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Litigation in China - What Foreign Investor Need to Know - Onshore Litigation - CHINA LEGAL ONLINE

litigation in China. Generally speaking, the limitation period is two years (including property damage claims) and it starts from when the claimant knew or, in the circumstances, ought to have known of the facts giving rise to its claim (Article 135 and

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china employee handbookchinese business licensechina court systemshanghai free trade zone negative listchina business licensebusiness license in chinachina tax incentivesbusiness license chinachina salary taxtax incentives in chinachina personal income taxcorporate governance in china an overviewchina company verificationcompany chop chinavariable interest entity chinacanada china tax treatytrademark squattingchina uk tax treatyvaluation adjustment mechanismshanghai free trade zone policychina vat reformvat reform chinatransferring money out of china
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Amendment to China Company Law and Effect on Foreign Investors - Requirements & Proceedings - CHINA LEGAL ONLINE

An amendment to the China Company Law was released by Chinese government at the end of 2013. The passed eight years witnessed the huge success achieved by the new China Company Law which issued in 2005 and this is the first amendment to it. In the
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Insights of China Foreign Exchange Control Systems - Current Foreign Exchange Control Systems - CHINA LEGAL ONLINE

Insights of China Foreign Exchange Control Systems - Current Foreign Exchange Control Systems - CHINA LEGAL ONLINE | China Legal Online | Scoop.it
Since late 2012, the China foreign exchange control authority, the State Administration of Foreign Exchange (the
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Generally, the foreign investor may exit from an FIE through the ways of equity transfer, capital decrease of the FIE or the FIE's liquidation. So far as the SAFE procedures are concerned, the following developments are of mention:
 
-- foreign currency's purchase and payment, prior SAFE approval is no longer required where the FIE needs to purchase foreign currency to pay its foreign shareholder in a capital decrease or liquidation transaction, or where domestic buyers need to pay the consideration in foreign capital to the foreign seller;
 
-- shares sale in a Chinese ListCo, if below 5%, no prior MOFCOM approval is required, the clearing house's shareholding change certificate suffices for the handling of relevant SAFE procedures.
 
In any event, SAFE Circular 59 and Circular 21 adopt welcome moves, further streamlining foreign exchange controls over foreign investment in China. They will no doubt much facilitate foreign investment activities in China, especially in light of the detailed guidance as specified in the Forms attached thereto.

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Ten Steps to Limit Corruption Allegations in China - Risks and Response Tactics - CHINA LEGAL ONLINE

Here are ten steps that multi-national companies operating in China should undertake to avoid corruption in China. Although some perceive that the China laws on bribery and corruption are vague and complex, recent events demonstrate that China is
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ransparency International’s 2012 Annual Corruption Perceptions Index ranked China 80th among 176 countries. By comparison, the United States ranked 19th and Denmark ranked first as being least corrupt. But China recently has begun making visible efforts to clean up its image, both by strengthening its anti-corruption rules and cracking down on enforcement. High-profile investigations announced by China’s Ministry of Public Security regarding bribery allegations against at least one leading pharmaceutical company and other multinationals in late July in 2013, are causing many companies doing business in the PRC to take note. 
 
Here are ten steps that multi-national companies operating in China should undertake to avoid corruption in China.
 
1. Understand The Laws related to Anti-Corruption in China. Although some perceive that the China laws on bribery and corruption are vague and complex, recent events demonstrate that China is increasingly aggressive in rooting out corrupt business practices. As a signatory to the recent United Nations Convention Against Corruption, the PRC laws related to s anti-corruption in China comply with the UN requirements. PRC laws also prohibit most conduct that violates the Foreign Corrupt Practices Act (FCPA) and even commercial bribery that does not involve a state-controlled entity. After passage of these laws, the PRC court issued guidance to assist in interpreting them. If company executives have a question regarding compliance, consult with a reputable PRC-qualified attorney.
 
2. Eschew Gifts and Entertainment. While many sales force employees at multinationals regard the bestowing of desirable gifts or entertainment on Chinese public officials in decision-making roles as standard operating procedure to help facilitate the purchase or adoption of their companies’ products, companies must institute a zero-tolerance policy regarding corruption in China. Chinese law, the FCPA and the UK Bribery Act absolutely prohibit companies from paying bribes to foreign government officials and political figures. The presentation of a gift, however small, can violate these laws if authorities can demonstrate that it is given with the intent to obtain or retain business or can be construed as providing improper advantage. Indeed, PRC rules require any gift that might affect an official's impartial exercise of his public function be turned over to the state. As an initial matter, the company should set standards for gift giving that are implemented by an experienced local compliance director. The local compliance director should have the support and backing of senior management to deny requests that fall outside the compliance polices of the company and local law. Lastly, employees should only give gifts that are for official, rather than personal, use, and should present them openly and in front of a group of people.
 
3. Vet Third Parties. Third parties are a common approach of corruption in China and the single biggest risk to companies doing business in China. In 2012, every US FCPA enforcement action involved a third party such as a contractor, subcontractor or consultant. Steps should be taken to assess the need for, and evaluate the background and qualifications of, third-parties hired to facilitate business for a company. Do not ignore any red flags in a background report, and keep careful records of any due diligence undertaken and then scrutinize the results of that due diligence.
 
4. Monitor All Travel Arrangements. Request for travel is common from PRC officials in China. In recent years, we’ve seen Chinese travel agencies used as a conduit for bribes to government officials. Since 2007, nine reported FCPA resolutions related to Corruption in China involved travel agents or travel-related corrupt activity. For example, one US telecom company faced actions by US regulators after spending millions of dollars for more than 300 trips for Chinese government officials. The stated travel purpose was for the inspection of factories and to train the officials in how to use the company’s equipment when, in reality, the officials instead visited tourist destinations such as Hawaii, Las Vegas, the Grand Canyon, Niagara Falls, Disney World, Universal Studios and New York City. Companies can avoid corrupt in China in this regard by ensuring that the compliance policy for travel is adequate to address the corruption risk in the culture. Create or update your travel policy to require a specific business basis for the trip, mandate approval be granted by senior managers only and require the submission of a detailed itinerary that lists each line item separately to ensure items such as stipends, per diems and unintended leisure travel do not creep into otherwise legitimate travel plans.
 
5. Institute Risk-Based Compliance Against Corruption in China. The government-issued A Resource Guide to the U.S. Foreign Corrupt Practices Act states, “DOJ and SEC will give meaningful credit to a company that implements in good faith a comprehensive, risk-based compliance program, even if that program does not prevent an infraction in a low risk area because greater attention and resources had been devoted to a higher risk area.” Consequently, a company should implement specific anti-corruption risk controls tailored to the environment. For example, a company whose only customer is the Chinese government faces considerable risk of corruption in China, so it should develop compliance policies that address that risk and specifically lay out procedures and protocols for the employees interfacing with government officials on behalf of the company to follow.
 
6. Provide Compliance Training. If employees are trained on the law and understand the reasons behind the compliance policy, companies will likely experience a measurable decrease in their risk of corruption in China. The higher the risk, the more important in-person training supplemented by a web-based training module, certifications and oversight becomes. Companies should evaluate position titles that present high-risk and target these employees for higher level anti-corruption training. These positions could include those in sales and marketing; employees that interact with government officials; personnel charged with maintaining agency external relationships; human resource personnel with international responsibilities; and appropriate legal, compliance and finance personnel. In addition, training related to corruption in China should be offered in the local language where appropriate.
 
