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Practical Issues in Entering the China Market and Sourcing From China
September 29, 2010 Approved for 3.6 hours of Missouri CLE
8 - 8:30 Registration and Continental Breakfast Tab
Speaker Biographies 1 8:30 - 9:15 Is a Long Distance Relationship Right for You? 2
Sourcing from and Exporting to China Linda Tiller, Partner, Husch Blackwell LLP
Ms. Tiller will cover selected legal issues and provide practical advice related to sourcing from China, such as U.S. import laws, sourcing methods, contracting issues, quality control, and China-specific export controls.
9:15 - 10 Legal Issues Relating to Entering the China Market 3
Fang Shen, Associate, Husch Blackwell LLP
Ms. Shen will discuss entering the China market through contractual arrangements, covering issues such as distributor arrangements, manufacturing and licensing agreements, compliance with local laws, foreign exchanges, payments, Incoterms, and the Foreign Corrupt Practices Act.
10 - 10:15 Break 10:15 - 11 Foreign Direct Investment in China 4
Lawrence Shu, Partner, Hylands Law Firm, Shanghai, China
Mr. Shu will discuss the process of a foreign company establishing a business entity in China, covering issues such as common entity choices, joint ventures, registration procedure, key issues for a U.S. business to understand (concepts of registered capital, overall investment amount, etc.), and industry guidance.
11 - 11:45 What You Have to Know for Doing Business 5
in China Lidong Pan, Partner, Wang Jing & Co., Guangzhou, China
Mr. Pan will cover areas such as labor contract law, IP protection, importation regulations affecting foreign companies, the new tax laws and how they work with the special economic zones, old tax holidays and other key issues.
Visa Challenges for Chinese Business Visitors handout 6
About Husch Blackwell LLP 7
PAN Lidong,
Partner, Attorney at Law in China and New York
Areas of practice: corporate law, cross-boarder investment, employment law, intellectual
property (trademark and copyright), insurance law, commercial litigation and arbitration,
disputes of cargo transportation, international trade and Customs law issues
Office: Guangzhou
Email: [email protected], Tel.: 86 20-87690107
Academic qualifications:
1994 Sun Yat-sen (Zhongshan) University Law School
1997 Sun Yat-sen (Zhongshan) University Law School (Master of Laws)
2004 Washington University in St. Louis School of Law (Master of laws, insurance,
banking & commercial law)
Professional qualifications:
1998 Licensed lawyer (PRC)
2004 New York State Bar
Languages:
Chinese (Mandarin, Cantonese) and English
Experience:
Mr. Pan was trained at a Guangzhou law firm from 1994 to 1996. He then worked in the
Claims Department for AIU Insurance (a member of AIG) Guangzhou Branch until
1997, and between 1997 and 1998 as civil servant at the Hong Kong and Macao Affairs
Division of the Foreign Affairs Office, Shenzhen Municipal Government. He joined
Wang Jing & Co. and practiced as attorney at law in 1998. From August to November
2004, he was interned at the United States District Court of Southern Illinois and at the
offices of Keesal, Young & Logan in Long Beach, California.
Mr. Pan has acted as legal counsel to companies on cooperate matters, providing and
drafting legal opinion in general legal matters, corporate documents and regulations on
internal management, mergers, acquisitions, divestment, establishment of branches, stock
equity and credits. He also acts as legal counsel to companies on intellectual property
matters, advising on strategy and protection in of intangible properties in China, and
handling disputes and litigation of know-how, copyright and trademark. He has
represented many clients in commercial and maritime arbitration and litigation, in disputes
of international trade and PRC Customs matters. He has acted for a number of insure
companies in handling insurance investigations and insurance-coverage disputes. As
approved by China Insurance Regulatory Commission, Mr. Pan has been retained as
person responsible for legal affairs by CITIC-Prudential Life Insurance Company Ltd. He
frequently advised foreign clients on the establishment of employment contracts and
company internal labor/management rules, and has been involved in employment
negotiations, labor arbitration and the litigation of employment disputes.
Mr. Pan has been a speaker on arbitration and litigation, corporate, employment law,
commercial or IP law at numerous symposiums, including several organized by the
German, Italian, Japanese, Singapore and US chambers of commerce. He has also
attended several court hearings as expert witness on PRC law in lawsuits of maritime,
Customs issues, cargo transportation and international trade in Singapore, Russia and
Hong Kong.
He has also published a number of essays including Enforcement of Arbitral Awards and
Court Judgments in PRC, Mainland Courts to Enforce Hong Kong Judgments, Legal
Aspects of PRC Domestic Transactions, Corporate Acquisitions and Mergers, Issues for
Corporate Counsel in the Sale/Purchase of a Business, and The TRIPS Agreement and
IPR Laws of the PRC.
Husch Blackwell LLP
Kansas City, MO
Direct: 816.983.8346
Fax: 816.983.8080 [email protected]
Practices Corporate Commercial Transactions China Mergers & Acquisitions Securities & Corporate Governance Transportation
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SHANGHAI OFFICE OF HYLANDS LAW FIRM
No. 1028, West Beijing Road, Xing Ye Tower, Suite 1805
Jing’an District, Shanghai 200041
Tel:+86-21-5256 9939 Fax: +86-21-5256 9930
www.hylandslaw.com
ATTORNEY’S BIOGRAPHY
LAWRENCE SHU
Partner
Member of the PRC Bar
Languages: Chinese and English
Education: � M.Jur., Oxford University
� LL.M., K.U. Leuven
� Master in Law, Nanjing University
� B.A., Southeast University
Email: [email protected]
Phone: + 86-21-5256-9939
Cell Phone: + 86 139 1664 8626
Fax: + 86-21-5256-9930
Practice Areas Foreign direct investment, merger & acquisition, general
corporate, and banking and investment.
Profile Mr. Shu worked as an engineer in China before he started his
legal practice. The unique background in both law and
engineering as well as the legal education both in civil law and in
common law facilitate his deep communication with clients from
various industries and jurisdictions so as to have a thorough
understanding of their real business needs.
Mr. Shu has provided efficient and high quality legal services to a
large number of multi-national companies, foreign investment
enterprises, hi-tech enterprises, commercial banks and
non-banking financial institutions. He is adept at providing
legal solutions for transaction structure design and conducting
complicated commercial negotiations.
Mr. Shu is the author of numerous books and articles, including
book of “Chinese Business Law” (one of the co-authors),
2
published by C.H. Beck in the Continental Europe and
co-published by Hart Publishing in the U.K. and the U.S. in
2010.
Mr. Shu is the member of various professional organizations such as
Chinese Bar Association, TerraLex and AIJA. He is the committee
member of Oxford China Scholarship Fund. He is also a guest
lecturer in Chinese law at University of Freiburg, Germany.
Husch Blackwell LLP
Kansas City, MO
Direct: 816.983.8223
Fax: 816.983.8080 [email protected]
Practices Customs & Trade International Mergers & Acquisitions Commercial Transactions
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© Husch Blackwell LLP
Is a Long Distance Relationship Right for You?
Sourcing From and Exporting to China
September 29, 2010
Linda [email protected]
816.983.8223
Trade Statistics(U.S. Census Bureau)
31.618.413.1Mexico3
40.633.37.3China2
40.821.119.7Canada1
Total Trade (7/2010) [billions]
Imports (7/2010) [billions]
Exports (7/2010) [billions]
CountryRank
2
Agenda
• Sourcing from China– Importing into the U.S.
–Sourcing Structures
–Contract Terms
–Tips
• Exporting to China–Lists to check
–The China Rule
–Validated End-User Program
Common Import Pitfalls
• Tariff Classification
• Country of Origin Determination/Marking
• Assists
• Antidumping/Countervailing Duties
• Special Certifications
– Consumer Product Safety Commission
– Lacey Act
• Counterfeit components
3
Common Import Pitfalls
• Tariff Classification
–Determines the amount of duties
– Importer of Record is responsible for proper tariff classification
– Importer must exercise “Reasonable Care” to properly classify imported products
Common Import Pitfalls
• Country of Origin– Every foreign good imported into the U.S. for consumption must be marked with the country of origin so that the ultimate purchaser knows where the product originated.
– For textiles, COO determined by tariff shift rules (similar to those in U.S. free trade agreements).
– For non-textiles, COO is the country in which the product was last “substantially transformed” into a new and different item.
– Imported goods that are not properly marked are subject to seizure or redelivery to Customs and Border Protection (CBP), plus the costs of marking under CBP supervision, plus a marking penalty of 10% of the entered value of the goods.
4
Common Import Pitfalls
• “Assists”– Definition: Any of the following if supplied directly or indirectly, and free of charge or at reduced cost, by the buyer of imported merchandise for use in connection with the production or the sale for export to the United States of the foreign merchandise:• (i) Materials, components, parts, and similar items incorporated in the imported merchandise.
• (ii) Tools, dies, molds, and similar items used in the production of the imported merchandise.
• (iii) Merchandise consumed in the production of the imported merchandise.• (iv) Engineering, development, artwork, design work, and plans and sketches that are undertaken elsewhere than in the United States and are necessary for the production of the imported merchandise.
- Value of the “Assist” is added to the entered value of the imported merchandise and duties are assessed on it.
- Suggestion – If feasible, have the Chinese manufacturer purchase the components, materials, etc. and simply add it to the selling price.
Common Import Pitfalls
• Antidumping/Countervailing Duties
– Numerous Chinese-origin products are subject to AD/CVD orders (79 AD/12 CVD).
