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align="justify">Issue 2006.2</font></b></u></font></td> <td width="112"></td> </tr> </table> <p style="margin-right: .98" ; align="justify"><b><font face="Verdana" size="2" color="#000000">SUMMARY OF CONTENTS</font></b></p> <table width="500" border="0" cellpadding="2" height="275"> <tr> <td width="257" valign="top" align="left" height="45"> <p style="margin-right: .98" ; align="left"><a href="#1"><b><font size="2" face="Verdana">Acquisition of Domestic Enterprises by Foreign Investors</font></b></a></p> </td> <td width="235" valign="top" align="left" height="45"> <a href="#7"><b><font size="2" face="Verdana">Foreign Investment in Logistics Sector </font></b></a> </td> </tr> <tr> <td width="257" valign="top" align="left" height="45"> <p style="margin-right: .98" ; align="left"><a href="#2"><b><font size="2" face="Verdana">New Enterprise Bankruptcy Law</font></b></a></p> </td> <td width="235" valign="top" align="left" height="45"> <a href="#8"><b><font size="2" face="Verdana">Foreign Investment Restrictions in Real Estate Market</font></b></a> </td> </tr> <tr> <td width="257" valign="top" align="left" height="45"> <p style="margin-right: .98" ; align="left"><a href="#3"><b><font size="2" face="Verdana">New Tax Arrangement between the Mainland and Hong Kong</font></b></a></p> </td> <td width="235" valign="top" align="left" height="45"> <a href="#9"><b><font size="2" face="Verdana">Amendments to Criminal Law</font></b></a> </td> </tr> <tr> <td width="257" valign="top" align="left" height="45"> <p style="margin-right: .98" ; align="left"><a href="#4"><b><font size="2" face="Verdana">Holding Company Regulations Further Revised</font></b></a></p> </td> <td width="235" valign="top" align="left" height="45"> <a href="#10"><b><font size="2" face="Verdana">VAT Refunds for Domestic Equipment</font></b></a> </td> </tr> <tr> <td width="257" valign="top" align="left" height="45"> <p style="margin-right: .98" ; align="left"><a href="#5"><b><font size="2" face="Verdana">CEPA IV</font></b></a></p> </td> <td width="235" valign="top" align="left" height="45"> <a href="#11"><b><font size="2" face="Verdana">Relaxation of Foreign Exchange Control over Current Account Items</font></b></a> </td> </tr> <tr> <td width="257" valign="top" align="left" height="45"> <p style="margin-right: .98" ; align="left"><a href="#6"><b><font size="2" face="Verdana">Enforcement of Judgments in Hong Kong and China</font></b></a></p> </td> <td width="235" valign="top" align="left" height="45"> <a href="#12"><b><font size="2" face="Verdana">Valuation of Intellectual Property Rights </font></b></a> </td> </tr> </table> <p style="margin-right: .98" ; align="justify"><a name="1"><b><font size="2" face="Verdana">ACQUISITION OF DEOMESTIC ENTERPRISES BY FOREIGN INVESTORS</font></b></a></p> <p align="justify"><font size="2" face="Verdana">The Ministry of Commerce (&quot;MOFCOM&quot;), the State-owned Assets Supervision and Administration Commission of the State Council, the State Administration of Taxation, the State Administration for Industry and Commerce, the China Securities Regulatory Commission (&quot;CSRC&quot;) and the State Administration of Foreign Exchange jointly issued the <em>Regulations Regarding the Acquisition of Domestic Enterprises by Foreign Investors</em> </font><font size="2"> &#20851;&#20110;&#22806;&#22269;&#25237;&#36164;&#32773;&#24182;&#36141;&#22659;&#20869;&#20225;&#19994;&#30340;&#35268;&#23450; </font><font size="2" face="Verdana"> on 8 August 2006. Effective from 8 September 2006, the Regulations supersede the 2003 <em>Provisional Regulations for the Acquisition of Domestic Enterprises by Foreign Investors </em></font><font size="2">&#22806;&#22269;&#25237;&#36164;&#32773;&#24182;&#36141;&#22659;&#20869;&#20225;&#19994;&#26242;&#34892;&#35268;&#23450; </font><font size="2" face="Verdana"> (&quot;Provisional Regulations&quot;) (as discussed in the 2003.4 issue of China Legal Update) and govern both equity acquisitions and asset acquisitions of domestic companies by foreign investors (&quot;domestic acquisitions&quot;).</font></p> <p align="justify"><font size="2" face="Verdana">While the Regulations largely reiterate the procedures set out under the Provisional Regulations, they do introduce some important new procedures and concepts, creating new structuring opportunities while reasserting the Ministry of Commerce's control over the acquisition process.</font></p> <p align="justify"><font size="2" face="Verdana"><strong>Compliance with Foreign Investment Policies</strong><br> Foreign acquisitions of domestic enterprises are still required to comply with the foreign investment regulations applicable to the targeted industry sector. The Regulations clarify that the business scope of any subsidiary of the domestic target must also comply with China's foreign investment policies. An acquisition cannot be used to circumvent foreign investment restrictions.</font></p> <p align="justify"><font size="2" face="Verdana">If the post-acquisition foreign shareholding is at least 25% of a target's registered capital, the target will be eligible to enjoy the benefits of FIE status. Acquisitions under 25% are still subject to the FIE approval process but are not eligible to enjoy FIE benefits.</font></p> <p align="justify"><font size="2" face="Verdana"><strong>&quot;Round Trip&quot; Investments</strong><br> The Regulations impose new restrictions on &quot;round trip&quot; investment. FIE treatment for the results of &quot;round trip&quot; investment is now subject to restrictions. If a domestic company, enterprise or individual carries out the acquisition of an affiliated domestic company through use of an overseas company established or controlled by it, the FIE established as a result of the transaction shall not be eligible to enjoy the preferential policies applicable to FIEs without the injection of additional foreign funds.