7. Make Internal Audit & Finance Accountable to Detect Corruption in China. Internal audit and finance teams should share joint responsibility for anti-corruption compliance with company lawyers and compliance professionals when operating in high-risk markets. In a recent FCPA enforcement action, the SEC described the failure of the internal auditor to detect a corrupt transaction as a failure of leadership. According to the SEC, company management “had the ability to review or cause internal audit to review” suspect transactions; the failure to do so decreased the ability of the internal audit to “provide an independent internal control function.” To avoid this, many companies are investing in specific anti-corruption training for audit and finance personnel. This team of professionals should have the full support of company leadership, including local management, to implement monitoring and, as necessary, enhanced controls or remedial steps to address risk of anti-corruption in China.
 
8. Conduct Business Combinations Due Diligence. Several reported FCPA cases highlight the important of anti-corruption due diligence in the context of business combinations in China. The failure to identify an FCPA issue in advance of a merger, joint venture or other business combination has been credited, in one instance, with the complete loss of the value of the investment. Conduct a risk assessment of the company to identify high-risk areas within the business where corruption in China is more likely to occur. Although much depends on the company’s stake in the venture, even minority stakeholders would be wise to exercise caution and ensure that appropriate risk-based due diligence is conducted. Companies should engage in documented due diligence prior to closing a merger or other business combination. The documentation usually starts with due diligence questionnaires issued to key managers, co-investors and relevant consultant followed by interviews related to responses that raised red flags, and also should include documentation to verify the answers to certain types of questions.
 
9. Determine if Chinese Employees Are Viewed as Foreign Officials. The Chinese government operates through a complex web of State Owned Enterprises (SOE), in key industries such as aviation, oil and gas, telecommunications and healthcare. US enforcement authorities interpret the term “foreign officials” to apply not only to bureaucrats, but also to employees of SOEs given their status as an “instrumentality” of the state. Multinationals seeking to limit potential corruption liability should closely review this question and exercise care in determining whether employees of any company are indeed “foreign officials” for purposes of anti-corruption laws.
 
10. Monitor, Audit and Enforce Compliance Policies to Fight Against Corruption in China. Anti-corruption programs must be embedded in the way a company does business. Compliance begins at the C-level, but it is up to middle management to deliver and reinforce the importance of anti-corruption compliance to ensure that it reaches employees most vulnerable to corrupt conduct. Those with compliance responsibilities must regularly monitor the effectiveness of compliance polices and their enforcement. Those found in serious violation of anti-corruption policies should face real and transparent consequences for their behavior so that employees understand that management takes corruption in China seriously.

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China Individual Income Tax - Individual Income Tax - CHINA LEGAL ONLINE

China Individual Income Tax - Individual Income Tax - CHINA LEGAL ONLINE | China Legal Online | Scoop.it
This guide gives a short overview on the China individual income tax regime with a focus on the taxation of the income of foreign employees and how it is applied in Shanghai and Beijing at the time of writing.
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Liabilities for Non-Payment of China Individual Income Tax
 
If an individual fails to declare his or her taxes within the specified three-month period, the local authorities may provide an extended deadline but may also impose a penalty for late payment.  If the taxpayer fails to make a tax declaration again, or fails to pay or underpays the tax payable, the taxpayer will be held liable for the amount of tax payable along with a possible surcharge.
 
Repatriation of Salary Paid in RMB in China
 
Foreign employees may repatriate their total monthly net salary back to their home country. In order to convert their RMB salary into foreign currency, they will need to present to their local bank proof of tax payment of China individual income tax, their Alien Employment Permit, proof of income as well as other documents required by the bank.

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Risks and Liabilities for Legal Representative in China - Legal Representatives - CHINA LEGAL ONLINE

The legal representative's authorities are only limited by law and - internally - corporate governance rules such as the Articles of Association (AoA). On the other hand, the legal representative faces certain responsibilities that may lead to personal

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The legal representative's authorities are only limited by law and - internally - corporate governance rules such as the Articles of Association (AoA). On the other hand, the legal representative faces certain responsibilities that may lead to personal risks for wrongdoings either by himself or by the company and its employees, subject to civil, administrative or even criminal liability.
 
Risks for the Company arising the legal representative: Exceeding Duties and Posing Harm to the Company's Interests
 
In general, actions of the legal representative that fall in his professional assignment are considered actions of the company herself, and therefore the company will be held responsible. Even in cases where the legal representative exceeds his authority while concluding contracts and his actions do not comply with the actual intent of the company, the contract will be binding and the company will be held liable if the business partner reasonably believes that the legal representative acted on the company's behalf. Therefore, a legal representative that has not been carefully chosen can seriously damage the business. If the company can prove to the court that it has clearly defined and recorded the limits of the legal representative's authority, it may ask a court to release it from the liability for the action.
 
However, civil liabilities to the company may arise when the legal representative clearly violates the laws or AoA, or if his actions constitute malpractice, gross negligence or intentional harm to the company's interests. If the company suffers any losses from the legal representative's actions, she can claim compensation.
 
Access to Company Chops and Termination of Employment
 
In China, business contracts are usually "signed" with the company stamp that is registered with the Public Security Bureau. In practice, the company stamp is much more powerful than a written signature. In fact contracts are legally binding even without the signature of the company's authorized representative, as long as they are properly stamped. This can be convenient as the person in charge does not have to be physically present to conclude a binding contract. Moreover, rules on stamp use, and procedures to restrict access and monitor use - with or without the assistance of a law firm - are key parts to managing and supervising the activities of senior managers.
 
Firing an uncooperative legal representative can be painful if the proper precautionary measures have not been taken in advance. For a valid termination of employment, the legal representative must sign and approve his own termination documents, and a person who is confronted with accusations of exceeding his competences and harming the business may have anything in mind but cooperating with the employer who tries to get rid of him. It is not uncommon that the company finds itself in the unfavorable situation where a legal representative keeps the company stamps "hostage" and demands a financial settlement. A good strategy to facilitate termination is to ask the person to be appointed as legal representative, to sign and stamp an undated termination agreement.
 
Risks for the Legal Representative: Senior Management Misconduct and Criminal Practice
 
A potential risk for the legal representative is posed by activities of other executive directors or senior managers that harm the interest of the company. Since the legal representative's actions are considered as those of the company, he can only avoid joint liability for the misconduct of others if he can show credibly that he was not aware of the harmful acts, did not participate in them, or explicitly disagreed at the board meetings.
 
Criminal activities of the company generally result in liability of the company itself. However, if the legal entity is charged with a crime, the persons directly in charge or the persons responsible for the crime may also bear criminal liability. Illegal business operations that could lease to risks of criminal liability for the legal representative include, most notoriously, tax evasion, customs duties evasion, bribery, environmental crimes and manufacturing of counterfeit or substandard quality goods. As the legal representative is in charge for the company's business activities, the illegal activities may be considered within the scope of his duties and therefore he could be held directly responsible. When the melamine milk scandal was exposed in 2008, the legal representatives of various dairy companies were held responsible for manufacturing and selling substandard goods and had to face criminal prosecution.
 
Bankruptcy Proceedings: Travel Restrictions for Legal Representative
 
In case the company files for bankruptcy, the legal representative will have to take on a heavy burden that even influences his private life. To make sure that the bankruptcy procedure runs smoothly, PRC law determines that the legal representative is responsible for preserving the company's assets, stamps, accounting books and any documents under his control, and he is obligated to cooperate with courts and the bankruptcy administrator. Unless a replacement is found to take over the responsibility for unpaid taxes and liabilities, the legal representative may be prevented from leaving his domicile without permission of the court, and may not take up senior posts in another company. While the appointed legal representative is not required to reside in China, for those who are located in China this may result in a lengthy restriction on exiting the country. A way to mitigate this restriction is to seek permission of the courts to appoint an agent (usually a law firm) to represent the (foreign) legal representative in the process.
 