– AD/CVD orders impose additional duties on imported products to “level the playing field.”
– Additional duties could range from .1% to 300+% of the entered value of the goods.
– Rates can be manufacturer/exporter specific so know who you are buying from.
– CHECK THE AD/CVD ORDER LIST!• International Trade Administration - http://trade.gov/ia/
5
Import – Special Certifications
• Consumer Product Safety Commission– China exports more than $250 Billion in consumer products to the U.S. each year
– Consumer Product Safety Improvement Act of 2008 established requirements for testing and compliance certifications for any “consumer” product and for any product directed at children
– Violations could result in seizure and destruction or export of the products
– April 2010 - CBP and CPSC signed MOU which will give CPSC the capability to conduct import safety risk assessments and perform targeting work using CBP’s Automated Commercial System.
Import – Special Certifications
• Lacey Act– Makes it unlawful to import, export, transport, sell, receive, acquire, or purchase in interstate or foreign commerce any plant, with some limited exceptions, taken or traded in violation of the laws of the United States, a U.S. State or a foreign country.
– USDA identified a list of products and the associated Harmonized Tariff Schedule (HTS) numbers which requires filing a Plant Product Declaration Form (PPQ 505) with the import.
6
Counterfeit Goods/Components
• Enforcement of intellectual property rights is a priority trade issue of CBP. (http://www.cbp.gov)
• Counterfeit goods (or goods with counterfeit components) are subject to seizure and forfeiture at the U.S. border.
• Protect your marks and your imported goods:– If you have a recorded trademark/copyright, register it with CBP.
– If you are importing a product that includes a component trademarked/copyrighted by some other party, be sure that the component is genuine.
Sourcing from ChinaGetting Started
• Quality Control is key!– Supplier choice is critical!
• Considerations in selecting a factory– Location• Access to raw materials?• Costs to get finished goods to port?
– Expertise• Do they specialize in your type of product?• Do they have technical resources?
– Size• Too big? Too small?
• Recommendation: VISIT THE FACTORY!
7
Sourcing Structures
• Contract directly with the factory
• Use a sourcing agent– Full-service independent sourcing agent• Confirm whether it is a Buyer’s Agent or a Seller’s Agent
– Set up a PRC representative office to handle
• Use a trading company– Trading companies usually specialize in a particular type of product, but work for the factories so you may not know or have any control over which factory is producing
Manufacturing Contract
• Written Agreements should:– be clear and concise
– include all agreed upon terms
• Remember: – Entering into a contract in China is just the beginning (some say it is just the beginning of the negotiations).
– Constant oversight and mutual cooperation is required from the time the Agreement is signed until the product is delivered.
– If you simply issue a purchase order and expect perfect product and delivery without being engaged, you will likely be extremely disappointed.
8
Manufacturing ContractKey Terms
• Quality Control, Testing, Monitoring– Be specific– Require written reports– Joint Inspection– Independent inspector– Rules of Inspection
• Setoff Rights• Subcontracting– Generally not a good idea– If it will be required to complete the product, specify the terms
Manufacturing ContractKey Terms
• Dispute Resolution -- Arbitration VS Litigation– Arbitration
• In China– Over 200 arbitration institutions in China– Chinese International Economic and Trade Arbitration Commission
– Hong Kong International Arbitration Center– International Chamber of Commerce
• Outside China– China is a signatory to the New York Convention so enforces foreign arbitral awards
- Litigation• In China
– In the past, this was the last resort, but in recent years the Chinese courts have gained popularity
• Outside China– Difficult to get enforced in China
9
Manufacturing ContractKey Terms
• Dispute Resolution - Arbitration VS Litigation
- Evaluate the type of disputes that may arise
• E.g. - Quality issue and manufacturer has no assets outside of China; remedy = money damages
• E.g. – Manufacturer is using your intellectual property to manufacture and sell product to India in violation of Agreement; remedy = injunction.
• E.g. – Manufacturer refuses to return your molds after termination – You don’t need $$ - you need the molds returned; remedy = court order for return of the molds.
Manufacturing ContractKey Terms
• Specify Governing Language
– If contract will be in printed in more than one language, specify which language governs.
– Governing language may depend on whether disputes will be resolved by arbitration or in a Chinese court.
– Recommendation: Governing language should be Chinese if you want to enforce in a Chinese court.
10
Manufacturing ContractKey Terms
• Labor Matters
– Include provision prohibiting forced, convict, or child labor.
– Include a right to inspect the factory to actually confirm that labor matters comply with the contract.
Sourcing from ChinaTips
• How to encourage long-term reliability from Suppliers– Work closely at the beginning to establish acceptable performance.
– Keep monitoring quality (get written signed records and don’t lower your standards).
– Dump the worst factories.
– Give regular business to those that perform.
– Understand that the best factories receive a reasonable premium on prices.
– Don’t switch suppliers for a few pennies, but keep them in competition with at least one other factory to avoid unreasonable quotations.
11
Sourcing from ChinaTips
• Practical Recommendations
– Order 2nd quarter products in 4th quarter of the previous year (Chinese New Year is in Jan/Feb and everyone goes on vacation)
– Build in plenty of time for completion (e.g. don’t expect delivery of an order for 350,000 in the same time as you would expect delivery of 70,000)
– Establish a process for quality control and inspection [hire an in-country agent if necessary]
Export – Lists to Check
• Denied Persons ListA list of individuals/entities that have been denied export privileges. Any dealings with a party on this list that would violate the terms of its denial order is prohibited.
• Unverified ListA list of parties where Bureau of Industry and Security (BIS) has been unable to verify the end-user in prior transactions. Being on this list is a “Red Flag” that should be resolved before proceeding with the transaction.
• Entity ListA list of parties whose presence in a transaction can trigger a license requirement under the Export Administration Regulations (EAR). The list specifies the license requirements that apply to each listed party. These license requirements are in addition to any license requirements imposed on the transaction by other provisions of the EAR.
12
Export – Lists to Check
• Specially Designated Nationals ListA list compiled by the Treasury Department, Office of Foreign Assets Control (OFAC). OFAC’s regulations may prohibit a transaction if a party on this list is involved. In addition, the Export Administration Regulations require a license for exports or reexports to any party in any entry on this list that contains any of the suffixes "SDGT", "SDT", "FTO", "IRAQ2" or "NPWMD".
Export – Lists to Check
• Debarred ListA list compiled by the State Department of parties who are barred under the International Traffic in Arms Regulations (ITAR) from participating directly or indirectly in the export of defense articles, including technical data or in the furnishing of defense services for which a license or approval is required by the ITAR. (22 CFR §127.7)
• Nonproliferation SanctionsSeveral lists compiled by the State Department of parties that have been sanctioned under various statutes. The Federal Register notice imposing sanctions on a party states the sanctions that apply to that party. Some of these sanctioned parties are subject to a general policy of denial. (15 CFR §744.19).
13
Export – “The China Rule”
• Export license to China is required for a targeted list of items that are intended for a “military end use” (i.e. incorporated into a military item). (§744.21)
• Involves 20 product categories and associated technologies and software, as described in 31 entries on the Commerce Control List.
• Items subject to the military end-use control include aircraft and aircraft engines, avionics and inertial navigation systems, lasers, depleted uranium, underwater cameras and propulsion systems, certain composite materials, and some telecommunications equipment for space communications or air defense.
Export – “The China Rule”
• Validated End-User (VEU) program
–Certain Chinese companies that qualify (i.e.“trusted customers”) with a track record of responsible civilian use of U.S.-controlled technology will be able to receive certain controlled items without individual export licenses.
14
QUESTIONS?
Linda Tiller
Husch Blackwell LLP
4801 Main Street, Suite 1000
Kansas City, MO 64112
DD: 816.983.8223
Cell: 913.339.8430
1
© Husch Blackwell LLP
Legal Issues Relating to Entering the China Market
Fang Shen
Husch Blackwell LLP
© Husch Blackwell LLP
Road Map
• Overview of Forms of Market Entry
• Distribution Agreement
• Manufacturing Contract
• Other common issues
2
© Husch Blackwell LLP
Forms of Market Entry
• Employee? Sales representative? Independent contractor?
• Distribution Agreement
• Manufacturing Contract
• Franchise Agreement (allowed, but not the focus of today's discussion)
• Setting up your own operation (representative office, WFOE, or JV) to be covered later
© Husch Blackwell LLP
Forms of Market Entry
• What is the most effective method of entering the market?
• What tax issues are created?
• What liability issues are out there?
3
© Husch Blackwell LLP
Distribution Agreement
© Husch Blackwell LLP
Facts• MoInc is a Missouri company with headquarters
in Kansas City. MoInc makes and sells animal health care products. MoInc desires to expand its market in China.
• MoInc’s VP-International attended several trade shows and identified BeijingInc, a company that currently makes and distributes similar products in China. BeijingInc has offices in Beijing and several other major cities in northern and western China, but not southern China.
• After a few initial visits both are very interested in having BeijingInc serve as MoInc’s distributor in China and to market and sell MoInc’s products
4
© Husch Blackwell LLP
Question
What are the key issues that MoInc will need to consider in the contracting process?
© Husch Blackwell LLP
Due Diligence
• Existence and operation
• Business scope
• Financial strength
• Trustworthiness
5
© Husch Blackwell LLP
Exclusivity?
• Goes both ways
• Geographical consideration
• Competitive consideration
© Husch Blackwell LLP
Key Provisions
• Specify the geographic area, market, segment or scope of distribution
• Include specific performance requirement
• What else do you want to control (e.g., limit on resale price mark up)?
