Transfers and Sectional Capital Items to the taxation authorities when domestic entities and individuals make an overseas payment of more than $30,000 USD. Foreign service trade, earnings, current transfers and capital amounts are not included in this $30,000 USD total.
The Circular establishes items that a domestic entity may exempt from seeking a Taxation Certification for:
- (1) A domestic entity’s overseas travel, conference, and exhibition expenses;
- (2) A domestic entity’s overseas representative office expenses, and any advance payments on overseas construction projects;
- (3) A domestic entity’s import and export commissions, insurance fees and compensation;
- (4) A domestic entity’s overseas representative office’s international transportation fees acquired through the import trade;
- (5) A domestic transportation enterprise’s overseas maintenance, fuel and other costs;
- (6) An Individual’s overseas personal expense, including, studies, tours, and visits to relatives.
- (7) ny other situations that the laws or regulations establish should exempt from Tax Certification.
KW’s Comments: The Circular clarifies the situations where an entity or an individual needs to submit taxation certificates for service trade, earnings, current transfers and oversea payment for some capital items, and it improves the State’s management of foreign exchange and taxation.
Anti- Commercial Bribery
Opinions on Several Issues Regarding the Application of the Criminal Laws in Commercial Bribery Cases
On November 21st, 2009, the Supreme People’s Court and the Supreme People’s Procuratorate jointly issued the Opinions on Several Issues Regarding the Application of the Criminal Laws in Commercial Bribery Cases (“Bribery Opinions”). The Bribery Opinions clarify how the criminal law will be applied to commercial bribery cases.
First, the Bribery Opinions establish that commercial bribery violates the Criminal Law in eight ways. Before the Bribery Opinions were promulgated PRC law did not have any specific provisions regarding commercial bribery. The Opinions clarify that commercial bribery is covered by all bribery crimes under the Criminal Law, including, government officials accepting bribes and bribes to non-governmental staff.
Second, the Opinions provide the scope of what is considered criminal commercial bribery. It clarifies that the staff of standing organizations and institutions (like hospitals and schools) and temporary organizations (like evaluation commissions, sales negotiating teams, procurement inquiry panels) are included in the “staff of other units” in the June 2006 amendments to the Criminal Law. Government staff, non-government staff, and project contractors are all considered “staff of other units” under this amendment.
Third, the Bribery Opinions specifically define some kinds of payments as commercial bribery that have previously been controversial, but not considered bribery. Now, when an individual receives a payment from an individual or entity when schools are attempting to acquire teaching materials, when public bidding occurs, when competitive negotiation occurs, or when the government is procuring items it is considered to be commercial bribery. Furthermore, the Opinions also establish that kickbacks from a medical institution are also considered commercial bribery.
Fourth, the Opinions expand the scope of what is considered a bribe. Bribes now include housing decorations, membership cards that include credit to purchase items, gift cards, and travel expenses. How much money is actually paid or the cost of the item provided as a pay off will determine how large the bribe is. These expansions in scope keep the PRC’s standard for bribery narrower than the internationally accepted standard, but this expansion shows that the judiciary is trying to address the use of bribery in Chinese society.
Fifth, the Bribery Opinions define what “Malfeasant Interest” is. It establishes that policy and industry norms are the Chinese standards for what is considered a legitimate interest, and any actions taken to “gain a competitive advantage” in the public bid process, government procurement process, or any other commercial activity will be considered commercial bribery. In turn, individuals and entities should avoid any situation where they could be suspected of having a “Malfeasant Interest” and attempting to promote that interest by seeking a competitive advantage.
Finally, the Bribery Opinions draw a distinction between bribes and legitimate gifts from relatives and friends. The Opinions provide a standard to differentiate between what is a bribe and what is an acceptable gift. Specifically, the Opinions establish four parameters that will help determine whether an act is a bribe or an acceptable gift. First, whether the person offering the item is a relative or friend of the person he or she is making the offer to, and the extent of any contact between the two prior to the offer that is being extended to the person. Second, the value of the property the individual is offering to give the other individual. Finally, if there was a specific reason or occasion that the item was being offered for, and the method the offeror used to make the offering and the method the offeree used to accept property.
KW’s Comments: This interpretation clarifies the boundary on what is considered criminal commercial bribery. It establishes a uniform standard for a judge to determine if an offer of property constitutes commercial bribery, and it increases the likelihood that more commercial bribery cases will be brought to the people’s courts. Furthermore, enterprises can use the Bribery Opinions as a reference for them to development their own codes of conduct. The Opinions will help make sure that an enterprise’s employees are not seeking benefits for themselves. Moreover, by creating a code of conduct based on the Opinions an enterprise will be showing that it is unwilling to engage in illicit activities for a competitive advantage. With a code of conduct in place an enterprise will be self-regulating, which will help promote the norms and guidelines for the development of a healthy market economy. Finally, promulgating the Opinions shows that the judiciary mindset and determination to address corruption and bribery in the PRC, and it is setting a standard that market players adhere to if they do not want to be considered engaging in bribery.
Venture Capital
China Banking Regulatory Commission Notice on the Publishing and Issuing of the Guide for Commercial Banks to Control Risk in Merger and Acquisition Loans Yin Jian Fa [2008] No. 84
The China Banking Regulatory Commission (“CBRC”) recently released its Circular Concerning the Publishing and Issuing of the Guide for Commercial Banks to Control Risk in Merger and Acquisition (“M&A”) Loans (“Notice”) and its Guide for Commercial Banks to Control Risk in Merger and Acquisition Loans (“Guide”). These two items establish how commercial banks may qualify to operate a M&A loan business and how commercial bank M&A loan activities will be regulated.
The Notice establishes that any commercial bank, including, city commercial banks, rural commercial banks, foreign-owned banks and sino-foreign joint venture banks can have a M&A loan businesses, as long as, it meets five conditions:
- (1) The bank must have a comprehensive risk management and effective internal control system;
- (2) The bank’s specific loan loss reserve adequacy ratio shall be no less than 100%;
- (3) The bank’s capital adequacy ratio shall be no less than 10%;
- (4) The bank’s general reserve balance shall be no less than 1% of its concurrent loan balance;
- (5) The banks must have staff in place to provide due diligence investigations and risk evaluations for M&A loans;
The Guide specifies that M&A loans are loans used in local M&A transactions where the acquiring party takes over or controls a target enterprise by acquiring the enterprise’s existing shares, by acquiring newly issued shares, purchasing the enterprise’s assets, or taking over the enterprise’s debts. The Guide stipulates that a bank’s total M&A loan balance should not exceed 50% of its core net capital, and its M&A loans to one borrower should not exceed 5% of its core net capital. The Guide clarifies the fact that a M&A loan cannot be more than 50% of the funds used to acquire an enterprise, and that M&A loans need to have under a five year repayment term.
KW’s Comments: The Guide establishes a basis for commercial banks to comprehensively analyze and evaluate their M&A loan risk, and strengthen management and control of M&A loans. The promulgation of the Guide shows that the PRC government is looking to encourage M&A loan financing methods in the PRC. Furthermore, the promulgation of the Guide shows the PRC government is expanding the M&A financing channels available through Chinese commercial banks. Finally, the promulgation of the Guide shows how the PRC government is attempting to help national enterprises weather the financial crisis.