FDI Laws

(The Order of State Administration for Industry and Commerce (SAIC) No. 39)

The SAIC recently released the Administrative Measures for the Registration of Capital Contribution with Equities (the “measures”), which will become effective on March 1, 2009. The measures clearly allow investors to make capital contribution with equities. The measures also require that the total amount of capital contribution with both equities and other non-monetary assets by all shareholders must not exceed 70% of the registered capital of the invested company. Article 3 of the measures further requires that equity used as capital contribution be transferable according to other laws and regulations, and have an identified ownership and origin, as well as “complete capabilities.” Notwithstanding these requirements, the measures bar the use of equity as capital contribution outright under the following circumstances:

(a) Where the registered capital in the equity enterprise has not been fully paid;

(b) Where the equities have been pledged;

(c) Where the equities have been legally frozen;

(d) Where the parties stipulate that equity used in the association be non-transferable;

(e) When the equity transfer subject to the approval of the competent authorities according to Chinese laws, administrative regulations, or the State Council decisions fail to obtain such approval; and

(f) Where transfers are otherwise prohibited by law, administrative regulations or State Council decision.

The measures strictly regulate the deadline of actual capital payment. Article 6 of the measures requires that investors making equity capital contributions fully pay within one year of the company establishment. Further, the financed company must register the change in its capital structure; if the recipient company decides to increase its registered capital, the investors who are making capital contribution with equities must actually contribute equity before the invested company registers its capital increase.

KW Comments: The measures clarify the ambiguities in the provisions regarding company incorporation in the PRC Company Law, secures the shareholders’ interests, facilitates the assets invested into the company to generate value for the shareholders, add a new channel using equity interests, reduce the transfer costs, promote investments, help small and medium enterprises handle the difficulties raised by the international financial crisis, and ensure a steady and relatively fast growth of the economy.

Real Estate

(JianJin [2008] No.217, promulgated by the Department of Housing and Rural-Urban Construction on Nov.26, 2008, and implemented immediately)

The Interest Rate Adjustment Notice reduces, effective November 27, 2008, the interest paid on deposits made within the last year from 2.88% to 1.98%, and the interest paid on deposits made this year from 0.72% to 0.36%. Simultaneously, the notice reduced the interest rate for loans of five years or fewer to 3.51% from 4.05%. The interest rate on loans lasting longer than five years were reduced to 4.05% from 4.59%.

KW Comments: The People Bank of China (“PBC”) issued a Notice on Reducing Benchmark Rate for Loans Advanced by Financial Institutes and the Interest Rate for Deposit and Loan in PBC by Financial Institutes (YinFa [2008] No.339) on November 26, 2008, by which the PBC again lowered the benchmark interest rate and provident fund loan interest rates. Consequently, the interest rates on loans and deposits of individual housing funds were again adjusted.

(GuoBanFa [2008] No.131, promulgated by the General Office of the State Council on December 20, 2008)

The opinions set out certain central government policies intended to strengthen the real estate market. In particular,

(a) the opinions promote the construction of affordable housing for low-income families and the renovation of rural homes in a dangerous state of disrepair. In some areas, the Individual Housing Funds may be used to finance the construction of affordable housing.

(b) in order to encourage the purchase of homes for residential purposes, home-owners with an existing home that is smaller than the average size for their locality may buy a second apartment under favorable loan terms similar to first-time buyers. Furthermore, from now until December 31, 2009, homeowners who have owned their houses for two or more years can resell them without paying business tax. Homeowners who have owned their houses for fewer than two years will only have to pay business tax on the difference between the original price and the sales price when they sell their house (as opposed to on the entire sales price, as was previously required). Owners of non residential property who have held the property for at least two years are similarly required to pay taxes only on their capital gain on the property, and not on the whole of the property value at the time of the sale. .

(c) financial institutions are expected to provide ample credit to real estate developers seeking to build “low to moderate cost” or "small-to-medium-size" housing projects. Lenders are expected to particularly support those projects currently under construction and provide financial support and other related services to real estate developers with good credit for merger and acquisition activities. Real estate developers are encouraged to issue bonds.

(d) The opinions reconcile the real estate taxes imposed upon domestic and foreign-funded enterprises. Both types of enterprises and the individuals will be subject to the PRC Tentative Regulations on Real Estate Tax, regardless of the source of their capital.

KW Comments: The measures and requirements promoted in the Opinions were adopted and implemented immediately by various governmental departments. On Dec. 29, 2008, the Ministry of Finance and the State Administration of Taxation jointly issued a Notice on the Business Tax Policies on Individual Housing Transfer (Cai Shui [2008] No.174), providing that from Jan.1, 2009 to Dec.31, 2009, business tax on transfer of individual houses shall be collected in accordance with the Opinions. On the last day of 2008, the State Council promulgated an order No. 546 declaring the revocation of PRC Tentative Rules on Taxes of Urban Real Estate from Jan.1, 2009. Accordingly, starting Jan.1, 2009, either foreign funded enterprises or foreign individuals shall be subject to the PRC Tentative Regulations on Real Estate Tax, according to which the property owner of any real estate in PRC shall pay real estate tax (1) at a rate of 1.2% of the original purchasing price deducting 10% to 30% (subject to specific regulations of local governments), or (2) 12% of the rental proceeds of the premises using for lease purposes. The Real Estate Tax is collected annually.

