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Below listed are some questions concerning China laws by visitors and the relevant answers by Mr. Wang Xuanjun. You are also welcome to put forward your questions by sending email, which shall be answered as soon as possible.

Note: All answers here are for reference. Mr. Wang shall have neither liability nor responsibility to any party for any loss or damage caused or alleged to caused by the use of the answers without written confirmation to the party.

Investment in Intellectual Property Rights

Question:

Dear Mr Wang,

Can I can form a joint–venture company in Beijing using intellectual property as a economic value and use as an investment asset?
If, yes, is there a maximum percentage of share in the joint-venture company a partner can demand using intellectual property as the item of investment?
How do you calculate the value of intellectual property as an economic asset?
Is there any significant difference using intellectual property as an investment asset compared to the usual solely monetary investments?
If forming a joint-venture company, what would be a most suitable for the duration of the joint venture should continue before it expires?
How much is the salary of an average expatriate working in Beijing who holds the position of the consultant who provides the intellectual property transfer to the joint-venture company?
In the event of breach of law by a joint-venture company, who will be held liable?
What kind of taxes are incurred before an expatriate can take money out of china?

Thank you.

An American organization Aug. 1, 2005

Answer:

Dear Sirs,

1. You may form a joint venture company in Beijing and make your investment in industrial property rights or know-how, according to the provision by Paragraph 1 of Article 5 of the Law of the People's Republic of China on Chinese-Foreign Equity Joint Ventures ("Joint Ventures Law") and the provisions by Article 22 of Regulations for the Implementation of the Law of the People's Republic of China on Chinese-Foreign Equity Joint Ventures("Joint Ventures Regulations").

2. The amount of industrial property rights or non-patented technology (know-how) in value shall not exceed 20 percent of the total value of the registered capital of a joint venture (limited liability company), except otherwise provided for by the State for the use of high and new technology, according to the provisions by Paragraph 2 of Article 24 of Company Law of the People's Republic of China ("Company Law").

If high and new technology is made as investment to a joint venture, the amount of high and new technology in value may exceed 20% but 35% of the total value of the registered capital of a company, according to the provisions by Article 3 of Provisions Concerning Some Issues on Investment in High and New Technology, jointly promulgated by State Commission of Science and Technology, PRC and State Administration for Industry and Commerce, PRC on July 4, 1997.

3. If the investment is in the form of industrial property rights or known-how, the prices shall be ascertained through consultation by the parties to the joint venture on the basis of fairness and reasonableness, or evaluated by the third party agreed upon by parties to the joint venture, according to the provisions by Article 22 of Joint Ventures Regulations.

4. According to the provisions by Article 25 of Joint Ventures Regulations, the industrial property rights or know-how contributed by the you (foreign party) as investment shall meet one of the following conditions:
(1) Being capable of improving markedly the performance, quality of existing products and raising productivity;
(2) Being capable of notable savings in raw materials, fuel or power.

And according to provisions by Article 26 of Joint Ventures Regulations, you (foreign participants who contribute industrial property rights or know-how as investment) shall present relevant documentation on the industrial property rights or know-how, including photocopies of the patent certificates or trademark registration certificates, statements of validity, their technical characteristics, practical value, the basis for calculating the price and the price agreement signed with the Chinese party. All these shall serve as an annex to the contract.

7. It depends on case by case. Generally, In the event of breach of law by a joint-venture company, the joint-venture will be held liable. Sometimes the responsible person(s) will be held liable. For example, it is provided by Article 212 of Company Law that, "If a company is found to have provided false financial and accounting statements or concealed important facts in the reports to shareholders or the public, the responsible person(s) directly in charge and other directly responsible persons shall be imposed of a fine of RMB10,000 to RMB100,000. If the case is serious enough to constitute a crime, criminal responsibility shall be affixed according to law. "

8. It depends on what kind of money. Before an expatriate can take money out of china, progressive tax rate of 5% to 45% in excess of specific amount shall be imposed on a expatriate's salary, and proportional tax rate of 20% shall be imposed on a expatriate's dividends, according to the provisions by Article 3 of Individual Income Tax Law of the People's Republic of China.