</font></p> <p align="justify"><font size="2" face="Verdana">Such related party &quot;round trip&quot; investment now requires Ministry of Commerce approval regardless of the approval level that would otherwise be applicable. These transactions cannot be approved locally. </font></p> <p align="justify"><font size="2" face="Verdana"><strong>Acquisitions Involving Affiliated Companies</strong><br> Further disclosure concerning connected party acquisitions is now required. Under the Regulations, parties to a domestic acquisition are required to declare whether or not they are affiliated companies. If both parties are controlled by a single entity, the identity of the entity should be disclosed and an explanation provided as to the purpose of the acquisition and whether the transaction value represents the price recognised by the market. The Regulations expressly prohibit the evasion of these requirements by means of arrangements such as trusts or nominee shareholders.</font></p> <p align="justify"><font size="2" face="Verdana"><strong>Share Consideration</strong><br> The Regulations clarify the permitted use of share consideration. The Provisional Regulations permitted the use of equity consideration without offering any procedural guidance, making the approval of its use difficult. The Regulations should make the use of share consideration practically feasible, although subject to significant restrictions. The foreign investor whose shares are to be used as consideration must satisfy certain restrictive criteria:</font></p> <ul> <li> <p align="justify"><font size="2" face="Verdana">the foreign investor must be lawfully registered and it and its management shall have not been penalised by its competent supervisory authority in the most recent three years;<br> </font></li> <li> <p align="justify"><font size="2" face="Verdana">the jurisdiction in which the foreign investor is registered must have a complete corporate law system;<br> </font></li> <li> <p align="justify"><font size="2" face="Verdana">the foreign investor must be a listed company (not OCT traded) unless it is a special purpose vehicle (see discussion below); and<br> </font></li> <li> <p align="justify"><font size="2" face="Verdana">the jurisdiction where the foreign investor is listed must have a complete securities exchange system.</font></li> </ul> <p align="justify"><font size="2" face="Verdana">The share price of the consideration shares must also have been relatively stable in the year prior to the transaction. The domestic company or its shareholder(s) must also appoint a China-registered intermediary organisation to investigate and verify compliance with the Regulations. The opinion of the China-registered intermediary will be required in the approval process.</font></p> <p align="justify"><font size="2" face="Verdana">Interim approvals are used to monitor these transactions. These transactions require sequential approval first for use of share consideration and then for the overseas investment by the Chinese party receiving the shares. Both sets of approval requirements must be satisfied. The use of share consideration is not a short cut to offshore investment for Chinese entities. The offshore investment approval process remains applicable in such transactions.</font></p> <p align="justify"><font size="2" face="Verdana"><strong>Special Reporting</strong><br> The Regulations also require that acquisitions involving key industries, impacting national economic security or resulting in the change of control of an entity with a well-known or famous domestic trademark be reported to MOFCOM. No guidance is provided on the meaning of such terms, but failure to satisfy the reporting requirement can result in the unwinding of an otherwise properly approved transaction. MOFCOM now has potentially broad discretion to review transactions.</font></p> <p align="justify"><font size="2" face="Verdana"><strong>Special Purpose Vehicles</strong><br> The Regulations also further regulate the use of special purpose vehicle shares in the restructurings of domestic enterprise where the ultimate purpose is an offshore listing of the special purpose vehicle. Fairly stringent criteria have been introduced for such reorganisations. The provisions shall be applicable if a domestic shareholder uses shares of an offshore special purpose vehicle controlled by it as consideration for the acquisition of shares it controls in a domestic company with the purpose of the special purpose vehicle offshore, thus indirectly listing the PRC assets. </font></p> <p align="justify"><font size="2" face="Verdana">MOFCOM and CSRC approval is required and the listing must take place within one year, otherwise the transaction must be unwound. The CSRC previously did not have approval authority over such offshore listings. The proceeds from the financing exercise shall be repatriated to China.</font></p> <p align="justify"><font size="2" face="Verdana"><strong>Individual Shareholders</strong><br> The restrictions on individual PRC shareholders in FIEs have also been relaxed under the Regulations. Chinese law generally does not permit individual Chinese nationals to hold equity in FIEs. The Provisional Regulations permitted an individual to retain his equity with MOFCOM approval provided that the shareholder had held the shares for a year. The Regulations eliminate these requirements allowing existing shareholders to retain their interests without any special approvals. The change of nationality of any individual shareholder will not affect the status of the company.</font> <p style="margin-right: .98" align="right"><a href="#contents"><font size="1" face="Verdana">Back to Top</font></a></p> <p style="margin-right: .98" align="justify"><b><a name="2"> <font size="2" face="Verdana"> NEW ENTERPRISE BANKRUPTCY LAW</font></a></b></p> <p align="justify"><font size="2" face="Verdana">The Standing Committee of the National People's Congress issued the <em>Law of the People's Republic of China on Enterprise Bankruptcy </em> </font><font size="2">&#20013;&#21326;&#20154;&#27665;&#20849;&#21644;&#22269;&#20225;&#19994;&#30772;&#20135;&#27861; </font><font size="2" face="Verdana"> on 27 August 2006 to replace the <em>Law of the People's Republic of China on Enterprise Bankruptcy (for Trial Implementation) </em> </font><font size="2">&#20013;&#21326;&#20154;&#27665;&#20849;&#21644;&#22269;&#20225;&#19994;&#30772;&#20135;&#27861;</font><font size="2" face="Verdana">(</font><font size="2">&#35797;&#34892;</font><font size="2" face="Verdana">) passed in 1986. The Law, which becomes effective on 1 June 2007, establishes the procedures for handling bankruptcy petitions, proceedings, restructurings and liquidations of enterprise legal persons (&quot;enterprises&quot;) in the People's Republic of China (&quot;PRC&quot;). <br> <br> <strong>Application </strong><br> The Law