Some companies consider to illegally withdraw their investments from China, even though this means that it will be extremely difficult to conclude any future business in the country. In this scenario, the legal representative may be jointly held responsible for failure to complete liquidation procedures, which can even lead to criminal charges.
 
Conclusion
 
The legal representative occupies a powerful and important position in the company. Due to the broad scope of authority and access to the company's most valuable properties, it is important to carefully choose the right person for the position, and even more, to make use of best practices to prevent abuse of power. This includes clear limitations of the legal representative's powers in the AoA and other internal rules, as well as stipulations on stamp use, and termination strategies.
 
Minimizing personal risk is much more difficult, Liability insurance is generally available only for directors of listed companies, and in any case does not protect against criminal liability. Best practice is for the legal representative to know what is going on, be able to show that he has done all he could to prevent unlawful practices, and If the threat of (criminal) liability does
  
 
You are welcome to contact the author (s) if you have any questions about Legal Representative in China.

All rights reserved by the original copyright holder. The contents of this article are intended to provide a general guide to the subject matter (Risks and Liabilities for Legal Representative in China) and should not be treated as a substitute for specific advice concerning individual situations. Readers should seek legal advice before taking any action with respect to the matters discussed herein.

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How to Set up China Labor Contract - General - CHINA LEGAL ONLINE

Establishing China labor contract is an essential, albeit complicated, process, and manufacturers setting up shop in the country should avoid moving forward before they fully understand the Chinese labor laws that dictate contract terms, salary stipulatio
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Establishing China labor contract is an essential, albeit complicated, process, and manufacturers setting up shop in the country should avoid moving forward before they fully understand the Chinese labor laws that dictate contract terms, salary stipulations and statutory vacation rules.
 
Chinese labor laws are typically more stringent and rigid than those followed by U.S. employers, and the below considerations and guidelines may serve as a starting point when manufacturers begin formulating their workforce needs and set up a China labor contract.
 
1. Mandatory China labor contract

China Labor Contract Law requires that companies operating in the country provide workers with an labor contract. These contracts are generally comprehensive and formal, and outline whether workers will be hired on a fixed-term, open-term or variable-term basis. By law, there are several employment stipulations that must be included in the contract, and are as follows:
 
- Name, domicile and legal representative or main person in-charge of the employer
- Name, residential address and number of the resident ID card or other valid identity  document number of the worker
- Term of the labor contract
- Scope of work and place of work
- Working hours, rest and leave
- Labor compensation
- Social insurance
- Labor protection, working conditions and protection against occupational hazards
- Other issues required by laws and regulations to be included in the labor contract
 
According to the China Labor Contract Law, an employer must ensure that it has completed a written labor contract with every staff member within one month of the employee commencing work. This is important because if such a contract is not in place by the end of the first month the employee will have the right to claim double salary for the period in which the company remains out of compliance with this regulation.
 
If the company neglects to complete such an China labor contract after the employee has worked for one whole year, not only can the employee claim double salary for the previous eleven months, they can also claim an open-term contract from the employer. This will mean that the employer loses the ability to terminate the contract of the employee at the end of the fixed-term contract.
 
2. Salary                                                       

A regional trend that often occurs in China is the expectation that salaries are paid on a 13-month basis, with the final month paid just prior to the Chinese New Year. Although this is not compulsory, it is common and expected in many areas of China, making it critical that U.S. employers outline whether they will adhere to this custom and put it in writing.

The mandatory social insurance system in China also adds 35-40 percent to the cost for the employer on top of an employee’s salary.
 
3. Statutory vacation rules

China imposes strict vacation rules among its workforce, with which U.S. companies must comply. These rules dictate that employees do not receive a vacation during the first year of employment. They are then required five days of vacation in years two to 9, and 10 days of vacation in years 10 to 19. For those employed 20 years or more, 15 vacation days are allotted.
 
4. Non-mandatory terms              

Although many of the laws in China are inflexible, employees have some negotiating room in their contracts. It’s not uncommon for employees to negotiate terms such as probation periods, on-the-job training, confidentiality/non-disclosure conditions and breach of contract stipulations. Therefore, companies hiring Chinese employees should determine beforehand how flexible they will be in agreeing to certain terms, if only to make for a more consistent hiring process.

We also recommend that some reference be made to the company rulebook in the employment contract. This makes a clear association between the signing of the employment contract by the employee and their observation of the company rules.
 
5. Contract termination under China labor contract law

China has very particular laws governing the termination of employment contracts, so U.S. company owners should be well-versed on what may constitute fair and unfair termination. There are also a number of scenarios in which owners are still bound by salary requirements, even in the event of a termination.

In the case of an employment dispute, the burden of proof will fall primarily on the company, so it is critical that the employer organizes all documentation relating to its employment relationships in a thorough and consistent manner.In the case of termination, to show that an employee is not properly fulfilling their job duties or has violated company rules, employment documentation from throughout the employment relationship may prove useful, including:
 
- Offer letter/letters of intent
- Labor contract
- Confidentiality agreement
- Non-competition agreement
- Employee handbook
- Job description
- Appraisal forms
- Employee registration form
 
6. Acknowledgment of contracts

Labor arbitration is a common issue in China, making it critical that companies operating in the country ensure they have a formal and signed document from employees acknowledging receipt of their contract. Failure to provide this document during an arbitration process could result in significant financial losses to companies.
 

You are welcome to contact the author (s) if you have any questions about China Labor Contract.

 
All rights reserved by the original copyright holder. The contents of this article are intended to provide a general guide to the subject matter How to Set up China Labor Contract and should not be treated as a substitute for specific advice concerning individual situations. Readers should seek professional advice before taking any action with respect to the matters discussed herein.
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How to Set up China Labor Contract - General - CHINA LEGAL ONLINE

Establishing China labor contract is an essential, albeit complicated, process, and manufacturers setting up shop in the country should avoid moving forward before they fully understand the Chinese labor laws that dictate contract terms, salary stipulatio
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Managing Product Recalls in China--Motive - Product Liability - CHINA LEGAL ONLINE

Automotive manufacturers selling vehicles in China are subject to strict rules governing product safety and must follow procedures set by a regulator when undertaking recalls. Manufacturers face financial losses, regulatory fines and significant reputatio
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Managing product recalls in China-Automotive
 
Automotive manufacturers selling vehicles in China are subject to strict rules governing product safety and must follow procedures set by a regulator when undertaking recalls. Manufacturers face financial losses, regulatory fines and significant reputational and brand damage if they fail to comply. 
 
However, perhaps the biggest risk to organisations is in having to disclose business know how as part of complying with the regulatory regime. Car makers operating in China need a recall plan to manage their regulatory duties and reduce the risks associated with non-compliance.
 
The regulations and who they apply to
 
The Chinese automotive recall regulations refer to the recall of automobiles and trailers manufactured or sold in China. They do not apply to those automobiles and trailers manufactured in China and exported abroad.
 
A number of other players and stakeholders in the automotive industry are also affected by the recall regime, which is overseen by the Chinese State Administration of Quality Supervision, Inspection and Quarantine (also known as SAQSIQ).
 

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Tax incentives in China - Tax Incentives and High Tech Enterprises - CHINA LEGAL ONLINE

China offers several tax reductions in order to stimulate related industries and regions. In this article, we outline the major tax incentives in China.
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China offers several tax reductions in order to stimulate related industries and regions. In this article, we outline the major tax incentives in China.
 