6
© Husch Blackwell LLP
Term and Termination
• Statutory restrictions
• Be specific about term and termination rights
• Comply with notice requirement and put termination in writing
© Husch Blackwell LLP
Manufacturing (and Often Licensing)
Agreement
7
© Husch Blackwell LLP
Facts• KansasCo is a Kansas company that
manufactures a range of measuring and precision devices that are commonly used in industrial manufacturing, farming, and construction
• It started selling its products in China three years ago. Since then KansasCo has seen the overall demand for its products increase in China, but at the same time local competition has also grown.
© Husch Blackwell LLP
Facts• To produce more products quickly to supply the
China market and bring down the cost, KansasCo started discussion with a Chinese company called ShanghaiCo. ShanghaiCo currently manufactures similar products under its own brand names.
• KansasCo would like to have ShanghaiCo manufacture the products under KansasCo's design and brand name. The products will then be shipped to KansasCo's existing distributor in China for sale to customers.
8
© Husch Blackwell LLP
Question
What are the key issues that KansasCo will need to consider in the contracting process?
© Husch Blackwell LLP
Structure
Shanghai Co.
Kansas Co.
Distributor
Kansas Co.
DistributorShanghai Co.
Option one Option two
Manufacturing and
sale contract
Paym
ent
Distribution
agreement
Customers
Paym
ent
Distributor
agreement
License agreem
ent
Payment
Products
Lice
nse
fee
Des
ign
and
trad
emar
ks
Purchase
agreement
9
© Husch Blackwell LLP
Issues
• Any import duty applicable?
• What local taxes are due?
© Husch Blackwell LLP
Structure
Shanghai Co.
Kansas Co.
Distributor
Kansas Co.
DistributorShanghai Co.
Option one Option two
Manufacturing and
sale contract
Paym
ent
Distribution
agreement
Customers
Paym
ent
Distributor
agreement
License agreem
ent
Payment
Products
Lice
nse
fee
Des
ign
and
trad
emar
ks
Purchase
agreement
Imports
duty
and
VAT
10%
inco
me
tax
and
5% b
usin
ess
tax
10
© Husch Blackwell LLP
Protection of Intellectual Property
• Registration of the contract?
• What are the IP rights important for your business?
• Think about China when you register your patents in the U.S.
• Are your trademarks registered in China?
• Is your domain name registered in China?
• Restrict access to sensitive information to the smallest possible group of individuals
© Husch Blackwell LLP
Other Common Issues
11
© Husch Blackwell LLP
Local Licensing and Registration Requirements
• Mandatory Product Certification Requirement– New regulations effective September 2010
– Requiring certification by the State Administration of Quality Supervision, Inspection, and Quarantine for products that potentially pose hazards to human, animal, plant or environment health or safety
– Catalogue of specific products is currently in the works; past examples from previous catalogue included electric cables and wires, circuit switches, surge protectors, etc.
• Certain products may be subject to licensing requirement by industry regulatory authority: e.g., elevator, medical equipment
• Manufacturer Registration Requirement: e.g., Food Safety Law
© Husch Blackwell LLP
Payment Methods
• Payment methods: cash only, progress payments, L/C, document collection, open account.
• L/C– A promise given by buyer’s bank that they will pay for the goods if the
seller can provide a set of documents in strict compliance with clauses
of the L/C
– Usually operate under the Uniform Customs and Practices by the ICC
– Rule of “strict compliance” : “The issuing bank must examine a
presentation to determine, on the basis of the documents alone,
whether or not the documents appear on their face to constitute a
complying presentation.” (UCP Art. 14, Standard for Exam. Of Docs)
12
© Husch Blackwell LLP
Foreign Exchange
• Currency
• Exchange rate fluctuation protection
• Foreign Exchange control complications (e.g., missing documentation, suspicious fee)
© Husch Blackwell LLP
WHAT ARE INCOTERMS?
• “Incoterms” stands for “International Commercial Terms” – they are the international standard delivery terms published by the ICC. They are widely used in international transactions
• They are currently being revised and the most recent version will come into force January 1, 2011
• Each term defines at which point transaction responsibilities and costs related to the delivery, transportation, insurance, export and import documentation, are divided between the seller and the buyer
13
© Husch Blackwell LLP
EX-WORKS and FOB are the two most commonly used terms
COMMON INCOTERMS
© Husch Blackwell LLP
EX-WORKS– Delivery is at the Seller’s Premises (e.g., Ex-Works
seller factory, St. Louis, Missouri)
– Goods suitably packed for export
– Seller notifies buyer when goods are ready
– Buyer loads arriving vehicle – Seller often exceeds Incoterm responsibility
– Buyer contracts for the freight from seller’s door to buyer’s door, buyer’s risk and responsibility from the seller’s door all the way to the buyer’s door
– Insurance not mentioned, but common sense dictates that parties should work this into the contract or Buyer should arrange
– Buyer handles all export processes & paperwork
– Buyer handles all import entry documentation
14
© Husch Blackwell LLP
FOB– Seller arranges for pre-carriage to the port
– Seller delivers when the goods are loaded on board the ship at the seaport in the seller’s country (e.g., FOB Long Beach, CA)
– Goods must pass the ship’s rail
– Seller’s responsibility to load vessel
– Seller handles all export processes & paperwork
– Buyer contracts for freight from seaport in seller’s country to his location, and it is the buyer’s risk and
responsibility from the seaport in the seller’s country until he receives the goods
– Insurance not mentioned
– Buyer handles import documentation
© Husch Blackwell LLP
INCOTERMS – TWO KEY POINTS
• Best if, (1) each party’s responsibilities match its realistic capabilities and (2) control and liabilities go together if (1) each party's responsibilities match its realistic capabilities and (2) control and liabilities go together
• Make sure the INCOTERM works with payment method
15
© Husch Blackwell LLP
Local Law Compliance
• Safety standard?
• Packaging and labeling requirements?
• Any other industry requirement?
© Husch Blackwell LLP
Dispute Resolution
• Court v. arbitration
• Where?
16
© Husch Blackwell LLP
Unfair Competition Practice
• What you are doing needs to be legal under both U.S. law and Chinese law
• Unfair competition law– Price or rate fixing
– Kickbacks or bribes
– Exchange of cost or price information with competitors
– Require suppliers to buy your product in order to sell to you
© Husch Blackwell LLP
FCPA Overview• Prohibits bribery of foreign officials, foreign
political parties or candidates to obtain or retain business
• Covers any U.S. person and any “domestic concern” organized under the laws of the United States or its agents
• Who is an official? Any officer or employee of a government or of a government-owned entity, any foreign political party or official, any candidate for foreign political office, any official of a public international organization, and any other person while “knowing” that the payment or promise to pay will be passed on to one of the above.
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© Husch Blackwell LLP
Don’t Ignore the Facts!• “Willful blindness,” “deliberate ignorance” and
taking a “head-in-the-sand” attitude constitutes knowledge under the statute
• A company is not immune if the payment is made by a third party, such as an agent or consultant
• Liability may flow to a company if it: (1) authorizes an agent or third party to make improper payments to foreign officials or (2) makes payments to an agent or third party with actual or constructive knowledge that all or a portion of money will be paid directly or indirectly to foreign officials
© Husch Blackwell LLP
China Specific
• Sponsorship of overseas children’s study/work
• Travel expenses
• Excessive “license fee”
1
Foreign Direct Investment in China
Hylands Law Firm, China
Lawrence Shu
1. General FDI Policy
- FDI Guidance Catalogue
- FDI Provisions
- Exceptions to FDI Categorization
- Special Restrictions under FDI Provisions
- Summary
2. General FDI Concepts
- FDI Vehicles
- Capitalization of FIEs
- Forms of Capital Contribution
- Timetable for Capital Contribution
- External Loans
- Government Approvals
- Business Scope
Road Map
Hylands Law Firm
2
3. Representative Office
- Nature and Function
- Scope of Activities
- Streamlined Registration Procedures
4. Joint Venture
- Nature and Function
- EJV vs. CJV
- Establishment Procedures
5. Wholly Foreign Owned Enterprise
- Nature and Function
- Case Study – FICE Establishment
Road Map
Hylands Law Firm
General FDI Policy – FDI Guidance Catalogue (I)
� Catalogue of Industries for Guiding Foreign Investment (“Guidance Catalogue”)
� Four categories of industry sectors: “encouraged”, “restricted”, “prohibited”and “permitted”
� Each category provides a difference level of treatment
� Updated in regular intervals: the most recent edition by NDRC and MOFCOM in Oct of 2007
Hylands Law Firm
3
� 2007 Catalogue/2005 Catalogue
• upgrading the industrial structure
• reducing the consumption of industrial resources
• speeding up the developments in certain high tech-industry sectors
� Opening up of the service sector
• Encouraged: logistics, service outsourcing
• No longer restricted: foreign trading
� Cooling down excess investments (e.g. real estate)
General FDI Policy – FDI Guidance Catalogue (II)
Hylands Law Firm
General FDI Policy – FDI Provisions
• Provisions on Directing Foreign Investment
• By State Council in 2002
• Applicability
– Establishment of FIEs
– Foreign related M&A
• Catalogue of Industries in Central and Western China Favorable to Foreign Investment” (“Western Catalogue”)
– Part of “Go-West Policy”
Hylands Law Firm
4
General FDI Policy – Exceptions to FDI Categorization
• General principles subject to several exceptions
• Exceptions based on high-priority political concerns
• Examples of Exceptions:
– "Permitted" or "restricted" projects in Western Catalogue;
– "Permitted" projects that export all of their products;
– “Restricted” projects that export at least 70% of products.