applies to enterprises that are insolvent or at risk of becoming insolvent, and extends to property belonging to the debtor both in China and abroad. Under the proper circumstances, a bankruptcy petition can be filed directly to the people's court by any of the following parties: </font></p> <ul> <li> <p align="justify"><font size="2" face="Verdana">a creditor; </font></li> <li> <p align="justify"><font size="2" face="Verdana">the debtor; </font></li> <li> <p align="justify"><font size="2" face="Verdana">the enterprise representative in charge of liquidation (when the enterprise has been dissolved but not yet liquidated). </font></li> </ul> <p align="justify"><font size="2" face="Verdana">The Law also covers the bankruptcy and restructuring of financial institutions and specifies that the petition must be made by the relevant financial regulatory authorities under the State Council. </font></p> <p align="justify"><font size="2" face="Verdana">The people's court may also accept petitions for the recognition of foreign court bankruptcy rulings that pertain to property within the PRC. If accepted, these rulings will be recognised and enforced. Courts will consider any applicable foreign treaties and reciprocity when determining whether a foreign court award should be recognised. </font></p> <p align="justify"><font size="2" face="Verdana"><strong>The Administrator</strong><br> The people's court will appoint an independent administrator for the enterprise when it accepts the bankruptcy petition. While the Supreme People's Court shall draw up rules on the qualifications and remuneration of administrators, the Law does set out the basic qualifications, duties and standards of conduct for administrators. According to the Law, the administrator will have power over the debtor's assets and property, including the right to attempt to claw-back certain assets and to manage and dispose of the debtor's property. If a restructuring is undertaken, the administrator will supervise the debtor's management in the implementation of the restructuring. The administrator will report to both the creditors (at the creditors' meeting) and the court. </font></p> <p align="justify"><font size="2" face="Verdana"><strong>Creditors</strong> <br> When the people's court accepts the bankruptcy petition, it will announce its acceptance and the date by which creditors must file their claims. The court will then convene the first creditors' meeting to review the claims with all known creditors, the debtor and the administrator. Bankruptcy distributions will be based on these claims if unchallenged. </font></p> <p align="justify"><font size="2" face="Verdana">All resolutions proposed during the creditors' meetings will be adopted by a majority vote that must represent at least one-half of the unsecured claims. The creditors' meeting shall monitor the administrator and adopt restructuring, settlement or property distribution plans, as the case may be. In addition, the creditors' meeting can delegate certain of its powers to a committee comprised of a maximum nine representatives. </font></p> <p align="justify"><font size="2" face="Verdana"><strong>Restructuring</strong><br> The Law allows for the restructuring of insolvent enterprises at the request of a debtor, creditor or an investor holding at least 10% of the registered capital of the debtor. The debtor or administrator can submit a draft business restructuring plan to the people's court and the creditors' meeting. If the creditors' meeting rejects the restructuring plan, the debtor or the administrator may nevertheless apply to the people's court for the approval of the plan provided that it meets certain criteria. If the plan is also rejected by the people's court, the restructuring will be terminated and the debtor will be declared bankrupt. If the plan is accepted, the debtor will be responsible for implementing it under the supervision of the administrator. </font></p> <p align="justify"><font size="2" face="Verdana"><strong>Settlement</strong><br> The debtor can also petition the people's court for a settlement of the outstanding debt. The creditors' meeting and people's court must approve the terms of the proposed settlement. If either the court or the creditors reject the settlement agreement, or if the debtor cannot uphold the terms in the agreement, then the debtor will be declared bankrupt. </font></p> <p align="justify"><font size="2" face="Verdana"><strong>Distribution</strong> <br> Unless the creditors decide otherwise, the property in bankruptcy will be sold at an auction and the enterprise may be sold off in whole or in part. Unlike the 1986 bankruptcy law, the new Law does not give employees priority over other creditors.</font></p> <p align="justify"><font size="2" face="Verdana">When there is no more property available to be distributed, the administrator will petition to conclude the bankruptcy process. If additional property or recoverable property is found within two years from the date of conclusion of the bankruptcy procedure, a creditor can petition the court for further distribution.</font></p> <p style="margin-right: .98" align="right"><a href="#contents"><font size="1" face="Verdana">Back to Top</font></a></p> <p style="margin-right: .98" align="justify"><b><a name="3"><span style="text-transform: uppercase"> <font size="2" face="Verdana">NEW TAX ARRANGEMENT BETWEEN THE MAINLAND AND HONG KONG</font></span></a></b></p> <p align="justify"><font size="2" face="Verdana">The Central Government of the People's Republic of China (&quot;Mainland&quot;) and the Government of the Hong Kong Special Administrative Region (&quot;Hong Kong&quot;) jointly issued the <em>Arrangement between the Mainland and Hong Kong for the Avoidance of Double Taxation on Income and the Prevention of Fiscal Evasion </em></font><font size="2">&#22320;&#21644;&#39321;&#28207;&#29305;&#21035;&#34892;&#25919;&#21306;&#20851;&#20110;&#23545;&#25152;&#24471;&#36991;&#20813;&#21452;&#37325;&#24449;&#31246;&#21644;&#38450;&#27490;&#20599;&#28431;&#31246;&#30340;&#23433;&#25490; </font><font size="2" face="Verdana"> on 21 August 2006. The Arrangement replaces the previous double taxation arrangement when it becomes effective on 1 January 2007 in the Mainland and on 1 April 2007 in Hong Kong and covers both direct and indirect income.