1.  High and New Technology Company(HNTE)
 
The company must be a resident of China for over one year and also owns intellectual property for core technologies used in their products or gives their Chinese subsidiaries a global exclusive license for at least 5 years. Also a sufficient R&D department is a must and needs qualified personnel. At least 10% – 30% of them must have obtained a bachelor degree or above. Besides the company must develop in one of these areas:
 
- Electronic information technology
- Biological and new pharmaceutical technology
- Aviation and aerospace technology
- New material technology
- High technology service industry
- New energy and energy conservation technology
- Resources and environmental technologies
- High and new technology for traditional industries innovation
- The HNTE status is granted by provincial tax authorities for companies located in those provinces. It offers a tax reduced rate of 15 % and is valid for three years. It can be renewed every three years.
 
2.  R&D Expenditures
 
Another reduction can be made is with the R&D expenses incurred in the development of new technologies, products and processes as far as it is not an intangible asset. The super deduction can be an additional 50% from the R&D expenses. Requirements are HR personnel cost, costs for evaluation of R&D results, clinical trial costs, maintenance testing & repair cost, samples and models & testing equipment cost.
 
3. Salary of Disabled Personnel Cost
 
An additional 100% of salary expenses paid to disabled personnel can be deducted from taxable income.
 
4. Fixed Assets
 
- Fixed assets susceptible to fast obsolescence due to technological progress.
- Fixed assets in the state of strong vibration and high corrosion throughout the years. In the case of adapting a shorter-period depreciation method, the minimum term of deprecation shall not be less than 60% of the depreciation duration as set forth in article 60. In the event of using an accelerating depreciation method, fixed assets shall be depreciated using the double declining balance method or sum of the years digits method method.
 
5. Small or Low Profit Enterprises
 
In order to fulfill the requirements, an enterprise must have less than 300,000 RMB in annual taxable income, less than 10 million RMB in total assets, less than 80 employees and not be engaged in prohibited or restricted industries. An exception is provided for manufacturing companies, which may have less than 100 employees and a maximum of 30 million RMB in total assets. For small or low profit enterprises the tax rate is 20%, but you can get an additional 50% CIT reduction if you have less than 60,000 RMB annual taxable income.
 
6. Income Subject to Tax Reduction or Exemption
 
- Agriculture, forestry, animal husbandry and fishery project income are exempt.
- Infrastructure projects and environmental protection, energy and water saving investments are exempt for the first three years, and enjoy three years of 50% reduction afterwards.
- Technology transfer income is exempt up to 5 million RMB annually and a 50% reduction for any amount which exceed 5 million RMB.
 
7. 15% Tax Rate for Western Regions
 
Companies in western regions such as Chongqing, Sichuan, Guizhou, Yunnan, Tibet, Shaanxi, Gansu, Ningxia, Qinghai, Xinjiang, Inner Mongolia and Guangxi can profit from the reduced tax rate.
 
In order to benefit from all tax incentives in China and file your CIT according to the regulations, you should consult a tax advisory. There are also other areas you need to consider when doing CIT compliance.

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opening a company in China--Wholly Foreign-Owned Enterprise (WFOE) - Registration Proceedings - CHINA LEGAL ONLINE

Wholly Foreign-Owned Enterprise (WFOE) is one possible business structure that can be used by foreign investor to register and license a business in China. WFOE is a 100% foreign investor owned limited liability company (liability is limited to the amount
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Overview

Wholly Foreign-Owned Enterprise (WFOE) is one possible business structure that can be used by foreign investor to register and license a business in China. WFOE is a 100% foreign investor owned limited liability company (liability is limited to the amount of the registered capital).

Advantages of WFOEs

WFOE has become the most popular business structure among foreign investors. Some of the advantages of establishing WFOE include:
 
-  Independence and freedom to implement worldwide strategies of the parent company  without having to consider involvement of local Chinese partner. This is the main reason that most companies choose the WFOE business structure.
-  Ability to formally and legally conduct business inside China rather than simply function as a Representative Office (RO), including ability of issuing legal receipts/invoices (Fapiao) to clients in local Chinese currency (RMB) and ability to receive revenue in RMB. This benefit also applies to other Foreign Investment Structures (JVs, foreign invested holding companies, etc.) with the exception of ROs.
-  Ability to convert profits and revenues received in local Chinese currency (RMB) to other currencies such as U.S. dollars, British pounds, Euro, etc.
-  Protection of intellectual property rights and technology
-  Greater efficiency in operations, management and future development.
 
Key Points of WFOEs

-  Business Scope

Business scope is narrowly defined and interpreted for all businesses in China; a WFOE may only legally conduct business within the business scope that appears on its business license.

In the application documents, business scope is presented as a list of business activities that WFOE will conduct in China, and the first business activity defines the overall nature of  WFOE for classification purposes. Classification will further define the minimum required capital, type of invoices, type of applicable taxes, etc.

Scope of business is crucially important in WFOE business registration application. The investors shall confer with officials concerned to ensure that every business activity that is listed on the registration application is an approved business activity and that every business activity is designed as broadly as allowable so that investors can be more flexible in what activities they are allowed to conduct.
 
-  Registered Capital and Total Investment

Registered Capital and Total Investment are two important types of capital with regards to WFOE registration in China. 

Registered Capital is the amount of funds that the Chinese government requires of foreign investors to contribute to their projects in China (e.g. WFOEs).The required minimum amount of registered capital to start a business is set by the Chinese government. The Registered Capital can only come from foreign investors, must be actually paid into the company bank account and then verified by an independent Certified Public Accountant(CPA) in China. The amount of registered capital can be increased following relevant official procedures. Registered Capital must be no less than 70% of the Total Investment; however, the ratio may be decreased when the amount of Total Investment exceeds US$ 3 million.


The actual amount of Registered Capital required is subject to the final approval of the approval authorities. The relevant Chinese officials have the right to require a business to increase the amount of Registered Capital if they deem the minimum Registered Capital amount as insufficient for the requirements of starting business vis-a-vis the project description written in the application documents. The final amount of Registered Capital required is sometimes a result of negotiations with the officials concerned during the registration period.

Total Investment is the total amount of funds that will be invested in WFOE during its entire planned period of operation. The Total Investment must be greater than or equal to the Registered Capital.  This amount can be increased but any additional amounts of Total Investment Capital must be approved by the relevant Chinese authorities.

Registration Paperwork

Of the long list of documents that are required for business registration, there are two documents that are very important and could make the difference in whether or not the WFOE registration application process goes smoothly.

Articles of Association is one of the most important documents in registration process. The Articles of Association defines the rules for the entire operation of WFOE. It contains such information as Business Scope, amount of Registered Capital and Total Investment, Management Structure (which defines the highest authority in the WFOE, either a Board of Directors or an Executive Director), policies and rules on accounting, taxation, profit division, employment, conditions on termination and liquidation, etc.

Feasibility Study Report is the other important document for registration. In this report, the entire WFOE project must be described, explaining that each business activity will be conducted in China, demonstrating that all activities will follow Chinese regulations and that the entire project is feasible both technically and financially. For some small consulting WFOEs, for example, a 3 to 4 page Feasibility Study Report would be sufficient, while for large projects such as manufacturing WFOEs, a proper Feasibility Study Report may consist of dozens of pages.

Writing good Articles of Association and Feasibility Study Reports can guarantee at least a 50% chance for the approval from the Chinese government.
 
Procedures for Registering a WFOE

To fully and legally register a business in China, you will be required to visit more than ten different governmental bureaus and agencies. A tremendous amount of complicated paperwork is involved. Each bureau has its own specialized documents that are required to be dully filled, and only Chinese language documentation or translations are accepted. After you have chosen an office site and have signed a lease agreement, you are ready to dive into the registration procedures. The entire process can be roughly divided into four steps.