Question: I will be going to China in 4-6 months. My intention is to open a Consulting Firm to help Chinese companies in marketing, sales, effective presentation etc. While doing some research on the Internet I noticed that 'Company Law of the People's Republic of China' and it mentions in Article 23 that 'The registered capital of a limited liability company shall not be less than the following minimum amounts: (4) for a company engaging principally in technology development, consultancy and services, RMB 100,000 Yuan.'
My Questions are:
1-- Does this mean that a foreigner investing in a 'consultancy or services' company would be
required to invest 100,000RMB? If not, how much would it have to be with the various options
JV / WFOE/ Sole Foreign Investment Company, etc?
2-- How much would the legal cost be for incorporating?
Thank you very much for your assistance.

- W. R. Jan. 5, 2004

Answer: In accordance with the relevant provisions by (1) Regulations of the People's Republic of China on Administration of Registration of Companies; (2) Rules for the Implementation of the Law of the People's Republic of China on Foreign-Capital Enterprises; (3) Rules for the Implementation of the Law of the People's Republic of China on Chinese-Foreign Contractual Joint Ventures; (4) Regulations for the Implementation of the Law of the People's Republic of China on Chinese-Foreign Equity Joint Ventures, and with relevant practices, etc., my answer to you questions are as follows:

1. No, the minimum amount of registered capital is not 100,000 RMB. A foreigner investing in a 'consultancy or services' company is required to invest more than 100,000 RMB.

2. On registered capital of JV (both contractual and equity)/ WFOE (Wholly Foreign Owned Enterprise) / Sole Foreign Investment Company, there are no explicit provisions by the above mentioned Chinese laws and regulations. For JV, it is just provided that the registered capital of a JV means the total amount of capital contributed by the parties to the JV as registered at the administrative organs for industry and commerce for the purpose of establishing the JV. For WFOE/ Sole Foreign Investment Company (both are foreign-capital enterprises), it is just provided that the registered capital of a foreign-capital enterprise refers to the total amount of capital contributed by the foreign investor(s) for the purpose of establishing the foreign-capital enterprise. The registered capital of an enterprise shall fit in with the enterprise's scope of business operations.

3. According to the practices of the Chinese approving and examining authorities at present, the minimum amount of registered capital of a JV / WFOE/ Sole Foreign Investment Company engaging in consultancy or services industry is about 100,000 USD to 150,000 USD. It depends upon the region where the enterprise would locate.

4. The legal costs for establishing the enterprise shall be:
(1) fees charged by the relevant authorities (such as register fee), which shall not be more than 1,000 USD totally for establishing a 'consultancy or services' company.
(2) the lawyer fee.

- Wang Xuanjun Jan. 8, 2004

Question: We would buy some garments from a Chinese trade company by signing a contract whereby it was provided that “All disputes arising out of the performance of or relating to the Contract shall be settled friendly through negotiation. In case no settlement can be reached through negotiation, the case shall then be submitted to China International Economic and Trade Arbitration Commission (CIETAC), Beijing, China.” Owing to the reason that the sample is not in line with the provisions by the Contract, both parties agreed to rescind the Contract, but the exact amount of the compensation was unable to be fixed through friendly negotiation. Since the Contract was rescinded, we plan to maintain our lawful interests by litigation. So we wish to know if our claim against the Chinese trade company will be accepted by relevant court in China.

Answer: In accordance with the provisions by Article 16, 19 of China Arbitration Law (1994) and Article 38, 245 of China Civil Procedure Law, an arbitration agreement such as arbitration clause stipulated in the contract shall exist independently. The rescission of a contract shall not affect the validity of the arbitration agreement. So the arbitration agreement between you and the Chinese trade company is still valid. To have the dispute resolved, normally you should apply for arbitration to CIETAC Beijing but lodge an action in relevant people’s court. In case you lodge an action and the Chinese trade company raises no objection to the jurisdiction of the people’s court and responds to the action by making its defense, the people’s court shall accept the case. In case you lodge the action and the Chinese trade company raises objection, the people’s court shall firstly examine the objection. If the objection is established, the people’s court shall not accept the case, if not, the people’s court shall reject the objection and accept the case.