</font></p> <p align="justify"><font size="2" face="Verdana"><strong>Definitions</strong><br> The Arrangement provides definitions for &quot;resident&quot; and &quot;permanent establishment&quot; for tax purposes, as well as a test for determining residency. A resident of the Mainland is defined as any person (individual, company, trust or partnership) who is liable to tax on the Mainland, except those liable to tax only in respect to earning income from Mainland sources. A resident of Hong Kong is defined as a person who ordinarily resides in Hong Kong and stays there for more than 180 days over one year or more than 300 days over two years, a company (body corporate) incorporated or normally managed and controlled in Hong Kong or any entity constituted or managed and controlled in Hong Kong. If an individual is a resident of both Hong Kong and the Mainland, his residency shall be where he has a permanent home or where his closest economic and personal ties are. </font></p> <p align="justify"><font size="2" face="Verdana"><strong>Dividends, Interest, Royalties</strong><br> To date, dividends paid to foreign investors in foreign investment enterprises on the Mainland (&quot;FIEs&quot;) are not subject to withholding tax. The Agreement provides for the dividend rates that would be applicable to Hong Kong investors in FIEs in the event such exemption is revoked. The rates under the Agreement are very low and range from 5%, if the beneficiary is a company holding at least 25% of the FIE's capital, to 10%.</font></p> <p align="justify"><font size="2" face="Verdana">Interest payable from the Mainland may be taxed at a rate not exceeding 7%, while interest income received from the government or other recognised institutions is exempt from tax.</font></p> <p align="justify"><font size="2" face="Verdana">Royalties remitted from the Mainland may similarly be taxed in the Mainland at a rate not exceeding 7%. </font></p> <p align="justify"><font size="2" face="Verdana"><b>Capital Gains</b><br> Under the Arrangement, capital gains realised by a Hong Kong investor from the sale of shares in an FIE may be taxed if the shares sold account for more than 25% of the FIE's registered capital and the FIE's assets do not consist mainly of immovable property.</font></p> <p align="justify"><font size="2" face="Verdana"><strong>Individuals</strong><br> If they fulfil several criteria, individuals who are residents of one side may be exempt from taxes on remunerations or receive a tax credit. In order to be fully exempt from the taxes on remuneration of one side when one is a resident of the other or to receive a tax credit, the resident must:</font></p> <ul> <li> <p align="justify"><font size="2" face="Verdana">not spend more than 183 days in the other side over a twelve-month period;</font></li> <li> <p align="justify"><font size="2" face="Verdana"> be paid by or on the behalf of his employer of the first side;</font></li> <li> <p align="justify"><font size="2" face="Verdana"> not be paid by a permanent establishment that his employer has on the other side.</font></li> </ul> <p align="justify"><font size="2" face="Verdana">Therefore, in order for a resident of Hong Kong to be exempt from Mainland taxes on remuneration, he can only spend a maximum of 183 days on the Mainland over the course of twelve months and must be paid by his Hong Kong-based employer from their Hong Kong-based establishment. </font></p> <p align="justify"><font size="2" face="Verdana"><strong>Exchange of information</strong><br> The Arrangement provides that the relevant authorities may exchange information necessary to prevent tax evasion and carry out the provisions of the Arrangement. Neither side is to disclose any information that cannot be obtained under the normal laws nor any information that may disclose trade, business, industrial, commercial or professional secrets. </font> </p> <p style="margin-right: .98" align="right"><a href="#contents"><font size="1" face="Verdana">Back to Top</font></a></p> <p style="margin-right: .98" align="justify"><b><a name="4"><span style="text-transform: uppercase"> <font size="2" face="Verdana"> Holding Company Regulations Further Revised</font></span></a></b></p> <p align="justify"><font size="2" face="Verdana">The Ministry of Commerce (&quot;MOFCOM&quot;) promulgated the <em>Supplementary Regulations Regarding the Establishment of Holding Companies by Foreign Investors </em></font><font size="2">&#20851;&#20110;&#22806;&#21830;&#25237;&#36164;&#20030;&#21150;&#25237;&#36164;&#24615;&#20844;&#21496;&#30340;&#34917;&#20805;&#35268;&#23450; </font><font size="2" face="Verdana"> on 26 May 2006. The Supplementary Regulations amend and supplement the<em> Regulations on the Investment in and Establishment of Holding Companies by Foreign Business Entities </em></font><font size="2">&#20851;&#20110;&#22806;&#21830;&#25237;&#36164;&#20030;&#21150;&#25237;&#36164;&#24615;&#20844;&#21496;&#30340;&#35268;&#23450;</font><font size="2" face="Verdana">, which became effective on 17 December 2004 (the &quot;Holding Company Regulations&quot;) (as discussed in the 2004.4 issue of <i> China Legal Update</i>).</font></p> <p align="justify"><font size="2" face="Verdana"><strong>Holding companies</strong><br> Holding companies are sometimes also referred to as &quot;investment-type&quot; or &quot;umbrella&quot; companies. They are foreign investment enterprises established for the purpose of holding equity interests in various enterprises established by a single foreign investor in China (&quot;invested enterprises&quot;). Holding companies may provide certain services to its invested enterprises. The requirements in terms of capital contribution and existing investments for setting up a holding company are relatively high.</font></p> <p align="justify"><font size="2" face="Verdana"><strong>Timing of capital contributions</strong><br> The Supplementary Regulations require that the capital contributed to the registered capital of a holding company shall be not less than US$30 million within two years of its establishment. The registered capital must be contributed in full within five years of establishment.</font></p> <p align="justify"><font size="2" face="Verdana"><strong>Other changes</strong><br> Under the Supplementary Regulations, a holding company is permitted to undertake outsourcing service business for overseas companies. The revisions further clarify that a holding company may domestically sell goods by way of commission agent services (excluding auction) and wholesale that it has imported or purchased locally inside China. A holding company is also permitted to take strategic investments in PRC listed companies and will then be treated as an overseas shareholder.