Hylands Law Firm
General FDI Policy – Special Restrictions under FDI Provisions
• If only EJVs or CJVs are allowed, a WFOE may not be established;
• If the Chinese side is required to hold a majority share, one or more Chinese shareholders together must hold more than 51% share;
• If the Chinese side is required to hold a relative majority share, the combined shares of all Chinese investors must be greater than the share of each foreign investor.
• E.g. sole Chinese investor (40%) + two foreign investors each (30%)
Hylands Law Firm
5
General FDI Policy – Summary
• FDI Provisions and Guidance Catalogue: a leading role in guiding FDI
• Categorization of investment: basis of solid investment plan
• Practical advise on categorization issue
– One of the first question from client
– Not easy to answer – 3 reasons
– Sufficient communication with client & early consultation with gv’t needed
– Room of negotiation
• Economic policy more favorable
• Further opening up widely expected
Hylands Law Firm
General FDI Concepts – FDI Vehicles
• Basically four kinds of FDI vehicles:
– RO (“Representative Office”);
– CJV (“Contractual Joint Venture” or “Cooperative Joint Venture”);
– EJV (“Equity Joint Venture”) and
– WFOE (“Wholly Foreign-owned Enterprise”).
• CJV, EJV and WFOE collectively called Foreign Investment Enterprises (FIEs)
Hylands Law Firm
6
General FDI Concepts –Capitalization of FIEs (I)
• Concept of registered capital
– Total amount of capital contributions subscribed to by investors
– Investors’ equity in a FIE
• Concept of total investment
– Registered capital + external borrowings
• Minimum capital requirement
– To satisfy needs of future operation
– No general requirement on minimum amount for FIE
– Special requirement for specific industries
– Local difference
– General principle: being sufficient for preparation & initial operation
Hylands Law Firm
General FDI Concepts –Capitalization of FIEs (II)
• Registered capital/total investment ratio
At least 33.3% or US$ 12 million(whichever is higher)
> US$ 30 million
At least 40% or US$ 5 million(whichever is higher)
> US$ 10 million and ≤US$ 30 million
At least 50% or US$ 2.1 million(whichever is higher)
> US$ 3 million and ≤US$ 10 million
At least 70%≤ US$ 3 million
Registered Capital/Total InvestmentTotal Investment Amount
Hylands Law Firm
7
General FDI Concepts – Forms of Capital Contribution
• A variety of forms (inc. cash, machinery, equipment and intangible property)
• Foreign party: assets from FIEs previously invested in
– By early recoupment of investment, liquidation, share transfer, capital reduction, etc.
– Subject to SAFE approval
• Chinese party: right to use a site
• Restrictions on in-kind contribution
– Technology contribution ≤ 20% (may be increased for encouraged projects)
– Valuation: major block in JV negotiations
Hylands Law Firm
General FDI Concepts – Timetable for Capital Contribution
• One lump sum or in installments
• Timetable be specified in JV contract and AOA
• Paid in one lump sum:
– w/i 6 months
• Paid in installments:
– First installment of 20%, w/i 3 months
– Balance, w/i 2 years
Hylands Law Firm
8
General FDI Concepts – External Loans
• Borrowing funds from Chinese or foreign bank permitted
• Shareholder loans
– From foreign party, permitted
– From Chinese party, no sufficiently broad business scope in most cases
• SAFE registration
• External loans ≤ (total investment – registered capital)
Hylands Law Firm
General FDI Concepts –Government Approvals (I)
• MOFCOM/COFTEC approval on FIE establishment
– Final right to approve a FIE
– Local counterparts: COFTEC
– Approval levels: amount of total investment & presence location
• NDRC ratification on FDI projects
– Major and restricted projects be ratified and filed
– Project Ratification Procedures by NDRC
Hylands Law Firm
9
General FDI Concepts –Government Approvals (II)
• Whether shall be ratified by NDRC:– Category of project
– Total investment amount
be ratified by the local NDRC of provincial level; andthis ratification right cannot be delegated down to lower level bodies
% 50 Mrestricted6
be ratified by the local NDRC% 100 Mencouraged or permitted
5
after the NDRC ratification, be submitted to the State Council for final verification
≥ 100 Mrestricted4
after the NDRC ratification, be submitted to the State Council for final verification
≥ 500 M encouraged or permitted
3
be ratified by NDRC≥ 50 Mrestricted2
be ratified by NDRC≥ 100 Mencouraged or permitted
1
Ratification RequirementsTotal Investment Amount (US$)
Category of Project
General FDI Concepts –Government Approvals (III)
• Timetable for ratification
– 30 day window
– A great improvement
• NDRC verification document
– Basis for other procedures (land, FIE establishment, equipment import, tax benefits)
– Other gov’t dep. not to proceed till verification is obtained
• Department in charge
– SoE: department in charge
– In a JV project, consent from such department is fundamental
Hylands Law Firm
10
General FDI Concepts – Business Scope
• Limited scope of approved operation
• Generally impossible to obtain a general scope of business
• Typically restricted to a specific category of manufacturing or service
• Broader scope of business on a case-by-case basis– prohibiting business activities that are prohibited by PRC laws, regulations and
state policies regarding foreign investment industries;
– prohibiting business activities that require special approval prior to obtaining the special approval; and
– permitting any and all business activities that are not subject to special approval as provided by PRC laws and regulations and are not classified as "restricted" according to PRC foreign investment industry regulations.
• Expansion of business scope Hylands Law Firm
Representative Office – Nature and Function
• Nature of Rep Office
– Most basic form of foreign business presence
– Permanent base + liaison
– Not a independent legal entity, but a liaison office
– Establishment process: relatively simple
– No capital investment requirement
• Scope of Activities
– Quite restricted and must be specifically approved
– Prohibited from engaging in “direct business operations”
• No precise definition
• Determined on a case-by-case basis
• No direct business activities with a view to making profits
Hylands Law Firm
11
Representative Office – Scope of Activities
• Permitted activities
– Basic types of activities w/i business scope
– Coordinate visits and exchanges of personnel
– Conduct negotiations on behalf of parent company
– Conduct activities in relation to its own office adm
• Consequences of exceeding limitations on activities
– Penalties
• Fines up to RMB 20k
• Suspension of business activities
– In practice, somewhat discretionary & on a case-by-case basis
• Remedy situation w/o sanction
• Appropriate penalties based on the amount invested or income generated
Hylands Law Firm
Representative Office – Streamlined Registration Procedures
• Sponsor
– Usually through a local Chinese sponsor
– Service companies act as sponsors (e.g. FESCO)
– Lately, w/o engagement of sponsor allowed in certain cities
• Streamlined registration procedures
– Substantially simplified by a regulation in 2004
– Previous two steps consolidated into one-step procedure
– Two-step regime still apply to certain industries
• E.g. banking, insurance, securities, transportation, legal service
• Some adm streamlining
– Normally takes 5-15 days in Shanghai
Hylands Law Firm
12
Hylands Law Firm
Representative Office – Post AIC-Registration Matters
7 daysCustomsCustoms Registration(only required if import samples)
7
5 daysBank Designated by ClientBank Account Opening6
1 day Branch of State Administration of Foreign Exchange (“SAFE”)
Foreign ExchangeRegistration Certificate
5
3 daysStatistics BureauStatistics Registration Certificate4
30 days Foreign Taxation Department of Shanghai Taxation Bureau
Tax Registration Certificate3
3 day Public Security BureauChop Carving and Record Registration
2
7 daysMunicipal Administration for Quality and Technology Supervision
Organization Code Certificate1
Estimated Timetable
Authority in ChargeItems
Joint Venture – Nature and Function
• Overview– Definition– Often used in a “restricted” sector– Still important role– Two types of JV: EJV & CJV
• EJV– Separate entity – Profit-sharing in proportion to investment
• CJV– Organized by means of contract; 2 types of CJV– “Purely contractual” CJV
• A purely contractual arrangement• Cannot protect the partners from venture’s liability• Rare animal in today’s market
– “Legal person” CJV• A separate LLC• Shares more characteristics of an EJV
Hylands Law Firm
13
Joint Venture – EJV vs. CJV (I)
• Principal differences bet EJVs & CJVs– EJV: the earliest form of LLC
– CJV: the evolutionary LLC
– CJV may provide more flexibilities in the aspects of• Investment form
• Profits/risks distribution
• Operation management
• Investment recoupment
• EJVs vs. CJVs – investment form– EJV
• In cash or other in-kind contributions
• Debt/equity ratio and timing of contribution
– CJV• “cooperative conditions”
– Access to or use of certain assets
– Rights that are not assigned formally
Hylands Law Firm
Joint Venture – EJV vs. CJV (II)
• EJV vs. CJV – operation management
– EJV
• Substantially as a corporation in Western jurisdictions
• Also shares characteristics of a partnership
• No concept of Shareholders Meeting
– CJV
• Board of director OR joint management office
• Management to be delegated to a third party (e.g. hotel industry)
• EJV vs. CJV – distribution of management rights & profits
– EJV
• Profits/losses in proportion to respective percentage of equity contribution
• Management rights allocated by percentage of contribution
– CJV
• Not conform strictly to the ratio of capital contribution
• More flexible, not tied to the value of contributions Hylands
Law Firm
14
Joint Venture – EJV vs. CJV (III)
• EJV vs. CJV – recoupment of investment
– EJV
• Recouped from distributable profits & liquidated investor’s returns
– CJV
• Accelerated recovery possible
• Subject to the condition that fixed assets be reverted to Chinese partner
• Typically funded by excess cash flow generated by accelerated assets depreciation
Hylands Law Firm
Joint Venture – EJV vs. CJV (IV)
Accelerated recovery of investment is possible
From distributable profits and liquidated investors’returns
Recoupment of Investment
Not tied to the value of contributions, but set by contract
By percentage of equity contribution
Distribution of management rights and profits/losses
- Board of directors model; or- Delegation of management to a third
party with gov’t approval
Board of directors modelOperation management
- capital contributions; and - cooperative conditions (e.g. market
access rights, undertakings to supply certain services or cooperation, access to or use of certain assets)
Capital contributions as required by law (e.g. cash/ permitted in-kind contributions; debt/equity ratio; timing of contribution)
Form of investment
- Non-legal person: “purely contractual”CJV
- LLC: “legal person” CJV
LLCLegal form
CJVEJV
15
Hylands Law Firm
Wholly Foreign Owned Enterprise
• Most popular foreign investment vehicle– accounting now for more than half of foreign investment
– Popularity will grow
• Three factors– difficulties experienced with JVs
– growing confidence
– more industry sectors opened up
• Appropriate where there is no legal requirement or business reason to involve a Chinese partner
• Usually as a company with limited liability
• Compared to JVs, many similarities in a WFOE establishment project
Case Study: FICE Establishment
• Nature and Function of FICE
– WTO accession – to open trading & distribution sector
– FICE: recently established corporate structure
– Wholly foreign-owned businesses in the sectors of wholesale, retail & distribution
– Entry requirements lowered
– LLC
Hylands Law Firm
16
FICE Establishment – Business Activities of FICE
• Business activities of FICE
– Commission Agency: agents or brokers of goods
– Wholesaler: selling goods to retailers, industrial customers, commercial organizations or other wholesalers
– Retailer: selling goods for consumption and use by individuals• Retailing commodities
• Importing commodities directly
• Purchasing domestic products for export; and
• Other related businesses (e.g. product consultant).