Step One: Pre-registration of a WFOE name

To register a name for your WFOE, you will need to know the regulations for naming the business. The legal name of a WFOE consists of four words presented as:
 
Location [City] + Business Name + Industry + Structure.
Business Name + (Location [City]) + Industry + Structure.
Business Name + Industry + (Location [City]) + Structure.
 
For example:
Beijing + ABC + Management Consulting + Co., Ltd.
ABC + (Beijing) + Management Consulting + Co., Ltd.
ABC + Management Consulting + (Beijing) + Co., Ltd.

In the example, "ABC" is the Chinese translation of the foreign business name of foreign investor; the translation can be done following the sound or meaning. For example, "Mai Dang Lao" is the translation of "McDonald's" following sound (the Chinese version sounds close to the English pronunciation); "Wei Ruan" is the translation of "Microsoft" following meaning of the words (it means the same thing in Chinese as "Microsoft" does in English). "Management Consulting" is the main business activity of the WFOE ABC used in example and "Co., Ltd." is its legal structure.

A basic rule in naming a WFOE is that it can only register "ABC" as its business name when it has not already been registered by any other businesses in China. In practice, due to the vast number of businesses that have already been registered and thus a high chance of conflict, it is a good idea for WFOEs to work out a couple of options for the business names before going to the AIC for registration. Only the Chinese name of WFOEs can be registered, registration of English business names is not allowed. An English name for a WFOE is allowed, but it is not officially recognized, although business can apply for trademark protection for its English name in China .

Step Two: Applying for WFOE Approval Certificate

After obtaining a WFOE name and completing the application documents, a WFOE representative can then go to the competent relevant approval authorities for Approval Certificate.

Generally, local commerce committees are the right place for a WFOE representative to visit. Every approval authority publishes its "standard processing time", e.g., 5 working days, 10 working days, 20 working days, etc. The Approval Certificate can be issued within stated processing time if submitted application documents are complete and everything is in order. But in practice, a WFOE representative will probably face inquiries about the amount of registered capital, business scope, and other "hot" checking points. Officials have the right to require a WFOE to provide more supporting documents or to allow the amendment of the application documents, but if this happens, they will start all over and the processing time will be longer than the one that was published.

Our experience tells that friendly discussion and negotiation with officials of the approval authorities is the key to success in this step.

Once issued, Approval Certificate contains information such as WFOE's name, address of WFOE's main office site, Business Scope, Registered Capital, Total Investment, list of Foreign Investors, and Terms of Business Operation, etc.

Once a WFOE receives the Approval Certificate, Step Three can be addressed.

Step Three: Applying for WFOE Business License

With Approval Certificate and other required documents, a WFOE representative can go to the local Administration for Industry and Commerce (AIC) to apply for the Business License.

This step is relatively easier than the previous one because there is much less paperwork involved and a much shorter processing time. The standard processing time at a Beijing AIC is 5 working days.

AIC charges a registration fee of 0.08% of the Registered Capital. For example, if a WFOE's Registered Capital is US$ 1 million, you will need to pay US$ 800 as the registration fee.

Once the Business License has been received, a WFOE is officially established as a legal entity and can legally conduct business. The Business License also allows a WFOE representative to continue with remaining registration steps, opening a bank account, etc.

Last, but not least, if foreign business decides to appoint an agency to submit a registration application on its behalf, it needs to be sure that the agency is legally recognized and authorized by AIC. AIC will not accept any applications from any non-authorized agencies.

Step Four: Post-registration Work

Having received the Business License, a WFOE will need to be registered with a dozen bureaus and their local offices. A WFOE will need to have its "chops" carved and open bank accounts. Each bureau has its own specific list of documents that will be required to be duly filled and submitted. The processing time for Step Four varies from 1~20 working days. Overall, a WFOE will need 4-5 weeks to complete the post registration work . Some key points of Step Four are:

- Registration with tax bureaus and reporting to local tax offices:

A WFOE will need to register with two local Tax bureaus: the State Tax Bureau and the Local Tax Bureau. The bureaus will issue the Tax Registration Certificates that a WFOE will present to the bank when opening bank accounts. These certificates will also enable a WFOE to  purchase official invoices, which are essential documents for doing business in China.

In addition to registering with the tax bureaus, a WFOE will need to report to their local tax offices. There are two tax offices that require a WFOE’s visit, one has authority over Local Tax, the other has authority over State Tax. The local tax offices will assign tax officers who will set tax filing schedules and determine a tax filing method (most likely online by now) for a WFOE. A WFOE will receive an account number and password for online tax filing and receive appropriate type of invoices to provide its clients when providing services or goods. Tax  officers may also recommend specific machine models that will be needed for printing invoices. It is suggested that a WFOE send its accountant ( or future accountant) for reporting to the local tax offices.

- Opening of bank accounts

A WFOE is allowed to open at least one RMB basic account and one foreign currency capital account, depending on the number and nationalities of foreign investors. A WFOE can choose the bank for opening foreign currency capital account that is approved by the local office of State Administration of Foreign Exchange (SAFE).

Main foreign currency capital account is used for receiving registered capital from foreign investors.
The RMB basic account is used for tax payment, salary payment, withdrawal cash, expense payments and other business operation uses in China. The money going into the RMB basic account can come from its foreign currency accounts via a bank transfer, or from the income a WFOE receives from doing business in China.

- Registering a WFOE's expatriate employees with Labor Bureau

Expatriate employees who will work full-time for more than six months in a WFOE will need to be registered with Local Labor Bureaus to receive a Work Permit for each of them. Foreign employees will also need to get a Residence Permit from the local Public Security Bureau. With a Work Permit and a Residence Permit, a WFOE's foreign employees can legally work and reside in China.
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Labor Issues in China--FAQs of Foreign-invested Enterprises - General - CHINA LEGAL ONLINE

Labor issues and disputes may arise more frequently in FIEs than in domestic enterprises, especially on such issues as foreigners working in China, payment of salaries/bonus, and modification and termination of employment contracts triggered by M&A trans

chinalegalonline's insight:

Generally, foreign-invested enterprises (“FIEs”) in China are equally treated with domestic enterprises under the PRC Company Law and the labor laws and regulations. However, FIEs have their unique nature in operation and management, e.g. more foreign employees are commonly hired than domestic enterprises, payrolls are much higher than in domestic enterprises, and M&A transactions are more frequent than domestic enterprises. As a result, labor issues and disputes may arise more frequently in FIEs than in domestic enterprises, especially on such issues as foreigners working in China, payment of salaries/bonus, and modification and termination of employment contracts triggered by M&A transactions. Based on our experience in this area, the following topics are often raised by our FIE clients.
 
1.  Foreign employees who are dispatched by overseas holding company to work in Chinese subsidiaries: Labor issues in China-No. 1
 
“Dispatch” here means a foreign employee who has entered into an employment contract with the overseas holding company, is dispatched to China to work for the Chinese subsidiaries without any labor contractual relationship with the Chinese subsidiaries. However, the employment contract with the overseas holding company may stipulate that the employment contract shall be governed by a foreign law without mentioning any of his/her rights and obligations that are in fact regulated by PRC labor laws and regulations. In a word, the labor contractual relationship is established by such foreign employee with the overseas holding company rather than with the Chinese subsidiaries. The situations of this kind often occur where the employee is a senior management or a senior technical officer in transnational companies.
 
