Autumn 2007

CHINA’S NEW ENTERPRISE

INCOME TAX LAW:

PLANNING OPPORTUNITIES

AND TRAPS FOR THE UNWARY

by Alan W. Granwell and Qinghua Xu

The National’s People’s Congress of China has adopted a new Enterprise Income Tax law (EIT Law) which will become effective January 1, 2008. At that time, the former foreign-invested enterprises and foreign enterprises (FIEs/FEs) and domestic-invested enterprises (DEs) income tax laws will be repealed.

Under current law, China has two distinct sets of income tax laws, one for FIEs/FEs and one for DEs. Although, under the current law, both DEs and FIEs/FEs are subject to a statutory rate of 33 percent, FIEs/FEs enjoy so many preferences and tax holidays that their effective tax rate is generally 15 percent. The EIT Law will eliminate many of these preferences and will impose a uniform 25 percent tax rate on both domestic and foreign enterprises.

For our readers, we have prepared an article summarizing the major aspects of the EIT Law, suggesting actions that taxpayers should consider taking in China now and suggesting tax planning strategies that MNCs should consider taking to optimize their “inbound” Chinese tax positions.

Please read the article here.

An earlier version of this article originally appeared in the International Tax Newsletter,
August 2007.

CHINA PASSES

NEW EMPLOYMENT LAW

China’s Standing Committee of the 10th National People’s Congress has passed a new Employment Contract Law (New Law) that replaces the existing Labour Law. The New Law goes into effect on January 1, 2008.

Drafted amid some controversy, the New Law introduces a number of changes to the rights and obligations of employers and employees, including greater protections for individual employees in some areas and the strengthening of collective rights through various organizational bodies. While these changes are significant, they do not radically alter China's employment law environment.

Unfortunately, some provisions of the New Law remain vague, and the exact scope of the New Law is similarly unclear. It is widely expected that further implementation rules and notices will be issued in the coming months to offer the public more guidance.

We have prepared a brief article that summarizes the significant changes introduced by the New Law and compares them to the provisions of the current Labour Law.

Please read it here.

CHINA’S LONG MARCH

AGAINST BRIBERY:

ALARM BELLS FOR FOREIGN INVESTORS?

The Supreme People's Court and the Supreme People's Procuratorate of China has issued a landmark opinion aimed at tackling bribery violations by civil servants and government officials (the Opinion).

The Opinion is a continuation of the Central Government’s determined efforts to tackle government corruption. Among the visible signs of these efforts: Chen Liangyu, formerly the Communist Party boss of Shanghai and one of China’s most powerful political figures, was recently expelled from the Party—paving the way for corruption charges to be laid against him. In July, the country's former top drug regulator was executed for taking bribes to approve substandard medicines. In early September, a former official of the Agricultural Bank of China was executed for corruption and embezzlement.

The Opinion, issued July 8, 2007, sets out the two judicial bodies' views on the way criminal cases involving the acceptance of bribes by officials should be handled. Its contents are similar to those set out in a regulation issued by the Central Commission for Discipline Inspection, the Party’s disciplinary body, which took effect earlier this year (the CCDI Regulation).

For our readers, here is an overview of the Opinion and its implications for companies doing business in China.

WINDOW OF OPPORTUNITY STILL OPEN

BEFORE CHINA’S HISTORIC

ANTI-MONOPOLY LAW

TAKES EFFECT

After 13 years of heated debate, the People's Republic of China has enacted its first antitrust law. Before that day, China was the world’s largest economy without a formal antitrust law.

Literally translated, the new Chinese law is an “Anti-Monopoly Law.” The law, enacted on August 30, is comprehensive in scope, covering a wide range of traditional antitrust topics and even addressing anticompetitive administrative action. While the new law is vast in the areas it covers, its weakness may lie in the vagueness of many of its provisions and its frequent use of undefined terms.

Importantly, the law does not come into force until August 1, 2008. This delayed enforcement creates a valuable one-year window of opportunity that should be considered and utilized by corporations doing business in China or considering doing business in China. After that date, business in China will be a new ballgame.

We have prepared a brief overview of the provisions of the new antitrust law. Please read it here.

An earlier version of this article appeared in the Antitrust Alert in September 2007.

DLA PIPER IN THE NEWS

Upcoming Events

Registration is still open for the second annual Milestones’ 07 IPO Readiness Conference at the Peninsula Hotel, Beijing, on October 30.
DLA Piper and Ernst & Young will co-host the event, bringing together the most promising PE-backed and VC-backed emerging market leaders and serving as a peer-to-peer forum for experienced CEOs/CFOs. For conference details and registration, visit this site.

Feng Xue, partner in DLA Piper’s Chicago office, will participate in a panel at the World Trade Center of Illinois program entitled “China: Promise to Profits.” The program will be held on October 18 at Loyola University’s downtown Chicago campus.

Philip Zeidman, partner in DLA Piper’s Washington, DC office, will make the featured presentation on franchising in China during the International Bar Association’s annual conference in Singapore, October 18.

Rocky Lee will be among senior-level participants in the special session "Intra-China Logistics" at the CHaINA Summit '07, taking place on November 7-8 in Shanghai. The event is sponsored by the Global Supply Chain Council and its affiliate, the China Supply Chain Council, China's leading supply chain professional organization.

Deals

DLA Piper represented Beijing Enterprises Holdings Group in a HK$636 million placement of shares listed on the Hong Kong Stock Exchange, which closed on September 20, 2007. Dr. Wei Liu of DLA Piper’s Hong Kong office led the transaction. Goldman Sachs, Lehman Brothers and Macquarie Securities served as joint placing agents and joint bookrunners. Beijing Enterprises is the Beijing Municipal People’s Government’s “window company” in Hong Kong, holding interests in a broad array of businesses, including brewery products, tourism, telecommunications and IT, retail, geothermal energy, property investments, and water purification and treatment.