– Franchisor: vesting in others the use of its trademark, trade name, or mode of management
– Open outlets or storesHylands
Law Firm
FICE Establishment – Project Background
• Project Background
– A German company
• which manufactures medical imaging systems, in particular, X-ray equipment
– A rep office already registered in Shanghai
– To set up a WFOE in Shanghai
• to import and distribute their Products to their customers in China (e.g PRC hospitals)
– FICE is a suitable investment vehicle
Hylands Law Firm
17
Hylands Law Firm
Issuance of Approval Certificate
TIMEFRAME: approx. 30 days upon submission of documents
STEP 5: Application for Certificate of Approval
TIMEFRAME: approx. 30 days upon submission of documents
STEP 4: Application for Medical Equipment Operation License
TIMEFRAME: approx. 3-5 days upon submission of documents
STEP 3: Company name reservation
TIMEFRAME: approx. 15 days upon submission of documents
STEP 2: Registration of tenancy
TIMEFRAME: depending on the work efficiency and cooperation of client
STEP 1: Feasibility study
FICE Establishment – Procedures for FICE Establishment
Hylands Law Firm
TIMEFRAME: approx. 1 to 2 months
Issuance of business license by AIC (= formal legal existence of company)
STEP 7: Additional formalities after issuance of business license
� Registration with Public Security Bureau
� Application of Tax Registration Certificate with the tax authorities
� Finance Registration with the Finance Bureau
� Opening of bank accounts
� Customs registration
TIMEFRAME: approx. 1 to 2 weeks
STEP 6: Application for Business License
FICE Establishment – Procedures for FICE Establishment
18
HYLANDS LAW FIRM
Nanjing19th Floor, Tower E, Deji Plaza
No. 188 Changjiang Road
Nanjing 210018
P.R. China
Tel: (+86) (25) 8682 7100
Fax: (+86) (25) 8682 7103
Shanghai
Suite 1805, Xingye Tower1028 West Beijing RoadJing‘an DistrictShanghai 200041P.R. China
Tel.: (+86) (21) 5256 9939Fax: (+86) (21) 5256 9930
Beijing5A1, 5th Floor, Hanwei PlazaNo. 7 Guang Hua RoadChao Yang DistrictBeijing 100004P.R. China
Tel.: (+86) (10) 6561 2460Fax: (+86) (10) 6561 0548
Contact Person
Lawrence Shu
Tel.: (+86) (21) 5256 9939Fax: (+86) (21) 5256 9930Email: [email protected]
Hylands Law Firm
1
PAN LidongAttorney at LawChina and New York
Wang Jing & Co., Law Firm
Email: [email protected]
Contents
� I Labor Laws-Labor
� II Intellectual Property Protection-IP
� III Importing Goods to China
(Wine as case study)
� IV Enterprise Income Tax Law -EIT
2
I. Labor-Labor Laws in China
� Labor Law of the People’s Republic of China (which come into
force as of January 1,1995)
� Labor Contract Law of the People’s Republic of China, (which
is promulgated and come into force as of January 1, 2008)
� Law of the People’s Republic of China on Labor Dispute Mediation and Arbitration, (which is promulgated and be effective
as of May 1, 2008 )
� Regulation on the Implementation of the Employment Contract Law of the People’s Republic of China, (which is
promulgated and be effective as of September 3, 2008)
I. Labor-Labor Laws in China
� Labor Contract Law provides more protections to employee, such as open-ended labor contracts, double financial compensation for illegal termination of labor contracts;
� After the promulgation of Labor Contract Law and Law of the People’s Republic of China on Labor Dispute Mediation and Arbitration, Labor cases in Shenzhen has increased 198% than one year before. As the enterprises fail to keep records and adjust it’s internal regulations and management to employees, 60%-70% enterprises of the enterprises involving labor cases lose the cases.
3
1.1 Labor-Enter into Labor Contract
� Employers have to enter into written labor contracts with employees.
Three types of labor contracts:
� Fixed-term labor contracts
� Open-ended labor contracts
� Labor contracts that set the completion of
specific tasks as the term to end contracts
1.2 Labor- Open-ended Labor Contract
Unless the employee proposes to conclude a fixed-term labor contract a open-ended labor contract shall be concluded in the following circumstance:
1) The employee has already worked for the employer for 10 full years consecutively;
2) The labor contract is to be renewed after two fixed-term labor contracts have been concluded consecutively;
Failing to sign a written labor contract
after the lapse of one full year of work
open-ended labor contracts.
4
1.3 Labor-Liability for failing enter into a
contract pursuant to Labor Contract Law
Labor Contract Law Article 82
If an employer fails to conclude a written labor contract with an employee after the lapse of more than one month but less than one year as of the day when it started using him, it shall pay to the worker his monthly wages at double amount.
If an employer fails, in violation of this Law, to conclude with an employee a open-ended labor contract, it shall pay to the employee his monthly wage at double amount, starting from the date on which a open-ended labor contract should have been concluded.
1.4 Labor-how to terminate a labor contract
legally
Labor Contract Law Article 39
Where an employee is under any of the following circumstances, his employer may dissolve the labor contract:
1. the employee does not meet the recruitment conditions during the probation period;
2. The employee seriously violates employer’s rules;
3. The employee causes any severe damage to the employer because he seriously neglects his duties or seeks private benefits;
4. The employee simultaneously enters an employment relationship with other employers and thus seriously affects his completion of the tasks of the employer, or the employee refuses to make the ratification after his employer points out the problem;
5. The labor contract is invalidated due to the circumstance as mentioned in Item (1), paragraph 1, Article 26 of this Law; or
6. The employee is under investigation for criminal liabilities according to law.
5
1.5 Labor-other matters shall be paid more
attention
� Add a non-competition clause into labor agreement, if necessary
� Make sure your employee manual comply with labor laws and regulations
� Financial Compensation for termination labor contractthe employer shall pay financial compensation
EXCEPT that
the employer offer equal or better conditions as the previous contract to renew but the employee rejects such offer.
Labor-CASE STUDY
Case: A and B has signed fix-
term labor contract for
two times consecutively,
now they prepare to
renew the contract
A individual
Company B
6
Labor-CASE STUDY
Analysis:
� B has to sign a open-ended labor
contract with A.
� If B fail to do so, A might Claim against B for compensation
II IP- Laws and Regulations
WIPO WIPO Copyright
TRIPS (WTO) Paris Convention
Berne Convention Madrid Agreement
Paten Cooperation Treaty
General Principles of Civil Law
Copyright, Trademark, Patent Laws
Unfair Competition Law
Criminal Law
Regulations, Rules, and SPC
opinions
with domestic IP offices or
through international systems
7
Conventions and International Organizations
�World Intellectual Property Organization since 1980. (WIPO)
�Paris Convention for the Protection of Industrial Property since
1985
�Madrid Agreement Concerning the International Registration of
Marks since 1989
�Berne Convention for the protection of Literary and Artistic Works
since 1992
�WIPO Copyright Treaty since 1992
�Convention of Producers of Phonograms Against Unauthorized
Duplication of Phonograms since 1993
�Patent Cooperation Treaty since 1994 (PCT)
�Agreement on Trade-related aspects of Intellectual Property Rights
since 2001. (TRIPs)
II IP- Laws and Regulations
General laws and rules on IPRs
�General Principles of Civil Law (1986) in which IP was
adopted as a civil right.