Local Laws

Beijing

(JingJianBan [2009] No. 43, jointly issued by Beijing Commission of Construction, Beijing Development and Renovation Commission, Beijing Financial Bureau, Beijing Land Resources Bureau, Beijing Local Tax Bureau, Beijing Statistics Bureau, Beijing Investigation Unit of State Administration for Statistics, Beijing Management Centre of Individual Housing Fund on Jan. 23, 2009)

The Beijing Opinion is a localized implementation of the Opinions to Improve Healthy Development of Real Estate Market issued by of the State Council aiming at the speeding up of the recovery of real estate market. In addition to the Opinions, this Beijing Opinion further provides that:

(a) for the entirety of 2009, the conditions laid out in the Notice on Administration and Regulation of Purchase of Houses by Foreign Entities and Individuals (JingJIanJiao [2007] No.103) for foreigners purchasing houses in Beijing are no longer valid. The notice, now inoperative, required foreigners to work or study in Beijing for a year or more before becoming eligible to purchase a house. Even after a year, under the notice, foreigners who purchased a house in Beijing could not lease or transfer it.

(b) with respect to land used for real estate development purposes and obtained through public tendering and bidding, if the grantee has difficulties in paying the full land grant price (including the Land Initial Development Compensation and the Land Premium) in accordance with the grant contract, the land administration may approve a grace period of no more than six months, with interest at the benchmark bank loan rate payable for the postponed payment of the Land Initial Development Compensation, and a monthly rate of 0.2% payable for the postponed payment of the Land Premium.

KW Comments: The measures provided in the Beijing Opinion are regarded as festival presents for they are promulgated just prior to the Chinese New Year. Such measures are warmly welcomed by the real estate developers and are generally expected to be helpful for countering the ill effect of international economic crisis and the downfall of the real estate market.

Shandong Province

(the “Notice”, Qing Fa Gai Zi Ben [2009] No.69, promulgated Municipal Development and Reform Commission of Qingdao and effective as of January 1, 2009)

The Municipal Development and Reform Commission of Qingdao issued the said Notice to facilitate local enterprises’ access to China capital market and to implement the Opinions on Further Improving the Growth of Small and Medium-sized Enterprises jointly promulgated by the Qingdao Municipal Committee and Qingdao Municipal Government (Qing Fa [2008] No. 16), as well as the Opinions Relating to Qingdao Municipal Government Support to Public Offerings by Local Enterprises (Qing Zheng Fa [2007] No.23) issued by the Qingdao Municipal Government with code of.

The Notice specifies that companies should satisfy all listing requirements upon restructuring and provide valid documents to prove that the Municipal Development and Reform Commission of Qingdao has confirmed that said companies are qualified issuers-to-be when applying for 50% deduction of initial real estate title registration or real estate title transfer registration fees. Where the companies are subject to additional tax payments due to profit adjustment and these tax payments contribute to the increase of fiscal incomes of the local government, the competent financial authorities shall compensate the additional tax expenses of these companies according to the existing fiscal regime.

If the tax payments’ growth by a listed company for the first year of listing is higher than the growth of the local government fiscal incomes of the same year, the local government should, upon examination and approval by relevant authorities, compensate the difference between the company higher local tax payments against the local government growth. If the growth of tax payments of a listed company for the second year of listing exceeds the growth of fiscal incomes of the local government of that year, the local government should compensate the company for 50% of the difference between the higher company tax payment versus the local government growth upon the examination and approval of relevant authorities. When a listed company has raised the amount of capital needed via its IPO, the company may apply in writing for a reward at the local Development and Reform Department.

KW Comments: The Notice reflects the Qingdao Municipal Government initiatives to facilitate local enterprises to raise capital via the securities market and will help attract the attention of relevant departments and authorities of the local government on the local enterprises’ financing needs and difficulties, especially those of small and medium-sized enterprises. The Notice is expected to improve the financing environment for small and medium-sized enterprises and provides firm support for the growth of local enterprises in Qingdao.

Zhejiang Province

(No. [2009]8 Decree of Zhejiang Provincial Government, February 1, 2009)

The Measures specify the range of payment of maritime space use fees, which include fees for transfer, retransfer and rent of maritime space. It also stipulates that the Maritime Space Administration Authorities are responsible for the maritime space use fees collection and the Finance Bureaus are responsible for the management of collection of maritime space use fees. Further, the Measures stipulate that the marine administrative authorities at all levels should strictly follow the use type of maritime space, the grade of maritime space and standard for collection of maritime space use fees while levying on the maritime use fees, and it detailed in the annex to determine the collection standard for each type of the maritime space use fees. At the same time, the Measures provide for the maritime space where the use fees can be reduced or exempted by law besides collection of maritime space use fees, and the Measures require the procedure of the application for reduction and exemption: Except for the maritime space use fees for the projects approved by the State Council and aquaculture sea area, people who have right to use maritime space and fall within the scope of reduction and exemption of maritime space use fees can submit written application to local finance bureaus and the local Oceanic Administration authorities (“OA”) authority. After the local finance bureaus and the local OA authority review the application, their provincial equivalents will approve the application for the reduction or exemption. Finally, the Measures insert additional provisions regarding the State authorization of individuals or entities to use maritime space, transfer of the right to use maritime space among entities or individuals, and lease of maritime space. The Measures clearly require that if maritime space is transferred by bidding or auction, the maritime space use fees shall be based on the transaction price. According to the Measures, the said pricing standard is conducive to improve the efficiency of maritime space resources allocation and make the allocation better catering for market demands.