DLA Piper acted as US counsel to China Central Properties Limited (CCPL.L) in its US$500 million global offering and listing on the London Stock Exchange's AIM market, which closed in June, 2007. China Central Properties focuses on acquiring partially completed and distressed property developments in China. The offering, which included the issuance of 151.23 million new shares and convertible bonds, was sold to institutional investors in the US under Rule 144A, and outside the US in reliance on Regulation S. Deutsche Bank was the sole bookrunner for the offering. The team was led by Jeff Greene (Shanghai) and included Matt Adler (Seattle and Beijing), Jennifer Gallo, and Zhao Gang (both Beijing).

New Arrivals

Stephen Peepels and Gene Buttrill, leading corporate and securities lawyers with long track records in Asia, have joined DLA Piper as partners in our Hong Kong office—a significant step in the continued expansion of the firm’s global Corporate and Finance practice. Peepels will head the US capital markets practice in Asia. He comes to DLA Piper from Jones Day, where he helped to develop a large Asian capital markets practice. He has practiced in Asia for more than 10 years on transactions in Hong Kong, throughout Greater China, and in Southeast Asia. Buttrill, who is fluent in Mandarin Chinese, has substantial experience representing investment banks on corporate finance transactions in Greater China and has over 20 years experience in China.

Steven Liu has joined DLA Piper as a partner in the Beijing office, working with the firm’s award – winning venture capital and private equity team. A venture, mergers and acquisitions and capital markets lawyer, Liu has strong ties to Silicon Valley and extensive experience practicing law in the US as well as in China. He represents emerging growth and startup companies, mature public companies, investment banks, and venture capital funds in corporate transactions that include venture capital and PIPE financings, M&A transactions, and IPOs; regularly advises clients on corporate matters; and has counseled several US companies launching joint ventures in China, as well as private and public companies in China.

Claudio d'Agostino, a leading Italian lawyer with extensive experience in Euro-Sino transactions, joins DLA Piper as Of Counsel in Shanghai. A seasoned corporate lawyer, d’Agostino has 10 years of experience based in Shanghai advising European companies in a wide range of deals, focusing on foreign direct investment and mergers and acquisitions. Before joining DLA Piper, he was a partner at a major Italian law firm, managing its China practice in Beijing, Shanghai, and Guangzhou. He established the Shanghai office of another Italian law firm in 1997, transforming a two-man office into a reputable medium-sized law firm.

Richard L. Wageman, a prominent advertising and franchise lawyer in China, has joined DLA Piper as Of Counsel in Beijing. Based in China since 2001, he is a seasoned corporate and commercial lawyer and is among a small group of practitioners focusing on franchising in China. He represents international corporations, franchisors, and advertisers in businesses and activities in China and has also advised many foreign investment enterprises in an extensive range of industry sectors.

David M. Pendergast, a corporate and securities attorney with particular experience in transactions involving Chinese companies, has joined the firm and will be based in its Phoenix office. His clients have included an American-based NASDAQ-listed air carrier in its formation of a Sino-foreign equity joint venture company in the PRC, and a Hong Kong company in the sale of all its stock and the sale of all the assets of two California-based affiliates of a Canadian public company.

Moves

Partner Jeff Greene, a leading international corporate and securities lawyer, has joined DLA Piper’s Shanghai office. Greene is highly experienced in cross-border M&A and securities offerings, particularly advising high-tech and emerging growth companies. His assignment to Shanghai from
DLA Piper's Seattle office responds to growing client demand for M&A and capital markets experience in China. Greene has led cross-border M&A transactions in Australia, China, Germany, India, South Korea, the UK, and elsewhere, and will head the firm’s Venture Capital and Private Equity practice in Shanghai.

The Chinese Ministry of Commerce has invited Rocky Lee, head of
DLA Piper’s China Venture Capital and Private Equity practice, to join a committee to comment on the Ministry’s upcoming M&A and other foreign investment rules. Rocky was one of only two lawyers invited to sit on the panel, and the only person from an international law firm. The other participants are government officials and investors. The Chinese Ministry of Commerce is the government body that makes the rules governing investments in China, including regulations affecting venture capital and mergers and acquisitions.

Media Mentions

China's Ministry of Commerce is revising its foreign-invested venture capital enterprise rules, a move that could spark renewed interest in this structure. “The FIVCE vehicle might become the preferred vehicle for foreign venture capital firms wanting to invest onshore,” Rocky Lee told Dow Jones Newswire in late September. Lee also noted that the FIVCE structure may well be extended to private equity, since “there is no legal distinction" between the two types of direct investment in China.

Also in September, Lee was quoted in The Wall Street Journal, noting that "the Chinese government now views venture capital and private equity as a real industry sector and they're trying to develop their own domestic industry.”

Recent Events

Jeff Greene spoke at the seminar “How TMT Companies Win in
Cross-Border M&A” at Zhejiang University Information Technology Park in late August.

Rocky Lee spoke at the seminar “Term Sheet and Offshore IPO Legal Structures” that kicked off the China Entrepreneurs Start-Up 101 Series at the Kowloon Hotel in Beijing in mid-September. Lee led the workshop “Raising Capital: Term Sheets,” explaining the basics of reading and understanding term sheets. He and DLA Piper associate Chris Terry also led the workshop “Legal Restructuring for IPOs,” during which Terry talked about the Chinese rules and regulations for setting up a listable structure involving a Chinese business.

Philip Zeidman spoke on China’s new franchise law at the International Symposium in London, sponsored by the International Franchise Association and the Britain Franchising Association in early October.