In practice, the payrolls under this dispatching arrangement are usually paid by the employer through an offshore bank, rather than paid in China. However, for the purpose of convenience, remunerations of dispatched foreign employees are often paid directly from account of the Chinese subsidiaries. According to the relevant rules of State Administration of Taxation of PRC on individuals’ income tax (“IIT”) declaration, a foreign employee working in China under the dispatching arrangement, whose remunerations are paid by the offshore employer rather than by the Chinese subsidiaries, does not need to file IIT declaration and pay IIT as long as he or she stays for no more than 90 days consecutively or cumulatively in China within a tax-paying year, or no more than 183 days consecutively or cumulatively in the period specified in the tax treaty. Otherwise, the foreign employee shall file IIT declaration and pay IIT.
 
2.  Incompliance of foreigners in their handling working permits: Labor issues in China-No. 2
 
When a foreigner enters into labor contractual relationship with a FIE in China, he or she must apply to competent authorities for relevant permits. Under current Chinese labor laws and regulations, three permits are required for a foreigner to work in China, i.e. the Alien Employment License, the Work Permit for the Foreigner, and the Residence Permit for the Foreigner.
 
(1)  Alien Employment License
 
According to Chinese labor regulations, when an employer intends to hire a foreigner, it must apply for Alien Employment License. Only after obtaining such license can the employer proceed with the recruitment.
 
(2)  Work Permit for the Foreigner (“Work Permit”)
 
A foreigner seeking employment in China must hold an employment visa (i.e. Z visa) to enter China. Only after obtaining the Work Permit and Residence Permit can the Foreigner work legally in China. Foreigners without residence permit, or foreign students or foreign interns in China, or families of foreigners holding employment visa may not be employed in China. Under special circumstance, the employer shall apply for license according to Measures On Administration of Foreigners Working in China, and then the foreigner to be hired shall apply to local police department for approvals to change his or her residence status and apply to local labor department for Work Permit and Residence Permit.
 
(3)  Residence Permit for the Foreigner (“Residence Permit”)
 
A foreign employee who has obtained the Work Permit shall, within 30 days after entering China, apply to local police department for Residence Permit. The term of validity of the Residence Permit will be determined according to the term of validity of the Work Permit.
 
However, many foreigners working in China have not obtained the above-mentioned licenses. Some of them hold non-employment visas, while some others change their employers without completing necessary endorsement of the permits. Meanwhile, some FIEs fail to complete the employment formalities before hiring foreign employees. When labor disputes arise, it will be difficult to demonstrate that there exists a valid labor contractual relationship. If this is the case, the FIE employer may have to assume legal liabilities.
 
3.  Vacations of foreign employees “dispatched” to China: Labor issues in China-No. 3
 
As mentioned above, if a foreign employee has entered into an employment contract with his or her foreign employer outside China, he or she will be treated as having established labor contractual relationship with the oversea employer rather than with the Chinese enterprise where he or she will perform his or her job. However, according to Regulations on the Management of Employment of Foreigners in China and other rules promulgated by PRC Ministry of Labor and Social Security, if a foreign employee has worked in China for more than 3 months, his or her employment in the Chinese subsidiaries shall be also regulated by PRC laws and regulations and the foreign employee must apply for relevant working permits. Meanwhile, such foreign employee will be entitled to Chinese welfare and benefits provided by PRC laws and regulations, e.g. the rest and vacations. Specifically, he or she shall be entitled to vacations and other Chinese labor related benefits according to PRC laws and regulations.
 
In order to avoid potential disputes resulted from vacations, it is advisable for foreign employers to expressly define in the labor contract with foreign employees how to coordinate vacations based on the labor contract and vacations based on Chinese laws and regulations. Otherwise, it is likely to bring about unnecessary and additional burdens to FIEs.
 
4.  Foreign employee’s contribution obligation in respect of social insurance: Labor issues in China-No. 4
 
According to the Provisional Measure for Social Security Coverage of Foreign Employees in China (the “Provisional Measure”) in effect from October 15, 2011, if an employer in the territory of China engages a foreign citizen, the employer and the foreign citizen shall pay pension insurance, medical insurance, occupational injury insurance, unemployment insurance and maternity insurance contributions (hereinafter referred to as the “Five Insurances” collectively) according to the provisions herein.
 
After entering into employment contracts with overseas employers, foreign citizens sent to China-based branches, divisions or representative offices (hereinafter referred to as “domestic employers”) shall also cover the Five Insurances pursuant to law, and the domestic employers and the foreign citizens themselves shall pay social security contributions as required.
 
If a domestic employer recruits a foreign citizen or accepts a foreign citizen sent to work in China by an overseas employer, the domestic employer shall fulfill social security registration for the foreign employee within 30 days from the date of receipt of his/her work permit. 
 
5.  Legality of the offer letter and its relationship with the formal labor contract: Labor issues in China-No. 5
 
In general, an offer letter is a document in the nature of an offer. In other words, it may be deemed as a conditional labor contract. If the employee concerned elects to accept the terms and conditions of the offer letter, including job position, work location, remunerations and welfare benefits etc, and arrive at the company personally as required by the offer letter (for example, holding the required documents and within the required time limit), the offer letter will be further treated as a document in the nature of a labor contract, and, accordingly, a labor contractual relationship shall have been established.
 
In practice, however, after issuing the offer letter, some employers will not execute a labor contract with the employee after the employee begins to work. It should be noted that, unless the offer letter has stipulated expressly that the offer letter is of the nature of a labor contract after the employee’s commencement of work, otherwise, the offer letter may not be regarded as a “written labor contract” once any labor dispute will arise. Consequently, the employer will probably be required to pay the employee double wages for failure to conclude a written employment contract.
 
6.  Labor Relationship of Employees of Representative Office of Foreign Enterprises: Labor issues in China-No. 6 

 
Representative Office of Foreign Enterprise is an office established by a foreign enterprise in the territory of the PRC to engage in non-profit activities relating to the foreign enterprise’s business. Such office is a liaison agent for the foreign enterprise to engage in business in the PRC and a pioneer for the foreign enterprise entering into the PRC market. Because such office is not a legal person under PRC laws, its employment of personals have some special properties.
 
In accordance with Article 11 of Interim Regulations on Administration of Representative Office of Foreign Enterprises adopted by the State Council of the People's Republic of China, a representative office shall entrust local foreign affairs service units or other service units designated by the Chinese Government with such matters as employing a personal. Specifically, a representative office shall not directly employ a personal by itself, but shall employ a personal through foreign affairs service units (such as FESCO). Namely, an employee shall enter into a labor contract with the FESCO, and be dispatched to the representative office by the FESCO. Compared with the labor dispatch stipulated in the Labor Contract Law, though the two kinds of dispatch are based on different laws, their employment method and liability undertaking are similar.  
 
Currently, there is no express regulation on whether a representative office is entitled to sign with a dispatched employee a confidentiality agreement, non-competition agreement etc. In practice, it is commonly believed that such agreements shall be entered into between the dispatching enterprise, the employee and the representative office, to avoid legal risk caused by agreement signing by improper legal entity.
 
7.    Content of Labor Contract—Probation Period and Recruitment Condition: Labor issues in China-No. 7
 
Labor Contract Law stipulates that an employer may dissolve the labor contract of an employee if it is proved that the employee does not meet the recruitment conditions during the probation period. When the employer dissolves the labor contract with the aforementioned cause, the most important problem is how to prove what the conditions for recruitment of the employee are. The burden of proof shall be undertaken by the employer.
 
Therefore, to ensure labor compliance, it is necessary for the employer to expressly specify the recruitment conditions and the appraisal procedure for probation period in the labor contract, job description, rules and regulations and other similar documents. In such a way, when needed, the employer can provide sufficient evidence to prove what the recruitment conditions are, and decide whether the employee meets the recruitment conditions based on the employee’s performance during the probation period, and further decide whether, though continually perform the labor contract, to hire the employee as a regular member, or to dissolve the labor contract.
 