</font></p> <p align="justify"><font size="2" face="Verdana">The Supplementary Regulations specifically permit a holding company to entrust other enterprises inside China to produce or process its products or its parent company's products for domestic and overseas sales. The Holding Company Regulations limited the value of the goods that a holding company was permitted to import within a given year to the amount of capital contributions actually contributed. The Supplementary Regulations have removed this restriction.</font></p> <p align="justify"><font size="2" face="Verdana"><strong>Regional headquarter</strong><br> The Holding Company Regulations permit a holding company to be recognised as the regional headquarter of a multinational company (hereinafter &quot;regional headquarter&quot;). A multinational company refers to the parent company of the group of companies to which the foreign investor in the holding company belongs. The Supplementary Regulations expand the scope of activities in which a regional headquarter may engage. A regional headquarter is permitted to engage in operational and financial leasing services. It may further entrust other enterprises in China to produce or process products and sell its products inside and outside China and engage in consigned processing trade of products all for export. A regional headquarter which acts as a financial centre or fund management centre is permitted to centrally manage the foreign exchange funds of its affiliates in China. Such a regional headquarter may further open offshore accounts with banks in China to centrally manage the foreign exchange funds of its overseas affiliates as well as the foreign exchange funds of its affiliates inside China that have been approved by the foreign exchange bureau to make overseas loans. </font></p> <p style="margin-right: .98" align="right"><a href="#contents"><font size="1" face="Verdana">Back to Top</font></a></p> <p style="margin-right: .98" align="justify"><b><a name="5"><span style="text-transform: uppercase"> <font size="2" face="Verdana">CEPA IV</font> </span></a></b></p> <p align="justify"><font size="2" face="Verdana">The Central Government of the People's Republic of China (&quot;Mainland&quot;) and the Government of the Hong Kong Special Administrative Region (&quot;Hong Kong&quot;) reached a further understanding regarding the Closer Economic Partnership Arrangement between the Mainland and Hong Kong (&quot;CEPA&quot;) (as discussed in the July 2003 issue of <i> China Legal Update</i>) on 27 June 2006. This supplement, referred to as CEPA IV, further liberalises PRC market access for qualified Hong Kong service suppliers. It follows a pattern of annual updates of CEPA, which was previously supplemented in 2004 and 2005. </font></p> <p align="justify"><font size="2" face="Verdana"><strong>Further liberalisations</strong><br> One of the key features of CEPA is that it gives qualified Hong Kong service providers greater market access on the Mainland in a wide range of sectors. CEPA IV introduces further liberalisation measures in the legal, construction, information technology, convention and exhibition, audiovisual, distribution, tourism and transport sectors and for individually owned stores. Hong Kong barristers are now permitted to become agents in civil litigation cases on the Mainland. </font></p> <p align="justify"><font size="2" face="Verdana">CEPA IV allows Hong Kong permanent residents with Chinese citizenship to set up individually owned retail stores throughout the country and to provide services related to crop cultivation, animal husbandry, aquaculture, technology exchanges and marketing promotion, and computer repair. The establishment of such stores is not required to follow the approval procedures applicable to foreign investment.</font></p> <p align="justify"><font size="2" face="Verdana">Qualified Hong Kong service providers are also permitted to set up wholly foreign-owned enterprises in a wide range of service sectors, including engineering cost consulting, organisation of exhibitions in Hong Kong and Macao, air transport sales agency, road freight transport station (depot) and motor vehicle repair. CEPA IV permits Hong Kong travel agents to establish companies on a wholly-owned or joint venture basis in Guangdong Province to organise group tours to Hong Kong and Macao for Guangdong residents.</font></p> <p align="justify"><font size="2" face="Verdana"><strong>IP protection</strong><br> The two sides have extended their scope of cooperation under CEPA IV to include cooperation in intellectual property protection. The sides will communicate and exchange information relating to intellectual property protection through the Intellectual Property Protection Coordination Centre to be set up in Hong Kong.</font></p> <p style="margin-right: .98" align="right"><a href="#contents"><font size="1" face="Verdana">Back to Top</font></a></p> <p style="margin-right: .98" align="justify"><b><a name="6"><span style="text-transform: uppercase"> <font size="2" face="Verdana">Enforcement of Judgments in Hong Kong and China</font> </span></a></b></p> <p align="justify"><font size="2" face="Verdana">The Government of Hong Kong and the Central Government of the People's Republic of China (&quot;Mainland&quot;) signed <em>An Arrangement on Reciprocal Enforcement of Judgments in Civil and Commercial Matters by the Courts of the Mainland and of the Hong Kong Special Administrative Region pursuant to Choice of Court Agreements between Parties Concerned </em></font><font size="2">&#20851;&#20110;&#20869;&#22320;&#19982;&#39321;&#28207;&#29305;&#21306;&#27861;&#38498;&#30456;&#20114;&#35748;&#21487;&#21644;&#25191;&#34892;&#24403;&#20107;&#20154;&#21327;&#35758;&#31649;&#36758;&#30340;&#27665;&#21830;&#20107;&#26696;&#20214;&#21028;&#20915;&#30340;&#23433;&#25490; </font><font size="2" face="Verdana"> on 14 July 2006. Under the Arrangement, the two sides have agreed to recognise and enforce judgments on certain matters made in each others' courts. Legislative changes are required to be made in Hong Kong and the Mainland in order to implement the Arrangement.