KW Comments: The implementation of The Measures will contribute to increase market-oriented allocation and use efficiency of maritime space resources .and the protection of the maritime space of ownership of the country and the legitimate rights and interests of the maritime space users, and promotion of the rational development and sustainable use of the maritime space. In addition, the Measures link approval of maritime space use projects with the payment of the maritime space use fees, which have an important role in the guidelines for the examination and approval of the maritime space use project.

(No. [2009]50 Decree of Hangzhou Municipal Government, February 10, 2009)

The Promulgation of the Implementation Opinions indicates the formation of the Hangzhou dismantlement and monetary compensation policy. The Implementation Opinions mainly include the following elements:

(a) The Implementation Opinions applying to the residential housing dismantlement of the state-owned land of Shangcheng District, Xiacheng District, Jianggan District, Gongshu District, Xihu District and Hangzhou Hi-tech Development Zone (Binjiang).

(b) Apart from the basic compensation –the evaluation price of the dismantled houses, the dismantlees can also get subsidies which account for 20% of the evaluation price. That is, the dismantlee can get compensation which is 120% of the evaluation price of the dismantled houses if he chooses the monetary resettlement.

(c) If the dismantlee chooses to be compensated by currency and the building area of the dismantled house is less than 48 square meters (if the dismantle has another house in the city, the building area shall be counted in), the dismantlees will get monetary compensation from dismantlers in accordance with 48 square meters of building area and obtain the 20% of the evaluation price compensation as subsidy.

(d) The dismantlers should fully pay the monetary compensation and subsidies to the dismantlees within fifteen days from the date of the signing of monetary compensation protocol. The dismantlees purchasing new house within twelve months from the date of receiving the above compensation will enjoy the 2% incentive.

(e) If the dismantlee choose the way of monetary compensation, the period of the temporary resettlement subsidy payment is adjusted from four months to twelvemonths, and the subsidy is fully paid at one time; and if the dismantlee choose the way of property rights exchange, the dismantler and the dimantlee should clear the resettlement price strictly in accordance with the evaluation price of demolition houses and resettled houses.

KW Comments: The Implementation Opinions is an important supplement to the Administrative Measures on Urban House Dismantlement and Resettlement of Zhejiang Province, and is conducive to improvement of the Hangzhou city house demolition compensation and resettlement policy system, and will safeguard the smoothly implementation of urban house demolition job. At the same time, the encouragement of "monetary settlement" policy in the Implementation Opinions is another important initiative of the real estate market after the Some Opinions of Healthy and Stable Development of Hangzhou City promulgated by Hangzhou Municipal Government in October, 2008, and is the reflection of support policy of Hangzhou Municipal Government on the real estate market.

Guangdong Province

Shenzhen Municipal Government issued the Interim Measures on the Administration of the Pilot Operation of Small Loan Companies of Shenzhen (the “Interim Measures”) on January 8, 2009, which are formulated in accordance with the Company Law, the Guiding Opinion on the Pilot Operation of Small Loan Companies, and the Circular on the Relevant Policies of Village Banks, Loan Companies, Rural Mutual Cooperatives and Small Loan Companies, and based on the actual situation of Shenzhen. According to the Interim Measures, for small loan companies incorporated as limited liability companies, the registered capital shall not be less than RMB 50 million; and for those incorporated as joint stock limited companies, the registered capital shall not be less than RMB 80 million. The main initiator of the small loan company shall be the legal corporation registered in Shenzhen with the net asset no less than RMB 50 million, the asset-liability ratio no higher than 70%, the recent three consecutive years in profits, and the accumulated net profits of such three years no less than RMB 15 million. The Interim Measures also provide that the main sources of funds of the small loan companies shall be the capital or donated funds contributed by their shareholders, and financing obtained from at most two banking financial institutions. The small loan companies are prohibited from raising funds internally or externally, collect public deposit, or collect public deposit in disguised manner. The small loan company shall carry out business in compliance with the principle of “small-amount and dispersiveness”, where the balance of loans granted to the same borrower shall not exceed 5% of the net capital of such small loan company, which shall be capped at RMB 5 million.

KW Comments: The promulgation of the Interim Measures plays an active role in promoting the healthy development, and regulating the registration and supervision of small loan companies. By supporting the development of the small loan companies, a new source of civil loans would be originated as an important supplement of the current credit system, which will become important for solving the financing difficulties of small and medium enterprises.