8.    Content of Labor Contract—Employer’s Unilateral Amendment Right: Labor issues in China-No. 8
 
Many FIEs generally stipulate in the labor contract that the employer may transfer employees’ working position based on the business conditions or employees’ performance. No matter for what management purpose, employers shall pay attention to legal risks of such stipulations. 
 
Article 3 of Labor Contract Law stipulates that the principle of lawfulness, fairness, equality, free will, negotiation for agreement and good faith shall be observed in the formation of a labor contract. Article 35 of the Labor Contract Law stipulates that an employer and an employee may modify the contents of the labor contract if they so agree upon negotiations. The modifications to the labor contract shall be made in writing. Because working position is a basic element of a labor contract, it is commonly believed that, even if it is agreed as foregoing in a labor contract, working position can only be transferred by an employer with reasonability and necessity, but shall not be transferred at liberty without limitation. Otherwise, the transfer may not be recognized by ruling authority.
 
On the other hand, if unilateral transfer of working position is not stipulated in a labor contract, the transfer of position, as a material contract amendment, must satisfy the following two basic precedent conditions at the same time: (i) agreed by the two parties; and (ii) in written form. If an employer unilaterally transfers an employee’s working position without obtaining the employee’s consent through negotiation, the employee has the right to refuse such transfer. Therefore, the labor contract shall be performed according to original agreement.
 
9.   Performance of Labor Contract— Incompetence and Transfer of Working Position: Labor issues in China-No. 9
 
Incompetence is a common reason used by FIEs for transferring an employee’s working position. According to Article 40 of Labor Contract Law, if an employee is incompetent to his position or is still so after training or transferring his working position, the employer may dissolve the labor contract by notifying the employee in writing 30 days in advance or by paying the employee an extra month’s wages. This clause indirectly permits an employer to transfer an employee’s working position if such employee is incompetent to his position.
 
Notwithstanding the forgoing, the right of unilateral transfer of working position cannot be enforced without limitation. When a FIE intends to transfer the working position of an incompetent employee, the FIE shall provide sufficient evidence to prove that the employee is incompetent to current working position, such as, the employee failing to complete the task as stipulated in the labor contract according to requirements of the employer, or similar task completed by other employees of the same working position. In practice, such incompetence needs to be supported by such documents as job description, target responsibility documents etc. In addition, the working position after transfer shall be reasonable and be consistent with ability and technique of the employee. Otherwise, the effect of such transfer might be impaired due to violation the principle of reasonability.
 
10. Performance of Labor Contract—Performance Appraisal and Usage of Appraisal Results: Labor issues in China-No. 10
 
For an enterprise intending to operate in a compliant manner, good performance appraisal rules will exert an essential influence on human resource management. In practice, the result of performance appraisal will usually be directly used to decide an employee’s vital interests, such as transfer of working position, increase/decrease of remuneration, up to labor contract dissolution. Therefore, performance appraisal results must be used with special caution to avoid causing legal disputes easily.
 
From legal perspective, performance appraisal rules will directly affect employees’ vital interests. According to Article 40 of Labor Contract Law and enforcement practice of Labor Law, to ensure the rules in compliance with laws and regulations, and being used as legal basis for handling employee matters, the rules shall satisfy the following conditions:
 
(1)  The performance target and appraisal standard are agreed and signed by employees in advance;
(2)  Procedures for performance appraisal are expressly documented;
(3)  The rules are formulated in accordance with laws and are publicized to employees;
(4)  The contents of the rules and their enforcement are fair and reasonable and the appraisal procedures are fair and impartial; the rules do not contain any obviously unreasonable or intentionally oppressive conditions; appraisal is not conducted at liberty; and
(5)  The appraisal results are notified to employees in writing.
 
11. Dissolution of Labor Contract——Dissolution Caused by Merger or Business Adjustment: Labor issues in China-No. 11
 
Labor Contract Law stipulates that if the objective situation has changed considerably, and the labor contract is unable to be performed and no agreement on changing the contents of the labor contract is reached after negotiations between the employer and the employee, the employer may dissolve the labor contract if it notifies the employee in writing 30 days in advance or after it pays the employee an extra month's wages. In practice, the common discrepancy is whether the merger or business adjustment is an objective situation which changed considerably; or further on, whether  in such situation the labor contract can be considered as unable to be performed, and whether the employer can dissolve the labor contract. 
 
According to the regulations of Explanations of Several Clauses of the Labor Law of the People’s Republic of China issued by the Labor Department, the objective situations currently recognized in the judicial practice refers to: force majeure or other situations which cause all or part of clauses of the labor contract cannot be performed, such as company relocation, merger, asset transfer etc, with exclusion of the situation that the employer comes to the brink of bankruptcy or when it runs deep into difficulties in business. Except for the above regulations, there is no further express regulation on definition of “objective situations”.
 
In practice, it is believed that the objective situation shall adopt the standard of “non subjective reason of management”. For example, company merger, acquisition and division is a objective situation which is not caused by subjective reason of management, but caused by objective reasons of investment and acquisition; whether the cancel of position due to business adjustment is an objective situation shall be judged by the reasons for such cancel, if the cancel is determined unilaterally by the management with the reason of “development needs”, it shall be regarded as non objective situation, therefore, the employer is not entitled to dissolve the labor contract under such situation.
 
12.   Dissolution of Labor Contract——Dissolution due to Violation of Rules: Labor issues in China-No. 12 
Labor Contract Law stipulates that an employer may dissolve the labor contract of an employee if such employee seriously violates the rules and procedures set up by the employer. However, the definition of “serious violation” is not expressly stipulates by law. It is generally believed that because the extent of “serious” will affect the right of an employer to dissolve the labor contract, such violation shall be materially serious to certain extent, and the rules shall stipulate various violations and corresponding punitive measures, and ensure the violation is consistent with the responsibility and the punitive measures, which shall become more and more severe appropriate to the serious extent of the violation conduct. In addition, such standard shall make sure a third party (including arbitrator and judge) who is independent from the employer and employee will think the punitive measures are reasonable.
 
Therefore, the most effective method is to specify the different levels of violation and list the violation conducts in detail so that it can be directly used as the basis for dissolving a labor contract. The company rules shall not only play an important role in the company management, but also shall be a decisive element for winning a labor dispute. A good rule may make the company to take the initiative in a labor dispute and to reduce the risk of losing a labor dispute.
 
Besides concrete standard of rules, it is also very important to collect evidence of “material violation” of the employee. In judicial practice, the dissolution dispute applies the principle of onus proof conversi. This is to say, the employer shall provide evidence to prove that its dissolution is based on sufficient evidence. Therefore, the employer shall collect enough evidence before dissolving the labor contract of the employee who is seriously violates the rules. The following materials can be used as evidence: self-examination letter, letter of apology, application letter, defending letter, violation statement; violation record and punitive notification signed by the violation employee; testimony of other employees and insider; material evidence, photo and video documents proving the violation.
 
13.  Dissolution of Labor Contract-Upper Limit of Economic Compensation: Labor issues in China-No. 13
 
Labor Contract Law stipulates that if the monthly wage of an employee is higher than three times the average monthly wage of employees of the local area for the previous calendar year, the rate for the economic compensations to be paid to him shall be three times the average monthly wage of employees and shall be for no more than 12 years of his work. In addition, according to Article 48 of the Labor Contract Law, if an employer illegally dissolves or terminates a labor contract, the employer shall pay two times of the economic compensations. Therefore, if an employer is entitled to terminate the labor contract unilaterally and need to pay the economic compensation, the employer may pay the economic compensation within the limit prescribed by law. However, if the labor contract is dissolved based on the negotiation of the two parties, the amount of economic compensation shall also be freely agreed.  
 
