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Issue No.08 - August (2012 vol.45)
pp: 11-13
Published by the IEEE Computer Society
Brian M. Gaff , Edwards Wildman Palmer, LLP
Kenneth Choy , Edwards Wildman Palmer, LLP
Jamie Chan , Edwards Wildman Palmer, LLP
ABSTRACT
The eighth in a series of articles providing basic information on legal issues facing people and businesses that operate in computing-related markets discusses some issues that can occur when doing business in the People's Republic of China. The featured Web extra is an audio podcast by Computing and the Law contributors Brian M. Gaff and Kenneth Choy, who discuss the practical steps to consider before doing business in China. YouTube URL: http://youtu.be/cmTuxZBVEnI
The People's Republic of China (PRC) is a manufacturing center for much of the world, and its large domestic market makes it an attractive location for businesses looking to expand their operations and sales. In the computing-related market, the success of Lenovo Group Ltd.—one of the world's fastest-growing computer makers—demonstrates the PRC's rise in the global business community. Indeed, in 2011, The Wall Street Journal reported that the PRC overtook the US as the world's biggest personal-computer market ( online.wsj.com/article/SB10001424053111903461304576525852486131230.html).
Such growth is likely to lead foreign investors to continue pumping money into the PRC in a race to design products that will cater to the low-cost mass consumer market. An array of the world's largest tech companies, including Hewlett-Packard and Dell, have already taken steps to boost their presence in the PRC.
Here, we take a brief look at some useful things to keep in mind before doing business in the PRC. Be sure to visit the IEEE Computer Society's website to find the podcast that accompanies this article ( www.computer.org/portal/web/computingnow/computing-and-the-law).
Government and Approvals
The PRC is governed by the Chinese Communist Party. The PRC's legal system, administrative machines, and policy-making and governmental organizations are broadly organized into three tiers: the central government based in Beijing, the provincial or municipal government, and local municipal or country government. Although the PRC's legal framework has undergone significant development in recent years, it remains baffling to many. Foreign investors should be aware of rules and regulations prescribed at the local or provincial levels as well as the primary and supplemental legislation that will be relevant in each case.
Doing business in the PRC invariably involves working your way through the myriad required approvals and procedures. Foreign investors need to ensure they understand the government's role generally in the PRC business environment as well as the specific authorities they will need to deal with in relation to their particular activities.
Approval of foreign investment in the PRC operates at both the national and provincial levels. The primary regulator of foreign investment in the PRC is the Ministry of Commerce (MOFCOM), which is responsible for examining and approving the establishment of foreign invested enterprises (FIEs). Although MOFCOM approval at the national level is required for investment over a certain threshold, in other cases, MOFCOM approval at the provincial level where the investment is located will be sufficient. The National Development and Reform Commission is responsible for coordinating development policy and approving the planning aspects of a foreign investment project. In addition, the State Administration for Industry and Commerce handles final business registration matters.
The PRC enforces a strict foreign exchange control policy, and the State Administration of Foreign Exchange (SAFE) is charged with regulating all foreign exchange transactions in the PRC. Registration with SAFE is essential for any foreign investor looking to establish business in the PRC.
Common Business Vehicles
Foreign investors who want to invest in the PRC have a choice among the following types of FIEs:

    Representative office. Setting up a representative office is inexpensive and quick. However, a representative office is not itself a company and is not permitted to directly engage in business activities. As the name implies, the office is set up to represent foreign companies in the PRC.

    • Wholly foreign-owned enterprise. A limited liability company with 100 percent foreign ownership is one of the more popular FIEs because it allows the foreign investor to retain full ownership of, and total control over, its PRC entity.

    Joint venture. An entity with both foreign and Chinese investors, this type of enterprise can take the form of an equity joint venture, a limited liability company with both foreign and Chinese ownership, or a cooperative joint venture, which can take the form of either a limited liability company or exist as an unincorporated venture. Although these options usually are preferred by investors who want a local partner who knows the market well, negotiations can be fraught with difficulties and differences in business cultures can become an issue.

    Foreign investment company limited by shares. This type of enterprise is a share-issuing company limited in which both foreign and Chinese shareholders will own the shares, with at least 25 percent of the shares held by foreign shareholders. However, negotiations and approvals can take some time and effort.