</font></p> <p align="justify"><font size="2" face="Verdana"><strong>Position under the Arrangement</strong><br> To date, Mainland court judgments are not enforceable in Hong Kong and Hong Kong court judgments are not enforceable on the Mainland. To enforce a judgment obtained in the courts of one side, the judgment creditor has to start a fresh action in the courts of the other side.</font></p> <p align="justify"><font size="2" face="Verdana">The Arrangement will change this position. If a commercial contract designates Hong Kong or the Mainland as the exclusive forum for resolving disputes arising from the contract, a judgment obtained in Hong Kong or the Mainland (as the case may be) will be recognised and enforced in the courts of the other side if the judgment debtor keeps his assets there. </font></p> <p align="justify"><font size="2" face="Verdana"><strong>Scope of Arrangement</strong><br> The Arrangement will initially only apply to &quot;money judgments of commercial cases given by specified courts of either the Mainland or Hong Kong made pursuant to a valid exclusive choice of court agreement in writing&quot;. Accordingly, the Arrangement will only apply to:</font></p> <ul> <li> <p align="justify"><font size="2" face="Verdana">money judgments &ndash; in other words, orders for specific performance or injunctions are not covered;</font></li> <li> <p align="justify"><font size="2" face="Verdana">commercial cases &ndash; this means cases based on contracts in which the parties are acting for the purposes of their respective trade or professions, excluding contracts relating to matrimonial matters wills and successions, bankruptcy and winding up, employment and consumer matters etc;</font></li> <li> <p align="justify"><font size="2" face="Verdana">judgments of specified courts &ndash; in the case of Hong Kong, it is to apply to judgments of the District Court and above; in the case of the Mainland, it is to apply to courts at the Intermediate People's Court level or above and to those Basic Level People's Courts designated to have jurisdiction over civil and commercial cases involving foreign parties;</font></li> <li> <p align="justify"><font size="2" face="Verdana">if the parties concerned have expressly agreed in writing to designate a Mainland or a Hong Kong court to have exclusive jurisdiction for resolving any dispute;</font></li> <li> <p align="justify"><font size="2" face="Verdana">&quot;legally enforceable final judgments&quot; &ndash; there is to be a special procedure under the Arrangement for determining whether a judgment is final.</font></li> </ul> <p align="justify"><font size="2" face="Verdana"><strong>Safeguards</strong><br> Under the Arrangement, there are safeguards whereby either jurisdiction can refuse to enforce a judgment of the other based on the following grounds:</font></p> <ul> <li> <p align="justify"><font size="2" face="Verdana">the jurisdictional agreement (choice of court clause) is invalid in accordance with the law of the place where enforcement is sought; </font></li> <li> <p align="justify"><font size="2" face="Verdana">the judgment has been fully executed;</font></li> <li> <p align="justify"><font size="2" face="Verdana"> the court of the place where enforcement is sought has exclusive jurisdiction over the case according to its law;</font></li> <li> <p align="justify"><font size="2" face="Verdana"> the losing party has not been given sufficient time to defend his case;</font></li> <li> <p align="justify"><font size="2" face="Verdana">the judgment has been wholly obtained by fraud;</font></li> <li> <p align="justify"><font size="2" face="Verdana">the court of the place where enforcement is sought has made a prior judgment on the same cause of action;</font></li> <li> <p align="justify"><font size="2" face="Verdana">in the case of the People's Court of the Mainland, it considers the enforcement of the Hong Kong judgment contrary to the social and public interests of the Mainland;</font></li> <li> <p align="justify"><font size="2" face="Verdana">in the case of the Hong Kong court, it considers the enforcement of the Mainland judgment contrary to public policy of Hong Kong.</font></li> </ul> <p style="margin-right: .98" align="right"><a href="#contents"><font size="1" face="Verdana">Back to Top</font></a></p> <p style="margin-right: .98" align="justify"><b><a name="7"><span style="text-transform: uppercase"><font size="2" face="Verdana">Foreign Investment in Logistics Sector </font> </span></a></b></p> <p align="justify"><font size="2" face="Verdana">The Ministry of Commerce issued the <em>Notice on Further Improving the Work of Attracting Foreign Investment into the Logistics Sector </em></font><font size="2">&#20851;&#20110;&#36827;&#19968;&#27493;&#20570;&#22909;&#29289;&#27969;&#39046;&#22495;&#21560;&#24341;&#22806;&#36164;&#24037;&#20316;&#30340;&#36890;&#30693; </font><font size="2" face="Verdana"> on 20 April 2006. The Notice, which became effective on 31 March 2006, is the first major liberalisation in the PRC logistics sector since the 2002 <em>Notice on Relevant Issues in the Work of Launching Pilot Projects for the Establishment of Logistics Enterprises with Foreign Investment </em></font><font size="2">&#20851;&#20110;&#24320;&#23637;&#35797;&#28857;&#35774;&#31435;&#22806;&#21830;&#25237;&#36164;&#29289;&#27969;&#20225;&#19994;&#24037;&#20316;&#26377;&#20851;&#38382;&#39064;&#30340;&#36890;&#30693; </font><font size="2" face="Verdana"> (&quot;Pilot Notice&quot;). In the event of a discrepancy between the provisions of the Notice and the Pilot Notice, the Notice shall prevail.</font></p> <p align="justify"><font size="2" face="Verdana"><strong>Trial projects</strong><br> The Pilot Notice allowed the establishment of joint ventures in the logistics sector (&quot;logistics joint ventures&quot;) on a trial basis. Logistics joint ventures were permitted to take the form of cooperative or equity joint ventures. Such logistics joint ventures were in the past limited to eight locations in China: the cities of Beijing, Tianjin, Shanghai and Chongqing, the coastal provinces of Zhejiang, Jiangsu and Guangdong and the Shenzhen Special Economic Zone. Under the Pilot Notice, pilot logistics joint ventures were required to have a minimum registered capital of US$5 million and the foreign equity share was not permitted to exceed 50 percent if the venture engages in international logistics. </font></p> <p align="justify"><font size="2" face="Verdana">The Notice recognises the positive impact of the pilot projects on the development of China's international trade and logistics sector and announces a further opening of the sector to foreign investment.