In addition, for many foreign invested enterprises, the standard for economic compensation or for damages for breach of contract is usually agreed in the labor contract.  In practice, it needs to be noted that if the agreed amount is less than the prescribed national standard, the national standard shall prevail; if it is higher than the prescribed national standard, the arbitration committee may, for the benefit of the employee, require the employer to pay the economic compensation or damages according to the higher standard in a labor dispute. The allegation that the amount shall be lower according to the national standard or compensation limit may not be supported.
 
14. Non Competition: Labor issues in China-No. 14
 
With the continuingly improving importance of trade secrets to all kinds of enterprises, especially to the high-tech enterprise and large multinational enterprises, the non competition regulations prescribed by the Labor Contract Law is getting more and more attention from the enterprises. Compared to bring a claim against employee or third party for infringing trade secrets after the infringement has occurred, it has an obvious advantage in preventing disclosure of trade secrets by employees by restricting such employee by non-competition agreement.
 
When applying the non-competition regulations, it shall be noted that the employer and the employee shall sign an written non competition agreement which shall specify the period, territory, industry scope of non competition and corresponding compensation to employees in advance, and shall specify the liability for breach of contract of the employee, so that when the employee breach the agreement, the employer has the right to bring a claim to protect its legal rights and benefits.
 
In addition, to ensure the non-competition regulations to play an affirmative role, it is an important question on how to determine whether the employee violates the non-competition agreement and therefore to require the employee to undertake the liability for breach of contract. Generally speaking, the evidence for proving an employee violating non-competition obligations includes: labor contract between the employee with his new employer; voucher of social insurance premium paid by the new employer, pay sheet, notarization of phone calls, notarization of on-site presence, tax certificates proving the new employer paying individual income tax for the employee; name card indicating the employee’s new employer; information of the employee recorded on the website, publication materials or other documents. Besides, a testimony or sound recording evidence can also be used to prove the employee is engaging in business in competition with the employer. 
 
15.   Democratic Procedures for Formulating Rules of Employers: Labor issues in China-No. 15  
According to Article 4 of Labor Contract Law, where an employer formulates, amends or decides rules or important events which are directly related to the interests of the employees, such rules or important events shall be discussed at the meeting of employees' representatives or the general meeting of all employees, and the employer shall also put forward proposals and opinions to the employees and negotiate with the labor union or the employees' representatives on a equal basis to reach agreements on these rules or events. Based on the foregoing principle regulation, it is generally believed that democratic procedures shall consist of the following two steps: 1. hold meeting of employees' representatives or the general meeting of all employees to discuss the rules and put forward proposals and opinions; 2. further negotiate with the labor union or the employees' representatives to reach an agreement.
 
In step 1, in practice, the method of sending email to all employees to collect their opinions shall be regarded as “meeting to discussion”.  It needs to keep evidence proving the employer has collected opinions from employees. However, if there are too many employees and it is not convenient to hold a general meeting of all employees for them to put forward their opinions, it might be more convenient to hold a meeting of employees' representatives.   
 
In step 2, if the employer has established a labor union, the rules can be determined by negotiating with the labor union; if there are employee’s representatives, the rules can be determined by negotiating with the employee’s representatives to simplify the procedures and improve the efficiency. No matter what kind of method is used, it is necessary to maintain the evidence of negotiating, such as feedback opinions and meeting summary etc.
 

You are welcome to contact the author (s) if you have any questions about Labor Issues in China.
 
All rights reserved by the original copyright holder. The contents of this article are intended to provide a general guide to the subject matter: Labor Issues in China--FAQs of Foreign-invested Enterprises and should not be treated as a substitute for specific advice concerning individual situations. Readers should seek legal advice before taking any action with respect to the matters discussed herein.
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Insights of the Negative List in Shanghai Free Trade Zone - Policy Evaluation - CHINA LEGAL ONLINE

Insights of the Negative List. The China (Shanghai) Pilot Free Trade Zone Foreign Investment Market Access Special Administrative Regulation (widely known as the “Negative List”) was published by the Chinese government authorities on September 29
chinalegalonline's insight:

Background
 
The Shanghai Municipal Government has recently released the Special Administration Rules for Foreign Investments in China (Shanghai) Pilot Free Trade Zone relating to the Negative/Exclusion List (the "Negative List 2014”).
 
Compared with the 2013 version, the Shanghai Free trade Zone Negative List 2014 cuts the number of special administration measures on foreign investment from 190 down to 139, including 110 restrictive measures and 29 prohibitive measures. The issuance of the widely-followed Shanghai Free trade Zone Negative List 2014 signifies the Shanghai Municipal Government’s commitment to increase openness, transparency and maneuverability of foreign investment in China (Shanghai) Pilot Free Trade Zone (“Shanghai Free Trade Zone”). Based on the previous version, the  Negative List 2014 lifts the barriers imposed on foreign investment in certain industries. It is undoubtedly a positive message to those investors who desire variance greater degree of freedom in the Shanghai Free Trade Zone.

 
What’s new in the Shanghai Free trade Zone Negative List 2014?
 
The Shanghai Free trade Zone Negative List 2014 has been adjusted in the following aspects:
 
- Removal of 51 restrictions
 
Including 14 restrictions due to increased openness, 14 restrictions due to the same restrictions to the domestic enterprises, and 23 other restrictions due to re-classification.
 
- Relaxation of investment control
 
Including a total of 19 substantially relaxed items of special administrative measures
 
- Clarification of conditions on certain special administrative measures
 
Clarifying or removing limitation or restriction on those measures that have not hitherto had their limiting conditions defined. The number of special administration measures with no clearly defined conditions has been reduced to 25 from 55.
 
The following is a summary of the noteworthy changes in certain industry:


 
KPMG observations
 
The  Negative List 2013 was the first negative list to be published in China, and it attracted a lot of attention when it was released. It replaced the approval system with a filing system to simplify procedures and reduce processing time for setting up foreign investments in areas beyond the Negative List, while failing to meet investors’ expectation in terms of openness. The Shanghai Municipal Government promised to revise the Negative List and streamline the Negative List management model step by step to reflect the developmental needs of the Shanghai Free trade Zone. 
The issuance of Shanghai Free trade Zone Negative List 2014 illustrates the determination of the Shanghai Free trade Zone to increase its openness and transparency and to further align with international practice. On the other hand, it empowers the Negative List as a management tool that meets international standards.
 
It should be noted that the exclusion of several items from the list does not entail permission, as they are removed from the list insofar as the subject matter not solely apply to foreign enterprises, and are already adequately covered by the law. For instance, the exclusion of the gambling and sex industries from the list does not mean that foreign enterprises are allowed to invest in these areas thereon.
 
We have high expectations for the latest developments regarding the Shanghai Free trade Zone, which include 31 measures to open up provided by The Measures to Further Expand Openness in China (Shanghai) Pilot Free Trade Zone approved by the State Council on 28 June, and the 2014 Negative List released two days later. We will also pay close attention to the impact of such developments on investors.
 

You are welcome to contact the author (s) if you have any questions about  Shanghai Free Trade Zone Negative List.
 
All rights reserved by the original copyright holder. The contents of this article are intended to provide a general guide to the subject matter Shanghai Free Trade Zone-Negative List (2014) and should not be treated as a substitute for specific advice concerning individual situations. Readers should seek legal advice before taking any action with respect to the matters discussed herein.
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