Question: We are going to be transferred from our fellowman 20% of total stock of an American-Chinese equity joint venture company located in Beijing. In accordance with China law, what exact procedure should be carried out to ensure that the transfer is lawful and valid?

Answer: According to the provisions by Article 3 of China Law on Chinese-foreign Equity Joint Ventures (1990), Article 8, 11, 14, 16, 17 and 36 of Regulations for the Implementation of China Law on Chinese-foreign Equity Joint Ventures and other related regulations, to ensure the assignment valid and lawful, following exact procedure should be carried out:

(1) Decision on the assignment of the stock shall be made only after being unanimously agreed upon by the directors present at the board meeting of the Joint Venture;

(2) The names, countries of registration and legal addresses of parties to the Joint Venture, and the names, positions and nationalities of the legal representatives thereof, which were included in the Contract, Articles of Association (and Agreement, if any) of the Joint Venture, shall be amended accordingly;

(3) The above amendment shall be approved by the examining and approving authorities, the Ministry of Foreign Trade and Economic Cooperation or entrusted office (the people’s governments in the related provinces, autonomous regions, and municipalities directly under the Central Government or relevant ministries or bureaus under the State Council);

Question: When we have to lodge or respond to a legal action in China, from whom we can get legal services?

Answer: In accordance with the provisions by Article 58, 59, 241, 242 of Civil Procedure Law of the PRC and the related judicial interpretation of the Supreme People’s Court of the PRC, your bank or legal representative may appoint one or two persons to act as your agents ad litem. A lawyer, a person recommended by a relevant social organization or a unit to which the party belongs or any other citizen approved by the people’s court may be appointed as your agent ad litem. When your bank need lawyers as agents ad litem to bring an action or enter appearance on your behalf in the people’s court, you must appoint lawyers of the People’s Republic of China. Your bank is allowed to authorize your domestic person(s) resided in China as agent ad litem. And an officer of your diplomatic and consular missions to China is also allowed to act as agent ad litem in his own name when being authorized by your bank.

When your bank appoints anther to act on your behalf in litigation, your bank must submit to the people’s court a power of attorney bearing the signature of authorized representative or seal of your bank. The power of attorney must specify the matters entrusted and the powers conferred. An agent ad litem must obtain special powers from your bank if the agent is to admit, waive or modify claims, or to compromise or to file a counterclaim or an appeal on behalf your bank.

The power of attorney mailed or forwarded by your bank for the appointment of a lawyer of PRC or any other person must be notarized by a notarial office in Japan and authenticated by the Chinese embassy or consulate accredited to Japan or, for the purpose of verification, must go through the formalities stipulated in the relevant bilateral treaties between China and Japan before it become effective.

Question: Our company entered into a sales contract with a PRC enterprise for the sale of our products. Subsequently, we had disputes with the PRC enterprise over the quality of the products and the purchase price has not yet been paid. We was also notified that the business scope of the PRC enterprise does not permit it to purchase the type of products that we supplied. We understand from some PRC expertise that the contract might be void (from the beginning). If this is the case, we would like to know the followings:
1. Whether we can have the products returned?
2. Whether the sub-standard quality of the products, as claimed by the purchaser, will be of any relevance?
3. Whether we may claim damages?"

Answer:

According to the details provided by you, my answer to your question are as follows:

1. Before answering your 3 exact questions, we should know the validity of the sales contract entered into by and between you company and a PRC enterprise for the sale of your products.

According to the provision of Article 10 of Explanation 1 to Several Questions of the Supreme People's Court of PRC Concerning Application of Contract Law of PRC,the people's court does not hold that void is the contract entered into by one party going beyond its business scope except violating the provisions concerning restraint by the State of operation, franchise of operation, and prohibition provided by laws and administrative regulations by the State Council of operation. That is to say, provided that the PRC enterprise does not violate mandatory provisions as said above, although purchase of the type of products you supplied was not included in the business scope of the PRC enterprise, the pertinent contract is still valid and in force. Provided that the PRC enterprise violates mandatory provisions as said above, the pertinent contract is certainly null and void from the beginning.