</font></p> <p align="justify"><font size="2" face="Verdana"><strong>Definition</strong><br> The Notice defines a &quot;logistics enterprise with foreign investment&quot; as a foreign investment enterprise that has the provision of logistics and related services to other enterprises as its core business. The term includes foreign-invested road transport enterprises, water transport enterprises, air transport enterprises, freight forwarding agencies, commercial enterprises, third party logistics enterprises and other foreign investment enterprises that engage in logistics or logistics-related business.</font></p> <p align="justify"><font size="2" face="Verdana"><strong>Removal of restrictions</strong><br> The Notice permits logistics enterprises with foreign investment to be established in the form of equity joint ventures, cooperative joint ventures as well as wholly foreign-owned enterprises. Such enterprises may now be established throughout China without any regional restrictions and shall no longer be subject to the minimum registered capital requirement under the Pilot Notice. However, a logistics enterprise with foreign investment shall comply with the minimum registered capital requirements and other requirements specified in the various regulations governing foreign investment the business or businesses that it wishes to engage in. These regulations include the <em>Measures for the Administration of Foreign Investment in the Commercial Sector</em> </font><font size="2"> &#22806;&#21830;&#25237;&#36164;&#21830;&#19994;&#39046;&#22495;&#31649;&#29702;&#21150;&#27861;</font><font size="2" face="Verdana">, the <em>Measures for the Administration of International Freight Forwarding Agencies with Foreign Investment </em></font><font size="2">&#22806;&#21830;&#25237;&#36164;&#22269;&#38469;&#36135;&#29289;&#36816;&#36755;&#20195;&#29702;&#20225;&#19994;&#31649;&#29702;&#21150;&#27861; </font><font size="2" face="Verdana"> and the <em>Regulations for the Administration of Foreign Investment in the Road Transport Secto</em>r </font><font size="2"> &#22806;&#21830;&#25237;&#36164;&#36947;&#36335;&#36816;&#36755;&#19994;&#31649;&#29702;&#35268;&#23450;</font><font size="2" face="Verdana">. Unless these regulations specifically reserve the approval authority for the Ministry of Commerce, the establishment of a logistics enterprise with foreign investment may be approved by the provincial level commerce departments subject to the standard approval authorisation levels.</font></p> <p align="justify"><font size="2" face="Verdana"><strong>Scope of business</strong><br> Logistics enterprises with foreign investment may engage in international logistics and third party logistics. They may also engage in one or more types of logistics business specified in the regulations referred to in the previous paragraph as well as in the <em>Regulations for the Administration of Foreign Investment in the International Maritime Transport Sector</em> </font><font size="2"> &#22806;&#21830;&#25237;&#36164;&#22269;&#38469;&#28023;&#36816;&#19994;&#31649;&#29702;&#35268;&#23450;</font><font size="2" face="Verdana">, the <em>Regulations on Foreign investment in Civil Aviation</em> </font><font size="2"> &#22806;&#21830;&#25237;&#36164;&#27665;&#29992;&#33322;&#31354;&#19994;&#35268;&#23450; </font><font size="2" face="Verdana"> and the <em>Provisional Measures for the Examination, Approval and Administration of Foreign Investment in Freight Transport by Rail </em></font><font size="2">&#22806;&#21830;&#25237;&#36164;&#38081;&#36335;&#36135;&#29289;&#36816;&#36755;&#19994;&#23457;&#25209;&#19982;&#31649;&#29702;&#26242;&#34892;&#21150;&#27861;</font><font size="2" face="Verdana">. An applicant wishing to engage in more than one type of logistics business is required to comply with the highest qualification requirements for the types of logistics business it wishes to engage in.</font></p> <p style="margin-right: .98" align="right"><a href="#contents"><font size="1" face="Verdana">Back to Top</font></a></p> <p style="margin-right: .98" align="justify"><a name="8"><b><span style="text-transform: uppercase"><font size="2" face="Verdana">Foreign Investment Restrictions in Real Estate Market</font> </span></b></a></p> <p align="justify"><font size="2" face="Verdana">The Ministry of Construction, Ministry of Commerce, National Development and Reform Commission, the People's Bank of China, the State Administration for Industry and Commerce and the State Administration of Foreign Exchange jointly issued the <em>Opinions on Regulating the Entry into and the Administration of Foreign Investment in the Real Estate Market </em> </font><font size="2">&#20851;&#20110;&#35268;&#33539;&#25151;&#22320;&#20135;&#24066;&#22330;&#22806;&#36164;&#20934;&#20837;&#21644;&#31649;&#29702;&#30340;&#24847;&#35265; </font><font size="2" face="Verdana"> on 11 July 2006. The Opinions set out administrative measures designated to tighten the regulation of foreign investment in what is considered to be an overheated real estate market. </font></p> <p align="justify"><font size="2" face="Verdana"><strong>Restrictions</strong><br> The Opinions restrict the purchase by foreign real estate investors (both corporate entities and individuals) of properties that are not intended for their own use (&quot;non self-use properties&quot;). Foreign investors must now form an onshore foreign investment enterprise &quot;real estate FIE&quot; to invest in and purchase non self-use properties. Although not specifically stated in the Opinions, it is understood that real estate FIEs may take the form of wholly foreign-owned enterprises as well as joint ventures. They may engage in the business activities approved by the relevant authorities. The registered capital of a real estate FIE must not be less than 50% of the total investment amount (the normal rate is 40%) if the amount exceeds US$10 million. </font></p> <p align="justify"><font size="2" face="Verdana">The Opinions further prohibit a real estate FIE from obtaining any financing (both domestic and foreign) until: </font></p> <ul> <li> <p align="justify"><font size="2" face="Verdana"> its registered capital has been fully paid up; </font></li> <li> <p align="justify"><font size="2" face="Verdana">the relevant land use rights certificate has been obtained; or </font></li> <li> <p align="justify"><font size="2" face="Verdana"> at least 35% of the total project development cost has been funded.