�Copyright Law: adopted in 1990, revised in 2001;
�Trademark Law: adopted in 1982, revised in 1993, 2001;
�Patent Law: adopted in 1984, revised in 1992, 2000;
�Law Against Unfair Competition (1993), with clauses on
unfair competition, anti-monopoly, commercial secrets.
�Criminal Law (1979); 1997 revision includes
more new crimes on IP violation
�Other administrative regulations on IP protection by Chinese
central and local governments.
II IP- Laws and Regulations
8
Registration of IPRs under Chinese Law
•Trademarks: China Trademark Office,
or via the WIPO (int’l applications)
•Patent: State Intellectual Property Office
or via the PCT (int’l applications)
•Copyright: Copyright Bureau
•Domain Names: CNNIC
•Customs Protection: General Customs
Administration
2.1 IP-Registration IP in China
2.2 IP-Remedies
Administrative Adjudication (AIC, Trademark Office, Patent Office)
Civil Litigation
Criminal Prosecution
9
Effect:
Compen-
sation
Evidence:
Cost:
Time:
Infringement stopped,
potential infringers
warned off, products
confiscated, license
revoked, fines imposed
No compensation
Evidence less stringent
Low investigation fees, no
court fees / security
Relatively quick
DisadvantagesAdvantages
Effect:
Compen-
sation
Evidence:
Cost:
Time:
Infringement stopped,
potential infringers warned
off
Compensation
possible
Evidence relatively stringent
Court fees, lawyer fees, etc
Lengthy proceedings; IP
jeopardized pending the suit
Provisional measures
(against security)
DisadvantagesAdvantages
10
Effect:
Comp-
ensation
Evidence:
Cost:
Time:
Infringement stopped,
potential infringers warned,
products, tools and unlawful
income confiscated, fines
imposed
No compensation to
claimant
Stringent evidence
High investigation feesno court fees / security
Case by case
DisadvantagesAdvantages
Effect:
Compen-
sation
Evidence:
Cost:
Time:
CivilCrim / Adm
Adm / CrimCivil
Civil / CrimAdm
Crim / CivilAdm / Crim
Crim / CivilAdm / Crim
DisadvantagesAdvantages
11
2.3 IP-Remedies CASE STUDY
Case on trademark:Wholesale dealers sold counterfeit industrial batteries
Company A reported Infringement to Administrative Authorities
Authorities took Administrative Action (confiscation & fines)
Dealers appealed against
Administrative Actions in Court
claiming illegal procedures
Company A assisted with
defense, appeal withdrawn
Company A initiated civil lawsuits
√ lawsuits—manufacturer
×lawsuit -dealer
2.4 IP- strategy
Civil Lawsuit
or
Criminal Prosecution
Prevention
Pre-action Investigation
Administrative Adjudication
12
III Importing Goods to China
(Wine as case study)
� Business Licenses and Permits
� Application for a Registered Chinese Wine Label
� Quality Inspection - CIQ
� Customs Procedures/Forms
� Taxes
� Customs Duties/Website
� Import VAT
� Consumption Tax
� Tax Rate Formulas for Imported Goods
� Tax Rate - Case Study
� Contract Registration
3.1 Business Licensesand Permits (Wine as case study)
� Must be a legally registered PRC enterprise;
� Approval of Business Scope: BOFTEC provides approval for
importation (and domestic sales), and the business scope must
include trading.
� Permit for Wine Sales and Correct Business Scope : AIC grants
permit and the business scope must include the wine sales.
� Import and Export Operations: The enterprise may import the
wine on its own (with the above approvals, permits, and correct
business scope) or consign a separate trading company as its
agent to import the wine.
13
3.2 Application for Registered
Chinese Wine Label (Wine as case study)
An application must be filed with the local inspection & quarantine authority (“CIQ”) to obtain a registered Chinese label. Application documents:
� Business License;� Inspection & Quarantine Report on the quality of the wine;� Photocopy of Permit for Production provided by the wine manufacturer and a
Chinese translation (issued in the country of origin);
� Photocopy of the Health and Sanitation Permit provided by the wine manufacturer and a Chinese translation (issued in the country of origin);
� Photocopy of the Wine Production Process provided by the manufacturer and a Chinese translation;
� Design sample of the wine label in Chinese.
After the abovementioned documents are ready, the CIQ will report to the State CIQ for examination and approval. Upon approval, a Certificate of Approval for a registered Chinese label will be granted. One label may only correspond to one type of wine.
3.3 Quality Inspection - CIQ
Quality Inspection and Customs Declaration of imported goods areconducted simultaneously. The goods will be released by the Customsupon issuance of the clearance certificate from the CIQ. Goods must then also pass the CIQ’s sampling inspection which is done for each shipment received. The CIQ duties include the following:
� Examining the documents relating to the goods, including Sanitation Certificate, Certificate of Origin, Certificate of Quality, etc. issued by the exporting country;
� Whether the package is in compliance with the accepted standards
� Whether the goods have obtained a registered Chinese label (for wine);
� Sampling inspection: To discern whether the goods are in compliance with the sanitation standards of the PRC for imported food, three bottles are selected from each label, within each shipment, for inspection. The process takes about one week to complete.
14
3.4 Customs Procedures
Procedure - Declaration——Inspection——ReleaseDeclaration: Declaration must be made to the Customs by the receiver within14 days of the arrival of the means of transport. Necessary documents include: contracts, invoices, packing list, freight list (cargo manifest), bills of lading, a power of attorney for Customs declaration (if imported by agents), license to import and export, a write-off bill for collection of proceeds in export, and perhaps others.Inspection: Customs may examine whether the goods are in conformity with the documents and impose penalties or delay release if they are not satisfied with the results of their Inspection.
Release: After the consigner or its agent pays in full any tax or duties, the goods will be released by Customs upon obtaining the clearance certificate issued by the CIQ.One common source of delays at Customs is in the determination of the dutiable value of the imported goodsFactors considered by Customs in determining the price include: packaging, label, brand name/trademark. Generally speaking, the grade of the wine is determined by a commercial specification, the brand name, the place of origin, the raw materials used, and the processing method involved in its production.
3.5 Customs Declaration Form
15
3.6 Taxes
Scope of taxable goods: goods being allowed to be imported
into or exported from PRC and entry articles
� Customs Duties
� Import VAT (value added tax)
� Consumption Tax (special goods)
3.7 Customs Duties
Rates:
� Different goods are subject to different tax rates
� The State Council has a Customs duty commission which is responsible for the adjustment and interpretation of taxable items, Customs codes, and Customs duty rates which are published in the Regulations of the People’s Republic of China on Import and Export Duties and the Table of Rates of Import Duties of Entry Articles.
Taxpayer:
� Consignee of imported goods
� Consignor of exported goods
� Owner of imported articles
16
3.8 Customs Website
(Tax Rates Listed)
3.9 Import VAT
Taxable items:
� Sale of Goods
� Processing Services
� Repair and Replacement Services
� Importation of Goods
Taxpayer:
Entities and individuals engaged in any of the abovementioned
operations within the territory of the PRC are considered
taxpayers of VAT.
17
3.9 Import VAT
Rate:
� 17%: Sale or importation of goods (most goods), including wine
� 13%: Food grains, tap water, edible vegetable oil, pesticides and other basic appliances necessary for the production and living of residents
� 0%: Export of goods (unless otherwise provided by the State Council)
Calculation:
� the VAT amount as indicated in the Import VAT Duty Paid Certificate (������������) issued by the Customs is the input tax amount which is allowed to be offset against or be deducted from the output tax amounts
� the payable tax amount = the output tax amount – the input tax amount
3.10 Consumption Tax (Wine as case study)
Scope: Consumption tax only applies to the importation of the following
commodities
� Cigarettes, wine and alcohol (including white wine, rice wine, beer,
other wines, and alcohol), cosmetics, precious jewelry and gems,
firecrackers, skyrockets, finished fuel, automobile tires, motorcycles,
cars, golf carts and golf equipment, top-grade watches, yachts,
wooden throwaway chopsticks, hardwood flooring
Rates: Different commodities are subject to different rates, ranging from 1%
to 45%.
18
3.11 Tax Rate Formulas for
Imported Goods
� Customs Duty: import duty = dutiable value X duty rate
(Dutiable value = total amount payable and actually paid by the buyer to the seller + the freight, the associated expenses, and the insurance premiumsincurred prior to the arrival and unloading of the goods at the destination within PRC).
Customs is entitled to examine the authenticity and exactness of the declared value and is entitled to consult with the related parties on the declared value and adjust the declared value if it deems that the value declared by the related parties is not correct.
� Consumption tax: composite taxable value = (dutiable value + Customs duty) / (1 – consumption tax rate);
payable amount of consumption tax = composite taxable value Xconsumption tax rate;
� VAT = (dutiable value + Customs duty + consumption tax) X VAT rate;
� Total taxable amount = Customs duty + consumption tax + VAT
3.12 Tax Rate - Case Study (Wine as case
study)
Enterprise A (domestic) imports wine with a dutiable value of RMB 1,000,000.
(Note: assuming that the Customs Duty rate is 14%, the VAT rate is 17% and the Consumption Tax rate is 10%)
� Customs Duty: RMB 1,000,000 X 14% = RMB140,000;
� Composite taxable value : (RMB 1,000,000 + RMB 140,000) / (1 - 10%) = RMB 1,266,667
� Consumption tax: RMB 1,266,667 X 10% = RMB 126.667
� VAT: RMB (1,000,000 + 140,000 + 126.667) X 17% = RMB 215,333;
� Total Tax = RMB140,000 + RMB126,667 + RMB215,333 = RMB 482,000
19
3.13 Contract Registration
Import enterprises must register contracts involving advance payments on the sales of exported goods and deferred payments regarding imported goods on the official website designated by the State Administration of Foreign Exchange (SAFE).