Obviously, the type of FIE will depend on the business model. Investors should seek the advice of an attorney to determine which FIE will be most appropriate for their needs, as well as which type of FIE is allowed in their industry.
Protection of Intellectual Property Rights
As a signatory to several international treaties and conventions, including the Paris Convention, the Patent Cooperation Treaty, and the Patent Prosecution Highway, the government has shown strong determination to enhance the protection of intellectual property rights in the PRC. However, despite substantial reforms, certain issues and concerns remain with the practical enforcement of intellectual property rights in the PRC, including the following:

    Patents, trademarks and copyrights. The PRC government has implemented various pieces of legislation to improve the registration and protection of patents, trademarks, and copyrights. Foreign investors should consult with an attorney and take steps to register such patents, trademarks, and copyrights in the PRC as appropriate. While registration of a copyright is not a precondition to enforcement, it might be helpful as evidence of ownership in enforcement status and will assist in determining the compensation awarded in the event of infringement.

    Software protection. Specific rules in the PRC protect computer software copyright, and software can be registered with the National Copyright Administration to provide prima facie evidence of ownership. Note that local software requires registration prior to enforcement, but foreign software copyrights can be enforced without registration.

Technology Transfer
As a member of the World Trade Organization, the PRC has issued several regulations relating to the transfer of technology between foreign and local parties. The term "technology transfer" includes both the licensing and assignment of technology. The PRC regime, governed by MOFCOM, covers both the import and export of technology transfer. Technology is divided into three broad categories:

    prohibited, which cannot be imported or exported;

    restricted, transfer of which is subject to approval (with different approval processes for technology import and export contracts); and

    freely tradeable, which only requires filing and registration.

Contracts for technology transfer take legal effect only after receiv-ing a grant of the relevant approval from MOFCOM and completion of the necessary registration re-quirements.
Corruption
As indicated in a previous article ("Do I Need a Lawyer? If You Have to Ask, You Probably Do," Computer, May 2012, pp. 10-12), the US Foreign Corrupt Practices Act (FCPA) monitors companies that do business abroad. In the PRC especially, the sometimes unknown extent of government ownership in economic entities means that the FCPA will unexpectedly cover business dealings with these entities and their employees.
Furthermore, foreign investors who do business in the PRC will already be aware of differences in business culture, specifically, the concept that business is relationship-oriented rather than transaction-oriented. Given the fundamental importance of interpersonal relationships and their relevance to successfully operating a business in the PRC, investors looking to do business in the PRC must take precautions to avoid violations of the FCPA.
Special Economic Zones
There are currently five Special Economic Zones in the PRC: Shantou, Shenzhen, Zhuhai, Xiamen, and Hainan. These zones have been granted a certain degree of autonomy and are designed to provide a more attractive environment for foreign investors. The primary benefits of Special Economic Zones relate to tax reduction—including a reduced corporate income tax rate—and exemption.
In an effort to create a more favorable foreign investment environment, the PRC has continued to designate other areas and special zones, which now include the Open Coastal Cities, the Open Coastal Economic Areas, the Economic and Technological Development Zones, the High and New Technology Development Zones, the Bonded Zones, and the Export Processing Zones. These specially designated zones offer preferential treatment (primarily tax benefits) to FIEs, which vary depending on the area.
Special Administrative Regions: Hong Kong and Macau
Hong Kong and Macau, while part of the PRC, are Special Administrative Regions that enjoy a high degree of autonomy and, to a large extent, have executive, legislative, and judicial independence.
Certain Hong Kong and Macau investors enjoy preferential treatment under the Closer Economic Partnership Arrangement of 2003. This arrangement continues to develop and facilitate investment opportunities in Hong Kong and Macau. Through more flexible investment methods, lower entry thresholds, and reduced tariffs, Hong Kong and Macau investors benefit from a more favorable environment for fostering investment.
Hong Kong, in particular, is widely regarded as one of the world's leading financial centers and one of the freest economies in the world, with its simple low-tax regime, free flow of capital, and lack of exchange controls. Hong Kong operates a common law legal system—a legacy of its past as a British colony—and has gained a reputation internationally as a progressive center of arbitration.
For these reasons, when considering doing business in the PRC, many foreign investors choose Hong Kong as a gateway so they can reap the benefits of entering the PRC economy while at the same time enjoying some safeguards offered by the rule of law and familiarity of the developed economy in Hong Kong.
Doing business in China is a broad and complex topic. Before expanding into China, investors should ensure that they are well-informed, well-prepared, and armed with comprehensive advice from an attorney and other advisers. That should help to pave a smooth road to operating a successful business in one of the world's largest economies.
Brian M. Gaff is a senior member of IEEE and a partner at the Edwards Wildman Palmer law firm. Contact him at bgaff@edwardswildman.com.
Kenneth Choy is a partner at Edwards Wildman Palmer. Contact him at kchoy@edwardswildman.com.
Jamie Chan is an associate at Edwards Wildman Palmer. Contact her at jchan@edwardswildman.com.
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