</font></li> </ul> <p align="justify"><font size="2" face="Verdana">Separately, foreign companies with branches or representative offices in China and foreign individuals may only purchase office premises or residential properties for self-use after one year. Foreign individuals must prove that they will work or study in China for more than one year, though this restriction does not apply to those from Hong Kong, Macau and Taiwan.</font></p> <p align="justify"><font size="2" face="Verdana"><strong>Tax implications</strong><br> Real estate FIEs will be subject to a corporate tax rate of 33%, unlike the previous 10% withholding tax rate for offshore investors. This will affect the potential dividend distributions and result in added cost in setting up real estate FIEs for those real estate investment trusts (REITs) that invest in Chinese properties.</font></p> <p align="justify"><font size="2" face="Verdana"><strong>Further regulation</strong><br> On 1 September 2006, the State Administration of Foreign Exchange and the Ministry of Construction jointly issued the <em>Notice on Several Issues in Standardising the Control of Foreign Exchange in the Real Estate Market </em></font><font size="2">&#20851;&#20110;&#35268;&#33539;&#25151;&#22320;&#20135;&#24066;&#22330;&#22806;&#27719;&#31649;&#29702;&#26377;&#20851;&#38382;&#39064;&#36890;&#30693;</font><font size="2" face="Verdana">. This Notice sets out the administrative measures, procedures and documentation requirements relating to foreign exchange for the implementation of the principal measures set out in the Opinions. It is expected that the city and provincial governments will issue more detailed implementation rules for the Opinions.</font></p> <p style="margin-right: .98" align="right"><a href="#contents"><font size="1" face="Verdana">Back to Top</font></a></p> <p style="margin-right: .98" align="justify"><b><a name="9"><span style="text-transform: uppercase"> <font size="2" face="Verdana"> Amendments to Criminal Law </font> </span></a></b></p> <p align="justify"><font size="2" face="Verdana"><em>Amendment (6) to the Criminal Law of the People's Republic of China </em></font><font size="2">&#20013;&#21326;&#20154;&#27665;&#20849;&#21644;&#22269;&#21009;&#27861;&#20462;&#27491;&#26696; </font><font size="2" face="Verdana"> (</font><font size="2">&#20845;</font><font size="2" face="Verdana">) was adopted at the 22nd Session of the Standing Committee of the 10th National People's Congress of the People's Republic of China on 19 June 2006 and promulgated by President Hu Jintao on 29 June 2006. The Amendment, which entered into effect on the date it was promulgated, introduces penalties for a range of economic crimes.</font></p> <p align="justify"><font size="2" face="Verdana"><strong>Work safety</strong><br> The Amendment introduces stiff prison sentences if production or operations in violation of safety regulations have led to serious injury or death. The sentence can be up to seven years of detention if the circumstances are particularly serious. If serious injury, death or other severe consequences are caused by the non-compliance with national work safety standards, the person directly responsible shall also be liable to a prison sentence of up to seven years if the circumstances are particularly serious.</font></p> <p align="justify"><font size="2" face="Verdana">Those who order others to carry out dangerous operations in violation of rules and regulations may be sentenced to a maximum of five years if it results in serious injury or death.</font></p> <p align="justify"><font size="2" face="Verdana">The Amendment provides a maximum sentence of seven years of detention for those responsible for reporting safety accidents if they fail to report, falsely report or delay assistance in an accident.</font></p> <p align="justify"><font size="2" face="Verdana"><strong>Corporate acts</strong><br> The Amendment expands penalties related to information disclosure for companies that have legal disclosure obligations. If such a company discloses to its shareholders and the general public financial accounting reports which are false or conceal important facts or fail to disclose other important information according to law, thus harming its shareholders or others, the persons or managers directly responsible shall be liable to a monetary penalty of a maximum of RMB 200,000 or such penalty in combination with a custodial sentence of up to three years.</font></p> <p align="justify"><font size="2" face="Verdana">The Amendment introduces a new crime of &quot;false bankruptcy&quot;. &quot;False bankruptcy&quot; is a bankruptcy created by companies or enterprises by the assignment or disposal of their assets through the concealment of assets, fictitious debt, etc. The persons or managers directly responsible may be subject to a monetary penalty of a maximum of RMB 200,000 or such penalty in combination with a custodial sentence of up to five years if such false bankruptcy harms the interests of creditors or others.</font></p> <p align="justify"><font size="2" face="Verdana"><strong>Bribery and corruption</strong><br> The Amendment extends the application of its bribery and corruption related provisions from the staff and workers of companies and enterprises to the staff and workers of any other types of unit. The provisions are applicable to active and passive bribery and corruption.</font></p> <p align="justify"><font size="2" face="Verdana"><strong>Breach of fiduciary duties</strong><br> The Amendment criminalises certain acts committed by the directors, supervisors and senior management personnel of listed companies in breach of their fiduciary duties to their companies. The acts include the provision of money, goods or services for free or on unfair conditions or to parties who are clearly not able to pay; the provision of security to parties who are clearly not able to pay or for no good reason; etc.</font></p> <p align="justify"><font size="2" face="Verdana"><strong>Other provisions</strong><br> The Amendment further deals with