� The term “deferred payment” refers to a payment made through foreign exchange on a date stipulated in a COD (cash on delivery) import contract which is later than the date of the importation of the goods, as stipulated in the contract, or which is made on a date more than 90 days later than the date of the actual importation
� Deadlines for contract registration
1. Within 15 working days of execution of the contract; or
2. Within 15 working days, of the end of a 90 day period from the date when Customs approves the import goods declaration form.
IV Enterprise Income Tax Law
� Reasons for the Enterprise Income Tax Law (EIT)
� Tax Rates
� Taxable Income Amount and Deductions
� Changes in Preferential Tax Treatment
� Technology Transfer and R & D
� Advance Pricing Agreements and Investigations
20
4.1 EIT-Reasons for the EIT Law:
� Unify the income tax processes of both domestic enterprises and foreign invested enterprises
� Unify and standardize the procedures and criteria used for pre-tax deductions
� Implement a preferential tax policy: priority is being given to specific industries for preferential tax treatment and the prior practice of preferential treatment based on the region an enterprise is located is now secondary
4.2 EIT-Tax Rate
� General tax rate 25%- PRC registered enterprises
� Small/Low-profit enterprises 20% (enterprises must not have more than RMB 300,000 in annual taxes, no more than 100 employees, and assets exceeding RMB 30m)
- PRC registered enterprises� Specific New and Hi-tech enterprises 15%
(enterprises must meet standards regarding investment, employment of skilled workers, and levels of income to qualify as a New or Hi-tech enterprise)
- PRC registered enterprises� Withholding income tax: 10%
- Foreign registered enterprises
21
4.3 EIT-Taxable Income Amount and
Deductions
� Taxable amount of income = total amount of income each tax year = tax-free income = tax-exempt income = all deduction items = any remedies for the losses of the previous year(s)
� Tax-free income: proceeds not originating from business activities (Article 7 of the EIT )
Example: VAT rebates
� Tax-exempt income: preferential tax treatment provided for in specific situations (Article 26 of the EIT, Article 83 of the Regulation on the Implementation of the EIT)
Example: treasury debts, qualified dividends, profit distribution, and other returns on equity investments between domestic enterprises.
� Business entertainment expenses may also now be deducted up to a maximum of 0.5% (Article 43 of the EIT)
4.4 EIT-Changes in Preferential Tax
Treatment
Article 53 stipulates that specific
measures for preferential tax treatment
and the right to reduce or exempt tax
shall be subject to the approval of the
State Council. Local authorities have no right to reduce or exempt tax.
22
4.4 EIT-Changes in Preferential Tax
Treatment
Examples of Preferential Tax Treatment which have been cancelled:
1. Preferential tax rates of 15% and 24% in special economic zones, costal economic and technical development zones, and in the initial development of riverside cities, etc.
2. “2+3” or the system whereby the first two years of taxes were exempted and the following three years received a 50% exemption
3. Tax rebates for foreign invested enterprises from purchases of domestically manufactured equipment
4. Tax rebates from reinvestment into a foreign invested enterprise
5. 50% reduction of tax for foreign invested enterprises whose products are mainly for export
6. General principle: preferential tax treatment which has been stipulated in the new tax law will continue and any that were not included are cancelled.
4.4 EIT-Changes in Preferential Tax
Treatment
New Preferential Tax Treatment
New preferential tax treatment mainly focuses on agriculture, forestry, fishery and animal husbandry industries, also investment in key infrastructure, investment in environmental protection and energy conservation, technology transfer, and investment in not-for-profit organizations (the first three years are exempted and the following three years receive a 50% exemption)
23
4.4 EIT-Changes in Preferential Tax
Treatment
Preferential Policy Transition Period
From January 1, 2008, the tax rate of enterprises which enjoy a preferential treatment will gradually move to the statutory tax rate over a period of 5 years as of the implementation of the new tax law. Enterprises which enjoy a tax rate of 15% will be levied 18% in 2008, 20% in 2009, 22% in 2010, 24% in 2011, and 25% in 2012 (+3+2+2+2+2+1); enterprises which are levied 24% of the enterprise’s income will be levied 25% beginning in 2008.
From January 1, 2008, enterprises which enjoy a preferential treatment of regular income tax deductions such as “being exempt during the first two years and receiving a 50% exemption the following three years” , “being exempt the first five years and receiving a 50% exemption the following five years”, etc, will enjoy the preferential treatment until the preferential term expires according to the original tax law, the administrative regulations, and the preferential regulations and term in the relevant document; for enterprises which fail to enjoy a preferential policy because they have not yet begun to make a profit, the preferential term will commence from the year 2008.
4.4 EIT-Changes in Preferential Tax
Treatment
Preferential Treatment in Special Economic Zones and the PudongNew Area
� For New and Hi-tech enterprises registered in the special economic zone and Shanghai Pudong new area after January 1, 2008, their income from the special economic zone and Pudongnew area shall be exempted from tax for the first two years and shall receive a 50% exemption the following 3 years, using the statutory tax rate of 25% as of the tax year the enterprises obtained business and operational income.
In Guangdong Province Special Economic Zones include:
Shenzhen, Zhuhai, and Shantou
24
4.5 EIT- Technology Transfer and R&D
Expenses
� Technology Transfer: the portion of income from technology transfer in a tax year which does not exceed RMB 5million is exempted from tax; the portion which exceeds RMB 5million will receive a 50% tax exemption. The exemption may be delayed until a late time (Article 90 of the Regulation on Implementation of the EIT)
� An additional amount may be deducted from R&D expenses and the intangible assets formed as a consequence: additional 50% deduction (Article 95 of the Regulation on the Implementation ofEIT Law)
� Example: Company A earned RMB 6 million from the transfer of technology in 2008. In order to avoid paying the maximum tax liability Company A could divide it’s investment into segments less than 5 million RMB and pay over a period of a couple of years.
4.6 EIT-Advance Pricing and Investigations
� The tax authority shall be entitled to make tax readjustments within 10 years of the tax year when the related transaction was conducted. (PRC law states that accounting books, accounting documents, statements and certificates of tax payment must be kept for 10 years)
� An enterprise may file with the tax authority the pricing principles and computation approaches for the transactions between it and its affiliates, the tax authority and the enterprise shall enter into an advance pricing arrangement upon negotiations and confirmation.
� When the tax authority investigates the transactions of an enterprise with its affiliates and when it find the materials provided by the enterprise are false or incomplete, it may decide the rate of tax of transfer pricing based on the results of it’s investigation.Transfer pricing refers to the manipulation of product pricing between two connected enterprises in order to maximize their own profit or avoid tax and completely ignores market demands.
25
eg1: Comparing investment through HK and
abroad, in regards to changes in the EIT
Investor Company A (Sweden)
Subsidiary B
Interest, royalties 10%
Investor Company A
(HK)
Subsidiary B
Interest, royalties 7%
investment Profit, tax rate10%
Within the territoryof the PRC
investment Profit, tax rate 5=
Within the territoryof the PRC
eg2: Aspects not yet clear - Income tax in
regards to Equity Interest Transfer
Company A in HK Company B in HK
Company C within the territory of the PRC (target company)
� Questions still not clear:
1. the application of law (if in China then tax should be paid)
2. How to control the transaction and therefore implement tax rules
investmentwithin the territory
of the PRC
equity interest
transfer
26
Thank You
Lidong PAN� New Address: 11/F., South Tower,
Phase II, G.T. Land, 8 Zhu Jiang West Road, Zhujiang New Town, Tian He, Guangzhou 510623, P. R. China
� Tel: 86-20- 87600082 / 86-20-83930333
� Fax: 86-20-87784482
� Email: [email protected]
KCP-4054098-1
Visa Challenges for Chinese Business Visitors
The purpose of this information is to provide a basic understanding of the processes,
requirements, and challenges for people from China to visit the U.S. temporarily for business
purposes.
Visa Basics
* Citizens of China must apply for and obtain a Visa to enter the U.S.
* Applications are made at U.S. Embassy or Consulate locations
* Visas permit entry to the U.S. during the period of validity
* Can be issued for up to 12 months, but can be limited to much shorter periods
Visa Basics
* U.S. law presumes that a visa applicant will stay in the U.S. permanently
* The applicant for a temporary visa must prove that he or she will not remain permanently
* Must show ties to a non-U.S. country, such as maintaining a foreign residence, employment,
and other community ties
B-1 Visa Classification
* Commonly utilized, temporary visa classification
* Clearly encompasses:
- Engagement in commercial transactions
- Negotiation of contracts
- Consulting with business associates
- Participation in litigation
- Participation in conventions, conferences or seminars
- Undertaking independent research
* Does not permit "employment" - which is difficult to define
Alternative Uses of B-1 Visa Classification
* The B-1 Visa rules authorize some additional types of activities
* Each "exception" has very specific conditions that must be met
* The exceptions to the "no employment" rule include:
- Certain religious activities
- Non-governmental employees of foreign exhibitors at international fairs
- Certain trainees
- Entertainers, Artists, Cultural visitors, Musicians
- Physicians, for observation and consultations - no patient care
KCP-4054098-1
It is Critical to Plan Ahead
* Visa applicants may have to wait 2 to 3 months for an appointment
* Visa applicants should be well prepared and able to fully document applications
* The list of required documents is significant (see: http://beijing.usembassy-
china.org.cn/niv_business.html)
* U.S. officials have observed the presentation of fraudulent information and documents
* In cases of fraud, Chinese visa applicants may become subject to a lifetime visa ban
Supporting Documentation for B-1 Visa Applications
* Evidence of Return to China: Hukou Registration, ID card, proof of employment, pay
statement that shows regular monthly salary, bank books with regular deposits and withdrawals
* Invitation Letter: Information about who is inviting you, purpose of travel, and planned
itinerary or schedule
* Proof of Finances: Proof of support during the entire stay in the U.S. without working
* Specific information about destinations, people to visit, topics of discussion, and products to be
purchased, documented by: Detailed letters from U.S. business partners indicating the purpose of
the trip; copies of contracts or other agreements with U.S. business partners; and information on
machines, software or other equipment to be examined, tested or purchased in the U.S., such as
brochures or product catalogues, etc.
Beyond Temporary Visits
If a U.S. employer desires to employ a foreign worker in the U.S., it should consult with an
immigration attorney to examine the following temporary visa options:
* H-1B Visa - Utilized for a position requiring at least a specialized bachelor's degree
* B-1 in lieu of H-1B - Can be utilized, if the person is paid from a non-U.S. source
* L-1 Visa - Utilized for intra-company transferees, either for managers/executives or
"specialized knowledge" workers
Anthony E. Weigel
HUSCH BLACKWELL LLP
4801 Main Street, Suite 1000
Kansas City, MO 64112
Direct: 816.983.8242
Fax: 816.983.8080
Husch Blackwell LLP
About Husch Blackwell
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locations across the United States and in London, serving clients with domestic, international and
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helps manage risk, overcome hurdles and create meaningful advantages for our clients.
We represent national and global leaders in major industries that include agribusiness, energy,
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Our firm's history reflects almost a century of legal excellence and superior client service. We earned
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clients demand.
We understand that our value and strength is in our people and the diversity of their backgrounds. We
are dedicated to enhancing and supporting our cultural standards through our Diversity Programs and
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For more information about Husch Blackwell LLP, please visit www.huschblackwell.com.
Husch Blackwell LLP
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Lincoln
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London
Milton Gate, 60 Chiswell Street London, England EC1Y 4AG Memphis
200 Jefferson Avenue, Suite 1501 Memphis, TN 38103
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901 St. Louis Street, Suite 1900 Springfield, MO 65806
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Husch Blackwell LLP
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Husch Blackwell LLP
China
Husch Blackwell's China practice delivers a combination of services which brings together a deep
understanding of the laws and cultures of both China and the United States. Our team of diverse
talent includes attorneys who grew up in, lived in, or handled projects in China. Our team maintains
up-to-date knowledge of Chinese law and holds working relationships with leading Chinese law firms in
all major economic regions. This unique set of knowledge and resources combined with our extensive,
widely recognized expertise in multiple areas of corporate, commercial, trade and securities law make
Husch Blackwell well-positioned in advising both U.S. clients doing business in China and Chinese
businesses needing assistance in the United States.
Our Approach
Our bilingual team, with legal training in both the United States and China, is prepared to address our
clients’ cross-border legal needs in a responsive, reliable and cost-effective manner.
For U.S.-based businesses operating in China, our team serves as a strategic advisor and single point
of contact to coordinate matters in China, as well as, an effective intermediary to translate the
nuances of international laws into advice that is easily understood and practical for U.S. businesses.
Our firm and affiliated counsel in China will combine local knowledge and expertise in our respective
jurisdictions to provide clients with professional service for their legal needs in China.
For China-based businesses operating in the United States, our Chinese attorneys in the United States
guide clients through the entire process of investment, acquisition, operation and other business
transactions. Our Chinese attorneys have indelible experience in understanding the culture and
regulatory environment in which China-based businesses operate and are accommodating to their
unique needs.
Representative China-Related Services and Expertise
For U.S. Clients in China:
� Establishment of business entities or operations in China and follow-up operational counseling
(including seeking governmental approval, organizational document drafting, project feasibility
study, and agency registration)
� Joint venture agreements and set-up
� Sourcing, supply, procurement, and other contractual arrangements
� Sales and distribution agreements
� Acquisitions and investment
� Cross-border loan and financing
� Patent, trademark and copyright registration, enforcement and protection in China
� Cross-border dispute resolution
� Counseling on employee related issues and other regulatory issues
For Chinese Clients in the U.S.:
� Investment in and acquisition of U.S. companies or assets
� Establishment of the U.S. business entities and related business immigration issues for Chinese
businesses
� Securities offerings and other corporate finance transactions
� IPOs, reverse mergers and PIPE transactions
Husch Blackwell LLP
� Payment disputes with U.S. companies and collections
� Anti-dumping and countervailing duty investigations and proceedings
Team and Resources
Our China practice group answers the day-to-day needs of our clients’ China-related businesses, but
we staff each project on a case-by-case basis according to the nature and needs of each project. We
frequently call upon members of other practice groups such as securities, IP, and customs and trade,
as well as lawyers at our affiliated Chinese firms, for their related experience and expertise to best
serve our clients. The resources that enable our team to effectively and efficiently serve our clients’
needs include:
� We maintain a complete set of China’s business laws and regulations and subscribe to
authoritative legal services to ensure our lawyers have convenient access to the most up-to-date
laws and regulations in China
� We regularly travel to China to stay updated on issues of Chinese laws and regulations
� We have close affiliations with several leading Chinese law firms, with offices in all of China’s
major commerce centers including Beijing, Shanghai, Guangzhou, and Shenzhen
� We are the exclusive Missouri member of the World Services Group and TerraLex, two associations
of leading law firms operating in more than 130 countries, including throughout Asia, through
which we regularly obtain local expertise
Husch Blackwell LLP
International
Our International practice represents United States-based clients in the conduct of their businesses in
other countries and foreign-based clients in their operations in the United States.
Our extensive experience in handling international business transactions and import/export
transactions allows us to advise our clients in connection with their international distribution
arrangements, distributorship agreements, and sales representation agreements anywhere in the
world, as well as in connection with acquisitions, divestitures, and joint ventures.
One important element of our international service offering is our office in London, England. Our
London presence allows us to serve our clients’ interests throughout the European Union. Additionally,
our native Chinese and Korean attorneys regularly assist domestic clients with matters in Asia and
Asian clients with matters in the United States. Numerous bilingual attorneys provide services for
transactions in other parts of the world.
Our memberships in TerraLex® and World Services Group further enhance the geographic reach of
our international practice. One of the largest global networks of independent law firms, TerraLex®
consists of 150 law firms in almost 100 countries. We are the exclusive member of TerraLex® in
Missouri. World Services Group is an international organization of multi-disciplinary services providers
with more than 15,000 professionals spanning over 120 countries. We are the exclusive law firm
member of World Services Group in both Missouri and Nebraska. These memberships ensure our
clients instant access to leading professionals around the world.
Complementing our international transactions practice, our large and experienced litigation group can
resolve disputes practically anywhere in the world, through international mediation, arbitration or
litigation. Our insolvency litigation team is recognized worldwide for its success in tracing assets and
collecting judgments internationally.
Our International practice provides assistance in the following areas:
� Negotiating acquisitions of joint ventures with foreign companies
� Establishing U.S. subsidiaries in foreign countries
� Establishing and terminating overseas dealerships
� Drafting technology and licensing agreements and protecting intellectual property in foreign
countries
� Negotiating supply agreements between U.S. companies and their foreign distributors
� Obtaining recognition of U.S. judgments through comity or the initiation of fresh actions in foreign
countries in order to effectuate recovery of the same
� Assisting financial institutions and companies with the service of process and compliance with
Hague Convention provisions in regard to foreign litigation
� Assisting financial institutions and companies with responding to and defending the service of
orders to produce documents and respond to interrogatories from foreign jurisdictions
� Assisting financial institutions and companies with the appointment of receivers and the
recognition of receivers in foreign jurisdictions to recover secured or owned assets in conformity
with client needs
� Acting as a gatekeeper for financial institutions and companies to coordinate and oversee litigation
in foreign jurisdictions
Husch Blackwell LLP
� Assisting financial institutions and companies in the initiation of foreign litigation and the selection
and supervision of overseas counsel in the foreign litigation in conformity with client needs
� Assisting financial institutions or companies in complying with U.S. legislation such as Trading with
the Enemy Act and the Patriot Act
� Assisting clients in international finance and derivatives
� Guiding clients in global offerings of securities
� Arbitrating international disputes under all major dispute systems (including the rules of the
International Chamber of Commerce)
� Negotiating and documenting secured commercial loans in the United States by foreign financial
institutions
� Representing foreign-based clients in connection with real estate transactions
� Guiding clients in business acquisitions and mergers
� Providing clients assistance in foreign patent, trademark and copyright registration and
enforcement
� Supervising and coordinating a network of local foreign counsel for the registration and
maintenance of our clients’ patents, trademarks, copyrights and other intellectual property
� Handling immigration matters, including assisting in the entry of non-citizens into the United
States and maintaining their non-immigrant status during temporary visits
� Advising clients on the corporate and tax structure for business operations in foreign countries in
order to minimize worldwide taxes
� Assisting our clients in international trade (including Customs, Export and Import Regulations and
NAFTA)
� Advising clients in contract manufacturing arrangements